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OECD Committee on Fiscal Affairs Roundtable on Collective Investment Vehicles February 1-2, 2006 -- Paris, France Selected Treaty Issues Affecting Collective Investment Vehicles Investing in Securities Stephen E. Shay, Ropes & Gray LLP. Cross-Border Portfolio Investment Through CIVs.

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Cross-Border Portfolio Investment Through CIVs

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OECD Committee on Fiscal Affairs Roundtable on Collective Investment Vehicles February 1-2, 2006 -- Paris, FranceSelected Treaty Issues Affecting Collective Investment Vehicles Investing in SecuritiesStephen E. Shay, Ropes & Gray LLP


Cross-Border Portfolio Investment Through CIVs

  • At June, 2005, mutual fund assets worldwide (in 41 countries) were $16.41 trillion.*

    • $8.2 trillion were held in the United States

    • $5.6 trillion were held in Europe

      * Investment Company Institute, Worldwide Mutual Fund Assets and Flows, Second Quarter 2005, Supplementary Tables, Table S1, “Total Net Assets in U.S. Dollars,” found at http://www.ici.org/stats/mf/ww_06_05.html#TopOfPage.


Cross-Border Portfolio Investment Through CIVs

  • Benefits of CIVs to investors.

    • Investors achieve economies of scale and reduced transactions costs.

    • Investors receive benefits of professional investment management.

    • Investors achieve diversification of investments.

    • CIVs are important source of investment capital for source countries.


Cross-Border Portfolio Investment Through CIVs

  • CIV structural imperatives.

    • CIVs must realize income and gains on a tax neutral basis compared with direct ownership of securities.

    • Unrelieved tax costs discourage co-mingling in a CIV with international investments diminishing cross border portfolio investment.


Legal and Tax Attributes of CIVs

  • CIV investors include:

    • Institutional investors, many of whom at tax-exempt.

    • Individual investors.

  • Funds may be marketed publicly or privately.


Legal and Tax Attributes of CIVs

  • CIVs legal form may be

    • Recognized as a separate taxable legal entity, or

    • Transparent for tax purposes.


Legal and Tax Attributes of CIVs

  • CIV tax characteristics.

    • Irrespective of the legal form of the CIV, there is little or no effective taxation of the CIV.

    • Low or no taxation of CIVs is accomplished in myriad ways. CIV may be

      • “Not a person” or transparent,

      • Exempt from tax,

      • Subject to tax at low or zero tax rates,

      • Subject to tax with the integration at the investor level.


Legal and Tax Attributes of CIVs

  • Home country or third country CIV.

    • United States, the United Kingdom, France, Germany and other countries have substantial national mutual fund or investment fund industries serve principally resident investors.

    • Other fund locations, including Luxembourg and Ireland, service investors primarily from third countries.


CIV Difficulties in Obtaining Source Country Treaty Relief

  • CIV-level treaty issues.

    • Whether the CIV is a person and a “resident” of the treaty country.

    • The CIV is the “beneficial owner” of income whether CIV satisfies any limitation on benefits provisions.


CIV Difficulties in Obtaining Source Country Treaty Relief

  • Practical tax reclaim issues.

    • Not practical for investors in a publicly offered or widely-owned CIV to claim treaty relief.

    • In summary, CIVs face lack of direct access to treaty benefits and an inability to implement refund claims for investors.


CIV Difficulties in Obtaining Source Country Treaty Relief

  • CIV treaty relief – dividends.

    • Resident CIV must be “liable to tax.”

    • CIV must be beneficial owner of dividends.

    • US-style limitation on benefits:

      • Exemption for publicly-traded companies does not apply to “open-end” funds.

      • Ownership test difficult to administer.


CIV Difficulties in Obtaining Source Country Treaty Relief

  • Pension plans and other tax-exempt investors

    • Some treaties allow pension plans, tax-exempt organizations exemption from source country taxation.

    • CIVs sometimes organize to pool these investors’ funds.

    • CIVs should be allowed to accommodate these funds.


Principles for Obtaining Source Country Treaty Relief

  • Principles for addressing CIV/Investor treaty issues.

    • Avoid double taxation, do not foster double non-taxation.

    • Treat economically similar investors similarly.

    • Preserve benefits of residence country tax-exemption.

    • Implementation of treaty relief at CIV level.

  • Do not expect a “one size fits all” solution.


Addressing CIV Treaty Issues

  • Consider modifying treaty rules for CIVs.

    • Residence issues.

      • Clear definitions for classification of CIV forms as transparent and non-transparent.

      • Clear rules for whether CIV is eligible to claim treaty relief directly.

      • If CIV subject to tax, it should be allowed to claim treaty relief.


Addressing CIV Treaty Issues

  • Consider modifying treaty rules for CIVs (cont’d)

    • Transparent CIV entities.

      • To the extent possible, consistent with treaty purposes, identify transparent CIV entity may claim treaty relief on behalf of its investors.

      • For example, treaty relief allowed at the level of the CIV if investors are from qualifying countries that treat the CIV as transparent.


Addressing CIV Treaty Issues

  • Consider modifying treaty rules for CIVs (cont’d)

    • Beneficial owner and limitation on benefit issues.

      • If income taxed to the investor through withholding or directly, treaty eligibility should be allowed at entity level.

      • Tax-exempt entities.

  • Consider special CIV treaty rules


Improve Treaty Reclaim Process

  • Relief at source should be the objective.

  • Streamline procedures for standardize documentation requirements.

    • Permit use of omnibus accounts (pooling of assets).

    • Documentation by intermediary with a “know-your customer” relationship with investor.

    • Documentation should be “verifiable” by the source country.

  • See G30 Proposal


Next Steps

  • Consider convening advisory group including representatives from industry to further examine issues and alternative solutions.


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