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Headline Verdana BoldLink ‘n’ LearnInvestment Fund Tax2 November 2017

2© 2016 Deloitte. All rights reserved

01 Introduction

03 Administrative cooperation

Agenda

04 Country by Country reporting

02 Capital gains tax

05 Section 871(m)

06 Investor tax reporting

07 Conclusion

3

© 2016 Deloitte. All rights reserved

Introduction


Investment Fund Tax

Nenad Ilic, CFADirectorFinancial Services Tax

D: +352 451 452 046M: +352 621 652 [email protected]

Nenad Ilic is a Director in the Financial Services Tax department at Deloitte Luxembourg. He assists banking and asset management businesses on a broad range of local and international tax matters including amongst others corporate taxation, transactional tax planning, operational taxes and taxation of investment funds. Nenad has spent 5 years in a senior tax role at a leading asset manager where he was responsible for the EMEA tax affairs. He is thus well aware of the tax topics and practical issues faced by the fund industry. Nenad actively participates in industry bodies’ discussions on a wide range of tax topics such as FATCA, CRS, FTT, BEPS, etc. He has authored several articles on FATCA and was an invited speaker at the ALFI Spring Conference, one of the largest fund conferences in Europe.

Jacquou MartinDirectorAdvisory & Consulting

D: +352 451 452 174M: +352 621 281 [email protected]

Jacquou Martin is a Director within the Investment Management Practice in Luxembourg and is focused in the cross border distribution of investment funds. Over the last years, Jacquou has developed a wide expertise in pan-European tax reporting and assisted different fund administrators in the implementation and the parameterization of fund accounting systems for tax reporting. Nowadays, he is responsible for the Pan-European Tax Reporting department dealing with the compilation and the coordination of the certification for each pan-European annual tax reporting for funds. In his day-to-day work, he deals with investor tax reporting such as DE, AT, UK, CH, IT, BE, DK, SE, TW, etc.

Your speakers today Objectives

Following this session you will be able to:

Recognise the jurisdictions that impose a capital gains tax (CGT) and understand the benefits of provisioning CGT on unrealised capital gains

Understand the aims of the EU Directive 2011/16/EC (DAC) and its latest developments – DAC5 and DAC6

Identify the new obligations arising for the investment funds as a result of the country by country reporting (CbCR)

Understand the impacts of IRC section 871(m)

Identify jurisdictions in which investor tax reporting is required and understand the latest implications following the German investment tax act reform

Introduction

5


Capital Gains Tax


Capital Gains

World map of high risk countries

A few sample of ‘high tax risk’ countries:

• Bangladesh• China• India• Mexico• Pakistan• etc.

INDIA / PAKISTAN• Highly complex tax system• Local Tax Agent required• Tax assessment• Aggressive position of local

tax authorities

CHINA• Highly complex tax system• Great uncertainty despite

recent publication of tax circulars

VENEZUELA• Local Tax Agent required• Repatriation issues• Specific taxable basis

ARGENTINA• High penalty if no

payment• Remaining uncertainties


Capital Gains

Current trends and services

AWARENESS OF

LOCAL CAPITAL

GAINS TAX RISK

PROVISION FOR

UNREALIZED

CAPITAL GAINS

DELOITTE’S

ASSISTANCE

Description

• Monitoring and calculation of Capital Gain Tax exposure (on daily, monthly or quarterly basis);

• Review the countries of investments to identify in which high risk countries the fund is investing (if any)

• Check the compliance of the fund with the local tax requirements on capital gain taxation

• Assistance in Permanent Account Number or National Tax Number application, where applicable;

• Assistance in preparation of return of income and e-filing;

• Tailor-made calculation and advice on taxability of sale transactions;

• Liaison with the local custodian bank and local tax authorities;

• Preparation and filing of the advance tax statements to local tax authorities and/or tax certificates tocustodian;

• Asset managers and investors are becoming increasingly aware of the risk for funds to be taxed on capital

gains in the countries of investment;

• Some regulators and authorities start considering this matter as a risk area;

• Notwithstanding the above, the majority of Management Companies do not systematically monitor the

local taxation (and eventual changes) in the countries of investment and the risk exposure of their funds;

Funds investing in high risk countries should keep track of any provisions for unrealized capital gains; but

• the computation of the provision to be booked usually requires specific local expertise;

• a global network if key;

• if not done, a potential NAV impact exists upon sale or transfer of certain securities;

• worst case scenario, funds cannot liquidate if no provision is made.

8


Administrative cooperation in the field of taxation (Directive 2011/16/EC)Latest Developments


on administrative cooperation in the field of taxation

Council Directive 2011/16/EU

Council Directive 2011/16/EU was introduced as part of the legislative agenda aiming to combat tax abuse within the EU.It intends to provide a legal framework for tax cooperation between the EU Member States. Provisions of the Directive concern differentprocedures for exchange of information, notifications on tax decisions and introduction of an electronic system to facilitate the exchange.

The instrument is systematically amended in order to extend itsscope as well as to adapt it to the latest developments in theinternational tax arena.

This presentation covers the latest amendment to theDirective and the Commission’s proposal fora forthcoming change. These are known as DAC5 and DAC6respectively (Directive on Administrative Cooperation).

It is important to note that most of the solutions put forwardin the Directive are in line with the recommendations of theOrganisation for Economic Co-operation and Development(“OECD”) initiatives and may be better understoodin their context. The most significant, in the context of the recentchanges, is the OECD’s Base Erosion and Profit Shifting (“BEPS”)Project where the OECD identified 15 actions to address BEPS in acomprehensive manner.


New framework for Tax Administrative Cooperation

EU

2011: DAC1

Effective: 01.2013 (Directive 2011/16,

except Art. 8)

New framework and tools for

administrative cooperation and,in particular, new

provisions for: • Exchange on

request• Spontaneous

exchange

2011: DAC1 (AEOI ITEMS)

Effective: 01.2015(Directive 2011/16, Art.

8)

Automatic exchange of information

on 3 non-financial categories:

• Income from employment

• Director's fees• Pensions

2014: DAC2

Effective: 01.2016(Directive 2014/107)

Automatic exchange of information on

financial account information

2015: DAC3


Automatic exchange (using a central

directory as from 1.2017) of:

• Advance cross-border rulings

• Advance pricing arrangements

2016: DAC4

Effective: 06.2017 (Directive 2016/881)

Country-by-country reporting on certain financial information

2016: DAC5


Access by tax authorities to anti-money

laundering information

2017: DAC6 proposal

Effective: 01.2019?(Proposal 2017/0138)

New transparency requirements for intermediaries.Requirement for

the Member States to automatically exchange

the information they receive from

intermediaries.

OEC

D

OECD Multilateral Convention

No equivalent at the OECD level

MCAA CRS

Automatic exchange of information on

financial account information

Equivalent exists at the OECD level

(BEPS Action 5),however the scope regarding the years subject to exchange

differs

MCAA CbC signed on 27/01/2016

Annex III to chapter V of BEPS Action 13 concerning BEPS enumerates the

information that must be reported

No equivalent exists at the OECD level

Equivalent exists at the OECD level

(BEPS Action 12), however the proposalimposes, additionally,

a requirement to automatically exchange disclosed information between the Member

States

Council Directive 2011/16/EU

History and future developments


DAC5

On the 6th of December 2016, the EU Council has adoptedDirective 2016/2258, also known also as DAC5. That Directive isan amendment to the EU Directive 2011/16/EU as regards accessto anti-money-laundering information by the tax authorities.Following the transposition of the Directive into the nationalsystems, the tax authorities will be able to access mechanisms,procedures, documents and information referred to in Articles 13,30, 31 and 40 of the Council Directive 2015/849.

The information exchange will concern:

• customer due diligence information;

• beneficial ownership for trusts and corporate entities;

• records of transactions;

• other documents specified in Articles 13, 30, 31 and 40 of EU Directive 2015/849.

DAC6

On the 21 June 2016, the European Commission has publishedProposal 2017/0138 – DAC6 – to further amend the CouncilDirective 2011/16/EU. The proposal aims to set new transparencyrules for intermediaries such as accountants, banks, lawyers or taxadvisors which design and promote tax planning schemes for theirclients. In order to achieve this goal, DAC6 introduces a set ofobligations on the Member States that will have to transpose it totheir national systems in case DAC6 is adopted.

The obligations include:

• duty on the intermediaries to report cross-border arrangementsthat contain specific indicators (“hallmarks”) which may suggestthat the arrangement has been set up for tax avoidancepurposes;

• duty on the Member States to automatically share theinformation received from intermediaries with all other MemberStates on a quarterly basis;

• information sharing in a standardized format through acentralized database.

Executive summary

DAC5 & DAC6


DAC5: Directive 2016/2258

Insertion of the following paragraph in Article 22 of the Council Directive 2011/16/EU:

For the purpose of the implementation and enforcement of the laws of the Member States giving effect to this Directive and to ensure the functioning of the administrative cooperation it establishes, Member States shall provide by law for access by

tax authorities to the mechanisms, procedures, documents and information referred to in Articles 13,30, 31 and 40 of Directive (EU) 2015/849 of the European Parliament and of the Council (*).

*Directive (EU) 2015/849 of the European Parliament and of the Council of 20 May 2015 on the prevention of the use of the financial system for the purposes of money laundering or terrorist financing, amending Regulation (EU) No 648/2012 of the European Parliament and of the Council,

and repealing Directive 2005/60/EC of the European Parliament and of the Council and Commission Directive 2006/70/EC (OJ L 141, 5.6.2015, p. 73).



New obligations

DAC5 inserts a whole new paragraph to Article 22 of Directive 2011/16/EU

Amendment provides the tax authorities of the Member States with access to anti–money-laundering information

As a result of DAC5, each Member State’s tax administration possesses

equal access to the above-mentioned

information (full cooperation)

The information accessible for tax authorities of the Member States as a

result of DAC5 includes:• documents and other information

on the customer due diligence, evidence and records of

transactions;• information held on registries of

beneficial ownership collected under anti-money-laundering legislation concerning entities, trusts and similar other legal

arrangements

The amending Directive should enter into force and

be transposed to the national systems as soon as possible and no later than

1 January 2018



New obligations

Member State B

Member State A

• Client due diligence data

• Information on beneficial

ownership

• Other information gathered

under AML provisions

Transfer Agent in Member State B

Tax Administration

of Member State B

• Client due diligence data

• Information on beneficial

ownership

• Other information gathered

under AML provisions

Transfer Agent in Member State A

Tax Administration

of Member State A

Member State A

Automatic information exchange

15


Country By Country ReportingLatest Developments


Country by Country Reporting

Who will be subject to CbCR?

• CbCR applies to multinational companies (MNCs) with a combined revenue of euros 750 million or more.

What is CbCR and what is a CbC report?

• Country-by-Country Reporting (CbCR) is part of the OECD’s Base Erosion and Profit Shifting (BEPS) Action Plan 13. In essence, large multinationals have to provide an annual return, the CbC report, that breaks down key elements of the financial statements by jurisdiction. A CbC report provides local tax authorities visibility of revenue, income, tax paid and accrued, employment, capital, retained earnings, tangible assets and activities.

When will CbCR be implemented?

• This depends on when countries implement CbCR into their own legal system, but the intention is that reports will be required for the fiscal years starting on or after the 1st of January 2016 (FY16) and should be filed within 12 months of the relevant year end.

When will CbC reports need to be filed?

• CbC reports will need to be filed 12 months after the fiscal year has ended, starting with the first financial year commencing after 1 January 2016.

Where is a CbC report filed?

• CbC reports are primarily to be filed where the parent company is headquartered (HQ). If the HQ country has not implemented CbCR, MNCs should file in the country with CbC reporting where their most significant activities occur.

Ultimate Parent

Entity

Constituent

Entity

Constituent

Entity

Constituent

Entity

Constituent

Entity

Responsible for filing the CbCR, unless a surrogate parent is appointed by the MNE group

Responsible for notifying the local tax authorities of (1) the constituent entity status and (2) the identity and tax residence of the MNE group’s reporting entity



Scenario 1 – Investor consolidates fund holding

Fund may be required to file an “equivalent” CbC report if:

• the foreign investor is not in scope for CbC reporting in its resident country; or

• the investor’s country of residence has not concluded an agreement to exchange CbC reporting information; and

• no other entity in the consolidated group acts as surrogate parent; and

Fund may be required to notify the local tax authorities of its “constituent entity” status and the identity of the MNE group’s reporting entity

Country A

Investor

Equity holding

Country B Fund

Accounting Consolidation



Scenario 2 – Fund consolidates equity holding

Fund may be required to file a CbC report as an “ultimate parent entity” if it consolidates a foreign entity (e.g. an entity in which it holds a significant equity interest) into its financial statements.

Investor

Country C equity holding

Country B Fund

Accounting Consolidation

19


Section 871(m)


Background

• Section 871(m) refers to a set of U.S. tax rules aimed at expanding the scope ofderivative instruments subject to U.S. withholding and reporting obligations.

What is it?

• Prevent avoidance of U.S. dividend withholding tax by non-U.S. persons who, byinvesting into derivative financial instruments, achieve economic exposure to a U.S.source dividend without actually receiving such dividend.

Purpose

• Payments from derivative contracts linked to U.S. equities are treated as “dividendequivalent” payments subject to the same withholding obligations as regular U.S.source dividends.

Consequences

• Raise awareness• Make an inventory of impacted transactions and derivatives• Engage discussion with business partners:

• Custodians, brokers, CCPs: state of readiness and intentions regarding theQDD regime

• Data vendors: availability of relevant data (instrument status, delta,potential exemptions, etc.)

• Monitor developments

Key action points U.S.

Stock

Fund FIEquity Swap

Dividend

15% WHT

Equity leg = Dividend Equivalent

30% WHT

Floating leg


Building blocks

• Dividend equivalent payments

• Generally, a “dividend equivalent” is any payment that references the payment of a dividend from an underlying security pursuant to:

1. a securities lending or sale-repurchase transaction,

2. a Specified NPC,

3. a Specified ELI, or

4. any substantially similar payment

• Includes instruments referencing actual or estimated payments of dividends, whether the reference is explicit or implicit

− Single stock futures, whose price varies based on estimated dividends, are now caught by section 871(m)

• Includes a settlement payment on a price only contract regardless of direction of the final payment

Investment funds are at risk of suffering a 30% U.S. withholding tax, or lower treaty rate, on dividend equivalents received


Building blocks

• Delta

• Delta is defined as the ratio of a change in the fair market value of a contract to a small change in the fair market value of the asset referenced by the contract. In other words, delta represents the degree of correlation of the derivative with its underlier and thus ranges from -1 to +1.

• Section 871(m) applies to NPCs and ELIs that qualify as simple contracts (defined on next slide) and whose delta at issuance is 0.8 or higher

• Typical convertible bonds should be out of scope

• 2015 Regulations no longer require delta to be recalculated each time a derivative is acquired or disposed of or a dividend is paid on the underlier. Delta at issuance is sufficient but:

− Modifications to contracts could result in a deemed issuance

− Timing of issuance for listed options (in-the-money option’s delta increases as the option approaches maturity)

Portfolio managers may need to screen the 871(m) status of a derivative before making an investment decision to ensure that no unexpected withholding will take place

Particularly relevant when in-scope derivatives are used for hedging purposes as 871(m) withholding tax may reduce the effectiveness of the hedge


Building blocks

• Simple vs Complex Contracts

• Simple Contract: An NPC or ELI that references a single, fixed number of shares in an underlying security (e.g. listed options, futures, etc.)

• Complex Contract: An NPC or ELI that is not a simple contract (e.g. structured instruments having asymmetric, binary, path-dependent or formulaically-determined payouts). Complex contracts are not subject to the delta test but to a more intricate “substantial equivalence test”; the IRS and Treasury have requested comments on this test

• Amount of a dividend equivalent

• Simple contracts: per-share dividend x number of shares referenced in the contract x delta at issuance

• Complex contracts: per-share dividend x number of shares that make up the initial hedge of the complex contract

Withholding agents expected to undergo significant systems changes to be able:

to capture the relevant data (contract classification, delta at issuance, etc.),

calculate the dividend equivalent in a timely manner,


Building blocks

• Withholding

• Required by the later of:

— the date on which a payment on the Specified NPC or a Specified ELI is made, or

— the date on which the amount of a dividend equivalent is determined

• Withholding responsibilities

− Generally the short party is responsible for withholding

− If a broker is involved in the transaction, the broker is responsible for withholding

− If both the long and the short party transact though brokers, the broker of the short party is responsible for withholding

− Custodians may also be required to withhold

25


Investor Tax reporting


Which countries require investor tax reporting?

Reporting Daily tax Tax registration Annual tax Ad-hoc Abolition/new

Austria Non-eu TIS Oekb DDI - AT TIS abolished as from 31/12/2017

Belgium B-tis Ruling upon request Streaming (FCP) / Asset testSubscription Tax /

Cayman taxWHT rate increased to 30%

Chile - - - Asset test No

Denmark - Initial application Reportable income - No

EUSD - - Asset test -Abolished after 31/12/2016 (except for some associated territories)

France - - PEA/taper reliefdividend distri. Split (couponnage) New couponnage might become a market practice

Germany Akg i, akg ii, ig, zg Wm-daten DDI §5, §18 and §19 - Abolished in 01/01/2018 except for special funds

Addi

Italy - - IRRP (twice a year)/capital vs. Income split Inheritance, PIR No

Liechtenstein - - Fund earnings to corporate investors - No

Luxembourg - - Subscription tax for lux domiciled fund - E-filing of subscription tax mandatory as from 2018

South Korea Asset test/korean taxable NAV - - - Applicable from 01/01/2016

Norway Tax information at redemption - Asset test/distribution breakdown SSA No

Spain - - - Traspaso No

Sweden - Skv 2745 Investor specific reporting: KU forms - -

Switzerland - Ruling upon request Muster reporting - CH TIS abolished 31/12/2016

United KingdomFull equalisation investor specific Initial application Excess RI Asset Test 60% (Bonds) No

U.S. Computation8832 (CTB) /EIN / State PFIC / K1 / FIN 48 Investor Reporting No

CRS - - Exchange of information - A reporting to the investors might be advisable

CGT Variable frequency - - - With over 100 countries to be monitored


The new German Investment Fund Tax Regime

Who is affected?

Portfolios

Investment funds

Investors

Reduced rate on German sourced income

Access to partial taxexemptions

Status certificate

Fund CategoryAsset Test 2

1

All funds investing in German equities

All funds distributing in Germany

or



Status certificate

Why

A status certificate facilitates the application of the reduced German withholding tax rate of 15% directly on German sourced income paid out to the fund and reduces administrative burden on fund level.

For which funds

We recommend an analysis of the investment policies for all sub-funds in order to determine which sub-funds do receive or are likely to receive German sourced income in the future and therefore will benefit from the existence of a status certificate.

How to get it

Application forms and a short guideline are available on the website of the Federal Central Tax Office (BzSt). The application has to be filed per sub-fund. The BzSt will not issue any status certificate before 2nd of January 2018, but the applications can already be sent.

What to do

Once obtained the status certificate has to be transmitted to German data providers like WM (dedicated fact-sheet) and/or German paying/withholding agents

If you need more information or want us to assist with the filing please contact us.

26,375% 15%

Withholding Tax rate on German equity income



Asset Test

Why

Classification as equity, mixed or real estate fund in the sense of the German Investment Tax Act makes partial tax exemptions accessible for the fund’s German investors.

For which funds

We recommend a check for all sub-funds with German investors before 31/12/17

What to do

• Check the fund scope and determine which funds should be eligible for qualification as

• Prepare self-declaration to WM (dedicated fact-sheet)

• Review and revise the constituting documents/prospectus (alternatively: establish a side letter) before 31/12/2018 and include the minimum asset ratios

• Prepare the calculation of the daily asset ratio

If you need more information or want us to assist with the initial asset ratio check, the preparation of the self-declaration or the calculation of the daily asset ratio please contact us.

PrivateInvestor(IncTA)

Business Investor(IncTA)

Corporate Investor(CorTA)

Fund Classification

Investment policy

Distribution, DDI and redemption

Mixed Funds

>25%of the NAV

permanentlyinvested

in equity assets

15% 30% 40%

Equity Funds

>51%of the NAV

permanentlyinvested

in equity assets

30% 60% 80%

German Real Estate Funds

>51%of the NAV

permanentlyinvested

in Real Estate

60%

Foreign Real Estate Funds

>51%of the NAV

permanentlyinvested in foreign

Real Estate

80%

All other Funds

0%



Investor analysis

We would recommend performing the following checks as soon as possible in order to assess the need for restructuring:

Check for tax exempt (German) investors and their needs/expectations

• Special Investment Funds with transparency option

• Dedicated sub-funds / share classes in investment funds

• Tax reclaim procedures

Check existing special investment funds

• German investors and their needs/expectations

• Qualification special investment fund under the new regime possible and/or necessary

• If you need more information or assistance please do not hesitate to contact us.

15% 0%

Withholding Tax rate on German equity income



Action points

Set-up

Investors:

• Analyze the sub-funds classification to confirm the respective partial tax exemption (Individual, Business, Corporate);

• High level GAP analysis between the equity ratio and the investment restrictions;

• Recommendation of fund classification and description of the changes required in the prospectus;

• Complete and file the WM-Daten factsheet in order to list your sub-funds in a proper way and disclose the accurate tax status (Self-declaration procedure).

Assets:

• Application for Status certificate (analysis + completion + filing)

Reporting

Investors:

• Publication of daily NAV and Equity Ratio

o Option 1: ad-hoc review

o Option 2: End to end solution (from calculation till publication including coordination at each NAV evaluation)

• Preparation and filing of the reporting upon distribution

• Preparation of the annual report to investors

• Tax reporting upon merger or liquidation

• Tax reporting for Special Funds (daily and annual)

Assets:

• Execution of a Reclaim Process for EU tax-exempt investors (now penalised by ‘fund level’ taxation under the new GITA regime)

32


Conclusion/Q&A

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