EU: Collective investment

vehicles

Luxembourg: New generic

top level domain names

UK: Pensions planning on

relocation to Switzerland

Greece: Tax law changes

ECJ: Exit charge on cessation

of trade or transfer

TAX PLANNINGINTERNATIONALEUROPEAN TAX SERVICEInternational Information for International Business

VOLUME 14, NUMBER 8 >>> AUGUST 2012

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Collective investmentvehicles – issues incross borderinvestmentDavid BurkeMason Hayes & Curran, Dublin

This article draws a useful comparison between collective

investment vehicles popular in countries such as Ireland,

Luxembourg, Italy, Switzerland and UK and are mainly used for tax

and non-tax purposes in efficient cross-border investment

structures.

I. Introduction

Investors often prefer pooling funds with other in-

vestors and structuring their investment through

a collective investment vehicle over making a

direct investment, for both tax and non-tax reasons,

especially where investment and investors are in dif-

ferent jurisdictions. This article describes the features

and tax treatment of investment vehicles in Ireland,

Luxembourg, Switzerland, the UK and Italy that are

most frequently used in structuring of cross border in-

vestments. Some attract investors from specific juris-

dictions; others are used for specific target

investments and some offer a beneficial tax treatment

for the investment managers.

II. Ireland

The two Irish non-UCITS vehicles that are most popu-

lar with private investors are the Qualifying Investor

Fund (‘‘QIF’’) and the section 110 securitisation com-

pany (‘‘Section 110 Company’’).

A. Qualifying Investor Funds

A QIF is a tax exempt vehicle which is typically estab-

lished as an investment company or unit trust. It is au-

thorised by the Irish Central Bank (but more lightly

regulated than a retail fund) and issues equity (shares

or units). QIFs are more expensive than section 110

companies and require a longer lead-in time for

implementation. The minimum subscription in a QIF

is EUR 100,000 and investors must satisfy certain eli-

gibility criteria and an authorised fund promoter is

needed with net shareholder funds of at least EUR

635,000. QIFs are exempt from Irish tax on both

income and gains; it is possible to roll up income and

gains in the fund gross with no requirement to distrib-

ute. There are no net asset value-based taxes and no

stamp/capital taxes on issuance or transfer of shares/

units in the QIF. Non Irish resident investors are not

subject to withholding tax provided an appropriate

declaration is made. Irish resident individuals are

subject to withholding tax at 30 percent or 33 percent

that constitutes the final settlement of their Irish tax

liability.

David Burke is Tax

Partner in Mason

Hayes & Curran in

Dublin.

6 08/12 Copyright R 2012 by The Bureau of National Affairs, Inc. TPETS ISSN 1754-1646

B. Section 110 company

A section 110 company is unregulated and issues debt

securities. It is subject to tax at 25 percent on its tax-

able profits. It can get deductions for expenses which

are deemed to be revenue in nature. Interest is gener-

ally deductible, including profit participating interest,

save in certain circumstances. For example, if such

debt is regarded as equity in a corresponding regime

and a participation exemption applies, the deductibil-

ity in Ireland may be in question. Section 110 compa-

nies generally issue debt as dividends that are not

deductible. There are no thin capitalisation rules.

Exemptions from withholding interest are available

on quoted Eurobonds (listed security) and on pay-

ments to investors in treaty jurisdictions. A quoted

Eurobond can be held by anyone globally without fur-

ther enquiry. Section 110 companies are generally eli-

gible for treaty benefits on income received from

foreign investments.

C. Example structure

A section 110 company is frequently used in life settle-

ment securitisations. These transactions typically in-

volve transfers of life policies to the company. As a

section 110 company is entitled to treaty benefits,

such structures can be used to minimise the 30 per-

cent US withholding tax on death benefits. The com-

pany can issue participating profit and listed debt to a

Delaware LP for US taxable investors and to a

Cayman LP for US non-taxable investors.

There are a number of US issues to consider in rela-

tion to this structure. Firstly, it must be structured so

that no permanent establishment is created in the US.

As a result, services, managers and administrators etc.

are appointed outside the US. Secondly, the ability to

availoneself of the US treaty exemption from with-

holding on death benefits depends on meeting the

Limitation of Benefits (‘‘LOB’’) Article in the Ireland/

USA double tax treaty. Though the section 110 com-

pany is regarded as a resident in Ireland, the LOB test

still needs to be met. There are a number of LOB tests

prescribed in the Ireland/USA treaty, one of which

typically requires at least 50 percent of the investors to

be ‘‘qualified persons’’ (resident in the US or Ireland)

and a compliance with a base erosion test which re-

quires that deductions payable to people other than

investors must not be more than 50 percent of the

gross income of the fund. A QIF can also be used in

structures like these because a QIF is a ‘‘Collective In-

vestment Undertaking’’, which is specifically regarded

as a resident under the Ireland/USA treaty, which is

unusual for a tax exempt entity.

D. Summary

In summary, the two non-UCITS collective investment

vehicles used in Ireland are very different in nature

and scope. The advantage of a QIF is that it is tax

exempt, has treaty access in some cases (e.g. Ireland/

USA double tax treaty) and there is no withholding tax

from non-Irish investors. On the other hand, it is sub-

ject to regulations of the Central Bank with significant

lead time for authorisation and the costs associated

with such regulation.

A section 110 company is unregulated and hence

easy to establish. It can be structured so as to be tax-

neutral and it also has full treaty access. There are

generally no withholding tax issues, provided it is

structured correctly. A wide range of asset classes can

be repackaged into a section 110 company. On the

other hand, a section 110 company must ensure that

it has deductible expenditure (interest not dividends)

and certain anti-avoidance measures now apply to

profit participating interest. It is often necessary to list

debt securities to avoid interest withholding tax.

III. Luxembourg

The three most popular collective investment vehicles

in Luxembourg, apart from traditional retail UCITS

funds, are the SICAR, the SIF and the securitisation

vehicle.

A. SICAR

The Luxembourg Societe d’investissement en capital a

risque (‘‘SICAR’’) is a regulated venture capital/private

equity vehicle which invests in ‘‘risk capital’’. A SICAR

is tax-neutral in the sense that although corporation

tax at 28.8 percent applies, there is an exemption for

income and gains from securities representing such

‘‘risk capital’’ investments. A SICAR is generally eli-

gible for treaty benefits and EU directives, depending

on the view of the tax authority in the source state. In-

vestors in a SICAR need to be professional, institu-

tional, or well informed, invest a minimum of EUR

125,000 and be aware of the risks they are taking. If it

is uncertain whether a double tax treaty will apply to

interest or dividend income payable to the SICAR it is

possible to interpose a Societe de participations finan-

cieres (’’SOPARFI’’) - a taxable vehicle more widely

recognised abroad as eligible for treaty benefits.

B. SIF

The Luxembourg Specialised Investment Fund (’’SIF’’)

is a flexibly regulated investment fund which is also

available to professional investors only. It is tax-

neutral in the sense that it is completely exempt from

08/12 Tax Planning International European Tax Service BNA ISSN 1754-1646 7

corporation tax and net wealth tax. For that reason,

there is limited or no treaty access and if treaty access

is required for some investments then it is common to

interpose a SOPARFI for those. Like SICARs, SIFs are

used for private equity investments. They are used in

situations where it is not certain whether the invest-

ment will qualify as ‘‘risk capital’’ under the SICAR

rules (e.g. real estate). The key difference between the

two is that there is no limit on the nature of the invest-

ments in a SIF but it is necessary to have a spread of

risk so that not more than 30 percent is invested in any

one class of assets. It is possible to get an advance

ruling in this regard. There are about 1,400 SIFs and

200 SICARs in Luxembourg.

C. Securitisation vehicle

The Luxembourg Securitisation Vehicle (’’SV’’) is not

regulated unless it regularly issues securities to the

public. It is tax-neutral in the sense that corporate

income tax applies but all commitments to investors

are fully deductible, whether they are debt or equity.

An SV is typically eligible for treaty benefits. It can

take the form of a company or a fund. There are usu-

ally more tax reasons for using

an SV though there is a risk of

recharacterisation under the

doctrine of abuse of law if an

SV is used for a transaction

that is not a true securitisation.

D. Example structures

A typical real estate fund might use a SIF where a

series of property companies (Propcos) would be held

by a SOPARFI which would in turn be held by a SIF

that would issue units to investors. Other typical

structures might use a securitisation vehicle to invest

in Propcos holding property located in Germany. The

SV might hold shares in holding companies (Holdcos)

which each hold a Propco. The SV would finance the

Holdcos with loans. There is no withholding tax on

the dividends payable by the SV to investors and no

withholding on the payment of interest by the Propcos

to the SV or on dividends paid by the Holdco to the SV.

This structure may need to be reconsidered once the

new Luxembourg/Germany treaty comes into effect

on January 1, 2013.

E. Summary

In summary, Luxembourg collective investment ve-

hicles are flexibly regulated entities and tax neutral

though different forms of tax neutrality apply depend-

ing on the type of entity. All permit fully segregated

compartments. Securitisation vehicles can further-

more be structured in such a manner that they are

bankruptcy remote. Withholding is not usually an

issue unless income is paid to an individual who does

not agree to exchange information, in which case

withholding would be imposed under the EU Savings

Directive. There is an exemption from capital gains

tax for non-resident shareholders and an exemption

from VAT in respect of management services.

For certain types of investment, any of the struc-

tures, a SICAR, SIF or SV can be used. For debt invest-

ments, a securitisation vehicle is more popular and

for private equity and venture capital investments the

SIF or SICAR is more commonly used, possibly with a

SOPARFI interposed where treaty access is required.

On the downside, there is no or restricted access to tax

treaties for tax exempt vehicles such as the SIF and

other transparent entities.

Certain restrictions and conditions apply to activi-

ties and investments. For SIFs, there must be risk

spreading and for SICARs there must be qualifying

‘‘risk capital’’ investments. For securitisation vehicles,

a passive holding of existing securities is usually re-

quired.

IV. Switzerland

A Swiss collective investment vehicle is typically

chosen to benefit from the (light) Swiss regulatory en-

vironment rather than for tax reasons, noting however

that it can be advantageous for investment managers

to structure their rewards through Switzerland.

The two Swiss collective investment vehicles that

are most commonly used in practice are the societe

d’investissement a capital variable (‘‘SICAV’’) and Swiss

limited partnership (‘‘SLP’’). Both are subject to prior

authorisation and supervision of FINMA (Swiss Fi-

nancial Market Supervisory Authority). A SICAV is an

open-ended fund that can either be self-managed or

have external management. There is flexibility on the

shares that can be issued. The SICAV can invest in

bonds, indices and a broad range of other assets. An

SLP consists of a general partner that is a Swiss cor-

poration and (at least five) limited partners who are

‘‘qualified investors’’ with at least CHF 2 million each

of liquid assets.

Both the SICAV and the SLP are not subject to

Swiss tax as they are tax transparent and capital gains

realised by them retain this characterisation upon dis-

‘‘A section 110 company is

unregulated and hence easy toestablish

’’

8 08/12 Copyright R 2012 by The Bureau of National Affairs, Inc. TPETS ISSN 1754-1646

tribution to private investors. Income realised by an

SLP is subject to Swiss withholding tax at 35 percent

unless it derives from capital gains realised by the

SICAV or SLP or the investors are foreign investors

and at least 80 percent of the income is from foreign

sources.

A typical Swiss hedge fund investment structure

might include a Swiss investment manager receiving

service fees from a foreign limited partnership that

itself receives fees from a foreign investment fund.

The share of profits realised by the Swiss resident in-

vestment manager is exempt from Swiss taxes, pro-

vided that the foreign limited partnership conducts its

business abroad. The fund is not subject to Swiss

taxes. The advantage of this is that there is minimum

regulation of investment managers in Switzerland

and, based on a prior ruling of the Swiss tax adminis-

tration, a low tax result for an investment manager

living in Switzerland.

V. United Kingdom

The English Limited Partnership (‘‘ELP’’) is com-

monly used as a private equity

style investment vehicle. A 1987

agreement between the UK

Revenue and the British Ven-

ture Capital Association gives

certainty as to its UK tax treat-

ment.

An ELP acts through a gen-

eral partner (‘‘GP’’) with inves-

tors being admitted as limited

partners (‘‘LPs’’). LPs cannot

participate in the management of the LP without

losing limited liability. The GP can be an English lim-

ited company but must be regulated or it must con-

tract out services to a regulated manager. To avoid

VAT, it must be VAT grouped with such a manager.

This can create irrecoverable VAT which is why the GP

is often located in Jersey or the Isle of Man.

The ELP is not subject to UK tax, is fully transpar-

ent and, from a UK perspective, its activities are

treated as carried on by its partners. The partners are

taxed on their share of the profits and losses from the

ELP. No unpaid tax can be recovered from the ELP –

the ELP is under no obligation to withhold tax on dis-

tributions of profits to LPs.

An ELP is regarded as tax transparent in a large

number of other jurisdictions (potentially allowing in-

vestors to access preferential capital gains tax treat-

ment on the sale of assets owned by the ELP). If an

ELP buys shares and securities to hold as investments

any profit or return generally will be treated as a

return from investment, not trading. An ELP will usu-

ally establish one or more holding companies through

which it will make investments. As ELPs are tax trans-

parent, the choice of holding company becomes im-

portant for the tax treatment of UK (and other)

investors. A performance fee (carried interest) taken

through a profit share in the ELP allows preferential

tax treatment (capital gains, enhanced base cost). As

the ELP is tax transparent, treaty benefits are gener-

ally available by reference to the position of the inves-

tor.

A typical private equity investment structure might

have an ELP holding shares and debt in a Luxem-

bourg holding company that invests in debt and

equity in portfolio companies. This is suitable for in-

vestors in most European jurisdictions and for US in-

vestors with appropriate ’check-the-box’ elections for

specific entities. If investments are made by taxable

and tax exempt US investors, a separate partnership

would be established for the latter. The reason for this

is that if the US investor is taxable, income should

flow through from the investment directly into the US

to maximise capital gains tax rates but, if the investor

is tax exempt, a direct shareholding is preferred so

that foreign tax credits can be claimed by the tax

exempt vehicle (they would be harder to claim where

they are further down the chain).

VI. Italy

In Italy, a Fondo Chiuso (‘‘FC’’) is typically used as a

collective investment vehicle for private equity invest-

ments. In summary, there is no taxation at fund level

and no taxation for non-resident Italian investors,

provided certain conditions are met.

An FC is an undivided pool of assets set up and

managed by an Italian management company, the so-

ciete di gestione del risparmio (‘‘SGR’’), on behalf of in-

vestors whose rights are represented by interest units.

The FC has no legal personality and its assets are sepa-

rate from the assets of the SGR and of the investors.

The SGR is structured as a limited liability corpora-

tion and authorised by the Bank of Italy. A depository

bank is required to be responsible for the custody of

the investments of the fund. This can be an Italian

bank or the Italian permanent establishment of a for-

eign bank. Investors can be resident anywhere but tax

consequences will vary. Usually private equity funds

‘‘The English Limited

Partnership (‘‘ELP’’) is commonlyused as a private equity styleinvestment vehicle.

’’

08/12 Tax Planning International European Tax Service BNA ISSN 1754-1646 9

are established in the form of closed-end funds re-

served to qualified investors.

In general, distributions by an FC are subject to a 20

per cent withholding tax. For Italian resident indi-

viduals (and not-for-profit businesses) and non-Italian

resident investors, the withholding is a final statement

of their tax liability. For Italian resident companies,

the gross distribution is taxable but a credit is given

for the tax withheld by the fund. Certain non-resident

investors can apply for an exemption from the with-

holding tax. This includes residents of white-list coun-

tries (i.e. with adequate exchange of information with

Italy), residents of countries with tax treaties with

Italy and institutional investors, even if not subject to

tax and established in a white-list country.

David Burke works for Mason Hayes & Curran in Ireland. He

may be contacted by email at dburke@MHC.ie.

This article stems from a report of a workshop that took place in

Vienna on 30 March 2012 at the 12th Annual Tax Planning

Strategies Conference. It was chaired by Herbert Buzanich

(Schoenherr) and Gordon Warnke (then of Dewey & LeBoeuf

LLP, now of Linklaters LLP) and included contributions from

Mark O’Sullivan (Matheson Ormsby Prentice, Ireland),

Frederic Feyten (OPF Partners, Luxembourg), Jean-Blaise

Eckert (Lenz & Staehelin, Switzerland), Darren Oswick

(Simmons & Simmons LLP, London) and Stefano Petrecca (Di

Tanno e Associati, Italy).

10 08/12 Copyright R 2012 by The Bureau of National Affairs, Inc. TPETS ISSN 1754-1646

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