Issue 88 – Regulatory and Tax Developments in January 2012 pot

1 FUND NEWS January 2012 Investment Fund Regulatory and Tax developments in selected jurisdictions Issue 88 – Regulatory and Tax Developments in January 2012 Regulatory News European Union ESMA Consultation Paper on Guidelines on ETFs and other UCITS issues On 30 January 2012 the European Securities and Markets Authority (ESMA) published a Consultation Paper (CP) setting out ESMA’s proposal for guidelines on ETFs and other UCITS issues. This consultation follows on from a Discussion Paper issued in July 2011 on possible policy orientations on guidelines for exchanged traded UCITS and Structured UCITS. The 77 page consultation paper sets out detailed proposals in the following areas:  UCITS Exchange Traded Funds (ETFs); definition of a UCITS ETF, the use of an identifier, specific disclosure requirements for actively managed ETFs and rules for protecting investors on secondary             Regulatory Content European Union ESMA consults on Guidelines on ETFs and other UCITS issues Page 1 ESMA consults on draft technical standards for the EU Short-Selling regulatory regime Page 2 ESMA work programme 2012 Page 2 Ireland Amendments to UCITS Notices, NU Notices and Guidance Notes Page 3 Voluntary Corporate Governance Code Page 3 Spain Fund law amended Page 3 International IOSCO report on principles on suspension of fund redemptions Page 4 Tax Content European Union Public Hearing on the Financial Transaction Tax (FTT) Page 5 Luxembourg Aberdeen Case E-Alerts Page 5 UK HMT consults on introducing tax transparent authorised schemes for asset pooling Page 6 Spain Non-residents income tax changes Page 7 Accounting Content UK ASB issues revised proposals for future of financial reporting standards in the UK Page 8 Fund News – January 2012 2 markets. Two options are proposed regarding investors on secondary markets. 1) The UCITS Management Company will have to ensure that the market maker continues to offer redemption facilities to investors, and to replace the market maker if it is no longer willing or able to act in this capacity. 2) The UCITS will have to provide for investors to be able to redeem their shares from the UCITS directly at any time.  Index tracking UCITS; guidelines on the disclosure required in the Prospectus and financial reports which will include the size of the tracking error and an explanation of any divergence from the target.  Index tracking leveraged UCITS; guidelines on disclosure required in the Prospectus on the leverage policy and associated costs and risks. The Prospectus and Key Investor Information Document (KIID) would need to disclose the impact of any reverse leverage.  Guidelines on the employment of efficient portfolio management (EPM) techniques and on related disclosure requirements. As a general principle fees from EPM techniques should be returned to the UCITS. Any fee sharing arrangements should be disclosed in the Prospectus together with the maximum % fees payable to the third party. A UCITS should have a clear haircut policy for each class of collateral.  Rules and related disclosures for UCITS that enter into total return swaps;  Guidelines on gaining exposure to strategy indices by UCITS, including the full disclosure of the calculation methodology.  Transitional provisions; any new investment by a UCITS or any new collateral received after the date of coming into effect of the guidelines must immediately respect the guidelines. Any updates to the Prospectus or the KIID will have to be done within 12 months. The consultation contains 41 questions for whic ESMA is seeking feedback from market participants, a cost-benefit analysis and a feedback statement on the July 2011 Discussion Paper. The consultation is open until 30 March 2012 and ESMA indicates that they expect the guidelines to be adopted in Q2 2012. The CP is available via the following web link: http://www.esma.europa.eu/content/ES MA%E2%80%99s-guidelines-ETFs-and- other-UCITS-issues ESMA consultations on draft technical standards for the EU Short- Selling regulatory regime On 24 January 2012 ESMA published for consultation the draft technical standards to accompany the Regulation on short selling and certain aspects of credit default swaps that will apply from 1 November 2012. The consultation covers the following main topics:  agreements to borrow that ensure that the share or debt will be available for settlement  details of information to be reported to authorities and public on net short positions, and means of disclosure to public  exemption where principal trading venue is located outside the EU The consultation is open for comments until 13 February 2012. Following the close of the consultation, ESMA expects to publish a final report and submission of the draft technical standards to the European Commission by 31 March 2012 for endorsement. The consultation paper is available at the following web link: http://www.esma.europa.eu/page/Short- selling ESMA work programme 2012 ESMA issued a detailed work programme for 2012 and has indicated the following areas as key priorities for the year:  European Markets and Infrastructure Regulation  Financial consumer protection  Harmonisation of supervisory practices Fund News – January 2012 3  Credit Rating Agencies Regulation and Supervision  MiFID and Market Abuse Directive review  Alternative Investment Fund Manager Directive  Short Selling Regulation The 28 page work programme is available via the following web link: www.esma.europa.eu/system/files/esm- 2011-330.pdf Ireland Amendments to UCITS Notices, NU Notices and related Guidance Notes Just before Christmas, the Central Bank made amendments to its rule book for UCITS and non-UCITS. Many of these amendments are minor. However, the following policy changes have been made:-  Notice UCITS 11 & Notice NU 13 (Borrowing Powers) The off-setting deposit to a back-to- back loan is not required to be held in the base currency of the fund.  Guidance Note 2/07 (UCITS Financial Indices) The note has been amended to clarify the position where a financial index no longer meets with the 5/10/40 rule but remains an eligible index subject to the 20/35 rule.  Guidance Note 2/97 (Closed ended funds) The note has been amended to clarify the Central Bank’s policy on changes to duration, objectives and policy or fees and to include reference to funds with limited liquidity.  Guidance Note 2/99 (Money Market Funds) The ECB issued a new definition of a money market fund for statistical purposes and the note has been amended to reflect this. The Statistical Division in the Central Bank required this change be put in place before the end of the year for end December 2011 balance sheet reporting. The revised Notices and Guidance Notes take effect from 23 December. Note some prospectuses will need to be amended before a fund can avail of these changes. Voluntary Corporate Governance Code The Corporate Governance Code for Collective Investment Schemes and Management Companies (the Code) which was developed by the Irish Funds Industry Association (IFIA) became effective from 1 January. The Code has a 12 month transitional period. Although the Code is voluntary, its adoption is highly recommended by the IFIA. Spain Collective Investment Fund Law amended On 5 October 2011 the Spanish Official Gazette published Law 31/2011, amending Law 35/2003 on Collective Investment Schemes. The Law 31/2011 has the following objectives: (a) to start the transposition into Spanish Law of the UCITS IV Directive 2009/65/EC and Directive 2010/78/EU amending the former Directive. This transposition will be completed when the Regulations of Law 31/2011 are approved; (b) to amend the current Law to reinforce the competitiveness of the Spanish industry; and (c) to strengthen the supervision of Collective Investment Schemes (CIV) and management companies by the Spanish regulator (the CNMV). Extending the possibility to use global accounts for the domestic commercialization of funds Of the most relevant changes introduced by the 31/2011 Law is the possibility of using global accounts for the domestic commercialization of funds domiciled in Spain. To understand the far-reaching effects of this new rule, it should be borne in mind that foreign CIVs normally operate through global/omnibus accounts. This means that the management entities may not know the identity of the investors in the CIV, as they are allowed to only record the identification of the distributors, which inherit the obligation of identifying investors or, where appropriate, the successive sub- distributors. This modus operandi has Fund News – January 2012 4 been routine for some time in electronic securities markets, but could not be implemented for CIVs in Spain, where CIV managers were obliged to record the full identify of the unitholders or participants in the CIVs they managed, and commercializing and distributing entities were obliged to supply this information to the managers, with the resulting operational complexity and more than a few commercial qualms. This strict operational procedure was first made more flexible in the case of commercializing Spanish CIVs abroad through global/omnibus accounts, that is, joint positions of a number of investors in the foreign commercializing or intermediary entities. This measure was authorized by the Single Additional Provision of Non-resident Income Tax Regulations (Royal Decree 1776/2004 of 30 July). However, at the same time it imposed severe tax reporting obligations on the foreign marketing companies who were held directly responsible by the Spanish Tax Administration (identity and residence of non-resident unitholders or participants), the obligation to provide the management entities with tax residence certificates attesting to the non-resident status of the investors receiving income from the CIV, the impossibility of including Spanish resident investors in the global accounts, the prohibition of registering positions of a sub-distributor’s other global sub-account in a global account, an outline of the responsibilities in case of non-compliance by the management entity, and penalization of the cancellation of the commercialization contract when the marketing company does not comply with its obligations. All of this was aimed at obtaining adequate tax data about the final non- resident investors and avoiding the off- shoring of residents’ investments using these formulas. This tax framework for the cross-border commercialization of Spanish CIVs continues to be in force after enactment of Law 31/2011, and continues to place a fiscal burden on the distribution of CIVs outside of Spain. Its rigidity can be criticized, it undoubtedly places Spanish managers in a worse situation than operators in other EU countries, and it fails to properly understand how international financial markets work and their need for agility and the least number of administrative hurdles possible as well as their position against the regulations imposed on them. For this reason, we can assume that the model should be adapted in the near future. The first final Provision of Law 31/2011 describes the mechanism for commercializing in Spain investment funds authorized in Spain (please note that this does not affect other types of CIVs, such as SICAVs) when it mentions the existence of the new domestic global accounts, as follows:  The marketing company should notify the manager of each subscription, identifying the participant with its tax identification number.  The marketing company should notify the manager of all redemptions, identifying the participant with its tax identification number, so that the manager can calculate the income obtained (in accordance with the FIFO rule for PIT taxpayers) and apply the withholding on account, paying the marketing company the amount redeemed net of withholding and giving it the fiscal information to be provided to the participant.  The contracts to be subscribed between the manager and the marketing companies should establish the latter’s obligation to provide the former with at least the tax identification number of each participant, otherwise committing a tax infraction in case of non- compliance. The “Centralizing Agent” However, the main tax amendment introduced by Law 31/2001 is the need to appoint an entity in charge of a centralized registry of unit- holders/shareholders in connection with CIVs to be distributed in Spain through more than one distributor/marketer. This entity in charge of the centralized registry is named in the Spanish market/industry as “the centralizing agent”. According to the new rule established by Law 31/2011, when a CIV is distributed/marketed in Spain through different distributors (i.e. more than one), said distributor/marketer shall report to the “centralizing agent”, prior to the execution, any subscription, acquisition, redemption or transfer transaction, in order for the this “centralizing agent” to be in a position to determine the result of each transaction and notify the result to the distributor. Fund News – January 2012 5 The “centralizing agent” shall be in charge of the following;  To apply the relevant withholding tax or make the relevant payment on account derived from the transactions referred above;  To comply with all the relevant tax reporting obligations before the Spanish tax authorities. The main purpose of creating this “centralizing agent” role is to place the withholding and tax reporting obligations in one particular entity resident in Spain which could properly apply the so-called FIFO (First In – First Out) method to determine the withholding tax due on capital gains derived from the transfer/redemption of units/shares in CIVs. Finally, it should be noted that Law 31/2011 entered into force on 6 October 2011. International IOSCO publishes report on principles on suspension of fund redemptions On 29 January 2012 the IOSCO published its final report “Principles on Suspensions of Redemptions in Collective Investment Schemes” covering funds offered to both retail and institutional investors. The main principles are as follows:  Management of liquidity risk. A requirement to put in place a liquidity risk management policy and process and to assess the liquidity of each investment to ensure consistency with the overall liquidity profile of the fund.  Ex-ante disclosure to investors. A requirement to clearly disclose the ability to suspend redemptions prior to the investors investing in the fund.  Criteria/reasons for the suspension. Only if permitted by law under exceptional circumstances or if required by law, regulation or regulators.  Decision to suspend should be properly documented, communicated to competent authorities and communicated to unit-holders.  During the period of suspension no new subscriptions should be accepted. The fund should also take all possible steps to resume normal operations as soon as possible having regard to the best interests of investors and should keep both the authorities and the investors informed. The full report is available on the IOSCO website at www.iosco.org Tax European Union Public Hearing on the Financial Transaction Tax (FTT) On 6 February 2012 the European Parliament ECON Committee is holding a public hearing on the Financial Transaction Tax (FTT) in the context of the Commission's recent proposal. The hearing will address the following topics:  design of the FTT, tax base, tax rate, tax payers, definitions  tax collection and practical implementation  economic and financial impact. Luxembourg Aberdeen Case E-Alerts The latest Aberdeen E-Alert (tax newsletter focusing on withholding tax reclaims based on the Aberdeen case law) describes the recent increases in withholding tax rates on income in France and Spain. The e-alert is available via the following web link: http://www.kpmg.com/LU/en/IssuesAnd Insights/Articlespublications/Pages/Aber deene-alerts-Issue2012-01.aspx UK HMT consults on the UK introducing tax transparent authorised schemes for asset pooling On 9 January HM Treasury (“HMT”) issued its planned consultation regarding the introduction of a UK tax transparent Fund News – January 2012 6 fund (“TTF”). The proposed schemes will be contractual in legal form and tax transparent with the objective of enabling UK investment managers to offer a UK tax transparent authorised vehicle to investors. These proposals have a particular relevance to tax efficient asset pooling for institutional clients such as: pension funds; authorised funds including UCITS, Non- UCITS retail and QIS feeder funds, thereby having particular relevance to the Master-Feeder structure introduced by UCITS IV; and life funds. The delivery by HMT of contractual schemes is important at a time when investment managers assess the optimal structures in the light of opportunities made available under UCITS IV, including master/feeder structures, but, importantly, with the increased focus on withholding taxes and cost pressures on managing portfolio investments. One of HMT’s objectives is to enable the UK to compete on a level-playing field with existing equivalent structures available in Luxembourg, Ireland and the Netherlands. Subject to parliamentary approval, the final regulations are intended to enter into force in summer 2012. In parallel the FSA will consult in quarter one 2012 on the amendment of its COLL Rules to introduce these new contractual authorised funds. Key features of the proposals are:  The contractual schemes could be set up in either of two legal forms: the contractual co-ownership scheme (“CCS”) or the contractual partnership scheme (“CPS”).  These contractual schemes will be authorised by the FSA and can take the form of: UCITS schemes (for example a UCITS Master to UCITS Feeder funds); non-UCITS retail schemes ("NURS"); and as Qualified Investor Schemes ("QIS").  The vehicle itself will not be a taxable entity and will be deemed to be tax transparent. It is proposed that, being authorised funds, these will be classified as a "special investment funds" and therefore management and other qualifying services to the fund will be exempt from VAT.  It is also proposed that these contractual funds will be outside the charge to the Finance Act 1999 Schedule 19 SDRT regime. In our view these proposals have the capacity to provide: significant opportunities and benefits to asset managers and investors; to support the UK as a domicile for funds and asset pooling; and to support and potentially expand the wider services to UK Authorised Funds including fund accounting, pricing and administration; depositary and custody services; and audit and legal services. Examples of how the proposed TTF could facilitate opportunities and efficiency:  Managers seeking to set up asset pooling structures in the UK, enabling them to realise the economic efficiencies for the manager and participants that such pooling provides.  Enable the UK to set up Master funds under the UCITS IV Master- Feeder rules, with Feeder funds in the UK and other EU domiciles.  Provide a competitive tax transparent vehicle for tax-exempt investors who seek to minimise any tax drag that may occur if tax opaque funds are used for pooling.  The TTF could also be considered by hedge fund managers with a particular UK focus as a tax transparent master fund. The consultation runs until 19 March 2012, and HMT seeks responses to a series of legal, regulatory, tax and industry-focussed questions. KPMG has participated and will continue to participate actively in this consultation process, and will submit a response to HM Treasury, so please let us know if you have any comments that you would like us to consider. An introduction to and the consultation document (72 pages) is available via this web link: http://www.hm- treasury.gov.uk/consult_contractual_s chemes_collective_investment.htm Fund News – January 2012 7 SPAIN Royal Decree-Law 20/2011, 30 December 2011 Please find below the main measures passed by Royal Decree-Law 20/2011, dated 30 December 2011, with immediate effect as of 1 January 2012. It should be noted that the measures adopted with respect to Non-Residents Income Tax refer to the provisions of the Spanish domestic regulations. Thus, such measures should be taken into consideration without prejudice of the provisions of the relevant Tax Treaties signed by Spain. Personal Income Tax - Corporate Tax – Non-Residents Income Tax (applicable in 2012 and 2013) Withholdings on account of investment income:  Dividends  Interest and other similar income  Assurance transactions  Other issues (Intellectual property, industrial, technical assistance…) New applicable rate: 21% (Previous rate: 19%) Applicable to any income paid from 1 January 2012. This measure will require immediate adaptation of IT systems and processes. Withholdings on account of capital gains arising from the transfer or redemption of shares or units of investment funds, investment companies or others collective investment institutions. New applicable rate: 21% (Previous rate: 19%) Applicable to any income paid from 1 January 2012. This measure will require immediate adaptation of IT systems and processes. Withholdings on account of other income:  Awards  Lease or sublease of urban buildings.  Profit distributions made by Permanent Establishments in Spain to foreign Head Offices New applicable rate: 21% (Previous rate: 19%) Applicable to any income obtained from 1 January 2012. The withholding tax rate of 15% applicable to Professional Activities has not been modified. Non-Residents Income Tax Rate New applicable rate: 24.75% (Previous rate: 24%), applicable to other income subject to Non-Residents Income Tax not comprised in the above-mentioned categories (e.g. royalties). Fund News – January 2012 8 Accounting UK ASB issues revised proposals for the future of financial reporting standards in the UK On 30 January, after due consideration of responses and discussion with industry bodies, the UK Accounting Standards Board (“ASB”) has published three Financial Reporting Exposure Drafts (“FREDs”) together with explanatory notes which set out its revised proposals for financial reporting in the UK. FREDs 46 to 48 are important for the future financial reporting by UK Authorised Funds, of particular relevance is FRED 48 “The Financial Reporting Standard”, that is proposed to become FRS 102, and which, alongside the industry specific guidance in the Authorised Funds SORP, will establish the financial reporting by UK Authorised Funds (“UK AFs”) from 1 January 2015. The long term project of the ASB has been to recognise the need for global standards in financial reporting and, in this regard, the adoption of IFRS by appropriate UK entities. As previously discussed, until mid 2011, the ASB was proposing a tiered approach with all tier one entities complying with full EU- adopted IFRS, however, following consultation feedback it was determined that the ASB should not extend the scope of full IFRS adoption beyond the requirements of company law. Accordingly UK Authorised Funds, subject to the ASB revisiting the scope and content of the FRSME, would be expected to comply with the FRSME (Financial Reporting Standards for Medium Entities) together with the Statement of Recommended Practice for Authorised Funds (“the AF SORP”). The latest publications from the ASB replace FREDs 43 to 45 with FREDs 46 to 48.  FRED 46 sets out the reporting structure and it is expected that UK AFs will be within “all other entities [that] apply the draft standard set out in FRED 48”.  FRED 47 discusses the reduced framework for entities (primarily subsidiaries and ultimate parent companies) that will follow EU- adopted IFRS with reduced disclosures.  FRED 48 (about 250 pages) replaces all current standards with a single new FRS based on the use of IFRS for small and medium-sized entities (“SMEs”) modified to better fit with financial reporting in the UK. It is intended to become FRS 102 and the FRSME and it replaces FRED 44. This is expected to be the standard that will apply to UK AFs, alongside the interpretation provided by the AF SORP. After completion of this latest ASB consultation, which runs to 30 April 2012; consideration of consultation feedback by the ASB; and the expected publication of new FRS 102 (from FRED 48), which the ASB seeks to achieve before the end of 2012, then the AF SORP will be updated, perhaps commencing in quarter one 2013. This SORP update will be to adopt, in an industry specific context, the requirements of FRS 102 and should be completed considering the ASB’s revised proposed implementation date of 1 January 2015 for FRS 102. At this stage, subject to the consultation feedback: the risk disclosures are understood to be aligned to the current AF SORP; it is expected that financial instrument disclosures will increase, for example the presentation of the levels one to three in fair value measurement of instruments; and the exemption from cash flow statements for AFs is to be retained. The ASB’s introduction; Key Facts and other guidance, along with the texts of FREDs 46, 47 and 48 are all available on the ASB website via the ASB’s press release: http://www.frc.org.uk/asb/press/pub270 2.html In addition, the ASB provides a useful introductory summary on the first two pages of its publication “Inside Track Issue 69” (8 pages) – this is available via this link: http://www.frc.org.uk/images/uploaded/ documents/insidetrack/ASB_Inside%20T rack%2069.pdf Fund News – January 2012 9 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 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. Evolving Investment Management Regulation - Meeting the challenge here FATCA and the funds industry: Defining the path here Charles Muller Partner T: +352 22 5151 7950 E: charles.muller@kpmg.lu . 1 FUND NEWS January 2012 Investment Fund Regulatory and Tax developments in selected jurisdictions Issue 88 – Regulatory and Tax Developments in January 2012 . for funds and asset pooling; and to support and potentially expand the wider services to UK Authorised Funds including fund accounting, pricing and administration; depositary and custody. E-Alert (tax newsletter focusing on withholding tax reclaims based on the Aberdeen case law) describes the recent increases in withholding tax rates on income in France and Spain. The e-alert