Boston New York San Francisco Washington, DC OECD Committee on Fiscal Affairs Roundtable on Collective Investment Vehicles February 1-2, Paris, France Selected Treaty Issues Affecting Collective Investment Vehicles Investing in Securities Stephen E. Shay, Ropes & Gray LLP

2 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

3 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.

4 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 co- mingling in a CIV with international investments diminishing cross border portfolio investment.

5 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.

6 Legal and Tax Attributes of CIVs CIVs legal form may be –Recognized as a separate taxable legal entity, or –Transparent for tax purposes.

7 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.

8 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.

9 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.

10 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.

11 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.

12 CIV Difficulties in Obtaining Source Country Treaty Relief Pension plans and other tax-exempt investors –Some treaties allow pension plans, tax- exempt organizations exemption from source country taxation. –CIVs sometimes organize to pool these investors funds. –CIVs should be allowed to accommodate these funds.

13 Principles for Obtaining Source Country Treaty Relief Principles for addressing CIV/Investor treaty issues. –Avoid double taxation, do not foster double non- taxation. –Treat economically similar investors similarly. –Preserve benefits of residence country tax- exemption. –Implementation of treaty relief at CIV level. Do not expect a one size fits all solution.

14 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.

15 Consider modifying treaty rules for CIVs (contd) –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. Addressing CIV Treaty Issues

16 Consider modifying treaty rules for CIVs (contd) –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 Addressing CIV Treaty Issues

17 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

18 Next Steps Consider convening advisory group including representatives from industry to further examine issues and alternative solutions.