1 FUND NEWS November 2012 Investment Fund Regulatory and Tax developments in selected jurisdictions Issue 97 – Regulatory and Tax Developments in November 2012 Regulatory News European Union UCITS V Update On 9 November 2012 the European Parliament's ECON Committee published a draft report on the Commission’s proposal to amend the UCITS Directive (UCITS V) in the areas of custody, liability, remuneration and sanctions. The draft report contains a number of amendments, including: • Remuneration of management companies should be aligned with investor interests and therefore the remuneration rules should also apply to fees paid by the UCITS to the Management Company. Any variable remuneration paid by the UCITS to the Management Company should depend on the size of the fund or the value of the assets under management. • The scope of personnel subject to remuneration rules should be extended to cover all decision- making and influencing staff of the UCITS. Regulatory Content European Union UCITS V Update Page 1 ESMA Opinion on UCITS portfolio investments Page 2 Ireland Central Bank consultation on implementing the AIFMD Page 2 Proposed changes to the regulatory reporting obligations of Irish funds Page 3 Dear CEO letter on Anti-Money Laundering (AML) Page 3 Luxembourg CSSF Press Release on UCITS portfolio investments Page 3 UK FSA commences consultation on implementing the AIFMD Page 4 International FSB consultation on Shadow Banking Page 5 Tax Content European Union Advisory services can constitute exempt VAT management – the GfBk opinion Page 6 Luxembourg Tax Treaty Update Page 7 Aberdeen E-Alerts Page 7 Fund News – November 2012 2 • The maximum amount of variable remuneration should not exceed 50% of total remuneration (in line with CRD revision). • The share of variable remuneration to be deferred should be 60%, up from 40% (in line with CRD revision). • The remuneration committee should include employee representatives. • ESMA, in collaboration with the national authorities should supervise the implementation of remuneration policies. • The possibility to ban members of management for breaches of obligations of the Directive. • Administrative sanctions of legal persons up to 20% of total annual turnover and unlimited sanctions for natural persons. • The possibility to impose sanctions of up to 10 times the amount of profits gained or losses avoided because of a breach, where this can be determined. • Common standards and channels for whistleblowers. The draft report is available via the following web link: On 16 November 2012 the Council of the European Union released the first Cypriot Presidency compromise text on the UCITS V proposal. The document contains new provisions: • Prohibiting the re-use of financial instruments held in custody by the depositary for its own account or by any third party to whom custody has been delegated. • Foreseeing that in addition to banks and investment firms, other legal entities subject to prudential supervision and minimum capital requirements can act as a UCITS depositary. • Extending the remuneration provisions to amounts paid directly by the UCITS itself, including carried interest. • Allowing Member States to provide for higher levels of sanctions than those set in the Directive. ESMA Opinion on UCITS portfolio investments On 20 November 2012 the European Securities and Markets Authority (ESMA) issued an Opinion on Article 50(2)(a) of the UCITS Directive 2009/65/EC that deals with the types of portfolio investments that are eligible for the ‘other 10%’ bucket. According to ESMA article 50(2)(a) refers only to investments in transferable securities and money market instruments and not to units or shares of collective investment undertakings. Therefore, ESMA’s opinion is that UCITS may only invest in units or shares of collective investment undertakings as defined in Article 50(1)(e) of the UCITS Directive. ESMA expects that any portfolio adjustments required to ensure compliance with this opinion will be made taking into account the best interests of investors and at the latest by 31 December 2013. Ireland Central Bank consultation on implementing the AIFMD The Central Bank of Ireland has issued consultation paper 60 on how it proposes to implement the Alternative Investment Fund Managers Directive (AIFMD). The consultation paper which is over 300 pages long sets out in detail how the Central Bank proposes to amend its current rules by replacing them with a single ‘AIF Handbook’. The consultation paper 60 gives the Central Bank an opportunity to rationalise its Non UCITS notices and Guidance, and create one set of rules ‘AIF HandBook’ which would give advantage of no overlapping of issues, and avoid confusion and cost to investors and issuers alike. The AIF Handbook with evolve and change overtime. The AIF Handbook will be divided into the following 6 chapters:- 1 Retail investor AIF requirements 2 Qualifying investor AIF requirements 3 AIFM requirements 4 AIF management company requirements 5 Fund administrator requirements 6 AIF depositary requirements The Central Bank has also sought industry views on a range of issues including abolishing the promoter regime, discontinuing the professional investor fund (PIF) structure, removing Irish specific prime broker requirements and removing the existing property fund Fund News – November 2012 3 rules. The deadline for submission of responses is 11 December 2012 but worth noting that the final AIF handbook will not be effective before July 2013. AIF Interim Handbook will be published in January, and by consulting early with the industry it allows the Central Bank and the funds industry to be aligned, and allows the fund industry of Ireland to provide constructive input on a new regulatory framework. The industry will be able to rely on this handbook while the final AIFMD framework is put in place in Ireland. The consultation paper is available via the following web link: Proposed changes to the regulatory reporting obligations of Irish funds In June 2012, the Central Bank of Ireland issued a consultation paper (CP 59) proposing changes to the regulatory reporting requirements for Irish funds including a requirement to file: • the annual and interim financial statements • the auditor statutory duty confirmation • the Financial Derivatives Instruments report • the Key Investor Information Document (KIID) • two new regulatory returns. The Central Bank has now published a Feedback Statement on the submissions it received on CP 59. While the Central Bank has made some specific changes, in general the Central Bank intends to proceed as set out in the consultation paper. At this stage, the Central Bank is considering introducing this new regime in the first quarter of 2013. However, this date may be subject to change. Dear CEO letter on Anti-Money Laundering (AML) In the last year, the Central Bank of Ireland has carried out a range of inspections to monitor compliance by financial services firms with their AML obligations. As a result, the Central Bank has just issued a letter to all Irish regulated firms including funds, fund administrators and custodians. In this letter the Central Bank provides an overview of its key findings and asks firms to consider these findings in the context of their own AML control environment. Luxembourg CSSF Press Release on UCITS portfolio investments On 23 November 2012 the Commission de Surveillance du Secteur Financier (CSSF) issued a Press Release to draw to the attention of Luxembourg UCITS to the ESMA Opinion (see page 2) on the eligibility of instruments under article 41(2)a) of the law of 2010 on Undertakings for Collective Investment. Luxembourg UCITS will have until 31 December 2013 to liquidate any current non- compliant fund holdings, and are not permitted to make any new investments in non-compliant funds. The Press Release is available via the following link: Fund News – November 2012 4 UK FSA commences consultation on implementing the AIFMD On 14 November 2012 the Financial Services Authority (‘FSA’) issued a Consultation Paper (‘CP12/32’) on the proposed rules and guidance for transposing the Alternative Investment Fund Managers Directive (‘AIFMD’) into UK law. It is the first of two instalments and takes important policy positions on a wide variety of areas that will impact how the Directive applies in the UK to managers of traditional investment funds, hedge funds, investment trusts, private equity, infrastructure & real estate. The second instalment is expected to be published in Q1 2013 and will explain in more detail the AIFMD’s ‘regulatory perimeter’, clarifying which firms will need to seek authorisation as an AIFM, reflecting that areas will need to be clarified after the EU level 2 technical provisions are released. The key highlights are: • The FSA does not expect to be in a position to receive AIFM applications or Variation of Permissions (‘VoPs’) before 22 July 2013. • HM Treasury will decide upon the application of the AIFMD to smaller AIFMs (paper to be published in January 2013). • The FSA confirmed that firms seeking authorisation between 22 July 2013 and 22 July 2014, who meet the definition of an AIFM, must be fully compliant at the point of authorisation. • It will create a new section of its Handbook, entitled FUND, containing requirements for AIFs and UCITS funds, and the companies that manage them. • The FSA reiterates key points from the Directive regarding the interaction of UCITS/MiFID/AIFMD and the different combinations of firms and the capital and authorisation requirements of each. The FSA is of the view that MiFID activities of AIFMs should be passportable in the EU, however the FSA recognises that this view is not shared by fellow competent authorities in Europe. • Investment managers structured as limited partnerships subject to the law of England and Wales will not be able to become AIFMs. This is because limited partnerships subject to the laws of England and Wales, unlike some other jurisdictions, do not have separate legal personality. • HM Treasury doesn’t intend to require the External Valuer to be an authorised person. • The FSA does not intend to give firms the option of using contractual guarantees in lieu of regulatory capital. Article 9(6) allowed a Member State to let an AIFM provide up to 50% of the additional own funds required under Article 9(3) with a guarantee from a credit institution or insurance undertaking. • The FSA noted that they expect the level 2 regulation will also allow them to ask a firm to hold additional own funds if they are not satisfied the current level is sufficient to cover appropriately professional liability risk. They have not commented on the extent to which they will use this discretion. • New reporting forms will be required for different categories of manager. • The FSA has in general reiterated much of the ESMA advice but has said that it will consult on how the transparency provisions (annual report, disclosure to investors) of the AIFM interact with current requirements for NURS and QIS in their second instalment. Both regimes will continue, but the AIFMs of these AIFs will need to comply with the additional areas of the Directive. It is difficult to read between the lines and understand if the FSA expect the Authorised Corporate Director or the Investment Manager to be the AIFM, but it appears to suggest both are a possibility. • The FSA makes clear that the definition of marketing within the Directive is different from the current definition of a financial promotion. It intends to transpose that definition into the Handbook but have not at this stage issued additional guidance in this area. • It is not proposing to increase the private placement obligations above those within the Directive. • The FSA has opened the door for administrators to act as depositaries to certain private equity funds and real estate funds. They have set a minimum capital requirement (£125,000) for these firms which may limit the number of firms providing these services. It has Fund News – November 2012 5 indicated that there may also be some changes to CASS as a result of the Directive, but has not provided detail. • The FSA recognises that the extent to which investment trusts can delegate activities to investment managers will be decided at level 2, if they do not delegate then the investment trusts will need to have more substance to be compliant particularly in relation to investment decisions. The FSA’s introduction to CP 12/32 is available via this link: http://www.fsa.gov.uk/library/policy/cp/2 012/12-32.shtml This link includes a link to a pdf of CP12/32 (232 pages). International Developments FSB consultation on Shadow Banking On 18 November, the Financial Stability Board (FSB) published for public consultation a set of recommendations to strengthen oversight and regulation of shadow banking. The FSB has focused on the following five areas: 1 to mitigate the spill-over effect between the regular banking system and the shadow banking system; 2 to reduce the susceptibility of money market funds (MMFs) to ‘runs’; 3 to assess and mitigate systemic risks posed by other shadow banking entities; 4 to assess and align the incentives associated with securitisation; and 5 to dampen risks and pro-cyclical incentives associated with secured financing contracts such as repos, and securities lending that may exacerbate funding strains in times of ‘runs’. The consultative documents comprise: 1 a report entitled ‘An Integrated Overview of Policy Recommendations’ which sets out the FSB’s overall approach to shadow banking issues and provides an overview of its recommendations across the five specific areas; 2 a report entitled ‘Policy Framework for Strengthening Oversight and Regulation of Shadow Banking Entities’ which sets out a high-level policy framework to assess and mitigate bank-like systemic risks posed by shadow banking entities other than MMFs (other shadow banking entities); and 3 a report entitled ‘Policy Recommendations to Address Shadow Banking Risks in Securities Lending and Repos’ that sets out 13 recommendations to enhance transparency, strengthen regulation of securities financing transactions, and improve market structure. The main proposals are: • to establish minimum standards under which market participants would calculate haircuts, in order to limit the extent to which haircuts are reduced in benign market environments. • improve regulatory reporting and market transparency (in particular through the establishment of trade repositories); • improve corporate disclosures for financial institutions’ securities lending, repo and wider collateral management activities; • improve reporting by fund managers to end-investors; • limit liquidity risks associated with cash collateral reinvestment; • address risks associated with the re-hypothecation of client assets. Financial intermediaries should provide sufficient disclosure to clients in relation to re-hypothecation of assets so that clients can understand their exposures in the event of a failure of the intermediary; only entities subject to adequate Fund News – November 2012 6 regulation of liquidity risk should be allowed to engage in the re- hypothecation of client assets; and client assets should not be re-hypothecated for the purpose of financing the own-account activities of the intermediary; • Strengthening collateral valuation and management practices; and • Evaluate the establishment or wider use of central clearing in securities lending and repo markets. The consultation closes on 14 January 2013 and the Press Release is available via the following web link: Tax News European Union Advisory services can constitute exempt VAT management – the GfBk opinion The Advocate General’s (“AG”) Opinion in the GfBk case has been released. It raises a number of interesting points around the scope of the fund management exemption, the extent to which VAT interpretations ought to follow definitions drawn from other areas of law and regulation, as well as some potentially instructive notes on how EU exemptions ought to be applied in practice. A full Court of Justice of the European Union (“CJEU”) Judgment is expected within a few months. In his Opinion, the AG states that sub- delegated investment advisory services can qualify for VAT exemption on the basis that they fall within the meaning of “fund management”. The fact that responsibility for implementing a strategy is not delegated and these services are not listed as an aspect of management in the UCITS Directive should not affect this. Background GfBk, a German investment manager, provided various services to its clients, being fund managers. It made buy and sell recommendations within certain parameters set by the manager. Whilst responsibility for reviewing and approving those recommendations was retained by the manager, it effectively ‘rubber-stamped’ these (often within minutes), only rejecting the recommendation if it breached agreed rules. In the fact pattern referred to the AG, the manager did not undertake a separate asset selection process and did not have capacity to do so. At its core, the GfBk case should clarify the extent to which delegated fund management services can fall within the relevant exemption. The questions referred to the CJEU focus on whether an “advisory” service (i.e. where the provider does not have a specifically- mandated role) can fall within the meaning of “management” and, therefore, be a VAT exempt fund management service. AG’s Opinion The AG stated that GfBk’s services should fall to be VAT exempt. In reaching his conclusion, the AG Villalon argued that limiting “management” solely by reference to functions listed in Annex II of the UCITS Directive (85/611/EEC) was too restrictive, particularly given that Article 5 of that Directive states that Annex II is “not exhaustive”. This stance is clearly good news for the UK funds industry which since-“Abbey National”, has largely exempted from VAT this type of service. However, whilst it is true that Annex II is not exhaustive, investment advice is specifically referred elsewhere in the Directive to as a “non-core” service. This would appear to distinguish advisory services from management. Whether or not the AG considered and dismissed this point is interesting: if the CJEU follows the logic, it may reinforce the view that VAT concepts need not slavishly follow definitions drawn from other disciplines and regimes. Clearly, greater clarity from the CJEU on this point would be welcome. The AG also considered other factors, including whether an adviser needs to be able to change legal and financial Fund News – November 2012 7 relationships. The AG argued that this was not necessary, a view which follows comments in the Abbey National case that, were the fund management exemption limited only to services which altered the composition of a portfolio, its scope would be reduced dramatically. Pulling these strands together, the AG concluded that advisory services provided by a third party, which relate to the management of a special investment fund and the purchase and sale of assets, do constitute an act of “management”. The AG took the view that the services can, where provided autonomously and continuously, qualify for exemption. Why is this important? Whether or not VAT should be charged on bought-in advisory services is clearly a major issue for the funds industry. Had the AG concluded that VAT was due, it is likely that the managers of special investment funds, the management of which is exempt, would have faced an additional and significant cost. The industry will, therefore, be keen for the Judgment of the CJEU to follow the Advocate General’s Opinion (“AGO”) in full. It will be interesting to see if the CJEU provides any further guidance on the line between advice and management. What now? Many UK managers have typically applied the fund management exemption to effectively flow through the supply chain. It is likely that the majority of these services would, therefore, already have been treated as exempt in the UK. We would not, therefore, expect HM Revenue and Customs to be inundated with claims following the AGO. However, if UK managers have incurred VAT on these services, they should consider whether to request that their suppliers submit a claim for over-charged VAT or, as required, submit a claim for over- declared VAT where the supplier is non- UK. The full AGO opinion is available via this link: http://eur- lex.europa.eu/LexUriServ/LexUriServ.do ?uri=CELEX:62011CC0275:EN:HTML Luxembourg Tax Treaty Update Double Tax Treaty with Macedonia The treaty with Macedonia was signed on 15 May 2012 and has been ratified on 6 November 2012. The details are now available and the treaty generally follows the OECD Model Convention (2008). The maximum rates of withholding tax are: • 15% on dividends generally, but 5% of the gross amount if the beneficial owner is a company which holds directly at least 25% of the capital of the company distributing the dividends for an uninterrupted period of 12 months, • 0% on interest, • 5% on royalties. Double Tax Treaty between Luxembourg and Laos On 4 November 2012 Luxembourg and Laos signed a double tax treaty to strengthen the co-operation between the two countries. Details of this treaty will be communicated when made available. Double Tax Treaty with Mongolia Further to the revision of the tax treaty between Luxembourg and Mongolia in July 2012, the Parliament of Mongolia decided to cancel the double tax treaty on 2 November 2012. The effective date of cancellation has still to be determined. Double Tax Treaty with Jersey According to the Jersey Tax Authorities, Jersey and Luxembourg have initialed negotiations on a double tax treaty between the two countries. Further details will be provided when available. Aberdeen E-Alerts The Aberdeen E-Alert issue 2012-16 (here) (tax newsletter focusing on withholding tax reclaims based on the Aberdeen case law) discusses the administrative practice in The Netherlands in relation to the extended period of 5 years for filing reclaims. Fund News – November 2012 8 Contact us Dee Ruddy Senior Manager T: + 352 22 5151 7369 E: dee.ruddy@kpmg.lu Audit Nathalie Dogniez Partner T: + 352 22 5151 6253 E: nathalie.dogniez@kpmg.lu www.kpmg.lu Publications Tax Georges Bock Partner T: + 352 22 5151 5522 E: georges.bock@kpmg.lu Advisory Vincent Heymans Partner T: +352 22 5151 7917 E: vincent.heymans@kpmg.lu Charles Muller Partner T: +352 22 5151 7950 E: charles.muller@kpmg.lu The evolution of an industry – 2012 KPMG/AIMA Global Hedge Fund Survey here: The Perfect UCITS report September 2012 (KPMG survey) here: Evolving Investment Management Regulation here: We have launched a new channel “Fund Views” on our KPMG TV platform. In regular videos we outline the latest regulatory developments affecting European Asset Managers. The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. © 2012 KPMG Luxembourg S.à r.l., a Luxembourg private limited company, is a subsidiary of KPMG Europe LLP and a member of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International. . 1 FUND NEWS November 2012 Investment Fund Regulatory and Tax developments in selected jurisdictions Issue 97 – Regulatory and Tax Developments in November 2012 . notices and Guidance, and create one set of rules ‘AIF HandBook’ which would give advantage of no overlapping of issues, and avoid confusion and cost to investors and issuers alike. The AIF Handbook. December 2012 but worth noting that the final AIF handbook will not be effective before July 2013. AIF Interim Handbook will be published in January, and by consulting early with the industry