Issue 88 – Regulatory and Tax Developments in January 2012 pot

1 FUND NEWS January 2012 Investment Fund Regulatory and Tax developments in selected jurisdictions Issue 88 – Regulatory and Tax Developments in January 2012 Regulatory News Europea

1

FUND NEWS January 2012

Investment Fund Regulatory and Tax developments in

selected jurisdictions

Issue 88 – Regulatory and Tax

Developments in January 2012

Regulatory News

European Union

ESMA Consultation Paper on

Guidelines on ETFs and other UCITS

issues

On 30 January 2012 the European

Securities and Markets Authority

(ESMA) published a Consultation Paper

(CP) setting out ESMA’s proposal for

guidelines on ETFs and other UCITS

issues This consultation follows on from a Discussion Paper issued in July

2011 on possible policy orientations on guidelines for exchanged traded UCITS and Structured UCITS

The 77 page consultation paper sets out detailed proposals in the following areas:

 UCITS Exchange Traded Funds (ETFs); definition of a UCITS ETF, the use of an identifier, specific disclosure requirements for actively managed ETFs and rules for protecting investors on secondary

























Regulatory Content European Union

ESMA consults on Guidelines on ETFs and other UCITS issues Page 1

ESMA consults on draft technical standards for the EU Short-Selling regulatory regime Page 2 ESMA work programme 2012 Page 2

Ireland

Amendments to UCITS Notices,

NU Notices and Guidance Notes Page 3

Voluntary Corporate Governance

Code Page 3

Spain

Fund law amended Page 3

International

IOSCO report on principles on

suspension of fund redemptions Page 4

Tax Content European Union

Public Hearing on the Financial Transaction Tax (FTT) Page 5

Luxembourg Aberdeen Case E-Alerts Page 5

UK

HMT consults on introducing tax transparent authorised

schemes for asset pooling Page 6

Spain

Non-residents income tax

Accounting Content

UK

ASB issues revised proposals for future of financial reporting standards in the UK Page 8

Fund News – January 2012

2

markets Two options are proposed

regarding investors on secondary

markets 1) The UCITS

Management Company will have to

ensure that the market maker

continues to offer redemption

facilities to investors, and to replace

the market maker if it is no longer

willing or able to act in this capacity

2) The UCITS will have to provide

for investors to be able to redeem

their shares from the UCITS directly

at any time

 Index tracking UCITS; guidelines on

the disclosure required in the

Prospectus and financial reports

which will include the size of the

tracking error and an explanation of

any divergence from the target

 Index tracking leveraged UCITS;

guidelines on disclosure required in

the Prospectus on the leverage

policy and associated costs and

risks The Prospectus and Key

Investor Information Document

(KIID) would need to disclose the

impact of any reverse leverage

 Guidelines on the employment of

efficient portfolio management

(EPM) techniques and on related

disclosure requirements As a

general principle fees from EPM

techniques should be returned to

the UCITS Any fee sharing

arrangements should be disclosed

in the Prospectus together with the

maximum % fees payable to the

third party A UCITS should have a

clear haircut policy for each class of

collateral

 Rules and related disclosures for

UCITS that enter into total return

swaps;

 Guidelines on gaining exposure to

strategy indices by UCITS, including

the full disclosure of the calculation methodology

 Transitional provisions; any new investment by a UCITS or any new collateral received after the date of coming into effect of the guidelines must immediately respect the guidelines Any updates to the Prospectus or the KIID will have to

be done within 12 months

The consultation contains 41 questions for whic ESMA is seeking feedback from market participants, a cost-benefit analysis and a feedback statement on the July 2011 Discussion Paper

The consultation is open until 30 March

2012 and ESMA indicates that they expect the guidelines to be adopted in Q2 2012

The CP is available via the following web link:

http://www.esma.europa.eu/content/ES MA%E2%80%99s-guidelines-ETFs-and-other-UCITS-issues

ESMA consultations on draft technical standards for the EU Short-Selling regulatory regime

On 24 January 2012 ESMA published for consultation the draft technical

standards to accompany the Regulation

on short selling and certain aspects of credit default swaps that will apply from

1 November 2012

The consultation covers the following main topics:

 agreements to borrow that ensure that the share or debt will be available for settlement

 details of information to be reported

to authorities and public on net short positions, and means of disclosure to public

 exemption where principal trading venue is located outside the EU The consultation is open for comments until 13 February 2012 Following the close of the consultation, ESMA expects

to publish a final report and submission

of the draft technical standards to the European Commission by 31 March

2012 for endorsement

The consultation paper is available at the following web link:

http://www.esma.europa.eu/page/Short-selling

ESMA work programme 2012

ESMA issued a detailed work programme for 2012 and has indicated the following areas as key priorities for the year:

 European Markets and Infrastructure Regulation

 Financial consumer protection

 Harmonisation of supervisory practices

Fund News – January 2012

3

 Credit Rating Agencies Regulation

and Supervision

 MiFID and Market Abuse Directive

review

 Alternative Investment Fund

Manager Directive

 Short Selling Regulation

The 28 page work programme is

available via the following web link:

www.esma.europa.eu/system/files/esm-2011-330.pdf

Ireland

Amendments to UCITS Notices, NU

Notices and related Guidance Notes

Just before Christmas, the Central Bank

made amendments to its rule book for

UCITS and non-UCITS Many of these

amendments are minor

However, the following policy changes

have been made:-

 Notice UCITS 11 & Notice NU 13

(Borrowing Powers)

The off-setting deposit to a

back-to-back loan is not required to be held

in the base currency of the fund

 Guidance Note 2/07 (UCITS

Financial Indices)

The note has been amended to

clarify the position where a financial

index no longer meets with the

5/10/40 rule but remains an eligible

index subject to the 20/35 rule

 Guidance Note 2/97 (Closed ended

funds)

The note has been amended to

clarify the Central Bank’s policy on

changes to duration, objectives and

policy or fees and to include

reference to funds with limited liquidity

 Guidance Note 2/99 (Money Market Funds)

The ECB issued a new definition of

a money market fund for statistical purposes and the note has been amended to reflect this The Statistical Division in the Central Bank required this change be put in place before the end of the year for end December 2011 balance sheet reporting

The revised Notices and Guidance Notes take effect from 23 December Note some prospectuses will need to be amended before a fund can avail of these changes

Voluntary Corporate Governance Code

The Corporate Governance Code for Collective Investment Schemes and Management Companies (the Code) which was developed by the Irish Funds Industry Association (IFIA) became effective from 1 January The Code has

a 12 month transitional period Although the Code is voluntary, its adoption is highly recommended by the IFIA

Spain

Collective Investment Fund Law amended

On 5 October 2011 the Spanish Official Gazette published Law 31/2011, amending Law 35/2003 on Collective Investment Schemes

The Law 31/2011 has the following objectives:

(a) to start the transposition into Spanish Law of the UCITS IV Directive

2009/65/EC and Directive 2010/78/EU amending the former Directive This transposition will be completed when the Regulations of Law 31/2011 are approved;

(b) to amend the current Law to reinforce the competitiveness of the Spanish industry; and

(c) to strengthen the supervision of Collective Investment Schemes (CIV) and management companies by the Spanish regulator (the CNMV)

Extending the possibility to use global accounts for the domestic commercialization of funds

Of the most relevant changes introduced by the 31/2011 Law is the possibility of using global accounts for the domestic commercialization of funds domiciled in Spain

To understand the far-reaching effects of this new rule, it should be borne in mind that foreign CIVs normally operate through global/omnibus accounts This means that the management entities may not know the identity of the investors in the CIV, as they are allowed

to only record the identification of the distributors, which inherit the obligation

of identifying investors or, where appropriate, the successive

sub-distributors This modus operandi has

Fund News – January 2012

4

been routine for some time in electronic

securities markets, but could not be

implemented for CIVs in Spain, where

CIV managers were obliged to record

the full identify of the unitholders or

participants in the CIVs they managed,

and commercializing and distributing

entities were obliged to supply this

information to the managers, with the

resulting operational complexity and

more than a few commercial qualms

This strict operational procedure was

first made more flexible in the case of

commercializing Spanish CIVs abroad

through global/omnibus accounts, that

is, joint positions of a number of

investors in the foreign commercializing

or intermediary entities This measure

was authorized by the Single Additional

Provision of Non-resident Income Tax

Regulations (Royal Decree 1776/2004 of

30 July) However, at the same time it

imposed severe tax reporting obligations

on the foreign marketing companies

who were held directly responsible by

the Spanish Tax Administration (identity

and residence of non-resident

unitholders or participants), the

obligation to provide the management

entities with tax residence certificates

attesting to the non-resident status of

the investors receiving income from the

CIV, the impossibility of including

Spanish resident investors in the global

accounts, the prohibition of registering

positions of a sub-distributor’s other

global sub-account in a global account,

an outline of the responsibilities in case

of non-compliance by the management

entity, and penalization of the

cancellation of the commercialization

contract when the marketing company

does not comply with its obligations

All of this was aimed at obtaining adequate tax data about the final non-resident investors and avoiding the off-shoring of residents’ investments using these formulas

This tax framework for the cross-border commercialization of Spanish CIVs continues to be in force after enactment

of Law 31/2011, and continues to place

a fiscal burden on the distribution of CIVs outside of Spain Its rigidity can be criticized, it undoubtedly places Spanish managers in a worse situation than operators in other EU countries, and it fails to properly understand how international financial markets work and their need for agility and the least number of administrative hurdles possible as well as their position against the regulations imposed on them For this reason, we can assume that the model should be adapted in the near future

The first final Provision of Law 31/2011 describes the mechanism for

commercializing in Spain investment funds authorized in Spain (please note that this does not affect other types of CIVs, such as SICAVs) when it mentions the existence of the new domestic global accounts, as follows:

 The marketing company should notify the manager of each subscription, identifying the participant with its tax identification number

 The marketing company should notify the manager of all redemptions, identifying the participant with its tax identification number, so that the manager can calculate the income obtained (in

accordance with the FIFO rule for PIT taxpayers) and apply the withholding on account, paying the marketing company the amount redeemed net of withholding and giving it the fiscal information to be provided to the participant

 The contracts to be subscribed between the manager and the marketing companies should establish the latter’s obligation to provide the former with at least the tax identification number of each participant, otherwise committing a tax infraction in case of non-compliance

The “Centralizing Agent”

However, the main tax amendment introduced by Law 31/2001 is the need

to appoint an entity in charge of a centralized registry of unit-holders/shareholders in connection with CIVs to be distributed in Spain through more than one distributor/marketer This entity in charge of the centralized registry is named in the Spanish market/industry as “the centralizing agent”

According to the new rule established by Law 31/2011, when a CIV is

distributed/marketed in Spain through different distributors (i.e more than one), said distributor/marketer shall report to the “centralizing agent”, prior

to the execution, any subscription, acquisition, redemption or transfer transaction, in order for the this

“centralizing agent” to be in a position

to determine the result of each transaction and notify the result to the distributor

Fund News – January 2012

5

The “centralizing agent” shall be in

charge of the following;

 To apply the relevant withholding

tax or make the relevant payment

on account derived from the

transactions referred above;

 To comply with all the relevant tax

reporting obligations before the

Spanish tax authorities

The main purpose of creating this

“centralizing agent” role is to place the

withholding and tax reporting obligations

in one particular entity resident in Spain

which could properly apply the so-called

FIFO (First In – First Out) method to

determine the withholding tax due on

capital gains derived from the

transfer/redemption of units/shares in

CIVs

Finally, it should be noted that Law

31/2011 entered into force on 6 October

2011

International

IOSCO publishes report on principles

on suspension of fund redemptions

On 29 January 2012 the IOSCO published its final report “Principles on Suspensions of Redemptions in Collective Investment Schemes”

covering funds offered to both retail and institutional investors

The main principles are as follows:

 Management of liquidity risk A requirement to put in place a liquidity risk management policy and process and to assess the liquidity

of each investment to ensure consistency with the overall liquidity profile of the fund

 Ex-ante disclosure to investors A requirement to clearly disclose the ability to suspend redemptions prior

to the investors investing in the fund

 Criteria/reasons for the suspension

Only if permitted by law under exceptional circumstances or if required by law, regulation or regulators

 Decision to suspend should be properly documented,

communicated to competent authorities and communicated to unit-holders

 During the period of suspension no new subscriptions should be accepted The fund should also take all possible steps to resume normal operations as soon as possible having regard to the best interests of investors and should keep both the authorities and the investors informed

The full report is available on the IOSCO website at www.iosco.org

Tax European Union

Public Hearing on the Financial Transaction Tax (FTT)

On 6 February 2012 the European Parliament ECON Committee is holding

a public hearing on the Financial Transaction Tax (FTT) in the context of the Commission's recent proposal

The hearing will address the following topics:

 design of the FTT, tax base, tax rate, tax payers, definitions

 tax collection and practical implementation

 economic and financial impact

Luxembourg

Aberdeen Case E-Alerts

The latest Aberdeen E-Alert (tax newsletter focusing on withholding tax reclaims based on the Aberdeen case law) describes the recent increases in withholding tax rates on income in France and Spain The e-alert is available via the following web link:

http://www.kpmg.com/LU/en/IssuesAnd Insights/Articlespublications/Pages/Aber deene-alerts-Issue2012-01.aspx

UK

HMT consults on the UK introducing tax transparent authorised schemes for asset pooling

On 9 January HM Treasury (“HMT”) issued its planned consultation regarding the introduction of a UK tax transparent

Fund News – January 2012

6

fund (“TTF”) The proposed schemes

will be contractual in legal form and tax

transparent with the objective of

enabling UK investment managers to

offer a UK tax transparent authorised

vehicle to investors These proposals

have a particular relevance to tax

efficient asset pooling for institutional

clients such as: pension funds;

authorised funds including UCITS,

Non-UCITS retail and QIS feeder funds,

thereby having particular relevance to

the Master-Feeder structure introduced

by UCITS IV; and life funds

The delivery by HMT of contractual

schemes is important at a time when

investment managers assess the

optimal structures in the light of

opportunities made available under

UCITS IV, including master/feeder

structures, but, importantly, with the

increased focus on withholding taxes

and cost pressures on managing

portfolio investments One of HMT’s

objectives is to enable the UK to

compete on a level-playing field with

existing equivalent structures available in

Luxembourg, Ireland and the

Netherlands

Subject to parliamentary approval, the

final regulations are intended to enter

into force in summer 2012 In parallel

the FSA will consult in quarter one 2012

on the amendment of its COLL Rules to

introduce these new contractual

authorised funds

Key features of the proposals are:

 The contractual schemes could be

set up in either of two legal forms:

the contractual co-ownership

scheme (“CCS”) or the contractual

partnership scheme (“CPS”)

 These contractual schemes will be

authorised by the FSA and can take

the form of: UCITS schemes (for example a UCITS Master to UCITS Feeder funds); non-UCITS retail schemes ("NURS"); and as Qualified Investor Schemes ("QIS")

 The vehicle itself will not be a taxable entity and will be deemed to

be tax transparent It is proposed that, being authorised funds, these will be classified as a "special investment funds" and therefore management and other qualifying services to the fund will be exempt from VAT

 It is also proposed that these contractual funds will be outside the charge to the Finance Act 1999 Schedule 19 SDRT regime

In our view these proposals have the capacity to provide: significant opportunities and benefits to asset managers and investors; to support the

UK as a domicile for funds and asset pooling; and to support and potentially expand the wider services to UK Authorised Funds including fund accounting, pricing and administration;

depositary and custody services; and audit and legal services

Examples of how the proposed TTF could facilitate opportunities and efficiency:

 Managers seeking to set up asset pooling structures in the UK, enabling them to realise the economic efficiencies for the manager and participants that such pooling provides

 Enable the UK to set up Master funds under the UCITS IV Master-Feeder rules, with Master-Feeder funds in the UK and other EU domiciles

 Provide a competitive tax transparent vehicle for tax-exempt

investors who seek to minimise any tax drag that may occur if tax opaque funds are used for pooling

 The TTF could also be considered

by hedge fund managers with a particular UK focus as a tax transparent master fund

The consultation runs until 19 March

2012, and HMT seeks responses to a series of legal, regulatory, tax and industry-focussed questions KPMG has participated and will continue to

participate actively in this consultation process, and will submit a response to

HM Treasury, so please let us know if you have any comments that you would like us to consider

An introduction to and the consultation document (72 pages) is available via this web link:

http://www.hm-treasury.gov.uk/consult_contractual_s chemes_collective_investment.htm

Fund News – January 2012

7

SPAIN

Royal Decree-Law 20/2011, 30

December 2011

Please find below the main measures

passed by Royal Decree-Law 20/2011,

dated 30 December 2011, with

immediate effect as of 1 January 2012

It should be noted that the measures

adopted with respect to Non-Residents

Income Tax refer to the provisions of the

Spanish domestic regulations Thus,

such measures should be taken into

consideration without prejudice of the

provisions of the relevant Tax Treaties

signed by Spain

Personal Income Tax - Corporate Tax – Non-Residents Income Tax (applicable in 2012 and 2013)

Withholdings on account of investment income:

 Dividends

 Interest and other similar income

 Assurance transactions

 Other issues (Intellectual property, industrial, technical

assistance…)

New applicable rate: 21% (Previous rate: 19%) Applicable to any income paid from 1 January 2012 This measure will require immediate adaptation of IT systems and processes

Withholdings on account of capital gains arising from the

transfer or redemption of shares or units of investment funds,

investment companies or others collective investment

institutions

New applicable rate: 21% (Previous rate: 19%) Applicable to any income paid from 1 January 2012 This measure will require immediate adaptation of IT systems and processes

Withholdings on account of other income:

 Awards

 Lease or sublease of urban buildings

 Profit distributions made by Permanent Establishments in

Spain to foreign Head Offices

New applicable rate: 21% (Previous rate: 19%) Applicable to any income obtained from 1 January 2012

The withholding tax rate of 15% applicable to Professional Activities has not been modified

Non-Residents Income Tax Rate New applicable rate: 24.75% (Previous rate: 24%), applicable to other

income subject to Non-Residents Income Tax not comprised in the above-mentioned categories (e.g royalties)

Fund News – January 2012

8

Accounting

UK

ASB issues revised proposals for the

future of financial reporting standards

in the UK

On 30 January, after due consideration

of responses and discussion with

industry bodies, the UK Accounting

Standards Board (“ASB”) has published

three Financial Reporting Exposure

Drafts (“FREDs”) together with

explanatory notes which set out its

revised proposals for financial reporting

in the UK FREDs 46 to 48 are important

for the future financial reporting by UK

Authorised Funds, of particular relevance

is FRED 48 “The Financial Reporting

Standard”, that is proposed to become

FRS 102, and which, alongside the

industry specific guidance in the

Authorised Funds SORP, will establish

the financial reporting by UK Authorised

Funds (“UK AFs”) from 1 January 2015

The long term project of the ASB has

been to recognise the need for global

standards in financial reporting and, in

this regard, the adoption of IFRS by

appropriate UK entities As previously

discussed, until mid 2011, the ASB was

proposing a tiered approach with all tier

one entities complying with full

EU-adopted IFRS, however, following

consultation feedback it was determined

that the ASB should not extend the

scope of full IFRS adoption beyond the

requirements of company law

Accordingly UK Authorised Funds,

subject to the ASB revisiting the scope

and content of the FRSME, would be

expected to comply with the FRSME

(Financial Reporting Standards for

Medium Entities) together with the Statement of Recommended Practice for Authorised Funds (“the AF SORP”)

The latest publications from the ASB replace FREDs 43 to 45 with FREDs 46

to 48

 FRED 46 sets out the reporting structure and it is expected that UK AFs will be within “all other entities [that] apply the draft standard set out in FRED 48”

 FRED 47 discusses the reduced framework for entities (primarily subsidiaries and ultimate parent companies) that will follow EU-adopted IFRS with reduced disclosures

 FRED 48 (about 250 pages) replaces all current standards with a single new FRS based on the use of IFRS for small and medium-sized entities (“SMEs”) modified to better fit with financial reporting in the UK It is intended to become FRS 102 and the FRSME and it replaces FRED

44 This is expected to be the standard that will apply to UK AFs, alongside the interpretation provided by the AF SORP

After completion of this latest ASB consultation, which runs to 30 April 2012; consideration of consultation feedback by the ASB; and the expected publication of new FRS 102 (from FRED 48), which the ASB seeks to achieve before the end of 2012, then the AF SORP will be updated, perhaps commencing in quarter one 2013 This SORP update will be to adopt, in an industry specific context, the requirements of FRS 102 and should be completed considering the ASB’s revised proposed implementation date

of 1 January 2015 for FRS 102

At this stage, subject to the consultation feedback: the risk disclosures are understood to be aligned to the current

AF SORP; it is expected that financial instrument disclosures will increase, for example the presentation of the levels one to three in fair value measurement

of instruments; and the exemption from cash flow statements for AFs is to be retained

The ASB’s introduction; Key Facts and other guidance, along with the texts of FREDs 46, 47 and 48 are all available on the ASB website via the ASB’s press release:

http://www.frc.org.uk/asb/press/pub270 2.html

In addition, the ASB provides a useful introductory summary on the first two pages of its publication “Inside Track Issue 69” (8 pages) – this is available via this link:

http://www.frc.org.uk/images/uploaded/ documents/insidetrack/ASB_Inside%20T rack%2069.pdf

Fund News – January 2012

9

Contact us

Senior Manager

T: + 352 22 5151 7369

E: dee.ruddy@kpmg.lu

Audit

Nathalie Dogniez

Partner

T: + 352 22 5151 6253

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 challengehere

FATCA and the funds industry:

Defining the path here

Charles Muller

Partner T: +352 22 5151 7950 E: charles.muller@kpmg.lu