European Savings Directive 2003/48/EC

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European Savings Directive 2003/48/EC Information The ALFI Taxation of Savings Working Group was asked to look at practical ways in which some of the provisions of the European Savings Directive

1 European Savings Directive 2003/48/EC Information The ALFI Taxation of Savings Working Group was asked to look at practical ways in which some of the provisions of the European Savings Directive 2003/48/EC (hereafter EUSD) could be interpreted. The Directive and the Luxembourg Law dated 21 June 2005 (hereafter the Law) provide that the threshold (according to Article 6 (8)) is to be determined either by means of the investment policy described in the prospectus, or if the prospectus is not sufficiently clear, by means of an asset test. The primary purpose of this document is to inform you about the changes foreseen by the EUSD and the Law as of 1 January 2011 (i.e. change of threshold from 40% to 25% and grandfathering of bonds). Moreover, the scope of this document is to share possible options concerning when and how to perform asset tests to determine whether the distributions / redemptions of the UCI are «in scope» or «out of scope» for the purpose of the Directive and the Law. I. Reduction of threshold to 25% Current law and guidance The relevant articles in the law (French version) are the following: Art. 6. Définition du paiement d intérêts 1. Aux fins de la présente loi, on entend par «paiement d intérêts»: [ ] d) des revenus réalisés lors de la cession, du remboursement ou du rachat de parts ou d unités dans les organismes et entités suivants, lorsque ceux-ci investissent directement ou indirectement, par l intermédiaire d autres organismes de placement collectif ou entités visés ci-dessous, plus de 40% de leurs actifs dans les créances visées au point a): [ ] i) des OPCVM autorisés conformément à la directive 85/611/CEE; ii) des entités qui bénéficient de l option prévue à l article 4, paragraphe 3; iii) des organismes de placement collectif établis en dehors du territoire où le Traité instituant la Communauté européenne est applicable en vertu de son article A compter du 1er janvier 2011, le pourcentage visé au paragraphe 1, point d), et au paragraphe 3 sera de 25%. 7. Les pourcentages visés au paragraphe 1, point d), et au paragraphe 5 sont fixés en fonction de la politique en matière d investissement, telle qu elle est définie dans le règlement ou dans les documents constitutifs ou 1

2 European Savings Directive 2003/48/EC autres des organismes ou entités concernés et, à défaut, en fonction de la composition réelle de l actif de ces organismes ou entités. The ALFI handbook gives the following guidance: The following rules have been proposed by ALFI: Take the composition of the assets of the UCI at 2 dates and identify all the debt claims as defined in article 6.1.a) of the Directive (i.e. without the grandfathered bonds). Determine the fraction of the total (net) assets invested directly in such debt claims and the fraction invested directly and indirectly in such debt claims. The 2 dates taken into account are: date of the semi-annual report of the UCI; date of the annual report of the UCI. The fraction is determined based on the book value (usually market value) of the assets at the relevant date. Making use of total net assets instead of total assets may lead to a less favorable result (the fraction could even be higher than 100%). Take the average of the percentages invested directly and indirectly in debt claims at those 2 dates (test done by using 2 decimals at the percentage level and rounded down); Check if the average is higher than 15% / 40%; On the basis of these 2 tests, determine whether the distributions / redemptions of the UCI are «in scope» or «out of scope». The conclusion will be valid for a 12 months period starting on the first day of the 5th month after the UCI s year end (annual reports must be made available within 4 months after the year end). Analysis It needs to be distinguished between (1) funds for which the investment policy is used to determine the IN/ status of the fund (2) funds for which an asset test is performed. 2

3 European Savings Directive 2003/48/EC 1. Funds for which the investment policy is used to determine the IN/ status of the fund For the funds for which the investment policy is used to determine the status of the fund, and for those funds which have a debt claims < 40% investment policy, but > 25%, the new status should be applicable as of 1 st January Funds for which an asset test is performed. Elements of complexity: Asset test are currently performed at year-end and half-year and the average at both dates gives the status of the fund. If the asset test at half-year is to be taken into account, the fund would already need to be partially compliant with the 25% threshold in Example: fund has year-end on Composition at : 25% Given that it is the average (of the asset tests half-year end and end-year) that is taken in order to meet the threshold, the debt claims level at half-year would already need to be at 25%. Some funds have year-end on , but many don t Bonds grandfathering ends on (Please note: ALFI recommends to follow the future discussions in this particular issue closely furthermore, we recommend to adapt a prudent approach) Conclusion The Working groups opinion is that the following approaches can be considered: Possible options Funds would have 3 possibilities to determine the new status of the fund starting on Option 1: No new asset test is required to be made. The new status of the fund starting on is based on the asset test according to the old rules (average of semi-annual and annual reports) and is applied to the new percentage. If the calculated percentage based on old rules is between 25 and 40%, the fund will be considered as in scope for EUSD from onwards. Immediate publication of the new status. 3

4 European Savings Directive 2003/48/EC Option 2: Given that the change in rate from 40% to 25% is exceptional, funds would, on an exceptional basis, need to apply only a single asset test (and not on the average of two asset tests) as at ; the publication of the new status shall be done as quickly as possible, at least within one month. Grandfathering of bonds would not be available. Option 3: A single asset test will be done on the basis of the latest annual or semi-annual report in In this case grandfathering of bonds would be still available. The publication of the new status should be made immediately. II. Prospectus & Simplified prospectus Both the prospectus and the simplified prospectus may contain information about the status of a fund with regard to the Taxation of Savings. The above mentioned changes become effective as of 1 January 2011 and call for adaptation of the constitutive documents in good time. III. Interest Income Depending on whether the fund was always out of scope since the implementation of the EUSD and the fund provider has published the interest portion for the calculation of TIS, the TIS figure shall be set at zero on 31 December The computation of the TIS (Taxable Income per Share) can be determined by the following scheme: Since 1 July 2005 out of scope Since 1 July partially out of scope Fund provider published no TIS because the fund was out of scope Reset of TIS to Zero on 31 December 2010 Start of attributing interest from 1 January 2011 No reset of TIS Carry on of attribution of TIS Fund provider published TIS on a voluntary basis No reset of TIS Carry on of attribution of TIS No reset of TIS Carry on of attribution of TIS 4

5 European Savings Directive 2003/48/EC Appendix A: In addition to the above table and in the light of the principle of legitimate expectations and legal certainty, the ALFI Taxation of Savings Working Group considers that the following table might clarify the following situation: Target fund is since 1 July 2005 out of scope for the purpose of the Savings Directive but has always published the TIS on a voluntary basis. The TIS of the Top fund or Fund of Fund, which serves to determine the interest portion of a distribution to the investors or the interest portion of the capital gain that an investor realizes when he redeems his units, is influenced by the TIS of the Target Fund A in case Fund A is in scope for the purpose of the Savings Directive. Example: Accounting of Units from capitalizing Target Fund Target Fund Fund of Fund Taxable interest portion per share (published) Inclusion into the calculation of TIS Remarks Purchase of Units Target Fund A with NAV at Purchased TIS entered not into the accounts until During the hole holding period purchased TIS was not accounted = 0 Purchased TIS accounted as negative account accrued TIS accounted as positive amount = 0.02 Accrued TIS purchased TIS (in the following daily attribution of TIS difference t-t-1) Appendix B: 5

6 Illustration of the 3 possible options to determine the new status of the fund

7 Option 1 Example 1: Year-end: 30/09 The fiscal status is determined according to the old rules (with grandfathering and limit 40%), based on the average of the asset tests perforned on the and : and = 35% Status: Period of validity: Status on January 1st: IN Determination of the status for the following period: Asset test : 30% (with grandfathering) Asset test : 37% (with grandfathering) Average: 33,5% > 25% Status: IN Period of validity: IN IN The definition of the new status starting January 1st is based on the existing average. This status is valid during the originally defined period (according to the 2005 rules). The following period is fixed according to the same existing principles (average of semi-annual and annual closings) with or without considering the grandfathering rule (depending on the date of the semi-annual and annual closing).

8 Option 1 Example 2: Year-end: 31/12 The fiscal status is determined according to the old rules (with grandfathering and limit 40%), based on the average of the asset tests perforned on the and : and = 35% Status: Period of validity: Status on January 1st: IN Determination of the status for the following period: Asset test : 30% (with grandfathering) Asset test : 65% (without grandfathering) Average: 47,5% > 25% Status: IN Period of validity: IN IN The definition of the new status starting January 1st is based on the existing average. This status is valid during the originally defined period (according to the 2005 rules). The following period is fixed according to the same existing principles (average of semi-annual and annual closings) with or without considering the grandfathering rule (depending on the date of the semi-annual and annual closing).

9 Option 2 Example 3: Year-end: 30/ and = 35% Status: Period of validity: Exeptional asset test on : 24% (without grandfathering Status on January 1st: (to be published as soon as possible) Determination of the status for the following period according to the existing 2005 rules: Asset test : 30% (with grandfathering) Asset test : 37% (with grandfathering) Average: 33,5% > 25% Status: IN Period of validity: However, as the next regular asset test after the exceptional single asset test shall never go back to a date earlier than , the reference date for the new asset test shall remain Therfore Status: (until ). Exceptional single asset test Option 2: Given that the change in rate from 40% to 25% is exceptional, funds would, on an exceptional basis, need to apply only a single asset test (and not on the average of two asset tests) as at ; the publication of the new status shall be done as quickly as possible, at least within one month. Grandfathering of bonds would not be available. The next regular asset test shall never go back to a date earlier than

10 Option 2 Example 4: Year-end: 31/03 30/09/2009 and 31/03/2010: 35% Status: Period of validity: 1/08/ /07/2011 Determination of the status for the following period: asset test 30/09/2010: 30% (with grandfathering) asset test 31/03/2011: 23% (without grandfathering) Average: 26,5% > 25% Status: IN However, as the next regular asset test after the exceptional single asset test shall never go back to a date earlier than , the reference date for the new asset test shall be the average of 31/03/2011 and Therefore Status: (until ). Exceptional single asset test asset test on 31/12/2010: 24% Status on January 1st: Option 2: Given that the change in rate from 40% to 25% is exceptional, funds would, on an exceptional basis, need to apply only a single asset test (and not on the average of two asset tests) as at ; the publication of the new status shall be done as quickly as possible, at least within one month. Grandfathering of bonds would not be available. The next regular asset test shall never go back to a date earlier than

11 Option 3 Example 5: Year-end: 30/ and = 35% Status: Period of validity: Latest available : 24% Status on January 1st: (to be published 1st January 2011 at the latest) The status is now valid until next year-end ( ) plus 4 months (= ) The next asset test is based on the average of and Publication of the new status Option 3: A single asset test will be done on the basis of the latest annual or semi annual report in In this case grandfathering of bonds would be still available. The publication of the new status should be made immediately.

12 Option 3 Example 6: Year-end: 31/03 Publication of the new status 30/09/2009 and 31/03/2010: 35% Status: Period of validity: 1/08/ /07/2011 Latest available : 24 % Status on January 1st: (to be published 1st January 2011 at the latest) This status is now valid until next year-end (31/3/2011) plus 4 months (=31/7/2011). The next asset test is based on the average of 31/3/2011 and 30/9/ Option 3: A single asset test will be done on the basis of the latest annual or semi annual report in In this case grandfathering of bonds would be still available. The publication of the new status should be made immediately.

Option 3 Example 7: Year-end: 31/12 The asset test as at 31/12/2010 is not possible as option three requires the immediate publication of the new status as at 01/01/2011.

13 Option 3 Example 7: Year-end: 31/12 The asset test as at 31/12/2010 is not possible as option three requires the immediate publication of the new status as at 01/01/2011. In case the fund wants to use the asset test as at 31/12/2010, it needs to apply option 2. 31/12/2009 and 30/06/2009: 35% Status: Period of validity: 1/05/ /04/2011 Latest available : 24% Status on January 1st: (to be published 1st January 2011 at the latest) Publication of the new status The status is now valid until next year-end (31/12/2011) plus 4 months (=01/05/2012). The next asset test is based on the average of 31/12/2011 and 30/06/ Option 3: A single asset test will be done on the basis of the latest annual or semi annual report in In this case grandfathering of bonds would be still available. The publication of the new status should be made immediately.

REGULATION TO AMEND REGULATION RESPECTING MUTUAL FUNDS. Section 1.1 of Regulation respecting Mutual Funds is amended:

REGULATION TO AMEND REGULATION 81-102 RESPECTING MUTUAL FUNDS Securities Act (RSQ, c V-11, s 3311, par, (3), (11), (16), (17) and (34)) 1 Section 11 of Regulation 81-102 respecting Mutual Funds is amended: