1 FUND NEWS December 2011 Investment Fund Regulatory and Tax developments in selected jurisdictions Issue 87 – Regulatory and Tax Developments in December 2011 Regulatory News European Union Proposal for a Regulation on European Venture Capital Funds On 7 December 2011 the European Commission released a proposal for a regulation on European Venture Capital Funds. This regulation will introduce a common framework of rules for a new fund designation, the “European Venture Capital Fund” and conditions for the marketing of this type of fund to eligible investors across the European Union. The regulation would apply to AIFMD managers managing non-UCITS funds only, with assets under management in qualifying venture capital funds that do not exceed the threshold of €500 million. The "European Venture Capital Fund" would be restricted to those funds that:  invest 70% of the capital committed by its sponsors in small and medium size enterprises (SMEs); Regulatory Content European Union Proposal for a Regulation on European Venture Capital Funds Page 1 Proposal for a Regulation on Social Entrepreneurship Funds Page 2 ESMA consultations on MiFID Page 2 France AMF policy updates on collective investment schemes Page 3 UCITS IV transposition finalized Page 3 UK Introducing the Protected Cell Regime (“PCR”) for UK OEICs Page 4 FSA proposal to permit non-UCITS retail schemes to be feeder funds Page 4 Tax Content Italy New Italian tax withholding calculation for investors in funds investing in eligible bonds Page 6 Luxembourg Aberdeen Case E-Alerts Page 6 UK Tax Transparent Fund and Property Authorised Investment Funds Page 7 Accounting Content KPMG’s IFRS for Investment Funds Page 7 Fund News – December 2011 2  invest in equity or quasi-equity instruments; and  do not use borrowings or any form of leverage. The Regulation will provide all managers of qualifying venture capital funds with a European marketing passport allowing access to eligible investors across the EU. Eligible investors will be professional investors as defined under MiFID and certain other sophisticated venture capital investors. Managers will need to register in the country where they are established and will need to comply with rules regarding conduct of business, the management of conflicts of interest, valuation of assets and the production of annual financial reports. The proposed regulation now passes to the European Parliament and the Council for negotiation and adoption under the co-decision procedure. The Regulation is expected to apply from the 22 July 2013. A provisional version of the proposal is currently available at the following web link: http://ec.europa.eu/internal_market/inves tment/venture_capital_en.htm Proposal for a Regulation on Social Entrepreneurship Funds On 7 December 2011 the European Commission also issued a second proposal for a “European Social Entrepreneurship Fund” (EuSEF) label. The proposal lays down uniform requirements for those managers that wish to use the label, and conditions regarding the marketing of funds under this label across the European Union. The regulation will apply to AIFMD registered managers managing non- UCITS funds only, whose assets under management in EuSEFs do not exceed a threshold of €500 million. An EuSEF will be required to:  invest at least 70% of its assets in qualifying investments which include equities, debt, fund units, loans and other type of participations in unlisted social enterprises.  not employ any means of leverage apart from short term borrowings for liquidity purposes. EuSEF managers will be subject to conduct of business rules, requirements regarding conflicts of interest management, pre-sale disclosure rules and requirements to produce audited annual reports for their EuSEFs. The manager will benefit from a passport to market EuSEFs across the European Union by simple notification to their home regulator. The proposed regulation now passes to the European Parliament and the Council for negotiation and adoption under the co-decision procedure. The Regulation is expected to apply from the 22 July 2013. A provisional version of the proposal is currently available at the following web link: http://ec.europa.eu/internal_market/inves tment/social_investment_funds_en.htm# proposal ESMA consultations on MiFID On 22 December the European Securities and Markets Authority (ESMA) issued two MiFID related consultation papers (CPs) containing Guidelines on suitability and the Compliance function. The Guidelines on suitability focus on the need for firms to have in place appropriate policies and procedures in order to know their clients when recommending suitable investment choices. The Guidelines on the Compliance function cover the responsibilities of the function, specifically compliance risk assessment, monitoring, reporting and advisory obligations. They also cover the organizational requirements for the function and guidelines for the review of the function by the competent authority. The consultation period closes on 24 February 2012 and the consultation paper is available via the following web link: http://esma.europa.eu/consultations/over view/10 Fund News – December 2011 3 France AMF policy updates on collective investment schemes On 23 December 2011 the Autorité des Marchés Financiers (AMF) published updates to the following collective investment schemes guides.  The guide to regulatory documents for collective investment schemes (“OPCVM”) and real-estate collective investment schemes (“OPCI”).  The good practice guide to drafting commercial documents and distributing collective investment undertakings, illustrating appropriate behaviour and bad practice to be proscribed.  The good practice guide to monitoring collective investment undertakings. The purpose of this document is to inform asset management companies, depositaries and statutory auditors of the way certain aspects of the regulations should be interpreted. These guides contain recommendations which market players are asked to comply with, and also positions setting out the binding provisions of the General Regulation. The guides are available at www.amf- france.org. UCITS IV transposition finalised On 21 December the AMF published amended instructions governing the authorisation and operation of UCITS, non-UCITS and real estate collective investment schemes that now incorporate all the new UCITS IV measures introduced into French law. The AMF has also simplified the presentation of the instructions, so there is now only one for each major category of collective investment scheme targeting retail investors:  for UCITS: Instruction 2011-19 on authorisation procedures, establishment of a KIID and a prospectus, and the periodic reporting requirements of French UCITS and foreign UCITS marketed in France (previously Instructions 2005-01 and 2005-02).  for non-UCITS: Instruction 2011-20 on authorisation procedures, establishment of a KIID and a prospectus, and the periodic reporting requirements of non- UCITS (previously Instructions 2005- 01 and 2005-02).  for collective investment schemes for employees: Instruction 2011-21 on authorization procedures, establishment of a KIID and a prospectus, and the periodic reporting requirements of collective investment schemes for employees (previously Instruction 2005-05).  for approved venture capital collective investment schemes: Instruction 2011-22 on authorisation procedures, establishment of a KIID and bylaws, and the periodic reporting requirements of approved venture capital funds, innovation funds and local investment funds (previously Instructions 2009-03 and 2009-05).  for real estate collective investment schemes: Instruction 2011-23 on authorization procedures, establishment of a KIID and a prospectus, and the periodic reporting requirements of real estate collective investment schemes (previously Instructions 2009-01 and 2009-02). The AMF has also published Instruction 2011-15 on procedures for calculating the global exposure of UCITS, in order to implement CESR’s Guidelines on Risk Measurement and the Calculation of Global Exposure and Counterparty Risk for UCITS, published on 28 July 2010, and ESMA’s Guidelines to competent authorities and UCITS management companies on risk measurement and the calculation of global exposure for certain types of structured UCITS, issued on 14 April 2011. This instruction replaces Instruction 2006-04 of 24 January 2006 on the procedures for calculating the exposure of UCITS to derivative financial instruments. The Instructions are available at www.amf-france.org. Fund News – December 2011 4 UK Introducing the Protected Cell Regime (“PCR”) for UK OEICs As discussed in Fund News issue 86, on 20 December the Statutory Instrument (“SI”) was laid before Parliament and became “made” legislation coming into force on 21 December 2011. This commences the up to two year transition during which existing umbrella OEICs will need to become protected cell OEICs. The result is that the assets of each sub-fund are ring-fenced and cannot be called upon to meet an excess of liabilities of another sub-fund of the umbrella. All new umbrella OEICs must be established from the outset with protected cells. In parallel, on 21 December, to introduce the protected cell regime the Financial Services Authority (“FSA”) has published its Instrument 2011-76. This came into force immediately and amends the FSA’s Collective Investment Schemes sourcebook (“COLL”) to include rules and guidance on the PCR. The FSA’s Instrument has been supported by an information note to Authorised Corporate Directors (“ACDs”) explaining what is required, and its January Handbook Notice will provide the feedback and comments on the changes made to bring in the PCR. The FSA requires umbrella schemes to make a statement regarding the “principle of limited recourse”, that is that the assets of a sub-fund belong exclusively to that sub-fund and shall not be used to settle, directly or indirectly, the liabilities or claims against the umbrella or any other sub-fund. There is a caveat to the introduction of the PCR with respect to a potential uncertainty as to how foreign courts will react to claims by creditors under foreign law contracts with the OEIC, which are brought in foreign courts. Where there are such contracts this is to be made clear by the OEIC. The COLL rules require the ACD to take appropriate actions to resolve where a foreign law contract may be inconsistent with the principle of limited recourse. The introduction of the PCR has enabled the FSA to amend COLL rule 5.2.30 so that a sub-fund of an umbrella may invest in units of other sub-funds of the same umbrella provided the scheme documentation permits this and conditions are met. Permitted cross investment within OEIC umbrellas may provide opportunities to consolidate OEICs and reduce the costs of operating several umbrella OEICs. The same rules apply to Non-UCITS umbrella OEICs as to UCITS umbrella OEICs but, of course, the UCITS Directive requirement prevails in that UCITS and Non-UCITS schemes cannot be mixed in the same umbrella. With the introduction of the PCR the FSA COLL rules now make it clear that when terminating a sub-fund it is the solvency of the sub-fund that is to be assessed and reported to the FSA not that of the OEIC. The statutory instrument (2011 No. 3049) (7 pages) is available via this link: http://www.legislation.gov.uk/uksi/2011/ 3049/contents/made The FSA’s Instrument amending COLL (18 pages) is available via this link: http://media.fsahandbook.info/Legislatio n/2011/2011_76.pdf FSA proposal to permit non-UCITS retail schemes to be feeder funds On 6 December the Financial Services Authority (“FSA”) issued its quarterly consultation paper (“CP 11/27”) which includes, in Chapter 8 and Appendix 8, the FSA’s proposals to permit non- UCITS retail schemes (“NURSs”) to operate as feeder funds and minor consequential changes for its rules for UCITS feeder funds. The UCITS IV rule amendments allow UCITS funds to operate as feeder funds to a master UCITS and the FSA has already amended its Collective Investment Schemes sourcebook (“COLL Rules”) in this respect. In CP 11/27 it proposes to allow NURSs in general to operate as feeder funds. A NURS can already be a feeder fund in specific limited circumstances which are: a pension scheme feeder; a property authorised investment fund (“PAIF”) feeder; and a fund of alternative investment funds (“FAIF”) feeder. The proposals will leave these existing arrangements unchanged but will provide a set of framework rules to allow the feeder-master structure for NURSs in general. The proposed new rules for the COLL sourcebook, which will apply to schemes operating under COLL 5.6, are dispersed to the relevant sections of COLL rather than being contained in COLL 5.6. The proposals require the master fund to provide at least the equivalent level of protection as if the feeder fund had been a NURS. Therefore the permitted master fund is limited to funds that could have been sold to retail investors in the UK and this will restrict the master fund to being: Fund News – December 2011 5  a UCITS scheme authorised in the UK or another member state;  a NURS; or  a UK recognised scheme. The feeder NURS must be dedicated to investment in the units of a single master scheme, however a NURS feeder will not be constrained to invest at least 85% of the scheme property in the units of the master scheme as is the case for UCITS feeder funds. The proposal is that there is no hard limit on the minimum proportion of the feeder’s assets that must be held in units of the master; however, the balance of the property of the feeder must be invested in cash; near cash or derivatives held and used for efficient portfolio management. The master fund must not invest more than 15% of its assets in other funds, so the master fund cannot be a fund of funds or itself a feeder fund. However, if a feeder NURS wishes to invest in a master fund that is a fund of funds it can set up as a NURS managed as a FAIF. In addition, to prevent circularity, the master should not invest, within its 15% limit, in units of the feeder NURS. However, as the master may be outside the UK, a rule on the master scheme could not be effective in all cases so it will be the responsibility of the manager of the feeder NURS to prevent circularity by taking reasonable care to ensure its units are not beneficially, directly or indirectly, owned by its master fund. The proposals include a range of disclosures to the investors in the feeder NURS including:  naming the specific master fund in the feeder’s prospectus, and explaining the investment objective and policy, and the risk profile of the master fund;  stating whether the performance of the feeder and master will be identical or how and why they will differ;  past performance data must be of the feeder fund;  providing the aggregate charges of the feeder and the master in the annual short and long reports;  provision, on request, of the prospectus and annual and half- yearly long reports of the master fund, free of charge;  the FSA cannot specify that there may be no charge for the subscription and redemption of units in the master but it will require that where a charge arises to the feeder NURS the manager will be required to reimburse the feeder NURS. This requirement does not extend to charges related to dilution levy or stamp duty reserve tax;  the FSA will preclude a UK master making information available in priority to a feeder NURS that could be prejudicial to the interests of other investors in the master fund; and,  unlike for UCITS, there will not be imposed an obligation on the depositaries and auditors of the feeder and master funds to enter into information sharing agreements. However the depositary of a feeder NURS should be consulted by the manager prior to investment in the master fund to confirm whether it is satisfied it can obtain all the necessary information to comply with its general duties. The manager will need to ensure that the feeder NURS’s valuation, pricing and dealing can be co-ordinated with the master fund to prevent arbitrage. In proposing these COLL Rules the FSA is taking the opportunity to amend COLL to make it clear that:  a UCITS umbrella may contain both standard UCITS sub-funds and feeder UCITS sub-funds provided that where this is the case it clear which sub-funds are feeder UCITS; and  it will not be a requirement of the half-yearly short report of a feeder UCITS to disclose the aggregated charges of the master and feeder funds as this is not a requirement of the half-yearly long report of a UCITS. NURS and UCITS feeders will be the same in these respects. The FSA’s consultation paper is available via the link below, CP 11/27 is 155 pages – the relevant sections are Chapter 8 (page numbers 47 to 57) and Appendix 8 (pages 131 to 147). http://www.fsa.gov.uk/pubs/cp/cp11_27. pdf Responses to this aspect of the CP are required by 6 February 2012. Tax News Fund News – December 2011 6 Italy New Italian tax withholding calculation for investors in funds investing in eligible bonds In its decree dated 13 December 2011 the Italian tax authorities have revised the reporting regime with effect from 1 January 2012. The new regulations change the rate at which tax should be withheld on certain bonds and investment funds. The result, introduces a complex calculation to determine the amount of tax on distributions to Italian investors in investment funds where the fund, and therefore the investor indirectly, holds a composite of bonds eligible to be taxed at the lower rate of 12.5% and securities taxed at the new standard rate of 20%. This will require calculations to be made and information to be provided to paying agents for distributions from 1 January 2012. From 1 January 2012, Italian investors will be subject to tax at 20% on income from investments, including distributions from UCITS and non-UCITS funds where the rate had previously been 12.5%. The new 20% rate replaces the rates of 12.5% and 27%. However, income from Italian government bonds, public securities and other government bonds that have a sufficient exchange of information continue to be taxed at 12.5%. This would mean that holding such securities through an investment fund (e.g. a UCITS or non-UCITS) could be a disadvantage for investors. The solution advised in the Decree of 13 December (Ref 11A16232) is that an investment fund which holds a combination of bonds eligible for the lower rate (12.5%) taxation and new standard rate (20%) taxation will reflect the proportion of each to equate to a composite tax rate for investors. The manager must determine the proportion by value of bonds taxed at 12.5% and 20% every six months, the dates of calculation are to coincide with semi- annual and annual reporting dates. As an example a fund with a calendar year end, will with respect to its distributions for the period commencing 1 January 2012 look back to the proportion by value of bonds at the semi-annual report of 30 June 2011 and the annual report of 31 December 2010. The simple average of the proportion by value of eligible bonds on these two dates will determine the proportion of the distribution on which tax is levied at 12.5% and the proportion which now must be taxed at 20%. The proportion of bonds to be taxed at 12.5% is multiplied by 0.625 and added to the proportion to be taxed at 20% to determine an aggregate percentage of the distribution that will then be taxed at 20%. (E.g. if the average invested at the two dates in 12.5% eligible bonds was 30%; this is multiplied by 0.625 to equal 18.75%; and is added to the 70% in assets to be taxed at 20%; so that the total of 88.75% is the proportion of the distribution which is taxed at 20%.) For a new fund, until financial statements are published the 20% tax rate applies to the whole distribution. When financial statements are published then the taxable proportion of the distribution can reflect the information in that report. Paying agents will require the proportion of the distribution which is to be taxed at 20% for Italian investors by the end of December 2011 for distributions from 1 January 2012. The Decree of 13 December (Ref 11A16232) is available in Italian via this web link: http://www.gazzettaufficiale.biz/atti/20 11/20110292/11A16232.htm Luxembourg Aberdeen Case E-Alerts The latest Aberdeen E-Alerts (tax newsletter focusing on withholding tax reclaims based on the Aberdeen case law) that outlines the positive impact of new Italian legislation on Aberdeen tax reclaims is available via the following web link: http://www.kpmg.com/LU/en/IssuesAnd Insights/Articlespublications/Pages/Aber deene-alerts-Issue2011-13.aspx Fund News – December 2011 7 UK Tax Transparent Fund and Property Authorised Investment Funds In relation to the publication of the Finance Bill 2012 on 6 December, HM Treasury (“HMT”) announced proposals for the establishment of an authorised tax transparent fund in 2012, and to facilitate conversion of authorised funds to the Property Authorised Investment Fund (PAIF) tax regime. New tax transparent fund as a pooled investment vehicle Further details have been announced regarding the proposed new tax transparent fund (“TTF”), which will be a new form of pooled investment vehicle that could significantly facilitate asset pooling in the UK by investment managers and institutional investors such as insurance companies and pension funds. HMT will be given powers in the Finance Act 2012 to make regulations for two categories of a regulated asset pooling vehicle: a contractually based co- ownership fund transparent for income but opaque for chargeable gains; and a partnership-based fund transparent for both income and gains. Regulations are also proposed to provide that assets of the new class held within the long term fund of an insurance company will be deemed annually disposed of and reacquired (Section 212 TCGA), in order to give relief to insurance companies on the transfer of assets into the new tax transparent schemes and to simplify the application of the current chargeable gains rules on the merger and reconstruction of both new and existing types of collective investment schemes. The continued development of the UK’s TTF is welcome news as it will provide investment managers with a UK alternative when considering pooling structures. The delivery by HMT of the TTF in 2012 is important as managers assess optimal structures in the light of opportunities made available under UCITS IV and with the increased focus on withholding taxes and wider cost pressures on managing portfolio investments. A regulatory consultation document will be published later this month or in early 2012. HMT’s announcement is available via this web link: www.hm- treasury.gov.uk/d/tax_transparent_funds. pdf Exchange of units between Property Authorised Investment Funds (PAIFs) and feeder funds HM Revenue & Customs has announced proposals to assist the managers of authorised investment funds wishing to convert funds into Property Authorised Investment Funds (“PAIFs”). The Government intends to allow investors to exchange their units in a dedicated PAIF feeder fund for units in the PAIF itself and vice versa in specified circumstances without triggering a capital gains charge. After undertaking informal consultation with interested parties, a statutory instrument to make the required changes is expected in the late spring or early summer of 2012. This change has been sought by the industry to facilitate the process of converting authorised property unit trusts into PAIFs. It would allow investors who invest via a funds platform that is currently unable to support income streaming to initially invest via an authorised unit trust feeder, and then subsequently switch to the PAIF when these administrative streaming issues have been resolved. By allowing switching without suffering capital gains, it will also allow managers greater flexibility in managing the corporate ownership condition which limits corporate investors from holding more than 10% of the PAIF. HMRC’s announcement is available via this web link: www.hmrc.gov.uk/budget- updates/06dec11/paif-hmrc-stat.pdf Accounting News IFRS for Investment Funds Our series of IFRS for Investment Funds publications addresses practical application issues that investment funds may encounter when applying IFRS. It discusses the key requirements and includes interpretative guidance and illustrative examples. The first issue covers the presentation and measurement of the financial assets carried at fair value subsequent to initial recognition and classified as fair value through profit or loss and available for sale. The second issue covers segment reporting as applicable funds. The second issue in the series is available at: http://www.kpmg.com/LU/en/IssuesAnd Insights/Articlespublications/Pages/IFRSf orInvestmentFundsIssue2.aspx Fund News – December 2011 8 Contact us Dee Ruddy Senior Manager T: + 352 22 5151 7369 E: dee.ruddy@kpmg.lu Audit Nathalie Dogniez Partner T: + 352 22 5151 7319 E: nathalie.dogniez@kpmg.lu www.kpmg.lu Publications Tax Georges Bock Partner T: + 352 22 5151 5522 E: georges.bock@kpmg.lu Advisory Vincent Heymans Partner T: +352 22 5151 7917 E: vincent.heymans@kpmg.lu 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 endeavour 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. © 2012 KPMG Luxembourg S.à r.l., a Luxembourg private limited company, is a subsidiary of KPMG Europe LLP and a member of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International. Evolving Investment Management Regulation - Meeting the challenge here FATCA and the funds industry: Defining the path here Charles Muller Partner T: +352 22 5151 7950 E: charles.muller@kpmg.lu . 1 FUND NEWS December 2011 Investment Fund Regulatory and Tax developments in selected jurisdictions Issue 87 – Regulatory and Tax Developments in December 2011 . Tax News Fund News – December 2011 6 Italy New Italian tax withholding calculation for investors in funds investing in eligible bonds In its decree dated 13 December 2011. proposals include a range of disclosures to the investors in the feeder NURS including:  naming the specific master fund in the feeder’s prospectus, and explaining the investment objective and