Investment Fund Regulatory and Tax developments in selected jurisdictions pptx

1 FUND NEWS January 2013 Investment Fund Regulatory and Tax developments in selected jurisdictions Issue 99 – Regulatory and Tax Developments in January 2013 Regulatory News Europea

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FUND NEWS January 2013

Investment Fund Regulatory and Tax developments in

selected jurisdictions

Issue 99 – Regulatory and Tax

Developments in January 2013

Regulatory News

European Union

Commission adopts regulatory and

implementing technical standards for

the Regulation on OTC derivatives,

central counterparties and trade

repositories

On 19 December 2012, the European

Commission adopted nine regulatory

and implementing technical standards to

complement the obligations defined

under the Regulation on OTC derivatives, central counterparties (CCPs) and trade repositories They were developed by the European Supervisory Authorities and have been endorsed by the European Commission without modification The adoption of these technical standards finalises requirements for the mandatory clearing and reporting of transactions

The full texts of the standards are available via the following weblink:

x

Regulatory Content European Union

Regulatory & implementing technical standards for OTC derivatives, CCPs & trade repositories Page 1

ESMA Q&A Short selling and certain aspects of credit default swaps Page 2

Tougher credit rating rules voted

by European Parliament Page 2

ESMA approves co-operation agreement with Brazilian regulator Page 2

Luxembourg

New status for Advisers of UCIs

Circular 13/557 on EMIR Page 3

CSSF Anti-money laundering

UK

Progress in transposing the AIFMD

International

IOSCO Suitability rules for distribution

of Complex Financial Products Page 6 Tax Content

European Union

Council agreement on enhanced cooperation for FTT Page 7

Belgium

Modification of ‘exit tax’ regime &

increase in interest WHT Page 7

Germany

Draft Investment Tax Act Page 8

UK

HMRC draft guidance on Unauthorised Unit Trusts Page 9 USA

FATCA Final Regulations released Page 10

Fund News – January 2013

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ESMA Q&A on Implementation of the

Regulation on short selling and

certain aspects of credit default

swaps

On 30 January 2013 the European

Securities and Markets Authority

(ESMA) issued a second update of its

Questions and Answers paper (Ref:

ESMA/2013/159) on the practical

implementation of the Regulation on

short selling and credit default swaps

which is available via the following link:

Tougher credit rating rules voted by

European Parliament

In a Press Release dated 16 January

2013 the European Parliament advised

that in the plenary session of the same

day, new rules were voted on credit

rating agencies The rules cover the

following main areas:

1) Set dates for sovereign debt ratings

Unsolicited sovereign ratings could be

published at least two but no more than

three times a year, on dates published

by the rating agency at the end of the

previous year

2) Agencies to be liable for ratings

Investors will be able to sue an agency

for damages if it breaches the rules set

out in the legislation either intentionally

or by gross negligence, regardless of

whether there is any contractual

relationship between the parties Such

breaches would include, for example,

issuing a rating compromised by a

conflict of interests or outside the

published calendar

3) Reducing over-reliance on ratings

To reduce over-reliance on ratings, MEPs urge credit institutions and investment firms to develop their own rating capacities By 2020 no EU legislation should directly refer to external ratings

4) Capping shareholdings

A credit rating agency will have to refrain from issuing ratings, or disclose that its ratings may be affected, if a shareholder

or member holding 10 % of the voting rights in that agency has invested in the rated entity The new rules will also bar anyone from simultaneously holding stakes of more than 5% in more than one credit rating agency, unless the agencies concerned belong to the same group

ESMA approves co-operations agreements with Brazilian regulator

The European Securities and Markets Authority (ESMA) approved the co-operation arrangements between the

Brazilian Comissão de Valores Mobiliários (CVM) and the EU securities

regulators for the supervision of alternative investment funds (AIFs) The co-operation arrangements include the exchange of information, cross-border on-site visits and mutual assistance in the enforcement of the respective supervisory laws This co-operation will apply to Brazilian alternative investment fund managers (AIFMs) that manage or market AIFs in the EU and to EU AIFMs that manage or market AIFs in Brazil

Fund News – January 2013

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Luxembourg

New status for Luxembourg

investment advisers of undertakings

for collective investment (UCI) and

specialised investment funds (SIF)

On 10 January 2013 the Commission de

Surveillance du Secteur Financier (CSSF)

published a press release relating to the

new status of Luxembourg based

investment advisers of UCIs subject to

the Law of 17 December 2010, and of

SIFs subject to the Law of 13 February

2007 The new status will not impact

foreign advisers of Luxembourg

UCIs/SIFs

Further to the entry into force of the

Law of 21 December 2012

implementing Directive 2010/78/EU

amending the powers of the European

supervisory authorities, the scope of the

Law of 5 April 1993 on the financial

sector has been modified Luxembourg

based investment advisers of UCIs or

SIFs will now fall in the scope of the

Law on the financial sector and they will

have to apply for authorisation under

Article 24 of that law The authorisation

will be granted by the Minister of

Finance

Each Luxembourg based investment

adviser of UCIs or SIFs exercising the

activity at the time of the entry into force

of the Law of 21 December 2012 has

until 30 June 2013 at the latest to

comply with the requirements of Article

24 of the Law on the financial sector

The entity must contact the CSSF by

email (agrements.psf@cssf.lu), before 1

March 2013 in order to ensure that the

application can be dealt with within the

legal delay

The full text (in French) is available via the following web link:

Circular 13/557 on EMIR

The CSSF issued Circular 13/557 on 23 January 2013 which provides an overview of the requirements of the European Markets and Infrastructure Regulation (EMIR) The Circular recommends that financial counterparties should assess their EMIR readiness and lists the following questions that should be considered:

• Which trade repository can you report to for the types of derivatives you trade?

• Will you report directly to the trade repository or delegate reporting to your counterparty or a third party?

• Which CCPs accept to clear the types of OTC derivatives you trade? Will you access clearing directly as a

‘clearing member’? If not, you will need to be a client of a clearing member

• Are your existing systems and processes adequate to implement the new operational risk mitigation requirements set out in EMIR?

• Do you have collateral agreements

in place and sufficient collateral available to collateralise non-cleared OTC derivative trades?

The Circular is available on www.cssf.lu

Fund News – January 2013

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CSSF Anti-money laundering

Regulation 12-02

The CSSF Regulation 12-02 of 14

December 2012 on the fight against

money laundering and terrorist financing

has been published on 9 January 2013

Its purpose is first to respond to the

FATF criticism set out in the evaluation

report of Luxembourg published in 2010,

where the legally binding character of

the AML/CTF circulars issued by the

CSSF and the CAA was challenged

This regulation aims to complete the

current AML/CTF legislation in place and

to finally transcribe the latest

amendments introduced by the

Grand-Ducal Regulation of 1 February 2010 and

the Law of 27 October 2010 In addition

CSSF circulars 08/387 and 10/476 are

repealed

What are the main innovations

introduced by this Regulation?

To follow is a summary of the provisions

mentioned in this Regulation that are the

most relevant for the investment funds

industry

Chapter 2: Scope

In cases where investment funds are

distributed through intermediaries acting

on behalf of underlying investors, i.e

account opened in the name of the

intermediaries or in the name of indirect

investors, professionals are required

upon starting a business relationship to

apply enhanced due diligence

measures for these intermediaries

taking into consideration the same

principles applicable to the cross-border

correspondent banking relationships or

other similar relationships with institutions in Third Countries As such professionals should gather sufficient information to be in a position to determine the reputation of the intermediary, the quality of supervision,

as well as to assess its AML/CTF measures and controls This information should enable the professionals to assign a level of risk to this intermediary and determine the level of due diligence

to apply

Chapter 3: Risk Based Approach

According to articles 4 and 5 of the Regulation and as stipulated by article 3(3) of the modified Law of 12 November 2004, ‘professionals are required to perform an analysis of the risks inherent to their business activities’

taking into consideration the risks linked

to the nature of their customers, the offered products and provided services

Professionals should set down the outcomes of this analysis in writing and

be in a position to communicate this analysis to the CSSF

As such, professionals should assess and categorise their customers according to a certain level of risk This categorisation needs to be performed prior to client acceptance It should not

be considered as a “one shot exercise”

but must be continuously reviewed in order to apply the appropriate due diligence measures to mitigate the identified risks

Article 7 of the Regulation states that in order to apply simplified due diligence measures for direct customers, where the customer is a credit or financial institution of another EU Member State

or in a third country as defined by article 3-1 of the modified Law of 12 November

2004 or in order to rely on customer due diligence performed by third parties as defined by article 3-3 of the modified Law of 12 November 2004,

professionals should perform a risk

assessment of the country where the

credit/financial institution or the third party is located This assessment should enable the professionals to demonstrate that they have sufficiently documented their comfort that the country has equivalent AML/CTF requirements in place to those applied in Luxembourg and that simplified due diligence measures could be applied The outcomes of such assessment should

be reviewed and updated on a regular basis

Chapter 4: Customer due diligence procedures

Beneficial owner

The obligation to identify the customer and verify its identity includes the identification of the beneficial owner and the fact that professionals should take all reasonable measures and use relevant information or data obtained from a reliable source to verify properly the identity of the beneficial owner Art 17

of the Regulation indicates that

professionals should obtain a written

declaration from the customer whether

he is acting or not for his own account The customer will need to agree to inform the professional about any change in the beneficial ownership

There is nevertheless no longer a

reference to the former declaration of

beneficial owner signed by the beneficial owner itself that was recommended by

Fund News – January 2013

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repealed CSSF circulars 05/211 and

08/387

In addition, there is also a question mark

regarding article 23 of this Regulation

and the more stringent reinterpretation

of the definition of beneficial owner and

the 25% ownership threshold defined by

article 1(7) of the modified Law of 20

November 2004

Information on the purpose and intended

nature of the business relationship

While identifying its customers and in

order to understand the aim of the

business relationship, professionals have

the obligation to obtain information as

regards the origin of funds of the

customers but also as regards the type

of transactions foreseen This

information should enable the

professionals to conduct an ongoing

monitoring of the customers’ business

relationship according to article 24 of the

Regulation

Although this new Regulation does not

reinvent the wheel, we believe that

some of its provisions will definitely

have an impact on the Investment Funds

industry, at the level of the UCI and the

Management Company as well as the

Registrar, from both a commercial and

operational point of view

UK

Progress in transposing the AIFMD into UK law

On 11 January 2013, HM Treasury (“HMT”) published its first Consultation

Paper on the “Transposition of the Alternative Investment Fund Managers Directive” (“AIFMD”) This is the first of

two consultations planned by HMT The second consultation, to be published later in quarter one of 2013, will include guidance on:

• scope of application of the Directive, including charity funds; the

European Venture Capital Funds (“EuVECA”) and European Social Entrepreneurship Funds (“EuSEF”) Regulations;

• marketing of EEA retail funds, third country retail funds, and Financial Services and Markets Act 2000 Section 270 and 272 funds;

• application of the approved persons regime to internally managed investment companies; and

• application of the Financial Services Compensation Scheme and Financial Ombudsman Service to AIFM

This consultation includes a wider scope for AIFMs than the Directive:

• UK managers of authorised funds which are not UCITS authorised funds, so the management of authorised Non-UCITS Retail Schemes (“NURS”) and Qualified

Investor Schemes (“QIS”); together with UK managers where the assets under management (“AUM”) are less than €100million will have to comply with the requirements of the AIFMD

• AIFMs of AUM under €100m are, however, to be exempt from three aspects of AIFMD:

i) the Delegation Test:

that is the requirement for the AIFM to undertake substantially more activities primarily portfolio management

or risk management than their delegates and therefore would not be considered a

‘letter-box entity’;

ii) certain reporting and

transparency requirements such as reporting data to the regulator on leverage; and

iii) the remuneration

provisions and disclosure requirements of the Directive

However, all other aspects of the Directive are to apply including the regulatory capital and conduct of business rules

Additionally some firms will need to comply with special provisions in regard

to the de minimis threshold (€100m),

Fund News – January 2013

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such as:

• Private Equity firms, are only in

scope of the Directive if they are

managing AUM of more than

€100m

• Internally-managed funds, such as

Investment Trusts, will need to

apply for a registration even if the

assets are under €100m AUM The

Prospectus and Transparency

Directive and update to the FSA

Listing Rules will provide sufficient

transparency in regard to the

activities of these funds However,

the Financial Conduct Authority

(“FCA”) will have discretion as to

whether they choose to register a

fund, if there are concerns around

disqualification of directors or

criminal activity ; and

• Investment Trusts with external

managers are required to ensure the

external manager is authorised

• For managers of Unregulated

Collective Investment Schemes

(“UCIS”) under €100m marketing

into the UK only on private

placement basis there will be no

change in regulatory requirements

However, if they manage both

authorised funds (NURS and QIS)

and UCIS they will have to comply

with the requirements for the

authorised funds they manage

HM Treasury intends to make no change

to the types of investors a NURS or QIS

fund can be marketed to They are also

considering changes to the types of FSA

permissions that managers can have and

which will determine the activities they can undertake

HMT do not intend to make the private placement third country manager requirements greater than the Directive minimum, until the private placement regime is reviewed in 2015

This consultation and the Commission’s Regulations issued in December have triggered an intensive period of implementation activity

Notwithstanding the short period remaining, it is clear that the UK will impose compliance from July 2013 and, for UK AIFMs, will not allow the transition to full compliance to go beyond July 2014

The deadline for responding to this consultation is 27 February 2013 The consultation paper (134 pages) is available via this web link:

International

IOSCO Publishes Suitability Requirements for Distribution of Complex Financial Products

The International Organisation of Securities Commissions (IOSCO) published a final report on ‘Suitability Requirements with respect to the Distribution of Complex Financial Products’, which sets out principles relating to the distribution by intermediaries of complex financial products to retail and non-retail customers

The report introduces nine principles that cover the following areas related to the distribution of complex financial products by intermediaries:

• Classification of customers

• General duties irrespective of customer classification

• Disclosure requirements

• Protection of customers for non-advisory services

• Suitability protections for advisory services (including portfolio management)

• Compliance function and internal suitability policies and procedures

• Incentives

• Enforcement

These principles provide guidance for Members and reflect the current regulatory state of play in the distribution

of complex financial instruments by intermediaries among IOSCO’s members

The report is available via the following web link:

Fund News – January 2013

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Tax News

European Union

Council agreement on enhanced

cooperation for Financial Transaction

Tax

On 22 January 2013 the European

Council adopted a decision authorising

11 Member States to proceed with the

introduction of a financial transaction tax

(FTT) through enhanced cooperation

The proposal on the FTT is expected

within the coming weeks

Belgium

Modifications of ‘exit tax’ (‘TISbis’)

regime and increase of general

interest withholding tax rate

The law of 13 December 2012

containing various fiscal and financial

measures, bringing numerous changes

in Belgian tax legislation, was published

on 20 December 2012 in the Belgian

Gazette Inter alia, the Belgian ‘exit tax’

regime is affected The changes aim at

aligning the Belgian regime with the EU

Savings Directive, broadening the scope

of application and reflecting a decision of

the Court of the European Union It shall

be recalled that a special tax regime – usually referred to as ‘exit tax’ or also

‘TISbis’ regime – applies for Belgian-resident individuals holding shares or units in certain collective investment institutions Proceeds derived by the individuals from the redemption of shares or units in, or from the partial or total liquidation of, a qualifying collective investment institution are deemed to be interest income (taxable at a rate of 25%) to the extent that the proceeds relate to investments in debt claims

Bringing down of threshold from 40%

to 25% and abolition of grandfathering

So far, the exit tax regime came into operation only in respect of collective investment institutions that were invested, directly or indirectly, for more than 40% of their assets in debt claims

This threshold for investment in debt claims has now been brought down from 40% to 25% This brings the Belgian exit tax regime again in line with the EU Savings Directive, which has provided for the 25% threshold since 1 January 2011

Moreover, the grandfathering clause in Belgian law for debt claims that prior to

1 January 2011 did not fall within the scope of the Savings Directive is now abolished, thereby reflecting the earlier abolition of the grandfathering clause in the EU Savings Directive

Broadening of scope to cover secondary transactions

Whilst the exit tax regime was triggered

so far only by the redemption of shares

or the (partial or total) liquidation, the

amended regime applies also on the occurrence of secondary transactions, i.e the transfer of shares or units

Exclusion of investment entities established in EEA countries and not qualifying for European passport

Previously, collective investment institutions without a European passport escaped the application of the exit tax regime provided they were established

in a member state of the EU Following

a decision by the Court of Justice of the European Union (10 May 2012; C-370/11), Belgium has now excluded also those collective investment institutions without a European passport that are established outside the EU but within the European Economic Area

Increase of general interest withholding tax rate to 25%

The general interest withholding tax rate has been increased from 21% to 25% for interest paid or attributed as of 1 January 2013 The same tax rate will be applied, as part of the personal income tax assessment, to the (part of) capital gain realised upon redemption, liquidation or sale of shares / units in the aforementioned qualifying collective investment institutions if these are established outside Belgium and no Belgian withholding tax has been applied

to the proceeds Belgian-resident individuals have to report these capital gains in their personal income tax return

Fund News – January 2013

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Germany

Draft Investment Tax Act

On 30 January 2013, the German

Government circulated a government

draft version of the new Investment Tax

Act

The proposed changes could in particular

affect German investors in foreign

hedge funds and private equity funds

qualifying as non-UCITS funds, much

less investors in UCITS funds The

updated draft contains inter alia a couple

of amendments that can be regarded as

advantages for those funds

1 Non-UCITS funds, qualifying as an

open-ended alternative investment

funds (AIF)

− Under the draft a non-UCITS

has to fulfill specific

requirements in order to qualify

as an AIF thus being entitled

under a transparent taxation

under the Investment Tax Act

Otherwise the general

principles of taxation in

Germany will apply

These conditions include inter

alia:

• the existence of an investment

supervision and redemption

rights (which have to be fulfilled

cumulatively, whereby a trading

of the fund units at a stock

exchange is sufficient to meet

the redemption requirement),

• the restriction to the

investment and administration

of assets for the collective

account of investors,

• no engagement in active

entrepreneurial management of

the assets and no entrepreneurial influence on the portfolio companies,

• principle of risk diversification,

• not more than 20% of the fund’s assets may invested in non-listed corporations,

• the prohibition of short-term loans exceeding 30% of the fund’s assets,

• the restriction to invest in specific eligible assets only (e.g securities, money market instruments, derivatives, bank loans, precious metals, unsecuritised loan receivables if its market value can be

determined),

• Up to 10% may be invested in non-eligible assets,

• Investment invest in trade fixture and public private partnerships (ÖPP) under certain circumstances

• The restriction, that participations in the same corporation must not exceed 5% of the fund’s assets, has been cancelled

− The grandfathering rule has been taken over from the initial draft A grandfathering will be granted for the benefit of funds established before 22 July 2013 A

grandfathered fund will continue to

be treated as investment fund for tax purposes, even if it no longer meets the requirements under the new Investment Tax Act

2 Foreign investment companies not qualifying as an AIF (foreign investment companies)

− One of the main issues of the initial draft was, that investors in foreign investment companies not qualifying as an AIF and organised

as a corporation (e.g a Luxembourg SICAV/ SICAF, Irish PLC or

Guernsey Ltd.) would have been taxed on a lump-sum method This disadvantage is now cancelled German investors in such investment companies organized as

a corporation will now be taxed according to the general income tax rules Consequently, inter alia the German CFC rules under the Foreign Tax Act will be applicable In addition, corporate investors can benefit from the 95% participation exemption under § 8b of the German Corporation Tax Act, if the investment company is (i) subject to income tax in its state of residence

at a rate of at least 15% or (ii) has its state of residence in European Union or in a treaty state on the European Economic Area and is subject to an income taxation (i.e not tax exempt)

− Please note, that the rules with respect to foreign investment companies comparable with the legal form of a German

“Sondervermögen” (e.g a Luxembourg FCP or a French FCPR) not qualifying as an AIF, have been taken over from the initial draft This means that these foreign

investment companies are deemed

to constitute a corporate body within the meaning of § 2 No 1 of the German Corporation Tax Act and will be therefore subject to limited tax liability with its German source

Fund News – January 2013

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income Unfortunately no

grandfathering will be granted for

existing fund structures For

investment structures, however,

previously neither taxed according

to the Investment Tax Act nor the

Foreign Tax Act, thus subject to the

partnership rules (Gesonderte und

einheitliche Feststellungserklarung),

this will bring clarity insofar, as the

Foreign Tax Act should in future

become applicable

UK

HMRC draft guidance on

Unauthorised Unit Trusts

HM Revenue & Customs (“HMRC”)

have now published its draft guidance

for Unauthorised Unit Trusts (“UUTs”)

This is intended to help taxpayers

understand how the new rules will work

in practice

While the proposed changes are broadly welcome, two issues that have raised concerns are:

1) the requirement to prepare accounts

in accordance with the existing IMA SORP for Authorised Funds (“the

AF SORP”); and 2) to have those accounts audited

The AF SORP is designed for the activities, regulation, and operational requirements of funds authorised by the Financial Services Authority (“Authorised Funds”) While the investment and borrowing capabilities of Authorised Funds (UCITS; Non-UCITS Retail Schemes; and Qualified Investor Schemes) have, overall, a substantial capacity for diversity of investments, they are required to deliver features that are not required of UUTs

UUTs may carry out activities; have operational features; and operate with

investment assets beyond the scope permitted for Authorised Funds An example would be property

development Such aspects are not addressed by the AF SORP and preparers of UUT financial statements and the UUT’s auditors may have to interpret the required accounting from the principles in the AF SORP rather than by reference to specific guidance in the AF SORP

The new draft guidance does not offer additional advice for UUTs on this and so

it may present additional challenges and result in a wider variation in

interpretations when UUTs prepare financial statements

HMRC have requested comments on this draft guidance by 28 February 2013 The legislation will take effect after Finance Bill 2013 receives Royal Assent, with various transitional rules phasing in the changes for existing UUTs

The draft guidance (13 pages) is available via this web link:

Fund News – January 2013

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USA

FATCA Final Regulations released

On 17 January 2013, the U.S

Department of Treasury (Treasury) and

the Internal Revenue Service (IRS)

released the final regulations for the

Foreign Account Tax Compliance Act

(FATCA) Since the enactment of FATCA

in March 2010, Treasury and the IRS

have issued several rounds of

preliminary guidance, including proposed

regulations The recently released final

regulations have been much anticipated

by taxpayers that expect to be affected

by the new FATCA withholding and

reporting regime, particularly in light of

the looming January 1, 2014, effective

date

Several of the key provisions are listed

below:

• Harmonisation with

intergovernmental agreements

• Relaxation of certain documentation

and due diligence requirements

• An expanded scope of

“grandfathered obligations”

• Liberalisation of requirements for

certain retirement funds and savings

accounts

• Limited FFIs – continued transition

rule

• Bearer shares

• Brokers (delivery vs payments)

• Registration process

The KPMG analysis of the FATCA final

regulations is available via the following

web link:

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