29 March 2012

ABBL: Tax remains a major obstacle to implementation of UCITS IV in European Union

According to 'Fill the glass to the brim II: have we broken through?', an updated analysis of KMPG International’s 2010 'Fill the glass to the brim on the tax implications of UCITS IV', even though the 27 EU Member States should have transposed the UCITS IV Directive into national law by 1 July 2011, 13 Member States have not yet fulfilled their obligations. These include Belgium, Cyprus, Greece and Portugal. Late transposition may entail practical issues where cross-border operations involve a Member State that has not transposed the UCITS IV Directive.

Tax was identified as a major obstacle to the implementation of UCITS IV in KPMG International’s 2010 report. Since then, modest progress has been achieved. But on the main issue – tax neutrality for investors on fund reorganisations – progress seems to have stalled.

“KPMG International previously identified some important tax issues that should be addressed if UCITS IV is to serve as the platform for a truly pan-European product”, says Georges Bock, KPMG’s Chairman of the European Investment Management & Funds Tax Practice. “In numerous examples, our research found varying degrees of discriminatory tax treatment of cross-border fund operations. Unfortunately, to date, many of these cases of discrimination and adverse tax consequences remain. For cross border fund reorganisations, the situation is extremely complex. In some countries investors are neutrally treated, in others the treatment varies from insecurity to discrimination, and then in others there is no way around taxation of investors upon reorganisation—not even a ruling process. We believe the EU needs to take up the fight to protect investors’ interests in the near future.”

The report notes that most tax issues arising from the UCITS IV framework should be solved on an EU level and provides recommendations outlined below. To date, these recommendations have not been taken into consideration and the EU Commission has taken few public initiatives in this regard.

Commenting on the report, Claude Kremer, President of EFAMA, the representative association for the European investment management industry, says: “The success of the measures introduced by the UCITS IV Directive very much depends on a harmonised and efficient tax framework. With particular reference to cross-border fund mergers, we welcomed the statement of the EU Commission in its 2006 White Paper that mergers should not give rise to adverse tax consequences for investors. This is the only possible way forward and each EU Member State should adapt its internal tax legislation accordingly.”

“Given current economic difficulties, solving the tax implications of UCITS IV does not appear to be high on the political agenda. However, given the positive impact such measures could bring to the industry and their contribution to the economic recovery in the European Union, the policy-makers should seriously consider a shift of priorities”, comments Mr Bock.

Recommendations from 'Fill the glass to the brim II: have we broken through?':

• Fund Mergers: A separate EU Directive, based on the ideas in the EU Merger Directive, should be issued to cover taxation issues for cross-border fund operations at the levels of both the fund and of the investor.
• Management Company Passport: New EU-wide rules should be designed for the taxation of funds and their management companies. Alternatively, to avoid introducing new complexities and preserve the status quo, national tax rules should exempt UCITS undertakings from the “Effective Seat of Management” doctrine. In doing so, the funds could remain taxable in their country of establishment, even if the fund is managed by a non-resident EU-based management company.
• Value Added Tax (VAT): Member States take a more uniform approach on the question of when they consider a fund to be a “taxable person” for VAT purposes. To avoid distortions within the European Union, the report recommends that Member States adopt a more uniform interpretation of what activities constitute VAT-exempt fund management.

Press release

© ABBL - Luxembourg Bankers’ Association