Taxation Considerations for Fund Distribution in Europe
Ireland’s tax neutral regime for globally distributed investment funds has been in place for over 25 years. Our tax treaty network spans over 70 countries across the EU, Middle East, Asia and South America, and it is one of the most developed and favourable tax treaty networks in the world. The availability of treaty benefits in a particular case will ultimately depend on the relevant tax treaty and the approach of the tax authorities in the treaty country. Consequently, treaty access needs to be reviewed on a case-by-case basis.
Other than in respect of certain funds which hold interests in Irish real estate (or particular types of Irish real estate related assets), non-Irish investors are not subject to Irish tax on their investment and do not incur any withholding taxes on payments from the fund.
Ireland was the first international fund domicile to sign an Intergovernmental Agreement (IGA) with the US in respect of the implementation of FATCA.
Common Reporting Standard (CRS)
Ireland was also one of the early adopter jurisdictions of the OECD’s Common Reporting Standard (CRS) regime. Ireland’s tax regime, as well as being highly efficient, clear and certain, is open, transparent and fully compliant with OECD guidelines and EU law. The Irish framework is legislation-based and does not rely on rulings. Ireland has the highest rating in the OECD Global Forum on Transparency and Exchange of Information for Tax Purposes.
Irish regulated funds are exempt from Irish tax on income and capital gains derived from their investments and are not subject to any Irish tax on their net asset value. There are additionally no net asset, transfer or capital taxes on the issue, transfer or redemption of units owned by non-Irish resident investors.
As provided under EU law, the provision of management, administration and custody services to an Irish regulated fund is exempt from Irish VAT. Other services, such as legal and accounting services, can result in an Irish VAT liability, but may be offset, depending on the fund’s VAT recovery position.
In recent years, several European jurisdictions, such as Austria, Switzerland, Belgium, Germany, Italy and the UK, have either introduced new tax reporting regimes or modified existing ones.
From an Austrian tax point of view, investment funds which carry out Austrian tax reporting are considered transparent, meaning there is a direct allocation of income of the fund to investors. This is more attractive to investors than lump sum taxation which applies where a fund does not have tax reporting.
In Austria, foreign funds may appoint a local tax representative who along with the Fund administrator calculates and provides information (within certain timeframes) to the Oesterreichische Kontrollbank (OEKB) on deemed distributed income, net interest income and information on the taxable portion of the distributions paid to investors.
There is no investor tax reporting in Belgium as such, but it is required that tax is payable on the net assets of funds in Belgium and an accompanying return submitted to the Belgian tax authorities (“UCI Certification”). The Belgian Net Asset Tax is due on the net amounts invested in Belgium which equates to subscriptions (net of redemptions) made through a Belgian financial intermediary.
Where Belgian residents subscribe via foreign intermediaries, these subscriptions are excluded from a fund’s taxable base, irrespective of whether or not the fund is registered with the Belgian Banking, Finance and Insurance Commission. The tax is due and payable by 31 March each year.
In Germany the tax treatment for German investors is significantly better if they are investing in a transparent fund (i.e. a fund that has met the local German tax reporting obligations). For this reason most potential German investors require funds to have transparency status. In order to achieve tax transparency status the fund must satisfy various filing and reporting requirements, which include local publication requirements and obtaining a certificate from the German tax authorities that the fund’s German tax reporting is in compliance with German tax law.
Tax information must be certified by a tax auditor and published in the German electronic federal gazette within four months of the financial year end. In addition to annual reporting Germany requires daily reporting for certain parts of the fund’s income.Funds which fulfil the complete range of annual and daily reporting requirements are regarded as tax transparent. The consequence of being labelled non-transparent negatively impacts the tax treatment of German resident investors.
Italian tax reporting was introduced with effect from 1 January 2012. From this date, profits deriving from Italian and certain other funds became subject to a 20% tax rate. The increase from 12.5% to 20% of the tax rate applicable to profits deriving from investments funds mainly affected Italian resident private individual investors and certain non Italian resident investors.
In order to preserve the reduced 12.5% taxation in certain instances, tax reporting is required in Italy to identify the portion of profits/losses associated with “indirect” investment in eligible bonds. It is necessary to determine an average percentage on the basis of the ratio between the value of the eligible bonds and the total asset value based on the two last available financial statements of the fund.
Swiss individual investors require tax reporting so that they can declare their taxable income and the value of the investment in their tax return. If Swiss tax reporting is not undertaken, investors could suffer prohibitive income tax in Switzerland. Foreign funds are treated like Swiss funds if they pass certain equivalence criteria. If the foreign fund is to be distributed in Switzerland, an up-front authorisation by the Swiss Financial Markets Authority (FINMA) may be obtained, depending on the category of investor targeted.
The tax reporting involves the preparation of a calculation to separate the taxable income from tax exempt capital gains in the hands of the Swiss investor based on Swiss taxation principles. The taxable income and net asset value per share for income tax and personal net wealth tax purposes can be provided to the Swiss Federal Tax Administration (FTA) which then publishes these values in the official rates list. No tax information is required to be published for institutional or corporate investors.
In order for non-UK investment funds to achieve preferential treatment in the UK, it is important that investment funds obtain UK reporting status. Under the Fund Reporting Regime, a fund is required to obtain confirmation from the UK tax authorities prospectively that it meets the eligibility criteria to be considered for Reporting Fund Status.
Once Reporting Fund Status is obtained a fund must then comply with the reporting requirements set out in the regulations which require that it reports 100% of its income returns (calculated under the UK tax rules) to UK investors and the UK tax authorities on an annual basis. Where a fund has Reporting Fund status, UK investors will be taxed under the Capital Gains Tax (CGT) regime upon realisation of their investment in the fund, rather than as offshore income gains taxable at investors’ marginal tax rate which would otherwise apply if UK reporting status was not achieved.