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1 TAX PLANNING INTERNATIONAL EUROPEAN TAX SERVICE International Information for International Business >>>>>>>>>>>>>>>>>>>>>>>>>> VOLUME 14, NUMBER 8 >>> AUGUST EU: Collective investment vehicles Luxembourg: New generic top level domain names UK: Pensions planning on relocation to Switzerland Greece: Tax law changes ECJ: Exit charge on cessation of trade or transfer

2 Collective investment vehicles issues in cross border investment David Burke Mason Hayes & Curran, Dublin This article draws a useful comparison between collective investment vehicles popular in countries such as Ireland, Luxembourg, Italy, Switzerland and UK and are mainly used for tax and non-tax purposes in efficient cross-border investment structures. David Burke is Tax Partner in Mason Hayes & Curran in Dublin. I. Introduction Investors often prefer pooling funds with other investors and structuring their investment through a collective investment vehicle over making a direct investment, for both tax and non-tax reasons, especially where investment and investors are in different jurisdictions. This article describes the features and tax treatment of investment vehicles in Ireland, Luxembourg, Switzerland, the UK and Italy that are most frequently used in structuring of cross border investments. Some attract investors from specific jurisdictions; others are used for specific target investments and some offer a beneficial tax treatment for the investment managers. II. Ireland The two Irish non-ucits vehicles that are most popular with private investors are the Qualifying Investor Fund ( QIF ) and the section 110 securitisation company ( Section 110 Company ). A. Qualifying Investor Funds A QIF is a tax exempt vehicle which is typically established as an investment company or unit trust. It is authorised by the Irish Central Bank (but more lightly regulated than a retail fund) and issues equity (shares or units). QIFs are more expensive than section 110 companies and require a longer lead-in time for implementation. The minimum subscription in a QIF is EUR 100,000 and investors must satisfy certain eligibility criteria and an authorised fund promoter is needed with net shareholder funds of at least EUR 635,000. QIFs are exempt from Irish tax on both income and gains; it is possible to roll up income and gains in the fund gross with no requirement to distribute. There are no net asset value-based taxes and no stamp/capital taxes on issuance or transfer of shares/ units in the QIF. Non Irish resident investors are not subject to withholding tax provided an appropriate declaration is made. Irish resident individuals are subject to withholding tax at 30 percent or 33 percent that constitutes the final settlement of their Irish tax liability. 6 08/12 Copyright 2012 by The Bureau of National Affairs, Inc. TPETS ISSN

3 B. Section 110 company A section 110 company is unregulated and issues debt securities. It is subject to tax at 25 percent on its taxable profits. It can get deductions for expenses which are deemed to be revenue in nature. Interest is generally deductible, including profit participating interest, save in certain circumstances. For example, if such debt is regarded as equity in a corresponding regime and a participation exemption applies, the deductibility in Ireland may be in question. Section 110 companies generally issue debt as dividends that are not deductible. There are no thin capitalisation rules. Exemptions from withholding interest are available on quoted Eurobonds (listed security) and on payments to investors in treaty jurisdictions. A quoted Eurobond can be held by anyone globally without further enquiry. Section 110 companies are generally eligible for treaty benefits on income received from foreign investments. C. Example structure A section 110 company is frequently used in life settlement securitisations. These transactions typically involve transfers of life policies to the company. As a section 110 company is entitled to treaty benefits, such structures can be used to minimise the 30 percent US withholding tax on death benefits. The company can issue participating profit and listed debt to a Delaware LP for US taxable investors and to a Cayman LP for US non-taxable investors. There are a number of US issues to consider in relation to this structure. Firstly, it must be structured so that no permanent establishment is created in the US. As a result, services, managers and administrators etc. are appointed outside the US. Secondly, the ability to availoneself of the US treaty exemption from withholding on death benefits depends on meeting the Limitation of Benefits ( LOB ) Article in the Ireland/ USA double tax treaty. Though the section 110 company is regarded as a resident in Ireland, the LOB test still needs to be met. There are a number of LOB tests prescribed in the Ireland/USA treaty, one of which typically requires at least 50 percent of the investors to be qualified persons (resident in the US or Ireland) and a compliance with a base erosion test which requires that deductions payable to people other than investors must not be more than 50 percent of the gross income of the fund. A QIF can also be used in structures like these because a QIF is a Collective Investment Undertaking, which is specifically regarded as a resident under the Ireland/USA treaty, which is unusual for a tax exempt entity. D. Summary In summary, the two non-ucits collective investment vehicles used in Ireland are very different in nature and scope. The advantage of a QIF is that it is tax exempt, has treaty access in some cases (e.g. Ireland/ USA double tax treaty) and there is no withholding tax from non-irish investors. On the other hand, it is subject to regulations of the Central Bank with significant lead time for authorisation and the costs associated with such regulation. A section 110 company is unregulated and hence easy to establish. It can be structured so as to be taxneutral and it also has full treaty access. There are generally no withholding tax issues, provided it is structured correctly. A wide range of asset classes can be repackaged into a section 110 company. On the other hand, a section 110 company must ensure that it has deductible expenditure (interest not dividends) and certain anti-avoidance measures now apply to profit participating interest. It is often necessary to list debt securities to avoid interest withholding tax. III. Luxembourg The three most popular collective investment vehicles in Luxembourg, apart from traditional retail UCITS funds, are the SICAR, the SIF and the securitisation vehicle. A. SICAR The Luxembourg Société d investissement en capital à risque ( SICAR ) is a regulated venture capital/private equity vehicle which invests in risk capital. A SICAR is tax-neutral in the sense that although corporation tax at 28.8 percent applies, there is an exemption for income and gains from securities representing such risk capital investments. A SICAR is generally eligible for treaty benefits and EU directives, depending on the view of the tax authority in the source state. Investors in a SICAR need to be professional, institutional, or well informed, invest a minimum of EUR 125,000 and be aware of the risks they are taking. If it is uncertain whether a double tax treaty will apply to interest or dividend income payable to the SICAR it is possible to interpose a Société de participations financières ( SOPARFI ) - a taxable vehicle more widely recognised abroad as eligible for treaty benefits. B. SIF The Luxembourg Specialised Investment Fund ( SIF ) is a flexibly regulated investment fund which is also available to professional investors only. It is taxneutral in the sense that it is completely exempt from 08/12 Tax Planning International European Tax Service BNA ISSN

4 corporation tax and net wealth tax. For that reason, there is limited or no treaty access and if treaty access is required for some investments then it is common to interpose a SOPARFI for those. Like SICARs, SIFs are used for private equity investments. They are used in situations where it is not certain whether the investment will qualify as risk capital under the SICAR rules (e.g. real estate). The key difference between the two is that there is no limit on the nature of the investments in a SIF but it is necessary to have a spread of risk so that not more than 30 percent is invested in any one class of assets. It is possible to get an advance ruling in this regard. There are about 1,400 SIFs and 200 SICARs in Luxembourg. C. Securitisation vehicle The Luxembourg Securitisation Vehicle ( SV ) is not regulated unless it regularly issues securities to the public. It is tax-neutral in the sense that corporate income tax applies but all commitments to investors are fully deductible, whether they are debt or equity. An SV is typically eligible for treaty benefits. It can take the form of a company or a fund. There are usually more tax reasons for using an SV though there is a risk of recharacterisation under the doctrine of abuse of law if an SV is used for a transaction that is not a true securitisation. D. Example structures IV. Switzerland A typical real estate fund might use a SIF where a series of property companies (Propcos) would be held A Swiss collective investment vehicle is typically by a SOPARFI which would in turn be held by a SIF chosen to benefit from the (light) Swiss regulatory environment rather than for tax reasons, noting however that would issue units to investors. Other typical structures might use a securitisation vehicle to invest that it can be advantageous for investment managers in Propcos holding property located in Germany. The to structure their rewards through Switzerland. SV might hold shares in holding companies (Holdcos) which each hold a Propco. The SV would finance the Holdcos with loans. There is no withholding tax on the dividends payable by the SV to investors and no withholding on the payment of interest by the Propcos to the SV or on dividends paid by the Holdco to the SV. This structure may need to be reconsidered once the new Luxembourg/Germany treaty comes into effect on January 1, E. Summary In summary, Luxembourg collective investment vehicles are flexibly regulated entities and tax neutral though different forms of tax neutrality apply depending on the type of entity. All permit fully segregated compartments. Securitisation vehicles can furthermore be structured in such a manner that they are bankruptcy remote. Withholding is not usually an issue unless income is paid to an individual who does not agree to exchange information, in which case withholding would be imposed under the EU Savings Directive. There is an exemption from capital gains tax for non-resident shareholders and an exemption from VAT in respect of management services. For certain types of investment, any of the structures, a SICAR, SIF or SV can be used. For debt investments, a securitisation vehicle is more popular and for private equity and venture capital investments the SIF or SICAR is more commonly used, possibly with a SOPARFI interposed where treaty access is required. On the downside, there is no or restricted access to tax treaties for tax exempt vehicles such as the SIF and other transparent entities. Certain restrictions and conditions apply to activities and investments. For SIFs, there must be risk spreading and for SICARs there must be qualifying risk capital investments. For securitisation vehicles, a passive holding of existing securities is usually required. A section 110 company is unregulated and hence easy to establish The two Swiss collective investment vehicles that are most commonly used in practice are the société d investissement à capital variable ( SICAV ) and Swiss limited partnership ( SLP ). Both are subject to prior authorisation and supervision of FINMA (Swiss Financial Market Supervisory Authority). A SICAV is an open-ended fund that can either be self-managed or have external management. There is flexibility on the shares that can be issued. The SICAV can invest in bonds, indices and a broad range of other assets. An SLP consists of a general partner that is a Swiss corporation and (at least five) limited partners who are qualified investors with at least CHF 2 million each of liquid assets. Both the SICAV and the SLP are not subject to Swiss tax as they are tax transparent and capital gains realised by them retain this characterisation upon dis- 8 08/12 Copyright 2012 by The Bureau of National Affairs, Inc. TPETS ISSN

5 tribution to private investors. Income realised by an SLP is subject to Swiss withholding tax at 35 percent unless it derives from capital gains realised by the SICAV or SLP or the investors are foreign investors and at least 80 percent of the income is from foreign sources. A typical Swiss hedge fund investment structure might include a Swiss investment manager receiving service fees from a foreign limited partnership that itself receives fees from a foreign investment fund. The share of profits realised by the Swiss resident investment manager is exempt from Swiss taxes, provided that the foreign limited partnership conducts its business abroad. The fund is not subject to Swiss taxes. The advantage of this is that there is minimum regulation of investment managers in Switzerland and, based on a prior ruling of the Swiss tax administration, a low tax result for an investment manager living in Switzerland. V. United Kingdom The English Limited Partnership ( ELP ) is commonly used as a private equity style investment vehicle. A 1987 agreement between the UK Revenue and the British Venture Capital Association gives certainty as to its UK tax treatment. An ELP acts through a general partner ( GP ) with investors being admitted as limited partners ( LPs ). LPs cannot participate in the management of the LP without losing limited liability. The GP can be an English limited company but must be regulated or it must contract out services to a regulated manager. To avoid VAT, it must be VAT grouped with such a manager. This can create irrecoverable VAT which is why the GP is often located in Jersey or the Isle of Man. The ELP is not subject to UK tax, is fully transparent and, from a UK perspective, its activities are treated as carried on by its partners. The partners are taxed on their share of the profits and losses from the ELP. No unpaid tax can be recovered from the ELP the ELP is under no obligation to withhold tax on distributions of profits to LPs. An ELP is regarded as tax transparent in a large number of other jurisdictions (potentially allowing investors to access preferential capital gains tax treatment on the sale of assets owned by the ELP). If an ELP buys shares and securities to hold as investments any profit or return generally will be treated as a return from investment, not trading. An ELP will usually establish one or more holding companies through which it will make investments. As ELPs are tax transparent, the choice of holding company becomes important for the tax treatment of UK (and other) investors. A performance fee (carried interest) taken through a profit share in the ELP allows preferential tax treatment (capital gains, enhanced base cost). As the ELP is tax transparent, treaty benefits are generally available by reference to the position of the investor. A typical private equity investment structure might have an ELP holding shares and debt in a Luxembourg holding company that invests in debt and equity in portfolio companies. This is suitable for investors in most European jurisdictions and for US investors with appropriate check-the-box elections for specific entities. If investments are made by taxable and tax exempt US investors, a separate partnership would be established for the latter. The reason for this is that if the US investor is taxable, income should flow through from the investment directly into the US to maximise capital gains tax rates but, if the investor is tax exempt, a direct shareholding is preferred so that foreign tax credits can be claimed by the tax The English Limited Partnership ( ELP ) is commonly used as a private equity style investment vehicle. exempt vehicle (they would be harder to claim where they are further down the chain). VI. Italy In Italy, a Fondo Chiuso ( FC ) is typically used as a collective investment vehicle for private equity investments. In summary, there is no taxation at fund level and no taxation for non-resident Italian investors, provided certain conditions are met. An FC is an undivided pool of assets set up and managed by an Italian management company, the societe di gestione del risparmio ( SGR ), on behalf of investors whose rights are represented by interest units. The FC has no legal personality and its assets are separate from the assets of the SGR and of the investors. The SGR is structured as a limited liability corporation and authorised by the Bank of Italy. A depository bank is required to be responsible for the custody of the investments of the fund. This can be an Italian bank or the Italian permanent establishment of a foreign bank. Investors can be resident anywhere but tax consequences will vary. Usually private equity funds 08/12 Tax Planning International European Tax Service BNA ISSN

6 are established in the form of closed-end funds reserved to qualified investors. In general, distributions by an FC are subject to a 20 per cent withholding tax. For Italian resident individuals (and not-for-profit businesses) and non-italian resident investors, the withholding is a final statement of their tax liability. For Italian resident companies, the gross distribution is taxable but a credit is given for the tax withheld by the fund. Certain non-resident investors can apply for an exemption from the withholding tax. This includes residents of white-list countries (i.e. with adequate exchange of information with Italy), residents of countries with tax treaties with Italy and institutional investors, even if not subject to tax and established in a white-list country. David Burke works for Mason Hayes & Curran in Ireland. He may be contacted by at dburke@mhc.ie. This article stems from a report of a workshop that took place in Vienna on 30 March 2012 at the 12th Annual Tax Planning Strategies Conference. It was chaired by Herbert Buzanich (Schoenherr) and Gordon Warnke (then of Dewey & LeBoeuf LLP, now of Linklaters LLP) and included contributions from Mark O Sullivan (Matheson Ormsby Prentice, Ireland), Frédéric Feyten (OPF Partners, Luxembourg), Jean-Blaise Eckert (Lenz & Staehelin, Switzerland), Darren Oswick (Simmons & Simmons LLP, London) and Stefano Petrecca (Di Tanno e Associati, Italy). Gain expert analysis and full text of key international tax treaties Tax Treaties Analysis provides expert analysis, summaries, full text and English translations of essential international tax treaties. It helps you to quickly pinpoint the main elements of key tax treaties - and understand their effect and impact. As well as the incisive analysis, Tax Treaties Analysis also contains the full text of over 2700 international tax treaties. NEW: TAX TREATIES ANALYSIS Here s how helps you: Tax Treaties Analysis Pinpoint the main provisions of core treaties quickly and accurately in a user-friendly format. Gain expert analysis clarifying how the treaties work in practice. The authoritative guidance allows you to easily find the most beneficial treaty for a particular transaction. Understand all the essential elements of the treaties. The analysis clarifies provisions of each treaty. Compare treaties quickly and with ease. The unique treaty comparison chart allows you to compare against multiple treaties every article from each treaty. Tax Treaties Analysis provides you with: Authoritative analysis of key tax treaties. What their implications are, how they work in practice. Full text of over 2700 key international tax treaties. Expert summaries of the major tax treaties. Official treaty documents in native languages plus English translations. A treaty comparison chart allowing you to compare and contrast topics between different treaties. An In the News section providing updates and amendments that have been made to the treaties. Summaries and full text of the 3 Model Treaties (UN, US and OECD). Gain your free trial to Tax Treaties Analysis today by visiting or ing marketing@bnai.com First Floor, 38 Threadneedle Street, London, EC2R 8AY Telephone: + 44 (0) Fax: + 44 (0) marketing@bnai.com /12 Copyright 2012 by The Bureau of National Affairs, Inc. TPETS ISSN

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