EFAMA / KPMG European Investment Management Practice UCITS IV Report

An industry research report published jointly today by the European Fund and Asset Management Association (EFAMA) and KPMG’s European Investment Management practice shows that there are significant tax complications in the new Undertakings for Collective Investment in Transferable Securities (UCITS IV) Directive that prevent the achievement of a harmonised European funds industry. The report identifies critical tax issues and numerous examples of unequal treatment (“discrimination”) and inefficiencies across the 27 European Union (EU) Member States.

The report, entitled Analysis of the tax implications of UCITS IV, recognises that the UCITS IV Directive to be implemented by Member States by July 2011 offers considerable scope for re-structuring fund management operations in the EU. The directive introduces six efficiency measures, which could make the European fund industry more competitive and attractive to investors. However, the directive does not deal with critical tax reforms required to enable effective use of the efficiency measures of the directive.

EFAMA and KPMG’s European Investment Management practice make a number of recommendations to resolve the tax barriers preventing an efficient single market:

Fund Mergers: Under UCITS IV it will be possible to carry out cross-border mergers of UCITS funds. Certain Member States currently tax fund mergers at the investor level, which leads to a situation where investors would pay taxes on unrealised gains. In order to make UCITS IV a success, the report recommends that fund mergers should be carried out in a tax-neutral manner at the fund and investor level.

Management Company Passport: UCITS IV will make it possible to establish a UCITS fund in one Member State which could be managed from another Member State. In this respect, the main issue is that in certain Member States, the management of a fund cross border could lead to a fund becoming tax resident (and therefore liable for tax) in the Management Company’s state of residence. The report recommends that the fund should only be taxable in the country where the fund is established or registered, even if its Management Company is resident elsewhere.

Master-Feeder Fund Structure: under UCITS IV, a Feeder fund will be allowed to invest its assets in another fund, a Master Fund. As it currently stands, certain Member States levy withholding taxes on cross-border dividend distributions to foreign Feeders, or impose tax on redemptions in the country where the Master Fund is located. The report recommends that there should not be tax leakage between the Master and Feeder fund in order for the Master–Feeder structures to become a reality and offer investors a cost effective product. EFAMA and KPMG’s European Investment Management practice recommend the adoption of a tax Directive at EU level that would remove the tax barriers of UCITS IV being fully effective. In particular, it should provide for:

• Tax neutrality of fund mergers.
• Uniform rules governing the tax residency of funds and the place of incorporation and registration.
• Tax neutrality on the flow of cash between Master and Feeder funds.

In the meantime, in the absence of a directive, EFAMA and KPMG’s European Investment Management practice encourage each Member State to take the appropriate measures at national level in order to resolve the remaining tax obstacles.

Peter De Proft, Director General of EFAMA, said, “UCITS IV offers great opportunities to the funds industry and is another important step towards a single European market. EFAMA welcomes the six efficiency measures, but in the interests of the funds industry, and particularly its investors, it urges individual Member States to resolve these important tax issues. Otherwise, there is a risk that the objectives of UCITS IV will not be achieved and that the funds industry will not be able to make full use of all the efficiency measures.”

Georges Bock, Global Chairman of KPMG’s Funds Tax Network, said, “If the EU member states want to achieve their single market ambitions, they need to press at least for a merger directive for investment funds based on the principle of a tax deferral so that investors would only pay tax on mergers of funds once money truly hits their pockets. A deferral would not lead to an ultimate loss of tax revenues for the various EU Member States. It is therefore hopefully possible to reach the required unanimity for the adoption of such a measure.”