asset management tax: newsletter issue 1 - pwcnewsletter issue 1 june 2015 content foreword from the...

Asset Management Tax Newsletter Issue 1

June 2015

Content FOREWORD FROM THE CENTRAL CLUSTER

ASSET MANAGEMENT TAX LEADER

AUTOMATIC EXCHANGE OF INFORMATION: THE NEXT TSUNAMI IN THE FINANCIAL WORLD – IMPACTS FOR THE ASSET

MANAGEMENT INDUSTRY

NEW TRANSFER PRICING LEGISLATION IN LUXEMBOURG

WHAT’S UP FOR INVESTMENT FUNDS AND VALUE ADDED TAX IN LUXEMBOURG?

VAT NEWS FROM AROUND THE WORLD

SOLVENCY II REPORTING FOR FUNDS TO START 1 JANUARY 2016

FATCA UPDATE

LUXEMBOURG LIMITED PARTNERSHIPS - THE ANNOUNCED AND EXPECTED CIRCULAR DATED 9 JANUARY 2015

THE ASSET MANAGEMENT TAX TEAM IN LUXEMBOURG

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ContentContent


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Foreword from the Central Cluster Asset Management Tax LeaderContentContent

Welcome to this first edition of the Asset Management Tax Newsletter. At a time where tax affairs have become increasingly complex, where there is a fierce public debate on what is or is not acceptable, where asset managers, tax advisors and even tax authorities are challenged, there is a need – now more than ever – to communicate on tax developments.

Tax is no longer the preserve of isolated specialists but it needs to be embraced by management and become one of its top priorities, as beyond the potential financial impact, there could be a damaging reputational impact if tax affairs are not managed properly.

Compliance is key, as it always has been, but what is compliance in a situation where the borders of acceptable tax practices are blurred? How can the interests of employees, shareholders and taxpayers be balanced and how can a fair share of tax be defined?

When looking at the contents of this edition, it is obvious that what we call “tax” is far removed from what it used to be ten or even five years ago. This is not only a technical change but rather a cultural change.

This is about transparency on your customers and on your own tax affairs, not only with tax authorities, but also to a certain extent with public opinion – this represents a considerable challenge.

This is also about the need to comply with the increased documentation requirements imposed by various tax authorities.

All these challenges make things significantly harder and what is clear is the need for a proper definition of an internal tax policy where finding the appropriate resources becomes more critical than ever.

I hope you will enjoy reading this first edition and that this will help you to find some clarity in a tax world of uncertainty.

Laurent de La Mettrie

Asset Management Tax Leader

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1Automatic exchange of information: the next tsunami in the financial world – Impacts for the Asset Management Industry

1.1. In brief2014 was certainly a year to remember with regard to the automatic exchange of information in the world but particularly in Luxembourg.

In an increasingly globalised economy, taxpayers with offshore assets as well as financial institutions are faced with demands for more transparency from their local governments and tax authorities who are themselves under pressure to generate increased revenues and produce evidence of having cracked down on tax evasion and/or on aggressive tax avoidance.

Investigations carried out by tax authorities have often been hampered by the lack of information or evidence combined with a lack of cooperation from foreign countries. This led to multiple bilateral agreements being signed, but things were not going as fast as anticipated and the G8 and G20 did not believe that enough was being done. They charged the Organisation for Economic Co-operation and Development (OECD) with developing a standard for the automatic exchange of tax information on a global basis.

On 13 February 2014, the OECD released a Model Competent Authority Agreement (CAA) and Common Reporting Standard (CRS) to create a global standard for automatic exchange of financial account information. The good news for the financial sector is that the OECD has modelled the CRS on the tax compliance legislation of the US Foreign Account Tax Compliance Act (FATCA). There was significant political will to implement the standard with over 40 jurisdictions committing to early adoption.

In October 2014, the Luxembourg Minister of Finance announced the introduction of CRS by 1 January 2016.

On 29 October 2014, at the annual meeting of the Global Forum on Transparency and Exchange of Information for Tax Purposes in Berlin, 51 jurisdictions, including Luxembourg, signed a multilateral CAA to automatically exchange information for tax purposes.

At EU level, the new savings directive (“EUSD”) was repealed through the introduction of the CRS and the new Directive on Administrative Cooperation in the Field of Taxation (DAC -2011/16/EU)) was issued on 16 December 2014. It extends the scope of mandatory exchange of information between the Member States’ tax authorities. The DAC took advantage of the implementation of the FATCA regulations.


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1.2. CAA and CRS: what is it all about?The model CAA is a base agreement which sets out the general definitions, the obligations of the jurisdictions to obtain and exchange information, and the collaboration on compliance and enforcement. It does not need to be locally applied.

The CRS contains the reporting and due diligence requirements which are the foundations of automatic exchange of information. Participating jurisdictions will have to enact rules in domestic laws that are consistent with the provisions of the CRS. CRS seeks to establish a global methodology for the sharing amongst tax authorities of relevant data especially on their clients that are tax residents in other participating jurisdictions. The transparency created by the CRS is meant to be yet another deterrent to taxpayers’ use of offshore financial accounts or assets.

1.3. Impact on funds and financial institutions (FIs)

As with FATCA or other regulatory or tax reporting requirements, the consequences of CRS will be operational (including the reporting process), legal or regulatory and organisational and there will also be an impact on information technology. The most significant impact, however, will relate to strategic and commercial matters.

From an operational point of view, client account opening processes and documentation requirements for pre-existing accounts are strongly impacted and will require ongoing monitoring. For example, account holder self-certification

forms need to be completed again for CRS purposes, with a focus on the account holder’s residence and not on US citizenship or other AML requirements. A certification will be required for any aggregated accounts above EUR 1 million for which the relationship agent has no additional information that could counter their current classification.

With regard to reporting, FIs will need to industrialise production and require data from the fund industry. Compared to FATCA, a much larger amount of information will need to be provided in the reports, as the information will include most clients as long as they are tax domiciled in a CRS participating country. In this context, a definition of the reporting target operating model will be key and each FI will have to choose between in-house developments, acquisition of a package, use of the group reporting package or complete outsourcing. The impact on the Asset Management industry in Luxembourg might be limited, since the industry is currently required to meet a vast number of reporting requirements (e.g. tax reporting – German Tax, UK Tax – and regulatory reporting – VAG reporting, AIFMD, Solvency II), in accordance with which funds must produce vast amounts of reliable data in electronic format but also because the funds’ nominee account holders (including banks and distributors) have already implemented FATCA procedures.

How challenging, costly and complex CRS implementation will be will largely depend on the synergies between the FATCA compliance program, the existing reporting framework (e.g. Basel II) and the funds’ tax reporting and CRS compliance framework. FIs that have implemented limited solutions to comply with FATCA requirements (due to limited reporting volumes for FATCA purposes) may find it more challenging to adopt CRS.

From an IT point of view, in addition to reporting considerations, database volumes will need to be increased to provide sufficient data storage space, flexibility in the research of indicia and auditability when understanding the data calculated for reporting purposes. FIs will clearly have to leverage the expertise in data management and storage that Luxembourg has been developing for years in NAV calculation and publication processes.

As far as organisational impacts are concerned, training will need to be provided, job descriptions will need to be redesigned and new resources will need to be allocated – or existing resources reallocated – to optimise account documentation and report production.

The Luxembourg fund industry, as the largest fund distribution centre in the world, might be significantly impacted where some countries may require more detailed data (such as the portion of dividend or interest held through the funds). Funds will then have to be able to satisfy the FIs’ reporting needs around the world and those needs may differ from one country to another.

5 Strategic 2 Legal orregulatory

6 Commercial 1 Organisational

4 InformationTechnology 3

OperationalIncludingreporting

CRSimpacts

CRS Reporting process

CRS due diligence process

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1.4. Practical implications CRS will be another tsunami and a real game changer in the financial sector in the way in which jurisdictions share tax information to combat tax evasion. The consequences of CRS will be operational (including the reporting process), legal and organisational and there will also be an impact on information technology. The most significant impact, however, will relate to strategic and commercial matters

Even if CRS is similar to FATCA, the differences between the two sets of requirements are substantial and the FIs which invested in systems and resources for FATCA will have to continue to do so for

CRS. This will be amplified by the very short timeframe for the due diligence processes (as from December 2016) and the reporting process (as from September 2017).

Despite the uncertainties around future implications for funds (which income derived from funds will have to be reported and how), the Asset Management industry can look confidently to the future, as massive investments have been made both in data management and data processing (including publication) to overcome those challenges and the industry has demonstrated its abilities many times in the recent past.

1.5. The timelineAnticipated CRS timeline set by the Joint Statement

2013 2014 2015 2016 2017 2018

Political Milestones

Apr 19, 2013G20 countries mandate the OECD to develop the Common Reporting Standard (CRS)

Feb 22, 2014 CRS released

Jul, 2014

Release of final XML data

schema and CRS Commentary

Sep 20, 2014

endorsement by G20

Dec, 2014EU Directive voted on 9 December 2014

Jan 01, 2016Anticipated “Big Bang” start date for “Early Adopter” countries

Account Due

Diligence

Dec 31, 2015Cut-off date

for pre-existing accounts

eventually already collecting account balances or other

data

Jan 01, 2016Being new account opening procedures

Dec 31, 2016

Due diligence procedures must

be completed for pre-existing individual high value accounts

Dec 31, 2017

Due diligence procedures must be completed for

all other pre-existing accounts

Reporting

Sep 30, 2017

Initial automated ex-change of new accounts and pre-

existing high value accounts

Sep 30, 2018

Reporting for late adopters

Phasing-in of other countries

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Cédric Leroy,Director (+352 49 48 48 2661)


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2New transfer pricing legislation in Luxembourg

Luxembourg Parliament approved the new draft law on 19 December 2014 which includes changes to both the Luxembourg Income Tax Law of 1967 (LITL) and the general tax law. The new legislation restates the arm’s length principle, and as a separate measure makes explicit the need for documentation.

With the Law of 19 December 2014, article 56 LITL now contains a definition of a related party which is aligned with the OECD Model Tax Convention. One consequence is that the arm’s length principle is to be applied to transactions between two related entities both located in Luxembourg, and between two related entities where one party is taxed in a foreign jurisdiction.

The new measures have already taken effect as from 1 January 2015.

Moreover, the new text obliges the taxpayer to report in its tax return either an upward or downward adjustment of profits whenever transfer prices do not reflect the arm’s length principle.

The new law also clarifies that, from 1 January 2015, normal disclosure and documentation requirements also apply to transactions between related parties. One consequence of this change is that, whenever the Luxembourg tax authorities have reason to consider that a transfer of profits might have occurred (because the transaction under review does not comply with the arm’s length principle) and the facts are not made clear or documented by the taxpayer, the Luxembourg tax authorities may look to the underlying economic reality of the operations and presume that there has been an undue reduction in profits, without having to justify this exactly. Consequently, the absence of proper transfer pricing documentation could shift the burden of proof to the taxpayer.

Finally, the tax authority now imposes fees of EUR 10,000 for APA filings as from 1 January 2015 to cover the administrative and operational expenses it incurs in reviewing advance tax confirmation requests.

Impact of the new legislation on the asset management industry in Luxembourg

Based on the new law, Luxembourg companies operating in the asset management industry will need to meet the arm’s length principle for their transactions with foreign or Luxembourg related parties. In addition, they will need to have transfer pricing documentation in place for those transactions.

In the asset management industry, Luxembourg UCITS Management Companies and AIFMs will most likely be impacted most by the new law as they enter into numerous related party transactions.

Common related party transactions of UCITS Management Companies or AIFMs are all services transactions with related party portfolio managers, marketers, investment advisors, custodians, etc. The service fee paid to those service providers needs to comply with the arm’s length standard. Such service fee can be expressed as a percentage of the total asset management fee, a cost plus mark up for the service provider or a fixed number of basis points depending on the value of the services within the business.

In line with the new law, these services would need to be covered by transfer pricing documentation in line with the OECD Transfer Pricing Guidelines. Such transfer pricing documentation would typically include a business overview, a functional analysis and an economic analysis.

Caroline Goemaere,Partner (+352 49 48 48 3002)

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3What’s up for investment funds and value added tax in Luxembourg?

Following the VAT rate increase from 1 January 2015 in Luxembourg, doing away with unnecessary VAT costs for investment funds, their management companies and service providers is even more crucial than before. Developments in recent cases at EU level give opportunities to revisit the VAT treatment of some services that were treated as taxable before but which could benefit from the management VAT exemption in the light of these cases (consider for instance the impact of the GfBK (C-275/11) and ATP (C-464/12) cases on your business operations).

At the same time, we have observed that the VAT authorities increasingly question the VAT returns filed by investment funds and their service providers. The main area of focus of the audits performed by the authorities is on the expenses side, and notably the VAT treatment applied to commissions paid and services received from abroad. The VAT authorities perform cross-checks between the VAT returns filed by the funds and European Sales Listings filed by their suppliers in their respective countries based on the EU database called VIES. Any gap noted by the VAT authorities will generally lead to questions and finding the right explanation can be time consuming. Being in control and having secured the VAT treatment of the main transactions can definitely be an advantage when having to deal with such questions.

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4VAT news from around the world

4.1. Recent decision in The Netherlands on the VAT treatment of Asset Management services provided for pension fundsThe Dutch High Court recently analysed the specific pension scheme operated by a pension fund and, based on that analysis, ruled that the pension fund does not have the characteristics of a “special investment fund” within the meaning of the Dutch VAT exemption for fund management.

The Dutch High Court does not explicitly test the criteria in the ATP PensionService A/S case. In the ATP PensionService A/S case, the Court of Justice of the European Union clearly stated the criteria a pension fund must meet in order to qualify as a mutual investment fund. It remains to be seen whether the parties will appeal the Dutch High Court’s decision to the Dutch Supreme Court.

It is important for asset managers, pension funds and pension scheme administrators to keep protecting their rights by filing objections with the Dutch Tax Authorities in a timely manner.

In any event, the Dutch court’s ruling shows that the VAT position of a Dutch pension fund should be determined on a case-by-case basis, for the time being at least.

4.2. New HMRC policies on VAT and pension schemes in the UKHMRC has issued two business briefs in which it announces significant policy changes on VAT and pension fund management following the Court of Justice of the European Union’s judgments in PPG Holdings and ATP PensionService A/S.

In summary, HMRC now accepts that, provided the contractual position shows that employers are party to the contracts, are receiving the services and paying for them, they can treat VAT on investment management and scheme administration as a cost of their business. HMRC will also accept that the management of defined contribution pension schemes can be exempt from VAT. These changes will significantly reduce the VAT costs associated with providing pensions, and retrospective claims are possible.

4.3. VAT amendments for the financial sector in Russia Before 1 January 2015, no VAT was charged on services rendered on securities, commodities and currency markets by registrars, depositories, dealers, brokers, securities managers, fund management companies, mutual investment funds and non-government pension funds, clearing organisations and market traders, as well as a range of other services.

The newly adopted tax manoeuvre law provides that, from 1 January 2015, the services no longer need to be provided on “securities, commodities and currency markets” for the VAT exemption to apply.

It is hard to estimate the materiality of this amendment for VAT obligations with respect to the aforementioned types of financial intermediaries. In any case, the amendment simplifies and clarifies tax calculations.

Marie-Isabelle Richardin, Director (+352 49 48 48 3009)

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5Solvency II Reporting for funds to start 1 January 2016

Investment funds have been hit by a wave of reporting requirements from their investors - specifically from institutional investors, such as credit institutions, insurance companies and other institutional investors. These investors need detailed information in order to comply with their own reporting requirements.

The next wave with Solvency II will come into force on 1 January 2016. By then Asset Managers will have to provide investing insurance companies with detailed information on the assets held by the funds. Therefore, associations representing the investment management industries in France, Germany and the UK are converging on a common data exchange template.

That template – set up to become the reporting standard – was updated in mid-January 2015. With only slight final adjustments expected before the mandatory reporting process goes live in less than a year and huge data to be collected and processed, Asset Management Companies all over Europe are already setting up and testing the reporting process.

Solvency II is a new risk-based framework aimed at harmonising the European insurance business and will replace the current national regulatory framework. Unlike the current solvency regime for (re)insurance undertakings, quantitative and qualitative requirements are now closely linked to the asset side of the insurer’s balance sheet.

Asset managers are indirectly impacted by the new Solvency II Directive. Solvency II increases the data and governance demands on insurers and will require them to review and possibly rethink their investment strategies. Their main challenges are data volume, data management and data quality. Asset managers will have to provide investing insurance companies with detailed information, classified and enriched in accordance with EU regulatory rules on a quarterly basis. This information relates to investments in fund portfolios as well as a target fund look-through.

PwC has considerable experience in preparing the BVI VAG Reporting template for insurance companies and is working closely with its clients to ensure they are ready for the Solvency II reporting requirements – the next huge step in Regulatory Reporting.

If you are preparing the BVI VAG Reporting template now, you will need to comply with the Solvency II reporting requirements in early 2016. Since vast amounts of data need to be processed, test runs are absolutely necessary.

Our experts compile the data necessary for the insurance companies to comply with their reporting obligations and deliver the required classification and breakdown of assets according to the Solvency II reporting template developed by associations representing the investment management industries in France, Germany and the UK.

Christian Heinz,Director (+352 49 48 48 2247)

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6FATCA update

The Foreign Account Tax Compliance Act (FATCA) was enacted by US Congress in 2010 and has as a main objective to provide the US Internal Revenue Service (IRS) with the ability to detect US persons holding assets and receiving revenues via foreign structures, foreign accounts or insurance contracts. In order to make it easier for Luxembourg Financial Institutions to comply with FATCA, Luxembourg signed an Intergovernmental Agreement (“the IGA”) with the US on 28 March 2014. According to the IGA, Financial Institutions in Luxembourg should report information about US accounts to the Luxembourg tax authorities who will then transfer these data to the IRS.

Investment funds, together with some other players of the asset management industry, may qualify as Financial Institutions under the IGA. In this context, careful consideration should be given to some non-reporting status to which these Financial Institutions can be entitled, thereby putting the entity out of the scope of IRS registration and reporting obligations as well as reducing some other FATCA obligations. In this respect, one should analyse whether a fund can qualify as a “Collective Investment Vehicle” or a “Restricted Fund”, or whether it could agree with a “Sponsoring Entity” that the latter would perform all FATCA obligations on behalf of the fund. A fund management company might potentially fall under the “Investment Advisors and Investment Managers” non-reporting status.

From a practical standpoint, it should be kept in mind that FATCA in principle does not look through other Financial Institutions. In other words, a fund that is a Financial Institution will need to look for US investors (or Passive non-financial foreign entities (NFFE) which are controlled by US Persons) whose names are shown directly on its register. This should make life much easier for funds who have investors through a registered nominee, in which case they only have to determine the FATCA status of the nominee.

By now, all players of the Luxembourg asset management industry should have determined their FATCA status as well as the status of their products. If they qualify as “Reporting Financial Institution”, they should have registered with the IRS to obtain a Global Intermediary Identification Number (GIIN) before 1 January 2015. Without a GIIN, they would also face the operational risk of a 30% withholding tax on their US-source income.

Reporting Financial Institutions should also have put in place a specific on-boarding procedure for new individual and entity accounts (i.e. accounts opened on or after 1 July 20141) and due diligence procedures to review individual and entity pre-existing accounts in order to determine whether their investors are US Specified Persons or Passive NFFE controlled by US Persons.

Later this year, by 30 June 2015, Reporting Financial Institutions should have finalised the review of the pre-existing individual accounts whose value exceeds USD 1 million while the review of other pre-existing accounts should be finalised by 30 June 2016.

Reporting Financial Institutions should also, by 31 July 2015 (based on an exceptional extension of the reporting deadline from 30 June 2015 to July 31 2015 granted by the Luxembourg tax authorities), report electronically (via one of the two secured transmission channel tools validated by the Luxembourg tax authorities) US account holders and investors to the Luxembourg tax authorities. In practice, Reporting Financial Institutions which do not have any US investors should also file a nil report with the Luxembourg tax authorities. The Luxembourg tax authorities will transfer that information to the IRS by 30 September 2015.

Kerstin Thinnes,Partner (+352 49 48 48 3177)

Marie Laffont,Director (+352 49 48 48 3069)

1 Reporting Financial Institutions may opt to treat entity accounts opened between 1 July 2014 and 31 December 2014 as pre-existing accounts.

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7Luxembourg limited partnerships - The announced and expected circular dated 9 January 2015

Circular LIR no.14/4 (hereafter the “Circular”), which clarifies the tax regime of Luxembourg partnerships – namely SCS (Société en Commandite Simple) and SCSp (Société en Commandite Spéciale) – was issued on 9 January 2015.

Before the Circular was issued, there were doubts as to when SCSs and SCSps could be subject to Luxembourg taxation and when they could be tax transparent entities, as said entities could be subject to Luxembourg taxation when carrying out commercial activities.

The Circular starts by providing guidance on the extent to which the activity carried out by an SCS or an SCSp can be considered to be a commercial activity and thus result in a commercial profit within the meaning of Luxembourg law. In particular, it provides that the size of the assets and how quickly the assets are sold are not the only criteria that would result in a commercial activity being carried out.

The Circular confirms that any Alternative Investment Fund (AIF) – whether or not it carries out a commercial activity – with a general partner holding less than a 5% interest in an SCS or SCSp is not subject to municipal business tax and is considered to be tax transparent from a Luxembourg tax perspective.

In addition, the Circular expressly highlights that regulated vehicles need to be considered automatically outside the scope of the definition of “commercial activity”, since their objects are to invest according to a given investment policy and not to carry out a commercial activity. In other words, regulated vehicles in the form of SCSps should not be at risk of being considered to be entities carrying out commercial activities (however, non-compliance with the corporate objects – and thus the regulatory ones – could result in the non-application of the tax transparency concept).

Section 4 of the Circular confirms that AIFs in the form of an SCS or SCSp are NOT deemed to carry out any commercial activity within the meaning of article 14.1 of the Luxembourg Income Tax Law. That section specifies that the automatic absence of commercial nature is justified by the fact that an AIF must follow an investment policy in accordance (i) with the Luxembourg Alternative Investment Fund law dated 12 July 2013 and (ii) with the ESMA guidelines. The Circular refers to the objects of a collective investment vehicle as defined in section VI, paragraph 12 (a) of the ESMA guidelines dated 13 August 2013, which states that one of the characteristics of a collective investment vehicle is that it does not have commercial objects.

Sections 6 and 7 of the Circular confirm that the SCSs and SCSps governed by Part II of the law dated 17 December 2010 and those governed by the SIF law dated 13 February 2007 are subject to subscription tax only.Section 5 provides that those AIFs not set up in Luxembourg are not subject to any corporate income tax, municipal business tax or net wealth tax, even if they are managed in Luxembourg.

For further information, please also look at our Flashnews:

Flash News: Luxembourg - Circular on Luxembourg limited partnerships

Antoine-Michel Rodriguez,Director (+352 49 48 48 5390)

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8The Asset Management Tax Team in Luxembourg

PwC Luxembourg has brought together a team of 100+ tax specialists focusing on the Asset Management industry. Their areas of expertise cover taxation both at fund and investor level. They can provide structuring advice and assist clients with compliance and reporting, including in the areas of transfer pricing and VAT. PwC has also developed technology tools to help cope with taxation issues and monitor developments around the world.

From left to right: Sidonie Braud-Fichet, Antoine-Michel Rodriguez, Cédric Leroy, Oliver Weber, Caroline Goemaere, Marie-Isabelle Richardin, Olivier Vincent

Upcoming Events

Our next AM Tax breakfasts are scheduled for 3 July, 15 October, 12 November and 17 December.

If you would like to attend, please contact Caroline Venturini (by phone: +352 49 48 48 6208 or by email: [email protected]).

PwC Luxembourg has brought together a team of 100+ tax specialists focusing on the Asset Management industry. Their areas of expertise cover taxation both at fund and investor level. They can provide structuring advice and assist clients with compliance and reporting, including in the areas of transfer pricing and VAT. PwC has also developed technology tools to help cope with taxation issues and monitor developments around the world.

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Notes


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© 2015 PricewaterhouseCoopers, Société coopérative. All rights reserved. In this document, “PwC Luxembourg” refers to PricewaterhouseCoopers, Société coopérative (Luxembourg) which is a member firm of PricewaterhouseCoopers International Limited (“PwC IL”), each member firm of which is a separate and independent legal entity. PwC IL cannot be held liable in any way for the acts or omissions of its member firms.

asset management tax: newsletter issue 1 - pwcnewsletter issue 1 june 2015 content foreword from the...

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