1 FUND NEWS September 2011 Investment Fund Regulatory and Tax developments in selected jurisdictions Issue 84 – Regulatory and Tax Developments in September 2011 Regulatory News European Union ESMA publishes updated measures regarding Short Selling On 29 September 2011 ESMA published an updated list of measures adopted by competent authorities on short selling. This update includes measures taken by France, Greece, Italy and Spain. The full list of measures is available via the following web link: http://www.esma.europa.eu/popup2.ph p?id=7696 ESMA launches a Call for Evidence on empty voting On 14 September ESMA launched a Call for Evidence on empty voting. Currently there are no specific rules relating to empty voting at the European level. ESMA’s objective is to collect Regulatory Content European Union ESMA publishes updated measures regarding short selling Page 1 ESMA launches a call for evidence on empty voting Page 1 Ireland Fitness & Probity for directors and staff Page 2 UK FSA issues PS 11/10 on its Transposition of the revised UCITS Directive Page 2 FSA quarterly consultation includes minor amendments for the operation of Authorised Funds Page 2 Tax Content European Union European Commission proposes a Financial Transaction Tax Page 3 Netherlands New bill on reclaims of Dutch dividend withholding tax Page 4 Poland Proposed amendments to the tax exemption regime applicable to EU and EEA funds Page 4 Spain Royal Decree 1145/2011 amending the General Regulations on tax management and inspection actions and procedures Page 5 Switzerland Switzerland and the UK initial tax agreement Page 8 UK Authorised Investment Funds amending tax regulations published Page 8 HM Treasury confirms it will introduce a protected cell regime for OEICs by November 2011 Page 8 Fund News – September 2011 2 information and evidence on the extent to which empty voting practices exist in practice within the EU and the effects of such practices. The Call for Evidence is available via the following web link: http://www.esma.europa.eu/popup2. php?id=7819 Ireland Fitness & Probity for directors and staff The Central Bank of Ireland has issued new Fitness and Probity Standards for all Irish regulated firms. These rules apply to two categories of staff – Pre- Approved Control Functions (“PCFs”) and Controlled Functions (“CFs”). These new rules are being introduced on a phased basis over the next year in order to allow for the introduction of new internal controls and procedures. UK FSA issues PS 11/10 on its Transposition of the revised UCITS Directive On 2 September, the Financial Services Authority (“FSA”) issued its policy statement explaining its transposition of the revised UCITS Directive (“UCITS IV”) into UK regulation. This policy statement is relevant not only to the UK industry but also to those firms, in the UK and overseas, looking to passport services whether through the cross- border marketing of UCITS funds or those non-UK UCITS managers seeking to use the management company passport to manage UK-authorised UCITS schemes. PS 11/10 reports on implementing the revised directive in the UK and summarises the feedback received to the questions the FSA “asked” when it issued the implementation consultation paper of December 2010. PS 11/10 publishes the final rules that have already been implemented by the transposition deadline through statutory instrument (SI 2011/1613) and the FSA Board approved Handbook changes (see Fund News Issue 81). The new features of UCITS IV have already been extensively discussed, however, the FSA re-emphasises that the Key Investor Information Document (“KIID”) will be a shorter and clearer document to help consumers compare funds and make more informed choices before they make their investment decision. It reiterates that firms have until 30 June 2012 to introduce the KIID. The policy statement (295 pages) is available via this web link: http://www.fsa.gov.uk/pubs/policy/ps11 _10.pdf Note that from page 37 of PS 11/10, the document comprises the “Made rules”, i.e. the implementing legal instrument: UCITS IV Directive Instrument (FSA 2011/39), and, while these 257 pages were published in July and are already included in the updated FSA Handbook in a wide range of places, document FSA 2011/39 provides a useful “black line” version showing the changes made by the FSA across the FSA Handbook to implement the UCITS IV Directive. FSA quarterly consultation includes minor amendments for the operation of Authorised Funds On 7 September the FSA issued CP 11/18, its quarterly consultation paper 30, in which it proposes minor amendments to the Rules and Guidance in its handbook. In September the quarterly consultation included amendments with respect to authorised funds set out in chapter 6. The FSA’s quarterly CP proposes changes for authorised funds as follows:  umbrella Non-UCITS retail schemes (“NURS”) will be permitted to combine sub-funds that operate as FAIFs (Funds of Alternative Investment Funds) alongside sub- funds that are not FAIFs;  the FSA proposed to require that when the final sub-fund of an umbrella ICVC is terminated such that there is no remaining property in the ICVC then the ICVC will be automatically wound up. As Fund News – September 2011 3 proposed, this would prevent the ICVC becoming an empty shell that the Authorised Fund Manager may then repopulate with a new range of authorised funds;  the FSA proposes to issue new guidance for managers to assist with determining if interests in syndicated loans are eligible investments; and  following the implementation of UCITS IV into the COLL sourcebook the FSA seeks to make two clarifications: o which ongoing charges figure should be published in the short report and the next update of the KIID provided that it is not misleading as an indication of future charges; and o that with respect to COLL 9.4.2R(1) and Documents, that for a section 264 recognised scheme only the KII document must be in English in accordance with the Directive’s translation requirements. The quarterly consultation is available via the link below – the relevant Chapter for funds is Chapter 6 (on pages 28 to 33) and the draft COLL amendments are in Annex 6 (on pages 77 to 84) of the 102 page document. Comments on the proposed changes should be provided to the FSA by 6 November 2011, details on page 33 of the CP. http://www.fsa.gov.uk/pubs/cp/cp11_18 .pdf TAX News European Union European Commission proposes a Financial Transaction Tax On 28 September, the European Commission published a proposed Directive for a tax on financial transactions. The scope of the tax is wide, aiming at covering transactions relating to all types of financial instruments. The scope covers instruments which are negotiable on the capital market, money-market instruments (with the exception of instruments of payment), units or shares in collective investment undertakings (which include UCITS and alternative investment funds) and OTC derivatives agreements. The scope of the tax is focused on financial transactions carried out by financial institutions acting as party to a financial transaction, either for their own account or for the account of other persons, or acting in the name of a party to the transaction. The definition of financial institutions is broad and essentially includes investment firms, organised markets, credit institutions, insurance and reinsurance undertakings, collective investment undertakings and their managers, pension funds and their managers, holding companies, financial leasing companies, special purpose entities, and where possible refers to the definitions provided by the relevant EU legislation adopted for regulatory purposes. Taxation will take place in the Member State in the territory of which the Fund News – September 2011 4 establishment of a financial institution is located, on condition that this institution is party to the transaction, acting either for its own account or for the account of another person, or is acting in the name of party to the transaction. Two rates of tax are proposed:  A rate of not lower than 0.01 percent on the notional amount in respect of derivatives transactions; and  A rate of not lower than 0.1 percent on the consideration paid for the transaction (or the arm's length market price, if higher) for all other eligible financial transactions. The full text of the proposed directive is available via the following web link: http://ec.europa.eu/taxation_customs/re sources/documents/taxation/other_taxe s/financial_sector/com(2011)594_en.pdf Netherlands New bill on reclaims of Dutch dividend withholding tax The Dutch government has published a bill introducing a reclaim possibility for Dutch dividend withholding tax withheld on dividend payments to tax exempt entities resident outside the European Union / European Economic Area (for Dutch, EU and EEA resident tax exempt entities this reclaim procedure is already applicable). Earlier, the tax authorities announced to repay dividend withholding tax after claims were filed based on EU law. Main beneficiaries of the reclaim possibility are pension funds and charities. Tax exempt entities that have a function comparable to that of entities with an exempt investment institution or fiscal investment institution status (articles 6a and 28 Dutch CITA) are excluded. This new reclaim possibility only applies to portfolio investments. For the definition of portfolio investments the bill refers to the free movement of capital as defined in article 63 of the Treaty of the functioning of the European Union (and not being direct investments as referred to in article 64 of that treaty). Furthermore, the Dutch Ministry of Finance must have designated the country of residence as a qualifying country. Only countries that have concluded a tax treaty with the Netherlands that provides for the exchange of information (a Tax Information Exchange Agreement) can qualify. It is envisaged that this new legislation will be in force as of 1 January 2012. Further information re this bill (in Dutch) is available via this link: http://www.rijksoverheid.nl/onderwerpe n/belastingplan-2012 For information on earlier claims follow this link: http://www.kpmg.com/Global/en/What WeDo/Tax/Documents/EU-tax-flash/etf- 165.pdf Poland Proposed amendments to the tax exemption regime applicable to EU and EEA funds The Polish Government recently published further proposed amendments to the Polish Corporate Icome Tax Act. More specifically, as an additional condition to benefit from the exemption regime currently applicable to foreign investment funds, such foreign funds will have to be managed by an entity operating on the basis of a permission issued by the competent financial sector authorities of a given state. This additional general comparability requirement (i.e. existence of an authorized management company) will be imposed on all foreign funds, and one cannot exclude that it will lead to the exclusion of self-managed corporate funds from the exemption regime. In addition, it seems that the Government intends to apply the exemption also to close-ended funds which do not operate on the basis of a permission issued by the competent financial sector authorities of a given state but must only notify about initiation of investment activities. To benefit from the withholding tax exemption in Poland such funds will have to meet the following additional requirements:  such funds are close-ended funds  investment certificates (units) in a given fund are not offered publically (traded on the stock exchange) or traded on any regulated market or other multilateral trading facilities  in case investment certificates can be acquired by individuals, such Fund News – September 2011 5  individual purchases must have a minimum value of EUR 40,000. The proposed amendments are currently being discussed at Government level and, if accepted, will be submitted for consideration to the Parliament. These proposed provisions further depart from the EU Commissions' standpoint (formal request dated 11 June) according to which current legislation, by introducing numerous exemption requirements, remains discriminatory with respect to foreign funds. Spain Royal Decree 1145/2011 amending the General Regulations on tax management and inspection actions and procedures Simplification of formal obligations in connection with investors in fixed- income financial instruments (Government and Qualifying Public Debt). Modification of the obligation to obtain a Spanish Tax Identification Number. On 30 July 2011 the Official State Gazette published Royal Decree 1145/2011, dated 29 July, (“RT 1145/2011”), which amends the General Regulations on tax management and inspection actions and procedures, approved by Royal Decree 1065/2007, dated 27 July (“RD 1065/2007”). As described in the Preamble, RD 1145/2011 introduces a simplification of the reporting obligations for non- resident investors of fixed-income financial instruments. RD 1145/2011 also simplifies the obligations for Spanish Resident Corporate Income Tax (“CIT”) taxpayers in respect of investments of specific fixed-rate financial instruments and clears up certain doubts in connection with the obligation for non-resident investors to obtain a Spanish Tax Identification Number (“TIN”) when investing in securities. Modification of information duties of non-resident investors Royal Legislative Decree 2/2008, dated 21 April, which sets forth measures to boost economic activity, extended the scope of the exemption of the Non- Resident Income Tax (“NRIT”) Law for Government Debt and other financial instruments to all non-resident investors regardless of their country of residence (including investors which are resident in jurisdictions considered tax havens for tax purposes). On the other hand, Law 4/2008, dated 23 December, which abolishes Net Wealth Tax, eliminated the obligation of providing information on income derived from Government and private Debt issued in accordance with Law 13/1985, dated 25 May, on investment ratios, equity and information duties of financial intermediaries (hereinafter, “Qualified Corporate Debt”) obtained by non-resident investors without a permanent establishment in Spain. However, until the recently approved RD 1145/2011, no Regulations developing amendments introduced by Law 4/2008 were approved. In this regard, in accordance with the tax rulings issued by the General Directorate of Taxation (“Dirección General de Tributos”), dated 20 January 2009, information duties relating to the identity of beneficial owners as laid down in RD 1285/1991, dated 2 August, and article 44 of RD 1065/2007 remained applicable in order to apply the NRIT exemption to income derived from Government Debt and Qualified Corporate Debt obtained by non- resident investors acting without a permanent establishment in Spain. As a result, until the recently approved RD 1145/2011 the onerous information obligations applicable in respect of non- resident investors that existed prior to the enactment of Law 4/2008 were maintained. Fund News – September 2011 6 Tax regime applicable as of 31 July 2011 RD 1145/2011 has developed the amendments introduced by Royal Legislative Decree 2/2008 and Law 4/2008, establishing and simplifying the procedure for paying Government and Qualified Corporate Debt. In this sense, Article 44 of RD 1065/2006 has been amended, unifying procedures for Government and Qualified Corporate Debt. The new procedure established by RD 1145/2011 can be summarized as follows:  It is no longer obligatory to individually identify the beneficiaries of interest deriving from debt securities (both Government and Qualified Corporate Debt).  The current individual identification procedure is replaced with a certificate issued by: (i) In the case of Government Debt securities: Spanish management entities and securities clearing and settlement entities resident outside of Spain which have signed an agreement with a Spanish securities clearing and settlement entity. (ii) In the case of Qualified Corporate Debt initially registered with a Spanish clearing and settlement entity (Iberclear): Participant entities in Iberclear or non- Spanish securities clearing and settlement entities which have signed an agreement with Iberclear, or (iii) In the case of Qualified Corporate Debt initially registered with a foreign clearing and settlement entity (e.g. Euroclear, Clearstream, DTC): The paying agent designated by the issuer.  The certificate, which must follow the official form attached to RD 1145/2011, exclusively includes (i) the securities identification; (ii) the total amount of the return derived from the relevant securities; (iii) the amount of the return corresponding to individuals subject to the Spanish Personal Income Tax (PIT), and (iv) the total amount of the return that may be paid free of withholding tax in Spain (i.e. the part of the total amount of the return of the relevant securities paid to investors who are not Spanish PIT taxpayers).  In case of Qualified Corporate Debt initially registered with a foreign clearing and settlement entity (e.g. Euroclear, Clearstream, DTC), the statement issued by the paying agent must only include (i) the securities identification; and (ii) the total amount of the return corresponding to each foreign clearing and settlement entity (i.e. there is no requirement to include the amount attributable to Spanish PIT taxpayers).  The referred certificate does not replace other general information duties set forth in the Spanish Tax Law in connection with debt issuers or depositaries with regard to PIT and CIT taxpayers or NRIT taxpayers with a permanent establishment in Spain investing in Government or Corporate Debt. Payment procedure applicable as of 31 July 2011 RD 1145/2011 establishes a double payment procedure:  The above referred certificate must be filed on the business day prior to the date of payment of interest. This certificate can be filed electronically. Once this information is provided, interest can be paid gross.  In case the return is not filed within this deadline, the issuer or the paying agent will carry out the relevant withholding (currently at a19% rate), and pay the net amount. Nevertheless, the issuer or paying agent will refund the amounts initially withheld providing the certificate is filed (i) within the following 30 days as of the payment date of interest derived from Government Debt securities or (ii) as of the tenth day of the month following that in which the interest resulting from the Qualified Corporate Debt becomes due. Amendments affecting CIT taxpayers and non-residents with a permanent establishment in Spain RD 1145/2011 has also simplified the obligations for CIT and NRIT taxpayers with a permanent establishment in Spain investing in Government and Qualified Corporate Debt. The income obtained by these taxpayers will be subject to the same procedure explained for non-resident investors, thus simplifying their information duties. Fund News – September 2011 7 Amendments regarding the obligation for non-resident investors to obtain a Spanish Tax Identification Number when investing in securities RD 1145/2011 has also modified RD 1065/2007, introducing certain clarifications in connection with the obligation for non-resident investors without a permanent establishment in Spain to obtain a TIN when investing in Spanish securities. In this sense, it is not necessary to obtain a TIN in the following cases:  When acquiring or purchasing securities represented by stocks or book entries located in Spain, or acquiring financial assets with an implicit return, provided such transactions are carried out by means of a securities account held by a non-resident without a permanent establishment in Spain.  In case of the subscription, acquisition, reimbursement or transfer of shares in Spanish collective investment institutions or collective investment schemes commercialized in Spain under Law 35/2003, of 4 November, provided these transactions are carried out by means of a securities account held by a non-resident without a permanent establishment in Spain. It should be noted that RD 1145/2011 also eliminates the obligation for non residents operating with assets or liabilities account or shares account to obtain a TIN. As a result, the number of cases in which a TIN is not required has been increased (e.g. loans or credits). In order to apply this exemption from the obligation to obtain a TIN, the non- resident must evidence its status by providing: (i) a tax residence certificate issued by the relevant tax authorities; or (ii) a tax residence declaration using the Form approved by the Spanish Authorities. Enactment RD 1145/2011 came into force on the day following its publication in the Official State Gazette (31st July 2011), and is applicable to all interest payments, redemptions or reimbursements of securities issued at discount or segregated, made as from 31st July. As a result, it will be applicable not only to debt issues made from this date onwards, but also to those still “alive” on the referred date. Observations RD 1145/2011 changes the information duties of non-resident investors, which also applies to CIT and PIT taxpayers. The main amendments introduced may be summarized as follows:  Elimination of the specific obligation for the issuer to identify non-resident investors acquiring Government Debt securities or Qualified Corporate Debt. This obligation is also eliminated for CIT taxpayers as well as for NRIT taxpayers operating through a permanent establishment in Spain.  Issuers will also not be obliged to identify PIT taxpayers investing in Spanish Government Debt securities or Qualified Corporate Debt. In this sense, it will only be necessary to identify the total amount of the income corresponding to such PIT taxpayers. Nevertheless, in principle, this does not involve a change in the general withholding tax regime applicable to Spanish tax resident individuals nor the general identification and information duties regarding financial institutions taking part in these transactions. Furthermore, in the case of Qualified Corporate Debt initially registered with a foreign clearing and settlement entity (e.g. Euroclear, Clearstream, DTC), it will only be necessary to identify the total amount of the income corresponding to each foreign entity that manages the clearing and settlement of securities (that is, it shall not be necessary to include the information regarding the income obtained by Spanish PIT taxpayers).  A single information procedure is established together with a simple and flexible payment system which reduces the administrative requirements for issuers, depositaries and investors.  Unification of the different procedures and systems, creating a single procedure and payment system for investments in both Government Debt securities as well as Qualified Corporate Debt and applicable to both non-resident investors and CIT taxpayers.  No reference is made in RD 1145/2011 in connection with a “beneficial owner” test in case of certain pass-through non-resident institutional investors. This issue may still be relevant and outstanding in those cases in which, under the new Regulation, the total amount of the income obtained by Spanish PIT taxpayers must be identified.  Non-resident investors operating in Spain without a permanent establishment will not be obliged to obtain a TIN when investing in Fund News – September 2011 8  Spanish securities or in Spanish Collective Investment Institutions, provided these transactions are made by means of a securities account and the non-resident investor provides evidence of its non-resident status. The procedure for certifying the non-resident status is pending approval. Apparently, this new Regulation extends the exemption for obtaining a TIN to other loan and credit transactions.  RD 1145/2011 came into force on 31st July 2011. As a result, the amended information requirements and TIN obligations are fully applicable not only to debt issues made from this date onwards, but also to those still “alive” on the referred date. Switzerland Switzerland and the UK initial tax agreement On 24 August 2011, British and Swiss negotiators initialled a tax agreement in order to resolve outstanding tax issues between the two countries. This tax agreement is largely the same as the agreement between Switzerland and Germany signed by the Finance Ministers of both countries in September. Under this agreement, persons resident in the United Kingdom can retrospectively tax their existing banking relationships in Switzerland either by making a one-off tax payment or by disclosing their accounts. For the future, investment income and capital gains of British investors in Switzerland will be subject to a final withholding tax, and the proceeds of this will be transferred to the British authorities by Switzerland. The next step of the negotiations is the signing of the agreement by both countries’ governments and its approval by the parliaments of both countries. This agreement should enter into force at the start of 2013. More information can be found on the Federal Authorities of the Swiss Confederation website (www.admin.ch) or on the Federal Department of Finance website (www.efd.admin.ch). UK Authorised Investment Funds amending tax regulations published The final version of The Authorised Investment Funds (Tax) (Amendment No.2) Regulations 2011 have been published and come into force on 1 October 2011. The amendments align the treatment of UK funds with recent changes made to the offshore funds regulations, with regards to the genuine diversity of ownership condition and index tracking funds. Genuine Diversity of Ownership condition The genuine diversity of ownership (“GDO”) condition is a requirement of a number of tax-beneficial regimes established in recent years, including the tax regimes for: Qualified Investor Schemes; Property AIFs; Tax Elected Funds; and to provide certainty that diversely owned authorised funds are not taxable on trading profits. The GDO test previously only applied to a single fund or feeder fund into a property AIF, but in the case where funds are invested in other funds, the new regulations allow a ‘look-through’ to the underlying fund to substantiate the test. Index-tracking funds Provided the requirements of Regulation 14ZD are met for a UK authorised index tracking fund, offshore income gains under regulation 17 of the offshore funds regulations do not arise if the UK fund invests non-reporting offshore funds. Fund News – September 2011 9 Regulation 14ZD includes a requirement that the UK fund replicates the capital and income returns of the index ‘as closely as practicable’. This should reduce the administrative burden for index-tracking authorised funds. The regulations are contained in Statutory Instrument 2011/2192 (4 pages) which is available via this web link: http://www.legislation.gov.uk/uksi/2011/ 2192/made HM Treasury confirms it will introduce a protected cell regime for OEICs by November 2011 In September the Government confirmed that it will introduce a protected cell regime (“PCR”) for UK open ended investment companies (“OEICs”) by November 2011. The announcement was part of Mark Hoban, Financial Secretary to the Treasury’s wider “New Regulation 2” announcements. The introduction of a PCR for OEICs is part of the measures to facilitate the competitiveness of UK asset management and to protect investors in umbrella OEICs from the risk of contagion should a sub-fund in an umbrella OEIC collapse. The introduction of a PCR for UK OEICs has been under consideration for several years and, with the advent of UCITS IV, is an important feature for the UK to include and reflects that sub-fund asset ring-fencing already exists in other jurisdictions. The availability of a PCR may influence the location of the master funds under UCITS IV. The impact assessment has not yet been published. However, one area of concern is that prior discussion papers have envisaged that the requirements a PCR will be imposed on both new and existing OEICs. If the PCR is compulsory of all OEICs, the period that will be permitted for existing OEICs to adopt the PCR will need to allow sufficient time in which the OEIC’s supplier contractual arrangements can be revised where these would be impacted by the changes arising from the PCR. The statement (6 pages) is available via the web link below includes the PCR proposal as the second bullet on page one with a summary on the final page: http://www.hm- treasury.gov.uk/d/hmt_new_regulation_j undec11.pdf Fund News – September 2011 10 Contact us Dee Ruddy Senior Manager T: + 352 22 5151 7369 E: Audit dee.ruddy@kpmg.lu 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. © 2011 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. Evolving Investment Management Regulation - Meeting the challenge here FATCA and the funds industry: Defining the path here . 1 FUND NEWS September 2011 Investment Fund Regulatory and Tax developments in selected jurisdictions Issue 84 – Regulatory and Tax Developments in September 2011 . Switzerland Switzerland and the UK initial tax agreement On 24 August 2011, British and Swiss negotiators initialled a tax agreement in order to resolve outstanding tax issues between. Non-resident investors operating in Spain without a permanent establishment will not be obliged to obtain a TIN when investing in Fund News – September 2011 8  Spanish securities or in