OECD Committee on Fiscal Affairs Roundtable on Collective Investment Vehicles February 1-2, 2006 -- Paris, France Selected Treaty Issues Affecting Collective Investment Vehicles Investing in Securities Stephen E. Shay, Ropes

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OECD Committee on Fiscal Affairs Roundtable on
Collective Investment Vehicles February 1-2,
2006 -- Paris, FranceSelected Treaty Issues
Affecting Collective Investment Vehicles
Investing in SecuritiesStephen E. Shay, Ropes
Gray LLP
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Cross-Border Portfolio Investment Through CIVs

• At June, 2005, mutual fund assets worldwide (in
  41 countries) were 16.41 trillion.
• 8.2 trillion were held in the United States
• 5.6 trillion were held in Europe
• Investment Company Institute, Worldwide Mutual
  Fund Assets and Flows, Second Quarter 2005,
  Supplementary Tables, Table S1, Total Net Assets
  in U.S. Dollars, found at http//www.ici.org/stat
  s/mf/ww_06_05.htmlTopOfPage.

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Cross-Border Portfolio Investment Through CIVs

• Benefits of CIVs to investors.
• Investors achieve economies of scale and reduced
  transactions costs.
• Investors receive benefits of professional
  investment management.
• Investors achieve diversification of investments.
• CIVs are important source of investment capital
  for source countries.

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Cross-Border Portfolio Investment Through CIVs

• CIV structural imperatives.
• CIVs must realize income and gains on a tax
  neutral basis compared with direct ownership of
  securities.
• Unrelieved tax costs discourage co-mingling in a
  CIV with international investments diminishing
  cross border portfolio investment.

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Legal and Tax Attributes of CIVs

• CIV investors include
• Institutional investors, many of whom at
  tax-exempt.
• Individual investors.
• Funds may be marketed publicly or privately.

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Legal and Tax Attributes of CIVs

• CIVs legal form may be
• Recognized as a separate taxable legal entity, or
  
• Transparent for tax purposes.

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Legal and Tax Attributes of CIVs

• CIV tax characteristics.
• Irrespective of the legal form of the CIV, there
  is little or no effective taxation of the CIV.
• Low or no taxation of CIVs is accomplished in
  myriad ways. CIV may be
• Not a person or transparent,
• Exempt from tax,
• Subject to tax at low or zero tax rates,
• Subject to tax with the integration at the
  investor level.

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Legal and Tax Attributes of CIVs

• Home country or third country CIV.
• United States, the United Kingdom, France,
  Germany and other countries have substantial
  national mutual fund or investment fund
  industries serve principally resident investors.
• Other fund locations, including Luxembourg and
  Ireland, service investors primarily from third
  countries.

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CIV Difficulties in Obtaining Source Country
Treaty Relief

• CIV-level treaty issues.
• Whether the CIV is a person and a resident of
  the treaty country.
• The CIV is the beneficial owner of income
  whether CIV satisfies any limitation on benefits
  provisions.

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CIV Difficulties in Obtaining Source Country
Treaty Relief

• Practical tax reclaim issues.
• Not practical for investors in a publicly offered
  or widely-owned CIV to claim treaty relief.
• In summary, CIVs face lack of direct access to
  treaty benefits and an inability to implement
  refund claims for investors.

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CIV Difficulties in Obtaining Source Country
Treaty Relief

• CIV treaty relief dividends.
• Resident CIV must be liable to tax.
• CIV must be beneficial owner of dividends.
• US-style limitation on benefits
• Exemption for publicly-traded companies does not
  apply to open-end funds.
• Ownership test difficult to administer.

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CIV Difficulties in Obtaining Source Country
Treaty Relief

• Pension plans and other tax-exempt investors
• Some treaties allow pension plans, tax-exempt
  organizations exemption from source country
  taxation.
• CIVs sometimes organize to pool these investors
  funds.
• CIVs should be allowed to accommodate these funds.

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Principles for Obtaining Source Country Treaty
Relief

• Principles for addressing CIV/Investor treaty
  issues.
• Avoid double taxation, do not foster double
  non-taxation.
• Treat economically similar investors similarly.
• Preserve benefits of residence country
  tax-exemption.
• Implementation of treaty relief at CIV level.
• Do not expect a one size fits all solution.

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Addressing CIV Treaty Issues

• Consider modifying treaty rules for CIVs.
• Residence issues.
• Clear definitions for classification of CIV forms
  as transparent and non-transparent.
• Clear rules for whether CIV is eligible to claim
  treaty relief directly.
• If CIV subject to tax, it should be allowed to
  claim treaty relief.

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Addressing CIV Treaty Issues

• Consider modifying treaty rules for CIVs (contd)
• Transparent CIV entities.
• To the extent possible, consistent with treaty
  purposes, identify transparent CIV entity may
  claim treaty relief on behalf of its investors.
• For example, treaty relief allowed at the level
  of the CIV if investors are from qualifying
  countries that treat the CIV as transparent.

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Addressing CIV Treaty Issues

• Consider modifying treaty rules for CIVs (contd)
• Beneficial owner and limitation on benefit
  issues.
• If income taxed to the investor through
  withholding or directly, treaty eligibility
  should be allowed at entity level.
• Tax-exempt entities.
• Consider special CIV treaty rules

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Improve Treaty Reclaim Process

• Relief at source should be the objective.
• Streamline procedures for standardize
  documentation requirements.
• Permit use of omnibus accounts (pooling of
  assets).
• Documentation by intermediary with a know-your
  customer relationship with investor.
• Documentation should be verifiable by the
  source country.
• See G30 Proposal

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Next Steps

• Consider convening advisory group including
  representatives from industry to further examine
  issues and alternative solutions.