EUROPE: Funds Industry highlights UCITS IV Tax hurdles

Friday September 17 2010

A joint industry research report published by European Fund and Asset Management Association (EFAMA) and KPMG reveals significant tax complications in the UCITS IV Directive that prevent the achievement of a harmonised European funds industry.

The report, entitled Analysis of the tax implications of UCITS IV, identifies critical tax issues and numerous examples of discrimination and inefficiencies across the 27 European Union (EU) Member States.

UCITS IV 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.

In their 120 page report, EFAMA and KPMG have made a set of recommendations with the aim of resolving the tax barriers to an effective single market:

1- Fund Mergers: UCITS IV will allow 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.

2- Management Company Passport: UCITS IV will enable a UCITS fund in one Member State to 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.

3- Master-Feeder Fund Structure: UCITS IV will make it possible for a Feeder fund 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 Feeder structures to become a reality and offer investors a cost effective product.

The Joint report recommends 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:

i.Tax neutrality of fund mergers;

ii.Uniform rules governing the tax residency of funds and the place of incorporation & registration; and

iii.Tax neutrality on the flow of cash between Master and Feeder funds.

Click on the above link to download the Report.