Fund News - Issue 101 - March 2013

fund news

financial services / Regulatory and Tax / Issue 101

developments in March 2013 Investment Fund Regulatoryand Tax developments in selected jurisdictions

2 / Fund News / Issue 101 / Developments in March 2013

Regulatory Content

european union 3 AIFMD Delegated Regulation 3 EuVECA and EuSEF adopted 4 UCITS V Update 5 ESMA Q&A on Guidelines on ETFs & other

UCITS issues 5 Green Paper on long-term financing of

European Economy

Belgium 6 FSMA applies ESMA guidelines on ETFs and

other UCITS issues 6 FSMA issues circular on the notification of

foreign UCITS 7 FSMA issues circular on the notification of

Belgian UCITS

france 8 AMF applies ESMA guidelines on ETFs & other

UCITS issues

Ireland 8 Draft AIFMD Rulebook issued 9 Changes to UCITS Notices and Guidance Notes 9 New Rules for UCITS Management Companies 9 New Fund Structure 9 Amendment to AML law

switzerland 10 Amendment of Collective Investment Schemes Act

uK 10 FSA’s AIFMD implementation in the UK – Part 2

International 15 IOSCO Principles of Liquidity Risk Management

for CIS 15 IOSCO Report – Investor Education

Contents

Tax Content

european union 16 EU Commission Proposal for Financial Transaction

Tax Directive 16 CJEU judgements on the Wheels and GfBk cases

Germany 18 New regulations for free floating dividends for

corporate investors

Luxembourg 19 Aberdeen E-Alerts Update

netherlands 19 CAA with Spain re closed FGR

uK 20 Budget 2013: IM Strategy 20 Budget 2013: Funds tax measures

Accounting Content

uK 23 FRC publishes FRS 102

Fund News / Issue 101 / Developments in March 2013 / 3

Regulatory news

european union

certain other sophisticated investors. Cross-border marketing will be subject to a simple regulator-to-regulator notification procedure. In cases where fund managers do not opt-in, existing national rules and general EU rules will continue to apply.

2. Interaction with AIFMD

EuVECA and EuSEF will only apply to EU-established managers that are subject to registration with the competent authorities of their home Member State in accordance with the AIFMD with their assets under management not exceeding €500 million. Under the AIFMD, these so called “small AIFMs” will be subject to certain reporting conditions (“lighter regime”), but will not be able to benefit from the Passport regime unless they opt-in to full compliance with the AIFMD. The EuVECA and EuSEF frameworks will make it possible for fund managers of “qualifying” venture capital/social entrepreneurship funds to benefit from an EU-wide passport regime without having to comply with the full set of AIFMD rules. Fund managers registered under EuVECA or EuSEF whose assets in total subsequently grow to exceed the €500 million threshold of the AIFMD, and who therefore become subject to authorisation with the competent authorities of their home Member State (MS) in accordance with that Directive, may continue to use the designation “EuVECA” in relation to the marketing of qualifying venture capital funds in the Union, provided that they comply with the requirements laid down in the AIFMD and that they continue to comply with EuVECA or EuSEF at all times.

3. Operating conditions

A “qualifying fund” must be established as a Collective Investment Fund (non-UCITS) in an EU Member State, and must invest at least 70% of its aggregate capital contribution in “qualifying investments” such as equity or quasi-equity instruments issued by the “qualifying portfolio undertaking”, debt instruments, loans granted to the “qualifying portfolio undertaking” or units/shares of other EuVECA/EuSEF. A “qualifying portfolio undertaking” may be established in the EU or third country that has signed tax agreements with the MS of the fund manager and those of the MS where the funds will be marketed. For EuVECA, target companies should be SMEs employing fewer than 250 people with an annual turnover of less than €50mn / annual balance sheet not exceeding €43mn). In the case of EuSEF, social businesses should set out to achieve measureable social impacts whose profits are used to achieve social objectives and are managed in an accountable and transparent way.

Fund managers will need to comply with a number of requirements set out in these regulations including delegation rules, conduct of business and conflicts of interest rules similar to UCITS/MiFID, annual valuation of assets (minimum), capital requirements and transparency rules on disclosure to investors and annual financial reports. Fund managers of EuVECA or EuSEF may not employ at the level of the qualifying fund any method by which the exposure of the fund will be increased beyond the level of its committed capital, whether through borrowing of cash or securities, derivatives or by any other means. Furthermore, the fund manager may

AIfMd delegated Regulation published in the Official Journal

The three month objection period for the European Parliament regarding the proposed Alternative Investment Fund Managers Directive (AIFMD) Delegated

Regulation (level 2) passed on 19 March without any objections being raised. The Regulation was subsequently published in the Official Journal of the European Union on 22 March 2013 and will enter into force 20 days after publication (11 April). The Regulation does not require any transposition into national law and will apply directly in Member States from 22 July 2013.

european Venture Capital funds and social entrepreneurship funds Regulations adopted

On 21 March the European Council formally adopted the European Venture Capital Funds Regulation (“EuVECA”) and the European Social Entrepreneurship Funds Regulation (“EuSEF”) that were voted by the European Parliament on 12 March. The main aspects of these new frameworks include:

1. Voluntary registration:

Registration (and hence compliance) with the new regulations is voluntary. Those fund managers registered under the EuVECA or the EuSEF will benefit from an EU Passport regime that will enable them to market their funds under the EuVECA or EuSEF labels to eligible investors throughout the EU. Eligible investors include professional investors as defined under MiFID and


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only borrow, issue debt obligations or provide guarantees, at the level of the qualifying fund, where such borrowings, debt obligations or guarantees are covered by uncalled commitments. During the legislative procedure it was discussed whether to set out depositary requirements for EuVECA and EuSEF similar to the rules of AIFMD. The final text does not include such provisions and policy makers instead agreed on an enhanced audit function. The external auditor will be required to confirm at least annually that money and assets are held in the name of the fund and that the fund manager has established and maintained adequate records and controls in respect of the use of any mandate or control over the money and assets of the qualifying fund and its investor.

Compared to the AIFMD, the overall approach of the EuVECA and EuSEF can be considered as significantly lighter, with many aspects of both regulations containing much less detailed requirements.

4. Next steps

The EuVECA and EuSEF take the form of a regulation, which means that they will be directly applicable in all EU Member States and will not require any transposition into national law. Both regulations will enter into force 20 days after their publication in the Official Journal of the European Union and are set to apply from the 22 July 2013, the same date as the AIFMD.

The full texts of the Regulations are available via the following web links:

http://www.europarl.europa.eu/sides/getDoc.do?type=TA&language=EN&reference=P7-TA-2013-72

uCITs V update

On 21 March the ECON Committee of the European Parliament voted a report on the Commission’s proposal to amend the UCITS Directive in the areas of the depositary, fund manager remuneration and sanctions. Our Fund News of November 2012 outlined the content of the draft report and to follow are the main changes that were made to the draft:

• To align remuneration of Management Companies with investor interests the draft report required that any variable remuneration paid by the UCITS to the Management Company should depend on the size of the fund or the value of the assets under management. This provision is now applicable unless the UCITS is exclusively distributed to professional clients and other variable components are possible provided they are calculated based on an adequate benchmark, they provide additional remuneration for outperformance and deductions in the case of underperformance and concise non-technical information is provided to investors. Delegated acts shall further specify the requirements for benchmark portfolios and indices, holding periods and how the symmetrical effect of good and poor performance shall be determined.

• The share of variable remuneration to be deferred should be 25%, down from 60%.

• The possibility to ban members of management for breaches of

obligations of the Directive is removed.

• Administrative sanctions of legal and natural persons shall be effective, proportionate and dissuasive, when previously amounting to up to 20% of total annual turnover for legal persons and unlimited sanctions for natural persons.

• The information on the entities involved in providing custody of the fund’s assets and the description of the potential conflicts of interest shall be available on request from the depositary and no longer included in the prospectus.

• The financial instruments held in custody by the depositary shall not be reused by the depositary or by any third party to whom the custody function has been delegated.

• ESMA shall issue guidelines concerning adequate arrangements in the event of insolvency of the third party to ensure that assets held by the third party in custody are unavailable for the creditors.

• Beside credit institutions and investment firms, the depositary can also be national central banks and any other category of institution that is subject to prudential regulation and ongoing supervision provided that it is subject to capital requirements as well as to prudential and organizational requirements of the same effect as for credit institutions and investment firms. Member States will determine the categories of institutions that meet the above criteria.


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• The depositary may make arrangements for the purposes of meeting its liabilities for the loss of assets held in custody provided that such arrangements do not limit or reduce those liabilities or result in a delay in the fulfillment of the depositary’s obligations.

The report is available via the following web link:

http://www.europarl.europa.eu/document/activities/cont/201303/20130327ATT64015/20130327ATT64015EN.pdf

esMA publishes Q&A document on Guidelines on eTfs and other uCITs issues

On 15 March the European Securities Markets Authority (ESMA) released a “Questions and Answers” document on Guidelines on ETFs and other UCITS issues (refer to issues 94 and 98 of Fund News for details) which

came into effect on 18 February 2013. The Q&A document provides clarifications on the following aspects:

• Information to be inserted in the prospectus;

• “UCITS ETF” label;

• Secondary market;

• Efficient portfolio management techniques;

• Financial derivative instruments

• arrangement constituting delegation of investment management;

• Collateral management;

• Financial indices;

• Transitional provisions;

This document is intended to be continually edited and updated as

and when new questions are received.

The Q& A document is available via the following web link:

http://www.esma.europa.eu/system/files/2013-314.pdf

european Commission Green Paper on long-term financing of the european economy

On 25 March the European Commission adopted a Green Paper to initiate a broad debate about how to foster the supply of long-term financing and how to improve and diversify the system of financial intermediation for long-term investment in Europe. The consultation period lasts until 25 June 2013. Full details are available via the following web link:

http://ec.europa.eu/enterprise/newsroom/cf/itemdetail.cfm?item_id=6518&lang=en


Regulatory news

Belgium. Attention is drawn to the fact that, although the marketing is allowed, the UCITS may only advertise once they have received the prior approval by FSMA of the documents.

updating the notification file:

A change in the marketing arrangements detailed in the notification letter or the start of the marketing of an additional share class of an already registered sub-fund requires a notification to the FSMA by an e-mail explaining either the amendments made or the share class to be marketed in which case it must be accompanied by the KIID for that share class.

For updates of the prospectus, KIID, annual and semi-annual reports and their translations, the UCITS must inform the FSMA by e-mail, as soon as possible, such e-mail providing a clear overview of the amendments made. The amended documents must be accessible to the FSMA in electronic form.

UCITS marketed in Belgium must:

• Designate an intermediary in Belgium to handle their financial services. This intermediary will make payments to investors, sell and repurchase units and distribute the information that UCITS are required to provide. The types of intermediaries authorised to act in this capacity are listed in the Law of 3 August 2012.

• Provide at least the KIID in one of the national languages and the prospectus, the fund rules or the instrument of incorporation and the annual/semi-annual reports in one of the national languages or in English.

fsMA applies esMA guidelines on eTfs and other uCITs issues

The Autorité des Services et Marchés Financiers (FSMA) has indicated in a position paper dated 13 February 2013 that it will incorporate into its control framework the ESMA guidelines on “ETFs and other UCITS issues”. In line with the general approach followed in Belgium whereby UCITS rules are, to the extent possible, also applicable to UCIs with variable capital investing in financial instruments and liquid assets, the ESMA guidelines will also apply to these types of UCIs and to their management companies.

fsMA issues circular on the notification of foreign uCITs

On 14 February FSMA issued Circular 2013-05 on the notification procedure for UCITS governed by the law of another Member State of the European Economic Area. The circular provides an overview of the regulatory framework and of the circumstances in which a notification procedure is required.

The notification procedure is required when a UCITS governed by foreign law intends to offer its shares to the public in Belgium. The procedure is therefore not required when the UCITS markets its shares in Belgium with no public offer. The UCITS should refer to the criteria listed in Article 5 §1 of the Law of 3 August 2012 to determine whether or not an offer is public in nature.

The process described for the UCITS shall be followed separately for each sub-fund. However a single notification can be made for several sub-funds at the same time. Share classes are not

registered as such, but the UCITS must specify in the notification letter, which share classes it intends to offer to the public.

The circular further explains the procedure to follow when submitting or updating a notification file and the obligations that apply when units are marketed in Belgium.

submitting the notification file:

A UCITS that intends to market its shares in Belgium must submit a notification file to the competent authorities of its Home Member State that includes, among other documents, a notification letter (drawn up in accordance with the model set out in Annex 1 to Regulation 584/2010) providing under Part B, the marketing arrangements in Belgium. The FSMA accepts notification letters drawn up in one of the national languages of Belgium or in English. As part of the Circular, the FSMA clarifies the information that is expected under Part B of the notification letter:

• Overview of the categories of companies that will be responsible for marketing

• The name of the entity responsible for the financial service (under paying agent) as well as the details of the contact person for the FSMA.

• The competent authority of the Home Member State must transmit the notification file no later than 10 working days after the date of receipt. As soon as the file is received, the FSMA will add the UCITS to the list of entities authorised to market shares in

Belgium


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If not already included in the above documents, the financial inter-mediary must provide to the investors, before they make they make their investment, information on subscription and redemption charges, any minimum subscription amount and the applicable tax regime. The UCITS must also publish the net asset value of the sub-funds and share classes marketed in Belgium in at least one daily newspaper published in Belgium and on a website recognised by the FSMA or another form accepted by the FSMA.

• Submit all advertising materials for approval to the FSMA before they can be distributed in Belgium. The marketing material and the KIID must be provided in the same languages.

• Pay an annual fee to the FSMA.

Finally, the circular provides guidance on the termination of marketing in Belgium. The procedure to be followed differs depending on whether the UCITS has 100 or fewer investors in Belgium, a limit that is applicable by sub-fund.

• UCITS with more than 100 investors must submit a draft press

release to the FSMA that will inform the investors of the intention to stop marketing in Belgium. The UCITS will remain on the list of foreign UCITS and will need to maintain the financial service in Belgium until the number of investors falls below 100. At that point in time, the procedure for UCITS with fewer than 100 investors will have to be followed.

• UCITS with fewer than 100 investors must submit a file to the FSMA requesting their removal from the list of foreign UCITS and including a draft press release to the attention of investors and evidence of the number of investors. They do not need to maintain a financial service provider except during a minimum period of one month after the publication of the press release.

An annex to the Circular provides practical and technical arrangements for the electronic submission of documents to the FSMA.

The Circular can be obtained using the following web link:

http://www.fsma.be/~/media/Files/fsmafiles/circ/en/2013/fsma_2013_05.ashx

and the annex via the following web link:

http://www.fsma.be/en/~/media/Files/fsmafiles/circ/en/2013/fsma_2013_05-1.ashx

fsMA issues circular on the notification of Belgian uCITs

On 14 February FSMA issued Circular 2013-04 detailing the content of the notification file that Belgian UCITS must provide to FSMA when they intend to market their shares or sub-fund’s shares in another Member State of the European Economic Area.

The notification letter must be drawn up in accordance with the model set out in Annex 1 to Regulation 584/2010. The notification letter should be prepared in English or in one of the official languages of Belgium, provided that this language is also one official language of the Host Member State and that the latter agrees on the provision of the notification letter in this language. Part B of the notification letter shall describe the envisaged marketing arrangements in the Host Member State. Details of the information required are published by each individual Member State.


france Ireland

AMf applies esMA guidelines on eTfs and other uCITs issues

The Autorité des Marchés Financiers (AMF) has adopted in Position paper 2013-06 the ESMA guidelines on “ETFs and other UCITS issues” that came into effect on 18 February 2013. The guidelines have been incorporated into the AMF’s supervisory framework and give details concerning:

• the information to be supplied to investors about index funds and ETFs;

• the special rules that UCITS have to apply if they use over-the-counter derivatives and efficient portfolio management techniques;

• the criteria for financial indices in which UCITS invest;

• the implementation deadlines, particularly for existing UCITS.

Irish Regulator issues draft AIfMd Rulebook

Following a consultation with the industry before Christmas, the Central Bank has published a revised draft AIF Handbook which consolidates and revises all regulatory rules for non-UCITS. While the Handbook will be subject to an additional technical review, it will assist the industry in preparing for the implementation of the AIFMD by July 2013. Some of the key changes proposed include:

1. Abolition of Promoter Requirement AIFs will no longer need to have a regulated promoter.

2. New categories of AIFs. There will be two categories of AIF in Ireland – retail investor AIFs (RIAIFs) and Qualifying Investor AIFs (QIAIFs). The existing third category of non-UCITS in Ireland, Professional Investor Funds (PIFs) will be discontinued. Existing PIFs will be allowed to continue but will not be allowed establish new sub-funds or new share classes.

3. Delegation. The Irish regulator has confirmed that it will put in place an authorisation process which will allow existing Irish non-UCITS management companies and self-managed non-UCITS to transition across to the AIFMD. These entities are likely to need to make an application to the Irish regulator but will be able to continue with their existing business models without making very significant changes.

4. Master Feeder Funds. QIAIFs will be able to invest more than 50% in a single unregulated fund. This is subject to disclosure requirements

The prospectus, the fund rules or the instrument of incorporation and the annual/semi-annual reports prepared in one of the national languages or in one of the accepted languages of the Host Member State or English must be annexed to the notification letter. In addition, the annex must also contain the KIID for the sub-funds and shares that will be marketed in the Host Member State. The KIID must be prepared in one of the national languages or in one of the accepted languages of the Host Member State.

The notification letter must be submitted to the FSMA by e-mail. The Circular further provides indication on the technical arrangements and format of documents for such electronic submission.

Once the notification file is complete, the FSMA will transmit it to the competent authority of the Home Member State within 10 working days accompanied with an attestation certifying that the UCITS fulfills the conditions imposed by Directive 2009/65/EC and will notify the UCITS of the transmission.

Subsequent amendments to the notification file shall be dealt with by the UCITS directly with the competent authority of the Home Member State.

The Circular can be downloaded (only available in French) at the following link:

http://www.fsma.be/en/~/media/Files/fsmafiles/circ/fr/2013/fsma_2013_04.ashx

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and is only available to QIAIFs with a minimum subscription of €500,000.

5. Retail Investor AIFs. RIAIFs will replace the existing category of retail non-UCITS in Ireland. This category of fund had become less popular in recent years because the Eligible Assets Directive gave promoters the same result in a UCITS and provided a European passport. As a result, the Irish regulator has re-aligned this product by raising limits on investments in unlisted securities, single issuers and other investment funds. RIAIFs will also be able to establish side pocket share classes and will be able to carry out physical short sales. They will also be permitted to invest directly in gold and get exposure to any commodity through financial derivative instruments.

6. Real Estate and Private Equity Funds. These QIAIFs can have an initial offer period of up to 2 years and six months from the date of the first closing. These funds must describe themselves as “open ended with limited liquidity.”

7. Side Pockets. A QIAIF will be able to acquire assets and immediately place these in side-pockets. While there is no limit on the amount of assets that can be side pocketed such funds must describe themselves as “open-ended with limited liquidity.”

8. Prime Brokers. The prime broker and counterparty credit rating requirements have been abolished.

9. Fair treatment of Investors. The new rules require “fair” treatment

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of investors rather than the existing rules which require “equal” treatment

10. Verification of performance fees. Currently performance fees must be verified by a depositary. In the future this can be carried out by any independent party.

In addition, the Irish regulator proposes to have AIFM authorisations processes in place well before July 2013 and is currently preparing new application forms. It is anticipated that the Irish regulator will be able to accept applications for authorisation from the beginning of the second quarter of 2013.

Changes to uCITs notices and Guidance notes

The Central Bank of Ireland implemented the ESMA Guidelines on ETFs and other UCITS issues by amending the following Irish rules:

• UCITS Notices

• Guidance Note 2/07 Financial Indices

• Guidance Note 3/03 UCITS Financial Derivative Instruments

These revised rules took effect from 18 February 2013 and existing UCITS have one year to transition these rules.

new Rules for Irish uCITs IV Passporting Management Companies

The Irish regulator has revised Guidance Note 4/07 Organisation of

Management Companies to clarify how Irish UCITS management companies can apply for a passport. The process will involve the submission of a programme of operations dealing with corporate governance, administrator and trustee issues. The Central Bank will examine each submission on a case by case basis and will also engage with the regulator in the proposed host Member State.

new Irish fund structure

The Finance Bill 2013 introduces the legal framework for a new Irish fund structure which is equivalent to the Luxembourg SCIAV. This structure has two main advantages over existing Irish structures. Firstly, it will be able to elect its classification under the US “check the box” taxation rules as a “flow through” for US tax purposes. Secondly, it is likely to have lower running costs as it does not need to comply with certain company law and accounting rules.

Amendment to Irish Anti-Money Laundering (AML) Legislation

Last June proposed changes to Irish AML law were published by the Minister for Justice and an industry consultation took place. On 1 February the Criminal Justice (Money Laundering and Terrorist Financing)(Amendment) Bill 2013 (the Bill) was published. In general, the Bill clarifies existing obligations rather than introducing new requirements. The main changes proposed include:

1. Application of Simplified Due Diligence (SDD). The Bill clarifies


Regulatory news

fsA’s implementation of the AIfMd in the uK – Part 2

On 19 March the Financial Services Authority (“FSA”) published CP 13/9 “Part 2” of its consultation on the implementation of the Alternative Investment Fund Managers Directive (“AIFMD”) in the UK. This being “Part 2” is referred to as “CP2” and its proposals cover the issues set out in appendix 6 of “CP1” (CP 12/32 November 2012). Both CPs, along with the HM Treasury consultation documents of 11 January and 13 March 2013, implement legislation and regulations for the operation of the AIFMD in the UK from 22 July 2013.

There is a significant departure from the proposals in CP1 in that the FSA now intends to retain the current sourcebook for Authorised Funds (the “COLL Rules”) for a period after implementation of the AIFMD on 22 July 2013.

The proposals in CP 13/9 are discussed in the following sections:

1. The deferral of combining COLL into a unified FUND sourcebook

2. Transitional provisions

3. Submission of AIFM applications and variation of permission before 22 July 2013

4. Marketing

5. Delegation

6. Conduct of business and Systems and Controls requirements

7. Sub-threshold regimes

switzerland uK

the process that should be gone through to establish that a customer qualifies for SDD

2. Tightening of rules for Politically Exposed Persons (PEPs). Enhanced Due Diligence must be applied to an existing customer who subsequently becomes a PEP. Also, enhanced on-going monitoring must apply to customers who are PEPs.

3. Internal Policies and Procedures Requirements. The Bill clarifies that customer due diligence information must be kept up-to-date.

Amendment of the swiss Collective Investment schemes Act (CIsA)

With regard to the revision of the Federal Act on Collective Investment Schemes (CISA) and the Ordinance on Collective Investment Schemes (CISO), provisions concerning the Management Company Passport and Master-Feeder-Structures came into effect from 1 March 2013.

The previous law stipulated that an investment fund had to be based in the same country as the headquarters of the investment scheme or the fund management company that administers it. FINMA did not authorize funds that were not in compliance with this particular regulation. Under the revised Art. 120 para. 2(a) of the Swiss Collective Investment Schemes Act, the restriction that the management company or the investment scheme company respectively, and the fund must have the same country of domicile is no longer required.

Master-Feeder-Structures are now also permitted in Switzerland in accordance with Art. 73a revCISO of the Swiss Collective Investment Schemes Act. The revised article considers a collective investment scheme to meet the criteria of a feeder-fund once it invests a minimum of 85% of its assets in units of the same target fund.


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8. Depositaries

9. Prudential requirements

10. Consumer redress

11. AIFM passporting individual portfolio management activities

12. Private Equity Funds

Given European and other dependencies, the FSA continues with its AIFMD consultation in stages. This paper covers the issues that it was not able to address in Part 1 such as scope, delegation provisions, the sub-threshold regime and marketing. In addition, it has provided greater clarity on some of the more detailed provisions from Part 1. Firms must continue to prepare to be AIFMD ready, particularly those firms that intend to carry on the regulated activity of managing AIFs for the first time after 22 July 2013.

1. Combining COLL into the fund sourcebook deferred

In a departure from CP1, the FSA intends to retain the current sourcebook for Authorised Funds, the Collective Investment Schemes sourcebook or “COLL”, for a period after 22 July 2013.

In the short term, the FSA has determined that the combination of the COLL sourcebook into a new FUND sourcebook will result in more work than expected, so it does not consult at this stage on a full FUND sourcebook but proposes to retain all of COLL in the short term after 22 July 2013. The FSA will consult “no later than Q3 2013” on the text of the chapters of FUND that will replace COLL.

Managers of Non-UCITS Retail Schemes (“NURS”) and Qualified Investor Schemes (“QIS”) will become authorised as AIFMs after 22 July 2013 and will need to refer to both FUND and COLL sourcebooks. To address overlaps or ambiguity between the two sets of rules, the FSA will implement a rule which specifies that, in the event of any conflict between a rule implementing AIFMD and another rule in the Handbook that applies to the AIFM, the AIFMD rule will take precedence.

2. Transitional provisions

The FSA proposes to permit UK firms managing and/or marketing AIFs in the UK to make full use of the 12 month transitional period whether these AIFs become authorised or registered. This is in line with the Treasury’s position on the interpretation of the Directive’s transitional provisions in Article 61(1), as set out in its first consultation document, and applies irrespective of whether the AIF concerned is an EEA or non EEA AIF.

Firms carrying on management of AIFs from an establishment in the UK will have until 21 July 2014 to submit an application to become a UK registered or UK authorised AIFM, or to vary their Part 4A permission.

There remains some uncertainty over how some of the transitional provisions will be applied, in particular the provisions relating to disregarding certain AIFs which will make no new investments after 22 July 2013 and those whose subscription period will have ended by 22 July 2013 and will have been terminated by July 2016. Further clarification is awaited from HMT on its interpretation of these provisions.

3. submission of AIfM applications and variation of permission before 22 July 2013

The FSA appreciates that firms now operating on a cross border basis are seeking certainty that they will be able to continue to do so from 22 July 2013. It is working on being in a position to receive applications for variations of permissions before the 22 July from firms that need to be able to exercise single market rights to continue existing business without interruption.

The FSA will confirm its intentions after 1 April 2013 once it has become the Financial Conduct Authority (“FCA”). It is expected that the FCA will also confirm its intentions at this time in respect of applications from other firms.

4. Marketing

CP 13/9 gives further detail on the FSA’s thinking in respect of the marketing provisions under the AIFMD. In particular, the CP includes draft text for a new section in Chapter 8 of PERG (Perimeter Guidance) on financial promotions.

This guidance includes a consideration of, amongst other matters, how draft communications fit in with the AIFMD marketing regime, passive marketing, the Prospectus Directive and the UK financial promotion regime.

In relation to private placement, a new section of FUND (10.5) describes relevant notifications and other applicable conditions. The FSA states that further details will be provided before 22 July 2013.

The FCA will maintain the following public registers:


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• Article 36 Register – for full scope UK or EEA AIFMs managing non EEA AIFs;

• Article 42 Register – for non EEA AIFMs that are not small, managing AIFs; and

• Small third country AIFM Register – for non EEA AIFMs that are sub-threshold AIFMs managing AIFs.

This means that before commencing marketing all AIFMs which falls into these provisions must register with the FCA.

5. delegation

In this latest CP, the FSA gives further guidance on delegation and confirms it will take account of the criteria in Article 82 of the Level 2 Regulation in assessing proposed delegation arrangements by a full-scope UK AIFM. It expects such an assessment to be more qualitative than quantitative and will undertake a “proportionate supervisory assessment” on whether a proposed delegation may result in a “letterbox entity”.

The FSA guidance highlights the importance of ensuring that there has not been an abdication of responsibility by senior management of the governing body of the AIFM. Amongst other criteria, the FSA will consider the nature of the AIFM, and it indicates that it will review delegation structures with reference to its own statutory duty to carry out its regulatory functions in a way that promotes competition, so far as this is compatible with its other statutory objectives.

Following the Level 2 guidance on letterbox provisions it appears that the

FSA does not currently plan to issue any guidance on the application of the AIFMD’s delegation requirements, including the “letterbox entity” test. Instead, it will review delegation structures on a case by case basis and review the need for guidance once the AIFMD is implemented in light of any future developments at a European level. Firms may make requests for guidance in this area under SUP 9.2 of the current Handbook.

During the transitional period, the FSA does not intend to review a firm’s delegation arrangements until it applies for authorisation or a variation of permission to become an AIFM.

6 Conduct of business and systems and Controls requirements

The FSA intends to introduce a helpful table into SYSC to indicate which parts of this sourcebook apply to AIFM. It confirms that most of the organisational requirements under chapters 4 to 10 of the SYSC Handbook will not apply to full scope UK AIFMs. However, there will be a few exceptions where certain chapters will apply which are outside the scope of the AIFMD where these are considered necessary to secure adequate consumer protection, such as SYSC 6.3 concerning the prevention of financial crime and the record keeping requirements in SYSC 9.1.1R and 9.1.2R. Other rules will apply as guidance.

In addition, the existing table in COBS will be updated to indicate the scope of COBS that applies to full scope and sub-threshold AIFMs.

Exercising its rights under the AIFMD to impose additional requirements to

the marketing of AIFs to retail investors, the FSA proposes to implement additional transparency requirements to threshold UK AIFMs when they market an unauthorised AIF to retail investors. However, for full scope AIFMs the rules on inducements and some in respect of best execution will be disapplied where the AIFMD contains specific requirements.

7. sub-threshold regimes

In its first consultation, HMT proposed three categories of sub-threshold managers. Those being:

a) managers of authorised funds which will be subject to both existing regulatory requirements;

b) managers of unauthorised collective investment schemes (“UCIS”) and external managers appointed by AIFs that are not collective investment schemes which will be subject to existing requirements but will only have limited additional obligations under the AIFMD; and

c) internally-managed closed ended investment companies, which will be subject to a de minimis registration only regime under FSMA (plus UK listing rules where applicable).

Using these three categories, the first two will be authorised persons under FSMA, the third will not. But all three will be regarded as “registered”.

The FSA intends to apply all relevant AIFMD requirements including initial capital and own funds requirements to sub-threshold managers of authorised AIFs (category (a) above). It does not

Regulatory news

propose to apply changes to the prudential requirements for categories (b) and (c).

For managers of unauthorised AIFs, the FSA proposes to group together firms managing UCIS and firms managing other types of AIFs that are not within the definition of a collective investment scheme under the operators of UCIS, for example a firm appointed as an asset manager by a closed ended investment company.

8. depositaries

The FSA proposes to amend the Client Assets Sourcebook (CASS) so that CASS 6 is aligned to the AIFMD. It is intended that there will be a separate specialist regime for the following entities:

• Depositaries of unauthorised AIFs (funds intended for professional investors) for which the FSA lists the key CASS 6 provisions that will apply; and

• Depositaries of authorised AIFs, for which the FSA will apply additional rules and guidance to protect retail investors.

These additional provisions include those which relate to internal reconciliations and auditor opinions of alternative reconciliation methods; statements from delegated third parties; the frequency of external reconciliations; and the independence of persons conducting reconciliations.

The FSA also proposes that where a sub-threshold manager manages a UK authorised fund, the same provisions in CASS 6 will apply to depositaries as would apply to a full scope UK AIFM

managing a UK authorised fund; and to continue the application of other provisions in CASS to depositaries which are outside the scope of, or are consistent with, the AIFMD.

It is intended that COBS 18.7 will be revised to set out which parts of COBS apply to a depositary when acting as such.

The FSA is still considering the application of Article 21(7) of the AIFMD which details the cash monitoring responsibilities of a depositary. While the FSA had previously made proposals in relation to cash monitoring responsibilities in CP1 which appear in the current draft Handbook text (FUND 3.11.17R), the FSA believes there is some ambiguity in the drafting of the Article (21(7)). It states that this ambiguity has arisen in light of the Level 2 Regulation requirements in Articles 85 to 87 as it considers there is more than one way of interpreting the requirements which will affect the legal transposition, particularly in relation to the application of principles in Article 16 of the MiFID Implementing Directive prescribed in Article 86(a) of the Level 2 Regulation.

The FSA states that there is a possibility that all or some depositaries of AIFs may be subject to requirements for safeguarding cash in accordance with these principles. After further discussion with stakeholders to clarify the meaning of Article 21(7), the FSA will consult further should additional amendments be required.

9. Prudential requirements

As a result of implementing the AIFMD and the associated changes to the


Regulatory news

regulated activities including the deletion of UPRU, the FSA sets out:

• the proposed prudential regime for a sub-threshold UK AIFM; and

• amendments that will be necessary to IPRU (INV).

10. Consumer redress

The FSA does not intend to extend the remit of the Financial Ombudsman Service (“FOS”) or the Financial Services Compensation Scheme (“FSCS”) to investment companies or depositaries of UCIS, excluding UCIS in the form of common investment funds and common deposit funds where protection to investors will be provided and for investment companies.

In relation to cross-border activities, the FSA is considering options to extend the scope of the FOS and the FSCS. In particular, it proposes that the FOS’s remit should be extended to cover EEA AIFMs managing FCA authorised funds from establishments outside of the UK, although FOS will retain the discretion to dismiss a compliant without considering its merits if it has been referred to a comparable independent complaints scheme or dispute resolution process in another jurisdiction.

The FSA also proposes that the FSCS should cover cross-border fund managers where the fund is an FCA authorised fund.

This means that cover could apply to any EEA AIFM managing a UK authorised fund and these proposals will result in some EEA AIFMs becoming liable for annual levies from the FCA.

11. AIfM passporting individual portfolio management activities

In this current proposal the FSA has assumed that an AIFM will be able to passport individual portfolio management activities under article 6(4) of the AIFMD. However, it notes that the availability of the passport for such activities is still under consideration in Europe. Therefore its interpretation may be incorrect and a further consultation will be published on any amendments required.

12. Private equity funds

Although it was expected to be considered in this CP, the FSA has not included any guidance relating to the application of the AIFMD to Private Equity Funds. The FCA will consider issuing guidance at a later stage if required. The FSA does, however, give some example guidance in respect of scope and interpretation of some of the asset stripping provisions under Article 30 of the AIFMD, however, it is expected that further guidance will be necessary.

next steps

A further consultation on the AIFMD will be issued by the FCA after 1 April 2013.

This will cover:

• the consequential changes to bring the rest of the FCA Handbook into line with the rules consulted on in this CP and CP1 (expected to include further detail on AIFMD remuneration policies); and

• amendments to the FCA Handbook necessary to transpose Articles 35,

37 and 41 of the AIFMD to provide for the marketing and management passports for non EEA AIFM and non EEA AIFs.

In addition, the FCA intends to publish a full AIFMD policy statement in June. If possible, the FSA will also confirm some of the policy positions prior to the next consultation, including whether it will accept AIFM authorisation applications and variations of permission before 22 July 2013.

The closing date for responses to CP 13/9 is 10 May 2013. The CP (306 pages) is available via this web link:

http://www.fsa.gov.uk/static/pubs/cp/cp13-09.pdf


Regulatory news

IOsCO publishes Principles of Liquidity Risk Management for CIs

On 4 March the International Organisation of Securities Commissions (IOSCO) published the final report on “Principles of Liquidity Risk Management for Collective Investment Schemes (CIS)”, which contains a set of principles against which both industry and regulators can assess the quality of regulation and industry practices concerning liquidity risk management for CIS. They are structured according to the time frame of a CIS’s life, starting with principles that should be considered in the design (pre-launch) of a CIS and followed by principles that should form part of the day-to-day liquidity risk management process.

With regard to the pre-launch phase, the principle of drawing up an effective liquidity risk management process is considered as the fundamental basis of liquidity control within the CIS. The process needs to be effective in varied market conditions, and should fully consider the liquidity of the types of instruments in which the CIS will be invested to ensure the portfolio as a whole is consistent with the CIS’s ability to comply with its redemption obligations and other liabilities. Factors that must be taken into account as part of this process include the setting of appropriate liquidity thresholds and the determination of suitable dealing frequencies for the CIS’s units, the need to have relevant information available for liquidity management, an appropriate disclosure to investors of liquidity risk and its management process as well as of specific tools or exceptional measures affecting redemption risk, if any, and the consideration of liquidity aspects

International

related to proposed distribution channels.

Day-to-day principles emphasise the need for the liquidity risk management process to be supported by strong and effective governance, including effective oversight and appropriate escalation procedures, that should be effectively performed and maintained during the life of the CIS. This includes the regular assessment of the liquidity of portfolio assets, the integration of liquidity management in investment decisions, the use of liquidity risk management to identify an emerging liquidity shortage upfront, the incorporation of relevant data and factors into the process to create a robust and holistic view of possible risks, the assessment of liquidity in different scenarios including stress testing, and an appropriate record keeping and disclosure relating to the performance of the liquidity risk management process.

The full text of the Report is available via the following web link:

http://www.iosco.org/library/pubdocs/pdf/IOSCOPD405.pdf

IOsCO publishes Report on Investor education

On 25 February 2013 IOSCO published a “Report on Investor Education Initiatives Relating to Investment Services”. The report provides an overview of the different approaches that supervisory authorities and self-regulatory organisations take to educate retail investors on issues relevant to financial products that are distributed by intermediaries. It sets

out the results of a fact-finding survey of members of the IOSCO Committee on Market Intermediaries. These findings show a wide range of approaches, though they also indicate that supervisory authorities share common approaches and face some common obstacles to determining the most effective educational measures.

The full text of the Report is available via the following web link:

http://www.iosco.org/library/pubdocs/pdf/IOSCOPD404.pdf


Tax news

eu Commission issues Proposal for a directive on financial Transaction Tax

On 14 February the EU Commission issued a “Proposal for Council Directive implementing an enhanced cooperation in the area of financial transaction tax (FTT)” to be adopted by 11 Member States under the “enhanced cooperation” procedure.

The main objectives of the draft Directive are to harmonise legislation concerning indirect taxation on financial transactions, to ensure financial institutions fairly and substantially contribute to the costs of the recent crisis, and to create appropriate disincentives for transactions not enhancing the efficiency of financial markets.

The FTT is a tax on financial transactions between financial institutions (FI) charging 0.01% across derivative contracts and 0.1% against all other financial transactions, including, inter alia, the purchase, sale and exchange of financial instruments as well as securities lending and repurchase agreements. Tax rates shall be fixed by Member States but should not be lower than the previously mentioned ones.

According to the draft Directive, the FTT will apply to financial transactions where at least one party is an FI established in the territory of a participating Member State, acting either for its own account or for the account of another person or in the name of a party to the transaction. This “residency principle” ensures that if any party to the transaction is established in the FTT-zone, the transaction is taxed, regardless of where it takes place.

The term “Financial Institution” is broadly defined and captures also investment vehicles, i.e. UCITS and AIF, and management companies. Given the broad definition, care should also be given to the custodian banks, clearing institutions, prime brokers or any other agent intervening in the process of a financial transaction. Furthermore, only primary market transactions are exempt, meaning the issue of units/shares in an investment vehicle is exempt from FTT whereas the redemption of units/shares is taxable.

Luxembourg is currently not participating to the FTT. Nevertheless, FTT will affect non-participating Member States and Luxembourg investment vehicles will be affected by the draft Directive, as it foresees that an FI based outside an FTT Member State can be “deemed established” in a participating Member State where a relevant connection to such Member State can be established. For instance, Luxembourg funds or other FI will be deemed established in the Member State of the counterparty when participating to a financial transaction with an FI resident in an FFT Member State. The draft Directive further introduces an “issuance principle” in order to avoid FI relocating outside the FTT-zone. According to this principle, an FI which is party to a transaction in a financial instrument issued within the territory of a participating Member State will be considered as established in that Member State and liable to pay the tax.

The impact of the FTT for the fund industry is considered significant, and according to the European Fund and Asset Management Association

(EFAMA) the impact would have been EUR 13 billion assuming that it had been applied at the start of 2011. EUR 7.3 billion would have been attributed to participating Member States, while EUR 5.7 billion would have been attributed to non-participating Member States. The EFAMA study further indicates that investors would have paid EUR 4 billion on the redemption of UCITS units/shares, whereas EUR 9 billion would have been levied on the sales and purchases of securities by UCITS fund managers.

The draft Directive can be accessed via the following web link:

http://eur-lex.europa.eu/smartapi/cgi/sga_doc?smartapi!celexplus!prod!DocNumber&lg=EN&type_doc=COMfinal&an_doc=2013&nu_doc=71

CJeu judgements on the wheels and GfBk cases

On 7 March the Court of Justice of the European Union (“CJEU”) handed down two important decisions in the Wheels Common Investment Fund Trustees and Others (“Wheels”) and GfBk cases. Both these cases challenged the VAT exemption for the management of special investment funds (“SIFs”). These decisions are good news stories for fund managers who would have had to spend a lot of time putting together and negotiating claims but having to pass on any savings achieved to the pension funds. In contrast, the Wheels decision is disappointing news for pension funds themselves which had hoped that pension fund management services

european union


Tax news

would be found to be exempt supplies of services. Had the CJEU reached this decision, pension funds would have been entitled to recover significant amounts of VAT from Tax Authorities across the EU.

wheels (C-424/11)

EU law exempts from VAT the management of SIFs. In the UK, this covers the management of certain UK funds (such as OEICs and AUTs) and certain overseas funds which are regulated under the Financial Services and Markets Act 2000. The Wheels case sought to clarify whether defined benefit pension schemes also fell to be regarded as special investment funds to which the VAT exemption would apply.

The CJEU held that defined benefit pension schemes are not SIFs and, therefore, that the services of investment management is taxable. In reaching this decision, the CJEU found that pension funds are not SIFs because:

• employees do not bear the investment risk;

• the contributions of the employer are made as a consequence of the legal obligation to the employee rather than for the sake of investment per se; and

• a pension fund is not open to investments by the public and is not sufficiently comparable to a fund that is.

Following the CJEU’s decision, pension funds will continue to incur irrecoverable VAT on the services received from managers. Conversely,

fund managers will continue to recover any input VAT they incur in providing the service.

This is not the end for pension-related litigation and there are two other cases before the CJEU. The ATP Pension Services (“ATP”)(C-464/12) case will clarify whether pension fund management is exempt as a payment-related service; whereas the PPG Holdings (“PPG”)(C-26/12) case is focused more on which party is entitled to recover VAT on management fees – the fund or the sponsoring employer.

Depending on the CJEU’s decision, this could impact the current UK treatment of VAT on pension schemes which allows both the fund and the employer to recover a proportion. Often this is done under the so-called “70/30” split which divides a manager’s services between investment-related fees which are proper to the fund and scheme-management costs which are proper to the employer.

Whilst the Wheels case was being heard in the UK and European Courts, a number of managers protected their right to recover potentially over-declared VAT by submitting claims to HM Revenue and Customs. As Wheels has now been resolved, managers will need to consider whether these claims should be withdrawn or whether they can “stand behind” the ongoing cases, most likely the ATP litigation.

GfBk (C-275/11)

The GfBk case challenged the extent to which the fund management exemption can apply to sub-delegated managers and investment advisers.

In summary, GfBk, a German investment manager, provided investment advisory services to its fund manager clients. It made buy and sell recommendations and whilst the manager retained responsibility for reviewing and approving those, it effectively “rubber-stamped” these (often within minutes). The German Courts referred questions to the CJEU asking whether investment advisory services such as those provided by GfBk could fall to be fund management services for VAT purposes.

The CJEU has held that third party investment advisory services are capable of falling within the VAT exemption where they are “intrinsically connected” to the act of managing the investment funds. That the sub-delegated manager in this case could not execute trades on the fund’s behalf did not prevent its services from falling within the exemption.

The CJEU restated its position in the earlier Abbey National decision that the meaning of management for VAT purposes is not limited to functions listed in Annex II of the UCITS Directive. Whilst there is clearly a crossover between regulatory and tax law, the CJEU confirmed that Tax Authorities do not need to be limited in their understanding of “management” by reference to the regulatory position. One wonders, therefore, whether there are any additional services which may qualify for VAT exemption.

The GfBk judgment is another piece of good news for fund managers. Had the CJEU found that sub-delegated management and similar was taxable, UK fund managers would have faced a significant irrecoverable input VAT cost.


Tax news

VAT exemption on sub-delegated services has not been uniformly applied either in the UK or beyond. Any business which has historically incurred VAT on sub-delegated services should assess whether VAT was properly chargeable or whether these services already qualified for VAT exemption. Where any VAT has been over-accounted for, businesses should consider submitting claims to recover this amount.

Germany

new taxation regulations for free floating dividends (“streubesitzdividenden”) for corporate investors

The German legislator has been forced by the ECJ-Ruling C-284/09 to introduce amendments with regards to the German dividend taxation for corporate investors for free floating dividends (“Streubesitzdividenden”). These amendments cover dividends for holdings of less than 10% regardless of the domicile of the shareholder. Realised gains on equities are not affected by this regulation.

On 26 February 2013, the mediation committee of the German Bundestag presented a proposition revising current tax regulations by both changing the reimbursement procedures and time frame of the WHT for the aforementioned dividends under certain conditions and abolishing the tax exemption for such dividends in the future. The German Bundestag and Bundesrat have accepted this proposition, which will affect all income generated from free floating dividends from 1 March 2013 onwards.

This will not only have an impact on direct investments into German equity shares but also affects investors via investment funds.

All free floating dividends from shareholdings of less than 10% of the paying company’s share capital received on or after 1 March 2013 are now subject to corporation tax at investor level. This also applies to such dividends received by investment funds. Furthermore, separate accounting positions will have to be implemented for dividends received before and after 1 March 2013. An amended tax reporting table in acc. with § 5 Investment Tax Act (“InvStG”) is required for publications regarding financial business years ending after 28 February 2013.

The calculation of the so- called equity gain (“Aktiengewinn”) for investment funds is also subject to significant changes. The existing equity gain figure will be valid for private investors only from 1 March onwards. For corporate investors, a second equity gain will have to be published, where dividends received (and their related costs) after 28 February should not be included in the calculation (if shareholding is less than 10%).

Fund of funds will have to adapt their target funds data base and the respective processing of the data for the purpose of their own equity gain calculations.


Tax news

Luxembourg netherlands

Aberdeen e-Alerts

The Aberdeen E-Alert (tax newsletter focusing on withholding tax reclaims based on the Aberdeen case law) latest issues are available via the following web link:

http://www.kpmg.com/LU/en/Issues AndInsights/Articlespublications/Pages/Aberdeen-e-Alerts.aspx

• 2013-01France reimburses substantial amounts of withholding tax to Luxembourg SICAV.

• 2013-02 New German legislation regarding taxation of portfolio investments.

• 2013-03 France reimburses substantial amounts of withholding tax to Luxembourg SICAV.

• 2013-04 Dutch Court issues negative decision regarding Luxembourg SICAV.

CAA with spain re closed fGR

The Netherlands have concluded a Competent Authority Agreement (CAA) with Spain regarding the tax treatment of a Dutch closed FGR (“besloten fonds voor gemene rekening”).

A closed FGR is treated as tax transparent for Dutch tax purposes. This implies that all income and gains derived through such FGR are attributed to the investors in proportion to their participations in the FGR. FGRs are frequently used for asset pooling by pension funds and other investors.

In the CAA the Spanish tax authorities confirm that a closed FGR will also be regarded as tax transparent for the application of the tax treaty concluded between the Netherlands and Spain.

Furthermore, the FGR (represented by its manager or depositary) may – on behalf of its investors – claim the benefits of all tax treaties concluded by

Spain with regard to income from Spain. Thus, for any investor the lower withholding tax rates on dividend or interest income included in the tax treaty between Spain and its country of residence can be claimed.

The CAA is applicable to as of 1 January 2013.

Previously, the Netherlands have concluded similar CAAs with Canada, Denmark, Norway, the United Kingdom and the United States. Furthermore, in the Protocols to the new tax treaties with Germany and with Ethiopia, it is stated that the closed FGR will be treated as tax transparent. It is expected that agreements with other countries (including Switzerland) will follow.

The CAA is available via the following web link:

https://zoek.officielebekendmakingen.nl/stcrt-2013-1871.html


Tax news

Budget 2013: Investment Management strategy

The Treasury has launched its UK investment management strategy paper which provides a very strong statement of intent to preserve and enhance the UK’s position as a leading global investment management centre. The paper sets out a principled approach for the future focuses on taxation, regulation and marketing with many of the announcements centred on funds where the UK loses out to more nimble EU competitors.

The UK investment management strategy paper (26 pages) is available via this link:

http://cdn.hm-treasury.gov.uk/ uk_investment_management_strategy.pdf

The headline regulatory and marketing measures include:

• responsiveness to industry needs and constructive engagement on new legislation;

• a new co-ordinated approach and ongoing industry engagement;

• a “one-stop shop” for new managers including a “concierge” service;

• a sustained overseas marketing campaign; and

• an Islamic Finance task-force.

The paper provides good news for alternative fund managers, making a commitment to take a sensible approach on implementation of the

uK

Alternative Investment Fund Managers Directive and greater tax certainty.

Technical changes will be made to the Limited Partnership Act of 1907 to allow partnerships to elect for legal personality (although the VAT treatment needs careful consideration). The estimate of the funds about to come onshore could be optimistic but the important point is that the Treasury is acting now before on-shoring trends are known, not when it’s too late. The anti-avoidance measures for managers who are members of a Limited Liability Partnership will need to be carefully targeted so as not to have an unintended impact on UK asset managers.

The goal is to enhance the position of the UK as a domicile for funds. However if the UK is to make a breakthrough into new markets, the Treasury’s ideas in this area, involving the TheCityUK, IMA, AIMA and UKTI, will require sustained effort as the traditional fund centres have an established head start.

Budget 2013: Tax measures for funds

The following new tax measures were announced:

Abolition of schedule 19 stamp duty Reserve Tax

Abolition of Schedule 19 SDRT with effect from 1 April 2014 is a headline grabber and signals that the Treasury is committed to enhancing the marketability of funds. The step follows the exclusion of the new contractual schemes from Schedule 19 (subject to meeting anti-avoidance legislation

which may now be extended to cover all UK funds).

The announcement comes as the European funds industry is trying to assess the potential impact of the proposed EU financial transaction tax where suitable exemptions for funds have yet to be established.

KPMG have assisted the IMA with its lobbying efforts to make the case for abolition and as evidence of intent the Government looks at this change as part of the package of changes supportive of fund management in the UK leading to more income from employment, corporation and indirect tax receipts.

Management of non-uK non-uCITs funds by uK managers

The Government has announced that it will consult on proposals to widen the application of section 363A Taxation (International and other Provisions) Act 2010 (TIOPA 2010) that allow UK managers to manage non-UK funds without the risk that the funds will become UK tax resident. The legislation currently only protects UCITS, but, with the Alternative Investment Fund Managers Directive in mind, a consultation will be undertaken to extend this protection to certain non-UCITS. It remains to be seen if all funds will be protected given the wide variety of non-UCITS funds.

Gross distributions by bond funds

A consultation will be undertaken to allow UK bond funds to pay gross distributions to non-UK investors where the funds “are marketed to foreign investors in a manner that does not give rise to a risk of evasion”. This is welcome as it should assist


Tax news

managers selling UK bond funds overseas who are finding the reputable intermediary condition difficult to apply in practice.

Providing greater certainty whether fund transactions will be deemed to be trading or investing

The Government has announced an extension of the white list transactions to include traded life policy investments and certain forms of carbon credits.

The white list of transactions currently provides certainty for UK and offshore funds that invest in assets on this list will not deem the fund to be trading for UK tax purposes. This certainty supports a number of regimes including:

• UK funds are not taxed on capital gains;

• Offshore funds do not have a permanent establishment in the UK; and

• Offshore reporting funds do not need to report capital return as income to UK investors.

Offshore funds regime

With effect from 3pm on 20 March 2013, the Offshore Funds (Tax) Regulations 2009 (SI 2009/3001) will be changed to ensure that where a disposal of an interest in a non-reporting offshore fund would give rise to an offshore gain this cannot be avoided by any merger or reorganisation of the fund.

Other changes to the offshore funds regime:

• changing a technical mismatch between the rules for calculating total reported income and the amount reported to investors;

• amending the rules for funds operating “full equalisation” to permit capital returned to be set off against the first distribution made; and

• allowing excess expenses of one computation period to be offset against another computation period provided they are within the same overall reporting period.

Investment Trust Company tax amendments

Two changes will be made to the revised Investment Trust Company (“ITC”) tax regime that applies in respect of accounting periods that commenced on or after 1 January 2012. Both will have a positive impact on the existing ITC tax regime.

1. Condition A (contained in section 1158(2) of CTA 2010) will be amended to clarify that the condition will be satisfied provided that all, or substantially all, of the business of the company is to invest its funds in shares, land or other assets with the aim of spreading investment risk. The existence of some ancillary activities will not result in a breach of condition A provided those activities are not substantial. The amendment will have retrospective effect so that it applies for all accounting periods that commenced on or after 1 January 2012.

2. The ITC tax regulations will be revised to provide an additional

exception to the income distribution requirement. The amendment will result in there being no requirement for an ITC to pay a distribution from capital where an ITC has accumulated realised revenue losses in excess of its income for an accounting period. This change is anticipated to take effect for accounting periods commencing on or after 1 July 2013 subject to a consultation process.

Payments of Trail Commission – Revenue & Customs Brief 04/13

With effect from 6 April 2013, HM Revenue & Customs (HMRC) have announced that where all or part of any trail commissions are made to an investor in a Collective Investment Scheme, insurance policy or other investment product, this should be taxable as an annual payment. Such trail commission may be paid by fund managers, fund platforms, advisers or any other person acting as an intermediary between the fund and the investor.

Annual payments are subject to income tax in accordance with s.683 Income Tax (Trading and Other Income) Act 2005. As a result, payers are obliged to deduct basic rate income tax (currently 20%) in accordance with Chapter 6 Part 15 income Tax Act 2007 and account for this to HMRC. Individual investors who pay tax at the higher or additional rate should then account for the difference in tax rates through their individual Self Assessment tax return.

HMRC have confirmed that payments made by Individual Savings Accounts (ISA) Managers to an ISA account are exempt from taxation and withholding


Tax news

by the manager is not required in this regard.

Payments made in respect of Self invested personal pension (SIPP) account holders will be taxable as annual payments and payers should withhold basic rate income tax. However, HMRC confirm that if payments of trail commission are made to the SIPP and reinvested within the SIPP without leaving the control of the SIPP trustee or administrator then they will not count as withdrawals from the SIPP, and they will not count as new SIPP member contributions.

If such trail commission payments are made to investors in the form of

additional units, then this should still be an annual payment for tax purposes and the payer should account for basic rate income tax on the grossed up value of the units.

This tax treatment is due to take effect from 6 April 2013, and HMRC have confirmed that they will not seek to tax past payments made in this regard. Given the short implementation time-frame, HMRC have recognised that manual calculations may be required at the start of this regime with some degree of approximation. Such approximated calculations will be permitted until 31 December 2013 providing the calculations are as accurate as possible and the payer

makes arrangements to update systems by the end of 2013.

Managers and intermediaries should review the status of rebates made to clients in light of HMRC’s summary of the annual payment criteria as those in the UK may have an obligation to deduct basic rate income tax.

For the full announcement please see here:

http://www.hmrc.gov.uk/briefs/income-tax/brief0413.htm


Accounting news

fRC publishes fRs 102

On 14 March the Financial Reporting Council (“FRC”) published FRS 102: the Financial Reporting Standard applicable in the UK and Republic of Ireland. This standard provides the accounting and reporting requirements for unlisted entities. It is the standard which will apply, via the “recommended practice” in the SORP for Authorised Funds (“the AF SORP”), to fund accounting in the UK. FRS 102 will be applicable for accounting periods commencing on and after 1 January 2015 but early adoption is permitted. The publication of FRS 102 now enables the Investment Management Association (“IMA”) to update the AF SORP during the remainder of 2013.

The IMA’s AF SORP working party is now expected to commence the process of the revision of the AF SORP by presenting its Exposure Draft (“ED”) of the revised AF SORP to the FRC’s

uK

Accounting Council in May and obtain permission from the FRC in June for the public consultation on the SORP’s ED between June and September.

The revision of the AF SORP will also have to accommodate requirements of the AIFMD which embraces all non-UCITS funds and therefore, in the case of FSA Authorised Funds, Non-UCITS Retail Schemes (“NURS”) and Qualified Investor Schemes (“QIS”). It will also apply to the proposed new legal forms of authorised funds, the authorised contractual schemes.

A prospective timeline for revision of the AF SORP would be:

• IMA obtains permission from the Accounting Council of the FRC for the SORP ED to be released for consultation in June;

• SORP ED has a three month consultation to September;

Publications

FINANCIAL SERVICES

Industry InsightsA snapshot of the key trends, issues and challenges facing

the investment management industry

March 2013

kpmg.com

KPMG INTERNATIONAL

Industry Insights – March 2013

Swiss Financial Services Newsletter – Special Edition Investment Management

An overview of the alternative industry’s preparedness for AIFMD – December 2012

• IMA considers feedback and obtains Accounting Council approval of the revised SORP, prospectively in November and FRC Board approval in December; and

• revised AF SORP published in December, applicable for accounting periods commencing on or after 1 January 2015 (aligned with FRS 102) but with early adoption permitted.

The FRC press release together with an interview with Roger Marshall, Chairman of the FRC Accounting Council, and with a link to FRS 102 (342 pages) is available at this web link:

http://www.frc.org.uk/News-and-Events/FRC-Press/Press/2013/March/FRC-issues-FRS-102.aspx

The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.

© 2013 KPMG Holding AG/SA, a Swiss corporation, is a subsidiary of KPMG Europe LLP and a member of the KPMG network of independent firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss legal entity. All rights reserved. Printed in Switzerland. The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International.

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Markus schunkPartnerT: +41 58 249 36 82 e: [email protected]

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Yvan MermodPartnerT: +41 22 704 16 61 e: [email protected]

Lugano

Lars schlichtingPartner, LegalT: +41 91 912 12 32 e: [email protected]

Astrid KellerPartnerT: +41 58 249 28 82 e: [email protected]

dominik RüttimannPartnerT: +41 58 249 20 56 e: [email protected]

Pierre ZächPartnerT: +41 22 704 15 30 e: [email protected]

dr. Armin KühnePartner, LegalT: +41 58 249 28 37 e: [email protected]

Grégoire wincklerPartner, TaxT: +41 58 249 34 95 e: [email protected]

Jean-Luc eparsPartner, LegalT: +41 22 704 17 59 e: [email protected]

Contacts

www.kpmg.ch

Date post:	10-Mar-2016
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Fund News - Issue 101 - March 2013

Documents