OECD Committee on Fiscal Affairs
Roundtable on Collective Investment Vehicles
February 1-2, 2006 -- Paris, France
Selected Treaty Issues Affecting Collective Investment
Vehicles Investing in Securities
Stephen E. Shay, Ropes & Gray LLP
Boston
New York
San Francisco
Washington, DC
Cross-Border Portfolio Investment
Through CIVs
• At June, 2005, mutual fund assets
worldwide (in 41 countries) were
$16.41 trillion.*
– $8.2 trillion were held in the United States
– $5.6 trillion were held in Europe
* Investment Company Institute, Worldwide Mutual Fund Assets and
Flows, Second Quarter 2005, Supplementary Tables, Table S1, “Total Net
Assets in U.S. Dollars,” found at
http://www.ici.org/stats/mf/ww_06_05.html#TopOfPage.
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Cross-Border Portfolio Investment
Through CIVs
• Benefits of CIVs to investors.
– Investors achieve economies of scale and
reduced transactions costs.
– Investors receive benefits of professional
investment management.
– Investors achieve diversification of
investments.
– CIVs are important source of investment
capital for source countries.
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Cross-Border Portfolio Investment
Through CIVs
• CIV structural imperatives.
– CIVs must realize income and gains on a
tax neutral basis compared with direct
ownership of securities.
– Unrelieved tax costs discourage comingling in a CIV with international
investments diminishing cross border
portfolio investment.
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Legal and Tax Attributes of CIVs
• CIV investors include:
– Institutional investors, many of whom at
tax-exempt.
– Individual investors.
• Funds may be marketed publicly or
privately.
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Legal and Tax Attributes of CIVs
• CIVs legal form may be
– Recognized as a separate taxable legal
entity, or
– Transparent for tax purposes.
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Legal and Tax Attributes of CIVs
• CIV tax characteristics.
– Irrespective of the legal form of the CIV,
there is little or no effective taxation of the
CIV.
– Low or no taxation of CIVs is
accomplished in myriad ways. CIV may be
•
•
•
•
“Not a person” or transparent,
Exempt from tax,
Subject to tax at low or zero tax rates,
Subject to tax with the integration at the
investor level.
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Legal and Tax Attributes of CIVs
• Home country or third country CIV.
– United States, the United Kingdom,
France, Germany and other countries have
substantial national mutual fund or
investment fund industries serve principally
resident investors.
– Other fund locations, including
Luxembourg and Ireland, service investors
primarily from third countries.
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CIV Difficulties in Obtaining Source
Country Treaty Relief
• CIV-level treaty issues.
– Whether the CIV is a person and a
“resident” of the treaty country.
– The CIV is the “beneficial owner” of
income whether CIV satisfies any limitation
on benefits provisions.
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CIV Difficulties in Obtaining Source
Country Treaty Relief
• Practical tax reclaim issues.
– Not practical for investors in a publicly
offered or widely-owned CIV to claim treaty
relief.
– In summary, CIVs face lack of direct
access to treaty benefits and an inability to
implement refund claims for investors.
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CIV Difficulties in Obtaining Source
Country Treaty Relief
• CIV treaty relief – dividends.
– Resident CIV must be “liable to tax.”
– CIV must be beneficial owner of dividends.
– US-style limitation on benefits:
• Exemption for publicly-traded companies
does not apply to “open-end” funds.
• Ownership test difficult to administer.
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CIV Difficulties in Obtaining Source
Country Treaty Relief
• Pension plans and other tax-exempt
investors
– Some treaties allow pension plans, taxexempt organizations exemption from
source country taxation.
– CIVs sometimes organize to pool these
investors’ funds.
– CIVs should be allowed to accommodate
these funds.
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Principles for Obtaining Source
Country Treaty Relief
• Principles for addressing CIV/Investor
treaty issues.
– Avoid double taxation, do not foster double nontaxation.
– Treat economically similar investors similarly.
– Preserve benefits of residence country taxexemption.
– Implementation of treaty relief at CIV level.
• Do not expect a “one size fits all” solution.
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Addressing CIV Treaty Issues
• Consider modifying treaty rules for
CIVs.
– Residence issues.
• Clear definitions for classification of CIV
forms as transparent and non-transparent.
• Clear rules for whether CIV is eligible to
claim treaty relief directly.
• If CIV subject to tax, it should be allowed to
claim treaty relief.
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Addressing CIV Treaty Issues
• Consider modifying treaty rules for
CIVs (cont’d)
– Transparent CIV entities.
• To the extent possible, consistent with
treaty purposes, identify transparent CIV
entity may claim treaty relief on behalf of its
investors.
• For example, treaty relief allowed at the
level of the CIV if investors are from
qualifying countries that treat the CIV as
transparent.
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Addressing CIV Treaty Issues
• Consider modifying treaty rules for
CIVs (cont’d)
– Beneficial owner and limitation on benefit
issues.
• If income taxed to the investor through
withholding or directly, treaty eligibility
should be allowed at entity level.
• Tax-exempt entities.
• Consider special CIV treaty rules
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Improve Treaty Reclaim Process
• Relief at source should be the objective.
• Streamline procedures for standardize
documentation requirements.
– Permit use of omnibus accounts (pooling of
assets).
– Documentation by intermediary with a “know-your
customer” relationship with investor.
– Documentation should be “verifiable” by the
source country.
• See G30 Proposal
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Next Steps
• Consider convening advisory group
including representatives from
industry to further examine issues
and alternative solutions.
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