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fund news Financial Services / Regulatory and Tax / Issue 105

Developments in July 2013 Investment Fund Regulatory and Tax developments in selected jurisdictions


Regulatory Content

Accounting Content

UK 17 Revision of the SORP for Authorised Funds

European Union

3 Parliament position on UCITS V 4 ESMA Economic Report on retailisation in the EU 5 ESMA translations of AIFMD remuneration

Ireland 19 New Fund Reporting Obligations

Tax Content

guidelines 5 ESMA consultation on CRA Regulation implementation 6 ESMA updates Q&A on ETF and other UCITS issues 6 ESMA finalises AIFM supervisory co-operation agreements 6 AIFMD transposition table 6 ESMA issues opinion on late 6 AIFMD transposition

France 7 AMF Guide on French collective investments

UK 20 HMRC consultations in light of UK Investment Mangement Strategy

Germany 8 KAGB published Luxembourg 10 AIFMD Act adopted 10 CSSF guidance on AIFM Act UK 11 FCA publishes final rules and guidelines to implement AIFMD Ireland 13 AIFMD Regulations transposed 14 UCITS notices Switzerland 14 Fully revised FINMA Circular “Market conduct rules” 15 FINMA signed cooperation arrangements with 28 EU and EEA states International 16 IOSCO Final Principles for Financial Benchmarks

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Luxembourg 20 Aberdeen e-Alert

Malta 23 Malta and US conclude FATCA Negotiations

Regulatory News

European Union Parliament adopts position on UCITS V On 3 July 2012, the European Commission (EC) presented a legislative proposal aiming at updating the UCITS framework in the wake of the Madoff fraud and the Lehman Brothers default, and to align with the AIFMD rules on the role and liability of the depositary, the remuneration of UCITS managers and introduce a stricter sanctions regime. Exactly one year later, the European Parliament (EP) in Plenary adopted its position on the proposal in a first reading. The following main amendments already adopted in March in the ECON Committee and/or additions made by Parliament (marked as “NEW”) to the Commission’s proposal, were voted in Plenary: Depositary regime: • The depositary shall provide the management company on a regular basis with a comprehensive inventory of all assets held in the name of the UCITS. • Financial instruments held in custody by the depositary shall not be reused (e.g. transferred, pledged, sold, lent etc.) by the depositary or by any third party to whom the custody function has been delegated (i.e. subcustodian). • ESMA shall issue guidelines concerning adequate arrangements in the event of insolvency of a thirdparty (i.e. sub-custodian), to ensure that the assets concerned are unavailable for creditors.

• Besides credit institutions and investment firms, national central banks and any other category of institution subject to prudential regulation and ongoing supervision shall be able to act as depositary, provided they are subject to similar capital as well as prudential and organisational requirements (categories of institutions to be defined individually by Member States). • A depositary may enter into arrangements for the purpose of meeting its liabilities, provided that such arrangements do not limit or reduce those liabilities or result in a delay in the fulfilment of the depositary’s obligations. • Not only the depositary but also any delegate shall ensure that it does not carry out any activities that may create conflicts of interest. Remuneration rules: • The definition of “identified staff” has been extended: in addition to senior management, risk takers and personnel in control functions, the definition also includes fund managers and other persons either taking investment decisions affecting the risk position of a fund or exercising influence e.g. investment policy advisers and analysts. Both contractual and temporary employees are in scope. • The remuneration system shall not be primarily controlled by the CEO and the management team. Members and employees involved in setting and implementing the remuneration policy shall be

independent and shall have expertise in risk management and remuneration. (NEW) Details of the remuneration policy and the basis on which they have been decided shall be included in the KIID. • (NEW) When determining the period for the actual payment of performance-based components of remuneration within the multiyear framework not only the redemption policy and the investment risks but also the longterm performance of the UCITS shall be taken into account. • A substantial portion, and at least 25%, of the variable remuneration must be deferred over a period which is appropriate in view of the life cycle and redemption policy of the UCITS concerned. • (NEW) Investors shall be provided on an annual basis in a durable medium with information setting out the remuneration policy of the UCITS staff and describing how the remuneration has been calculated. Member States may also require an explanation in writing on how any variable remuneration package is consistent with the obligation of promoting sound and effective risk management and discouraging risk taking inconsistent with the UCITS rules or risk profile. • ESMA shall include in its Guidelines on remuneration policies guidance on how different rules (i.e. UCITS, AIFM, CRD) shall be applied where “identified staff” are subject to several regulations. Nevertheless, the most controversial amendments proposed by the ECON

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Regulatory News

Committee on remuneration policies and performance fees, having been discussed intensively during the past months, have not found sufficient support in Plenary, albeit a rather narrow difference of votes: • Whereas ECON proposed competent authorities to set the appropriate ratios between the fixed and variable component of the total remuneration, and the variable component not to exceed one time the fixed component of total remuneration (so-called “1:1 bonus cap”), Parliament removed the related paragraph and instead introduced the requirement for variable remuneration to be considerably reduced where subdued or negative financial performance of the Management Company or of the UCITS concerned occurs, considering current compensation and reductions in payouts of amounts previously earned, including through malus or claw-back arrangements. • ECON had also proposed that a variable component should vary only in proportion to the size of the fund or to the value of the assets under management and that any other variable component (like performance fees) should fulfil strict criteria: calculated based on an adequate benchmark, one-year reference period, symmetric reflection of performance including deductions in case of

underperformance, and information in prospectus and KIID. In addition, only costs linked to the maintenance and protection of investments should be charged to a fund. The related paragraph has been completely removed by Parliament. Following the vote in Parliament, discussions between the Parliament and the Council as well as the Commission (so-called Trilogue) will now be initiated. The text adopted by Parliament can be found via the following web link. sides/ =EN&reference=P7-TA-2013-309

ESMA issues Economic Report on Retailisation in the EU On 3 July 2013 the European Securities and Markets Authority (ESMA) published Press Release ESMA/2013/867 announcing the issuance of its Economic Report on “Retailisation in the EU” (ESMA/2013/326) which analyzes the growth in the sale of complex financial products to retail financial consumers in the EU. For this report, ESMA compared about 600 alternative UCITS funds and 2 750 structured retail products sold within the EU between 2007 and 2012, since those two classes of products showed

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a significant increase in Assets under Management (AuM) during that period. Key findings are: • The sale of alternative UCITS and structured retail products to retail clients has increased in the period under review. • Average returns have been relatively low for both products, however showing a high volatility. • Some structured products have been sold with significant issuance premiums. • Structured products with a 100% capital protection only showed a relatively low performance compared to a risk-free investment. • Risks and returns might not be easy to understand for retail investors who do not always possess the relevant knowledge, possibly leading to wrong investment decisions, unexpected losses and as such increasing reputational risk for issuers. • Adequate disclosure of information to retail investors is key, including the characteristics of a product, its total costs including implicit costs embedded in the selling price, as well as its risks. The report will be used by ESMA during its work on improving investor protection, especially with regard to

Regulatory News

disclosure of the total costs relating to an investment in complex financial products. The press release and the full report are available via the following web link. news/Press-release-%E2%80%94ESMA-publishes-research-salecomplex-products-retail-financialconsumers?t=326&o=home

ESMA announces translation of Guidelines on AIFMD remuneration policies On 4 July 2013 ESMA announced on its website that the EU translations for the “Guidelines on sound remunerations policies under the AIFMD” (ESMA/2013/232) are now available. The guidelines apply to AIFMs and competent authorities as from 22 July 2013 in relation to the remuneration policies and practices for AIFMs and their identified staff. The translations are available via the following web link. news/EU-translations-are-nowavailable-Guidelines-soundremuneration-policies-underAIFMD?t=326&o=home

ESMA launches consultation on implementation of CRA Regulation On 10 July 2013 ESMA issued a Discussion Paper on the “CRA3 Implementation” (ESMA/2013/891) seeking feedback and views from all interested parties regarding the implementation of Regulation (EU) No 462/2013 amending Regulation (EC) No 1060/2009 on Credit Rating Agencies (CRAs), which entered into force on 20 June 2013 and complements the existing regulatory framework for Credit Rating Agencies (see also our Fund News of May 2013). Based on the Regulation ESMA shall draft Regulatory Technical Standards (RTS) on the following topics: • Disclosure requirements on structured finance instruments (SFIs): Investors shall be provided with adequate information on SFIs and their underlying assets. As such, the draft RTS will specify the information that issuers, originators and sponsors of SFIs established in the EU must publish, the frequency requirements to update the information, and the presentation of the information via a standardized template.

• European Rating Platform (ERP): CRAs will have to report up-to-date ratings and outlooks as well as data on the historical performance of their ratings to the newly established ERP. The draft RTS will therefore detail the content and format of the periodic ratings data reporting of CRAs as well as the content and presentation of the information (including structure, format, method and timing) CRAs have to disclose. • Periodic reporting on fees charged by CRAs: CRA fees shall be costbased, non-discriminatory and independent from the outcome of the work performed, to reduce conflicts of interest and ensure fair competition. Hence, the draft RTS will specify the content and format of the periodic fee reporting CRAs have to provide to ESMA for their on-going supervision. Comments to the Discussion Paper can be submitted until 10 October 2013. They will be used by ESMA for its final draft Technical Standards to be adopted by 21 June 2014. The press release and the Discussion Paper are available via the following web link. ESMA-launches-consultationimplementation-new-CRARegulation?t=326&o=home

Fund News / Issue 105 / Developments in July 2013 / 5

Regulatory News

ESMA finalises supervisory co-operation agreements for alternative investment funds

ESMA issues updated Q&A on ETF and other UCITS issues On 11 July 2013 ESMA issued an updated version of its document “Questions and Answers (Q&A) – ESMA’s Guidelines on ETFs and other UCITS issues” (ESMA/2013/927). The following questions have been added to the previous version: •  Q1b on Prospectus •  Q3b on Secondary Market •  Q5d and Q5e on Financial Derivatives Instruments •  Q6I on Collateral Management •  Q7f, Q7g and Q7h on Financial Indices. Further, modifications have been made to the answers to questions Q5a and Q5d as well as Q7b. The updated version of the Q&A is available via the following web link. ESMA%E2%80%99s-GuidelinesETFs-and-other-UCITS-issues-0

On 18 July 2013 ESMA published a press release (ESMA/2013/992) announcing that it has approved another seven co-operation agreements (so-called “Memoranda of Understanding”, “MoUs”) on behalf of the 31 EU/EEA national competent authorities and their global counterparts, including jurisdictions such as Bahamas, Japan, Malaysia, Mexico and the US, including the Commodity Futures Trading Commission. These MoUs – being a precondition of the AIFMD – will support authorities in fulfilling their responsibility for the supervision of non-EU Alternative Investment Funds Managers (AIFMs) managing or marketing Alternative Investment Funds (AIFs) in the EU and EU AIFMs managing or marketing AIFs outside the EU, as well as their delegates and depositaries. They apply from 22 July 2013 and enable crossborder marketing of AIFs to professional investors. They will facilitate the mutual assistance in the enforcements of supervisory laws, including the exchange of information and cross-border visits. Nevertheless, although being negotiated on a global basis by ESMA, the MoUs still have to be signed bilaterally between each EU authority and non-EU authority, as such leaving it at the discretion of each EU regulator to decide with which non-EU regulator it will sign a MoU. This process is currently ongoing, with EU national securities regulators signing MoUs with the jurisdictions relevant for their market.

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ESMA is continuing to negotiate a MoU with China. The press release is available via the following web link. ESMA-finalises-supervisory-cooperation-agreements-alternativeinvestment?t=326&o=home

AIFMD transposition table The deadline for transposition into national law of the Alternative Investment Fund Managers Directive (AIFMD) by all 28 EU Member States was 22 July 2013. To keep up to date on the transposition of the AIFMD in the different Member States a “State of Play” document is available via the following web link. As of 22 July 2013 the AIFMD has been transposed by 11 out of 28 Member States, being: Austria, Croatia, Cyprus, Denmark, Germany, Ireland, Latvia, Luxembourg, Malta, the Netherlands and Sweden. ESMA issues opinion on practical arrangements for the late transposition of AIFMD Although the transposition deadline of the AIFMD was 22 July 2013, some Member State may not have yet transposed the text into national legislation with consequent difficulties being encountered for managers wishing to operate crossborder. ESMA opinion aims at proposing practical arrangements for operations under Articles 31, 32 and 33 of the Directive involving one Member State that has not

Regulatory News

France transposed the AIFMD and deals with the following issues:

AMF publishes Guide on French collective investments

• the launch of a pre-authorisation desk,

• An AIFM in a Member State where the Directive has been transposed may not be able to manage an EU AIF established in another Member State that has not transposed the Directive. ESMA believes that, provided the AIFM is authorised to manage that type of AIF in accordance with Article 33 of the AIFMD, it should be able to manage an EU AIF via the management passport irrespective of the provisions currently in place in any such jurisdiction.

On 12 July 2013 the Autorité des Marchés Financiers (AMF) published a guide in which it outlines the new measures applicable to French collective investment schemes, also taking into account the transposition of the AIFMD into French law.

• the release of an AIFM guide for management companies (only in French).

• AIFMs and competent authorities in a Member State that has transposed the Directive may have difficulties notifying the marketing of EU AIFs to relevant competent authorities if the host Member State of the AIFM has not transposed the Directive. In this instance ESMA believes that the competent authority of the host Member State of the AIFM or home Member State of the AIF may not refuse the notification on the ground that the Directive has not yet been transposed in the host Member State.

The guide sets out the following provisions, among others:

The Guide (only in French) can be accessed via the following web link.

• The range of investments funds currently offered by French managers has been reworked and simplified, resulting also in some names having changed. multimedia?docId=workspace:// SpacesStore/923b0a56-73bd-428e9ed7-ec2ee814148b_fr_1.2_rendition

The full text of the opinion may be obtained using the following link http://www.esma.europa. eu/news/News-ESMAissues-Opinion-practicalarrangements-late-transpositionAIFMD?t=326&o=home

The changes as presented in the guide will have to be applied within the coming weeks, once the AIFMD transposition texts are published in the Monetary and Financial Code and AMF General Regulation.

The News Release can be accessed via the following web link. Actualites/Communiques-de-presse/ AMF/annee_2013.html?docId=w orkspace%3A%2F%2FSpacesSto re%2F84f9c84d-7688-4a97-ae229ea896692f71

• Investment rules and techniques have been updated. • To make an investment fund offering more understandable for investors, the difference between funds covered by the UCITS Directive and those falling under the AIFM Directive is highlighted. Additionally, the AMF has introduced several further measures to support the French financial management industry, including: • the establishment of a dedicated e-mail address:,

Fund News / Issue 105 / Developments in July 2013 / 7

Regulatory News

Germany KAGB published On 10 July 2013 the law to transpose the AIFMD into German law (AIFMUmsetzungsgesetz) was finally published in the German Federal Gazette (Bundesanzeiger) and entered into force on 22 July 2013. The main and most extensive part of the law forms the new “Capital Investment Act” (Kapitalanlagegesetzbuch – KAGB) which covers UCITS and Alternative Investment Funds (AIF) as well as their managers. It integrates the existing German Investment Act (Investmentgesetz – InvG) which will be repealed, and as such constitutes a single framework covering both rules for products and managers. Scope / Types of investment funds The scope of the KAGB is quite broad and captures all types of investment funds meeting the definition of an “investment asset pool” (Investmentvermögen), being defined as an “organism for collective investment collecting funds from a number of investors to invest these funds according to a defined investment policy for the benefit of the investors, and which is not an operating company outside the financial sector”. Since the interpretation of the term “Investmentvermögen” already caused some questions, the BaFin just recently issued an interpretation document

regarding the scope of the KAGB and the interpretation of the term “Investmentvermögen” (please refer to our previous June Fund News). Investmentvermögen in principle are either UCITS or AIF, with possible exemptions listed in the law (e.g. holding companies) and also in the BaFin document. In this context, the set-up and management of closedended funds will be comprehensively regulated for the first time in Germany. After introducing general requirements for open and closed-ended investment funds the law further distinguishes between public investment funds (i.e. UCITS and public open/closed ended AIF, available for all investors) and special AIF (open/closed ended, available only for professional/semiprofessional investors). With regard to open-ended public investment funds, the types of funds are exhaustively defined and comprise mixed and other investment funds, fund of hedge funds and real-estate funds. A direct investment in hedge funds on the other hand will not be available for retail investors since they are categorised as special AIF. Requirements set for the different types mainly relate to the investment policy and investment limits/restrictions, valuation principles, subscription and redemption of units/ shares and disclosures. As a result of intensive lobbying, realestate funds also remained available for retail investors, albeit facing stricter

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rules than in the past. With regard to redemptions investors have to adhere to a minimum holding period of 24 months and a period of notice of 12 months which had already been previously introduced as a consequence of liquidity issues and the closing of some real-estate funds. The exempt amount of EUR 30.000 available for redemptions on a semiannual basis per investment fund has nevertheless not been transferred into the KAGB and is therefore not available anymore for investors subscribing for shares/units in real-estate funds after 21 July 2013. Investors subscribing before 21 July 2013 however still profit from this opportunity. Investors With the KAGB the German legislator introduced a new category of investor besides professional and retail investors, the so-called “semiprofessional investor”. A semiprofessional investor is defined as investor committing at least EUR 200,000 and meeting several other criteria (e.g. written confirmation of being aware of the risks linked to the investment, adequate knowledge and experience etc.), a director or employee of a management company, or any investor committing at least EUR 10 million in an investment fund. As a result, high net-worth individuals and investment professionals as well as foundations and church organizations falling under the

Regulatory News

definition of a semi-professional investor may also invest in products otherwise reserved for professional investors, like specialised AIF.

especially for investment funds falling below the authorisation thresholds foreseen in the law, requiring no authorisation but only the registration of the investment fund.

Management Company Exemptions from authorisation Depending on the investment funds managed, the KAGB distinguishes between a UCITS and AIF management company (Kapitalverwaltungs-gesellschaft). The management company needs to be authorised by the BaFin, and can be authorised for both the management of UCITS and AIF. Authorised UCITS management companies will stay authorised but have to modify the investment policies for the UCITS managed within 1.5 years in accordance to the requirements of the law. If they manage or also wish to manage AIF, they will have to apply for authorisation like any other AIFmanagement company within the given time limits. Closed-ended funds will also have to be managed by an authorized management company. The management company may be established as private limited liability company (GmbH), stock company (AG) or newly, as limited partnership with the sole general partner being a limited liability company (GmbH & Co KG). Besides appointing an external management company, an investment fund can also be self-managed if its legal form provides for this possibility. This might be worth considering

As just mentioned, certain AIFMs or self-managed AIF might not need to apply for authorisation if they fall below certain thresholds. Nevertheless, they will need to register with the BaFin and adhere to a set of further conditions (e.g. reporting, disclosures in marketing material etc.). Exemption from authorisation can be granted inter alia to: • Management companies managing only special AIF with AuM<EUR 100 million (including leverage) • Management companies managing only special AIF with AuM<EUR 500 million (without leverage) and where investors cannot redeem their shares/units for 5 years from the date of subscription • Management companies managing only German closed-ended investment funds with AuM<EUR 100 million (including leverage) Depositary With regard to the custody of assets the KAGB separately outlines the

requirements for UCITS and AIF depositaries. Nevertheless, some requirements for the AIF depositary, like the conditions for the use of subcustodians and the strict liability regime, have been also introduced for UCITS depositaries. Except for events of nature beyond control, the depository is fully liable for the assets in custody, and a contractual exemption from liability is only possible under very strict conditions. Distribution Distribution requirements are also quite detailed in the KAGB and are separately dealt with for the different type of investors, investment funds (UCITS, AIF (EU, non-EU)) and managers (German, EU, non-EU). Notably, marketing to retail investors will be subject to stricter rules than in the past, whilst the introduction of the “semi-professional investor” category expands the marketing opportunities for German specialised AIF and EU AIF. Nevertheless, with the entry into force of the KAGB, the Private Placement Regime will be abolished in Germany one year after the AIFMD is implemented. The full text of the KAGB is available via the following web link.

Fund News / Issue 105 / Developments in July 2013 / 9

Regulatory News

Luxembourg Luxembourg Parliament adopts new AIFM Act, fully transposing the AIFMD into national law On 10 July 2013 the Luxembourg Parliament voted the Bill of law n°6471 transposing the AIFMD (Alternative Investment Fund Managers Directive 2011/61/EU) in Luxembourg. The AIFM Act entered into force on 15 July 2013, the day it was published in the Mémorial (official gazette). The accompanying detailed AIFMD implementing rules take the form of EU Regulations and as such are directly applicable in Luxembourg, without the need for any local transposition. Read more on the new Act here. IssuesAndInsights/Articlespublications/Pages/LuxembourgParliamentadoptsnewAIFMAct.aspx

CSSF issues practical guidance on AIFM law On 18 July 2013 the Commission de Surveillance du Secteur Financier (“CSSF”) issued Press Release 13/32 giving practical guidance in relation to the registration or authorisation under the AIFM law of 12 July 2013 of AIFM established in Luxembourg. With the AIFMD having transposed into Luxembourg law, the CSSF now requires any person established in Luxembourg and potentially qualifying as an AIFM to perform a self assessment to: • evaluate whether it qualifies as an AIFM under the new AIFM law, and if yes • assess whether it falls under the authorisation or registration requirements of the AIFM law. This self-assessment has to be done in due time, since the CSSF – aiming at establishing an inventory of Luxembourg AIFM – is expecting each AIFM to provide it by 16 August 2013 at the latest with the following information: 1. Name of the AIFM,

The information has to be communicated using the e-mail address: Therefore, for all non-regulated AIF, UCI under part II of the law of 17 December 2010, SIF under the law of 13 February 2007 and SICAR under the law of 15 June 2004 it has to be assessed whether they would qualify as an internal (self-managed) AIFM, or would need to appoint an external AIFM, and whether authorisation or registration with the CSSF is required. For both authorisation and registration, the CSSF has issued relevant forms available on its website which are mandatory. A duly completed application for authorisation has to be submitted by 22 July 2014 at the latest. In case of registration, an AIFM has to register with the CSSF immediately where it has been performing activities falling under the new AIFM law before 22 July 2013. The text of the Press Release is available via the following web link. press-releases/news-cat/108

The application and registration forms are available via the following web link.

2. Address of the AIFM, 3. Information whether the AIFM is an Internal or External AIFM, and 4. Information whether the AIFM requires authorisation or registration with the CSSF.

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Regulatory News

UK £1 contribution, the guidelines state that this structure will not be an AIF (Question 2.11);

FCA publishes final rules and guidelines to implement AIFMD On 28 June 2013 the Financial Conduct Authority (“FCA”) published its Policy Statement 13/5, containing the FCA’s final rules and guidelines relating to the UK’s implementation of the AIFMD. This follows from two Consultation Papers, CPs12/32 and 13/9 (the “Consultation Papers”), that the FSA published in November 2012 and March 2013, respectively. Key guidance contained in the Policy Statement includes: •  Scope: The Perimeter Guidance on the meaning of an AIF has been finalised such that it is in line with ESMA’s Final Report guidelines on key concepts of the AIFMD (24 May 2013). There is further guidance on whether certain structures constitute AIFs:

–  Capital raising: the definition of an AIF required capital to be raised from a number of investors. The FCA notes that the ESMA guidelines require a link between capital raising and the defined investment policy. Therefore, where the AIF is listed and shares can be bought and sold on a stock exchange that will not on its own be capital raising (Question 2.10). For the avoidance of doubt, first and subsequent listings will constitute capital raising; – Limited partnerships: where there is a single limited partnership in which there is a single limited partner making a substantive contribution and a general partner making a nominal

– Structured products: SPVs issuing debt securities will not be deemed to be AIFs provided the arrangement meets the exclusion in the paragraph of the Schedule to the Financial Services and Markets Act 2000 (Collective Investment Schemes) Order 2001 (Debt Securities) (Question 2.44);

–  IMA’s: Separate investment management agreements (“IMAs”) with co-synchronised investments for different investors will be a Collective Investment Undertaking (“CIU”) (Question 2.40);

–  CIU: Factors for determining whether an undertaking is a CIU updated to take account of ESMA guidelines (Question 2.18 to 2.22);

–  Real estate joint venture vehicles: FCA guidelines explain that joint ventures structured as LP’s where the investors exercise control via a GP can be excluded joint ventures for the purposes of AIFMD. However, this is subject to the practical factors that should be taken into account in deciding whether a commercial venture is excluded from the definition of an AIF (see Question 2.49). Furthermore, where the exercise of control changes by virtue of one party retiring but continuing to participate in the investment, the status as an excluded joint venture will remain intact (Question 2.47).

–  Treatment of sub-funds: FCA permits a single AIFM of an umbrella AIF to market one or more sub-funds in the UK or another Member State without marketing the entire structure. In doing so the AIFM must ensure notifications under Articles 31, 36 or 42. ESMA is consulting on reporting guidelines for umbrella structures.

•  Managing an AIF: The guidelines specify that as per Article 51ZC(3) of the draft updated Regulated Activities Order a UK firm will not be “managing an AIF” if it performs functions that have been delegated to it by another person, provided that the delegating entity is not a letter box entity. Further guidance is provided for UK firms acting as the delegate of a non-EEA AIFM. •  Marketing - definition: The guidelines clarify construction of the term “marketing”. The guidelines specify that an offering or placement does not include secondary trading in an AIF and listing of an AIF on the FCA’s official list will not in itself constitute an offering or placement. •  Marketing – draft documentation: The FCA has also reiterated its earlier view that draft documentation shall not constitute an offer or placement, provided that units in the AIF are not made available on the basis of draft documentation. However, the FCA note in the absence of European guidance on the meaning of marketing, other EEA states may take a different view (PERG 8.37.6 (2)). Consequently, where marketing activities are undertaken

Fund News / Issue 105 / Developments in July 2013 / 11

on a cross border basis regard to local laws is required. •  Marketing – reverse solicitation: The FCA has simplified their guidance on marketing at the investors own initiative. Firms can rely on a confirmation from the investor that the approach is at his/ her own initiative provided that such confirmations are not being used as a means of circumventing the obligation’s imposed by the Directive. The FCA states that its supervisory approach will focus on evidence of circumvention. Marketing arrangements involving third parties would require back to back confirmation regarding reverse solicitation. In the absence of any guidance from ESMA to achieve a harmonised approach across the EEA, adherence to local laws in the member state where reverse solicitation takes place is required. •  Marketing – secondary offerings: The FCA expresses the view that an “offering” or “placement” for the purposes of the marketing does not include secondary trading in the units or shares of the AIF as it does not relate to capital raising within that AIF (PERG 8.37.5G (3)). However, where the AIF’s units or shares are temporarily purchased to be sold onto investors e.g. underwriter-type arrangement, this would be construed to be an indirect offering. • I dentification of the investor: Guidance is given on the approach to be used in identifying the investors. The FCA states that the investor should be regarded as the

person who makes the decision to invest in the AIF. Therefore, where the legal subscriber is a nominee or custodian, the FCA states that the AIFM should apply a “look through” approach to identify the underlying investors who made the investment decision. The guidelines note an exception to the application of “look through” for discretionary managers, in this instance the manager would be considered to be the investor. The FCA places emphasis on establishing who is responsible for taking investment decisions. • P  rudential requirements – auditor rules: the FCA has introduced guidelines for external AIFMs relying on the small companies audit exemption in IPRU (INV) under Table 11.4 of IPRU (INV). It clarifies that such firms cannot include retained profits or interim profits in the initial capital or own funds calculation, unless it appoints an auditor to audit or verify these items respectively. • A  pplication and periodic fees: the FCA has reduced the fees for nonEEA AIFMs marketing AIFs under Article 42. These will be formally published in the next Handbook notice expected in July 2013. The full text of the Policy Statement (392 pages) can be found via the following web link documents/policy-statements/ps13-05

Regulatory News

Ireland AIFMD Regulations transposed On 16 July 2013 Michael Noonan, the Minister for Finance signed into law the European Union (Alternative Investment Fund Managers) Regulations 2013 (the “AIFMD Regulations”) *S.I. No. 257 of 2013]; ahead of the 22 July deadline for implementation into national law in each of the member states of the European Union. Following the transposition of the regulations, on 19 July 2013 the Central Bank published revised applications forms to be utilised by alternative investment funds managers and alternative investment funds seeking authorisation or registration pursuant to the Alternative Investment Funds Managers Directive. In addition they published a revised AIF Rulebook which contains references to the European Union (Alternative Investment Fund Managers) Regulations 2013 and some consequential drafting updates were also made to the guidance relating to AIFs and their service providers. A third edition of the AIFMD Q&A was also published. The Q&A document and guidance notes help provide clarity around a number of topics. The Q&A document seeks to address a number of key questions as to how the Irish Central Bank intends to approach transition to the new AIFMD compliant regime and provides guidance on what is expected of Irish AIFMs and AIFs prior to 22 July 2014. The published regulations completes Ireland’s AIFMD regime which is now made up of: • The AIFMD Regulations

• The Level 2 Regulation [Commission Delegated Regulation (EU) 231/2013] • Commission Implementing Regulation 447/2013 (establishing the procedure for AIFM to opt-in under the AIFMD) • Commission Implementing Regulation 448/2013 (establishing a procedure for non-EU AIFM to determine their Member State of reference under the AIFMD) • ESMA Guidelines on Key Concepts of the AIFMD • ESMA Guidelines on Sound Remuneration Policies under the AIFMD • The Irish Central Bank’s AIF Rulebook (July 2013) • The Irish Central Bank’s Application Forms for AIF and AIFM authorisation • The Irish Central Bank’s Guidance related to AIFs and their service providers.

September 2013. Currently, Irish authorised non-UCITS investment funds are prohibited from originating loans as part of their strategy to source assets for investment purposes. The Central Bank is currently reviewing this policy and will address queries such as whether the current Alternative Investment Fund Rulebook (“AIF Rulebook”) provides sufficient protections for investors where investment funds are allowed to originate loans. The Irish Stock Exchange (ISE) has revised its Code of Listing Requirements and Procedures in line with the implementation of the AIFMD. The revised code (which is effective from 22 July 2013) sets out the suitability conditions, disclosures and ongoing reporting requirements for open ended funds. Requirements for Irish and non-Irish funds are set out in separate chapters while chapter 5 of the revised code addresses special categories of applicant, such as master feeder funds, applicants that transact with counterparties and/or prime brokers, and exchange traded funds.

On 19 July 2013 the Central Bank of Ireland published a discussion paper on loan origination by investment funds.

On 19 July 2013 the Central Bank of Ireland published a consultation paper (CP 68) on types of alternative investment funds under AIFMD and unit trust schemes under the Unit Trust Act 1990 (including Exempt Unit Trusts (EUTs) and Real Estate Investment Trusts (REITS) with a closing date for submissions of 11 October 2013.

The paper sets out a range of issues which must be considered if investment funds are allowed to source assets by directly originating loans. The Central Bank has invited written replies to the paper which should be received by 13

EUTs are unit trusts commonly used by pension providers as investment vehicles which exempt from certain Irish tax obligations on the basis that the investors in such trusts are either pensions or charities.

• The Commission AIFMD Q&A; and • The Irish Central Bank AIFMD Q&A (3rd Edition)

Fund News / Issue 105 / Developments in July 2013 / 13

Regulatory News

Switzerland UCITS Notices On 17 May 2013 the Irish Funds Industry Association (IFIA) published a paper providing guidance on the Central Bank of Ireland’s amendment in February 2013 of the UCITS Notices to reflect ESMA’s Guidelines on ETFs. The IFIA made recommendations for new disclosure requirements while noting that many of the disclosures required by the amended UCITS Notices may already be included in the annual and half-yearly reports by virtue of existing GAAP requirements.

1. Revision of the Stock Exchange Act and the Stock Exchange Ordinance For the first time at supervisory law level, the revision of the Stock Exchange Act (SESTA) and the Stock Exchange Ordinance (SESTO) regarding market offences and market abuse provides specific statutory provisions that prohibit all natural persons and legal entities from engaging in insider trading and market manipulation. With this essential step, Switzerland is moving closer to international standards. The revised SESTA and SESTO came both into force on 1 May 2013.

On 1 May 2013 the Central Bank of Ireland published revised UCITS Notices removing the requirement to include a list of all transactions with connected parties. The amendments apply to reporting periods after 30 April 2013. Previously transactions with connected parties were to be listed in the annual and half-yearly reports, however, these provisions have now been replaced with the requirement that the board of directors of the management/self management company must state in the periodic reports whether:

law for general market supervision of insider trading and market manipulation (market abuse).

Switzerland: Fully revised FINMA Circular “Market conduct rules” – Significant amendments

2. Revision of the FINMA Circular 08/38 on “Market conduct rules” Following the revision of the legal provisions, FINMA is fully revising Circular 08/38 on “Market conduct rules”. The revision includes – besides the section on general market supervision – also the part on specific organizational provisions for FINMA-supervised institutions. The consultation for the Circular’s draft ran until 13 May 2013. The Circular, however, has not yet entered into force (initially planned enforcement date: 1 August 2013).

a) The board of directors are satisfied that there are arrangements (evidenced by written procedures) in place, to ensure that all transactions with connected parties are carried out as if negotiated at arm’s length and in the best interest of shareholders; and

2.1 Key points of the revision

b) The board of directors are satisfied that transactions with connected parties entered into during the period complied with the obligations set out in (a) above.

The revision of the FINMA Circular includes in particular the following points: • Specification of the new legal basis under federal

14 / Fund News / Issue 105 / Developments in July 2013

• Streamlining and Clarification of organizational requirements and extension of the scope of application to all institutions subject to prudential supervision.

• Making a conceptual change by unbundling the rules on market conduct from those on the duty of loyalty as prescribed in Art. 11 SESTA.

2.2 Amendments – Focus on organizational requirements The revised Circular clearly defines the prohibition standards. It defines the revised scope of the SESTA and contains a non-exhaustive list including abusive practices. Moreover, the Circular clearly states that not only securities dealing on Swiss stock exchange is relevant, but also securities dealing in the primary market, on a foreign stock exchange and business activities such as the commodities and foreign exchange markets. The main focus of the revision lies on the revised organizational requirements: The organizational requirements are no longer directed exclusively at securities dealers, but also at all institutions under prudential

supervision. The requirements however, are not the same for every institution (applied on a individual basis, depending on business activities, size etc.). The organizational measures necessary must be defined according to a risk assessment that is conducted on a regular basis (at least annually). The risk assessment as well as the taken measures must be submitted to the Executive Committee’s attention and need to be submitted to the auditor. Moreover, measures for the surveillance of employee transactions (new: including the transactions executed by members of the Board of Directors) are to be established by means of internal guidelines. Further organizational requirements are the various documentation and recording duties (all facts of regulatory relevance have to be documented, telephone conversations which are in the focus of the risk assessment are to be recorded and the recordings as well as the electronic correspondence are to be retained for at least two years). For further information on the revised Circular (e.g. regarding Chinese Walls / Areas of confidentiality, Watch List and Restricted List) it is referred to: anhoerungen/Documents/ entwurf-rs-marktverhaltensregeln20130327-d.pdf (in German).

3. Conclusion Compared to the existing FINMA Circular, the revised FINMA Circular 08/38 on “Market conduct rules” includes more stringent provisions for the market participants – especially in terms of organizational requirements – and therefore may lead to an additional administrative burden. Finally, it should be noted that the precise content of the revised FINMA Circular as well as the date of entry into force are not yet definite. Therefore, the regulatory developments will have to be followed carefully. FINMA signed cooperation arrangements with 28 EU and EEA states FINMA has signed cooperation arrangements with all EU Member States (except Italy, Croatia and Slovenia) and all

EEA member states, concerning the cooperation and the exchange of information for the supervision of alternative investment fund managers. The cooperation arrangements are one of the conditions whereby the management of European alternative investment funds can be delegated to Swiss asset managers and the distribution of such funds to professional investors in EU member states is possible. The cooperation arrangements enter into force on 22 July 2013. It is important to note that the distribution of foreign funds (especially UCITS) to public investors in Switzerland is, however, not covered by these cooperation arrangements. More information is available via the following link: mm-mou-eu-20130716.aspx

Fund News / Issue 105 / Developments in July 2013 / 15

Regulatory News

International IOSCO issues Final Report on Principles for Financial Benchmarks On 17 July 2013 IOSCO published its final report on “Principles for Financial Benchmarks”, providing a comprehensive framework of principles for benchmarks used in financial markets. As reported in our April Fund News article on the related Consultation Paper, IOSCO aims at enhancing the integrity, liability and oversight of benchmarks by introducing guidelines for benchmark administrators and other bodies on governance, benchmark quality, methodology and accountability mechanisms. IOSCO has developed two sets of principles, since the universe of benchmarks is quite large and diverse: • a set of high-level principles applicable to benchmarks in general, and • a subset of more detailed principles for benchmarks containing specific risks arising from their reliance on submissions and/or their ownership structure.

One principle of quite eminent importance is the Data Sufficiency Principle relating to the quality of a benchmark, which requires a benchmark to be based on transaction data (i.e. prices, rates, indices, values) resulting from competitive forces of supply and demand, and to be anchored by observable transactions conducted on an arm’s length basis in such an active market.

experience regarding the manipulation or inaccuracy of some benchmarks mainly resulting from vulnerabilities in the content and transparency of methodologies, data submission procedures and governance arrangements.

The implementation of a robust governance process will further contribute to reducing potential conflicts of interest.

They should be understood as a set of recommended practices to be implemented by benchmark administrators and submitters, and should be applied proportional to the size and risks of a benchmark and/or administrator and the benchmarksetting process.

Based on responses obtained from the consultation, IOSCO also introduced a further principle regarding the use of expert judgment, requiring benchmark administrators to disclose on what basis and to what extent any expert judgment is used for determining the benchmark.

Within 12 months of the publication of this report benchmark administrators will have to disclose whether they comply with the principles or not. Additionally, IOSCO intends to perform a review within 18 months after publication regarding the extent of their implementation.

The report in addition outlines the feedback obtained from the Consultation Paper in April.

The final report is available via the following web link.

As reported in April, the principles have been developed in the light of past

16 / Fund News / Issue 105 / Developments in July 2013 pubdocs/pdf/IOSCOPD415.pdf

Accounting News

UK IMA issues the ED for the revision of the SORP for Authorised Funds On 31 July the Investment Management Association (“IMA”) issued the Exposure Draft (“the ED”) which proposes revisions to the Statement of Recommended Practice for the Financial Statements of UK Authorised Funds (“the AF SORP”). The revision of the AF SORP reflects that the Financial Reporting Council (“FRC”) has revised Financial Reporting Standards in the UK (“UK GAAP”) and has unified existing standards into FRS 102. FRS 102 is the standard that will apply when enterprises follow applicable SORPs. The ED also reflects developments since the AF SORP was last issued in October 2010. In addition, the ED also embraces the industry initiative, led by the IMA, to enhance the transparency of disclosure of unit performance and all charges to investors. The timetable and the key developments are discussed below. The changes and recommendations in the ED consider law, regulation and FRS issued up to 31 July 2013, principle of which is the issuance of

FRS 102 by the FRC in March 2013. The ED includes the following more substantial provisions and proposals:

New comparative tables for investors to show more transparently the unit performance and charges

Remove the requirement for aggregated statements in umbrella funds

The proposal to introduce new comparative tables which will set out, for each share class, and covering the last three years, the following:

Proposal to delete the requirement that the annual report of an umbrella company must contain aggregated financial statements. Removing aggregate statements, which are a summation of the sub-funds of the umbrella, is a logical step reflecting the adoption into UK Regulation of the protected cell regime (“PCR”). Fund units only exist at the sub-fund level, so no investor holds units in the umbrella; and under the PCR creditors of a subfund do not have recourse to the assets of another sub-fund. The PCR means that the financial position of the umbrella is no longer relevant to sub-fund creditors. It also allows for the previously prohibited cross investment between sub-funds of the same umbrella, and, if the aggregated statements were retained then either additional complexity in dealing with cross investment when aggregating sub-fund statement could arise, or there would be a risk that the aggregate statements would become more meaningless where sub-fund cross investment existed.

• The performance per unit; • charges per unit for managing and operating the fund; and • amount per unit incurred in transaction costs. • Performance after charges as a percentage. • Breakdown of operating charges; and • the operating charges as a percentage. • Highest and lowest unit price. • Additional detail on the transaction costs including separation of the cost of execution and research and dealing spread at the balance sheet date.

Fund News / Issue 105 / Developments in July 2013 / 17

Accounting News

There is a very extensive set of information and the details and proposed format are set out in the ED paragraphs 3.12A; 3.12B; and 3.12C. These new unit disclosures are an industry initiative, led by Daniel Godfrey, Chief Executive of the IMA who gives an update and explanation in his most recent blog on this topic: chief-exec-blog/2013/31-07-2013

The timetable for this aspect of the ED differs from that of FRS 102. Whereas the general proposal is that the revised SORP will apply to accounting periods commencing on and after 1 January 2015 (aligned with FRS 102, with early adoption permitted), these revised comparative tables on performance and charges would apply to accounting periods ending on and after 31 March 2014. Therefore this measure would apply to accounting periods which have commenced on and after 1 April 2013 for disclosure in the next annual report. New determination of, disclosure and presentation of the fair value of investments The fair value disclosure is expanded in new paragraphs 3.84 to 3.86. As

expected the requirement is for the fair value hierarchy, presented in the notes to the financial statements. The requirements proposed are supported by a new Appendix II which illustrates the presentation proposed for the fair value disclosures.

recommendations in the section on “Risk management policies” and revision of the scope and definitions of the risks.

Simplification of the accounting for debt securities

The ED also has regard to the specific requirements for financial statements of non-UCITS funds that is imposed by the AIFMD. Approximately 20% of all UK authorised funds are non-UCITS, paragraph 3.24A and Appendix III of the ED sets out the requirements to comply with the AIFMD.

The ED proposes that accounting for debt securities using the effective interest rate method (“EIR”) is discontinued and replaced with recognising coupons on an accrual basis adjusted to spread any premium or discount at purchase over the remaining life of the bond. The ED removes the existing EIR guidance and replaces it with guidance on the proposed accrual accounting. The result should be materially similar in its result for investors but accrual accounting is expected to be less complex to operate than EIR. This change reflects FRS 102 replacing FRS 26, which introduced the requirement for EIR accounting to funds from the start of 2007. Revision of the disclosures of fund risks The ED updates the information presented of the type and disclosure of the risks to which a UK authorised fund is exposed, including additional

18 / Fund News / Issue 105 / Developments in July 2013

The financial reporting by non-UCITS funds as required by the AIFMD

Other updates proposed These reflect the developments in the funds and accounting standards since the AF SORP was last revised and include: • For investments in fiscally transparent entities, this would include the new UK tax transparent fund, revenue would be accounted for “as it arises” in the fiscally transparent fund (look through) and not when that fund declares dividends or reportable amounts to the investing fund. • A feeder fund in a master-feeder arrangement would not consolidate

Accounting News

Ireland the master but should carry the master fund units at fair value. • Clarity that consolidation is not required except in special circumstances such as holding property in intermediate holding companies. • While the marginal basis of taxation set out in paragraphs 2.70 and 2.71 is not revised the inclusion in paragraph 3.60 allows for the policy on the treatment of expenses for determining the share class distribution not to have to reflect the marginal relief of tax. • Paragraph 3.75 now concludes that the authorised fund manager will not, generally, be regarded as a related party for the related party disclosures.

New Fund Reporting Obligations New regulations have come into effect whereby Irish regulated funds will be required to make certain additional informational returns to the Irish Revenue Commissioners. These changes apply in respect of 2012 and subsequent years. Under the new regulations, an Irish fund will be required to file an annual return with the Irish Revenue Commissioners by 31 March of the following year (30 September for 2013) with details of the name of the fund, its address and its tax reference number.  It is also obliged to give certain information in respect of its unit holders, namely: • Name • Address

The ED now enters a period of three months consultation with feedback to the IMA by the end of October. The ED (40 pages) shows the changes to the existing AF SORP issued in October 2010. It is available via the following web link, which includes the full invitation to comment (11 pages).

• Date of birth (for individuals) • Tax reference number (in respect of persons who make an investment on or after 1 January 2014) • Customer identifier number / reference used by the fund for that investor

Importantly, there are a number of exemptions from the new reporting regime. In particular, no returns need to be made in respect of investors who will be exempt from Irish exit tax in respect of their investment in the fund.  Consequently, all non-Irish investors (and certain classes of Irish investors) who have provided the appropriate declarations to the fund will not be subject to any reporting requirements.  In addition, no reporting needs to be made where there is an existing requirement to report under the European Savings Directive nor is any reporting required where the units are held in a recognised clearing system. In summary, while all Irish regulated funds will be required to make a return providing the above-mentioned details about the fund itself, reporting in respect of investors will, in practice, be limited to certain classes of Irish investors (i.e. those who are subject to it tax) who invest in funds the units of which are not held in a recognised clearing system.  As a result, these regulations are unlikely to have any meaningful impact on non-Irish resident investors or exempt Irish resident investors (e.g. pension funds).

• Value of units held

Fund News / Issue 105 / Developments in July 2013 / 19

Tax News



Aberdeen E-Alerts

HMRC consultations in light of the UK Investment Management Strategy

The Aberdeen E-Alert (tax newsletter focusing of withholding tax reclaims based on the Aberdeen case law) latest issues are available via the following web link: LU/en/IssuesAndInsights/ Articlespublications/Pages/ Aberdeen-e-Alerts.aspx

• Alert 2013-09 New legislation plans in the tax regime for Belgian investment companies

On 22 July 2013 HM Revenue & Customs (“HMRC”) issued three consultations that aim to provide the legislation for various announcements made in light of HM Treasury’s Investment Management Strategy which was revealed alongside this year’s Budget. The three measures, which are in line with requests from investment managers and are welcomed by the industry, comprise: • Allowing, where conditions are met, the making of gross interest distributions from authorised funds, i.e. without withholding tax at 20%. • Extending the scope of the tax legislation so that non-resident offshore funds are not brought into tax as a result of being managed from the UK. • Investment Management Exemption and Collective Investment Schemes – expanding the “White List”. Each of these consultations are summarised below. Interest distributions from Authorised Investment Funds paid without deduction of tax It is necessary to deduct 20% income tax from bond fund distributions to cover the basic rate tax liabilities of UK investors. While there are currently certain exemptions to permit gross distributions, for example where the fund has reasonable grounds for believing that the individual beneficial

owner is not resident in the UK, despite these exemptions, it is recognised by HMRC that it can be difficult to monitor who is beneficially entitled to distributions, particularly if funds are sold via intermediaries. If in doubt, managers must deduct the 20% tax; this means that UK funds can be at a disadvantage compared to comparable offshore funds which do not have any requirement to deduct tax. HMRC therefore proposes to supplement or replace the existing reputable intermediary condition by allowing funds to pay interest distributions gross where the following conditions are met: • the units/shares of that unit/share class are marketed exclusively outside the UK with no marketing that is specifically targeted to investors resident in the UK; • the units/shares are marketed and sold with clear information to the investor that:

– no UK income tax will be deducted from interest distributions, and

– if the investor is resident or becomes resident in the UK then they must account to HMRC for any tax due on the full amount of any interest distributions received or accumulated while they are UK resident.

The consultation runs to 16 September 2013 and the proposals are expected to be introduced by statutory instrument around the end of 2013. This change would mark a significant and pragmatic relaxation of the current requirement and is welcome.

Tax News

More details are available via this web link consultations/interest-distributionsfrom-authorised-investment-fundspaid-without-deduction-of-tax

Residence of Offshore Funds – extending the scope of Section 363A Taxation (International and Other Provisions) Act 2010 Background UK managers of offshore UCITS have legislative certainty that the offshore fund will not be treated as UK tax resident even if the authorised manager passports services from the UK. In light of the Alternative Investment Fund Managers Directive (“AIFMD”), HMRC’s consultation proposes to extend this certainty to: • non-UCITS funds which are within the definition of an offshore fund for UK tax purposes (section 355 TIOPA 2010), and • which have a UK-based manager that is either an AIFM authorised by the Financial Conduct Authority or a branch of an AIFM authorised in another member State under the AIFMD. The consultation runs to 14 October 2013 and the proposals are expected to be included within Finance Bill 2014. This change would assist managers looking to increase the scope of management functions and services that take place in the UK. HMRC are

keen that the scope is ring-fenced as there is a significant range of entities that can be classified as Alternative Investment Funds. Making use of the current definition of an offshore fund is sensible but this does not cover certain closed-ended vehicles. HMRC should consider extending the scope as, even though such funds should only have a concern if central management and control were to move to the UK, the proposed rules would remove uncertainty. More details are available via this web link consultations/residence-of-offshorefunds-extending-the-scope-ofsection-363a-taxation-act-2010

Investment Management Exemption and Collective Investment Schemes – expanding the “White List” The White List (technically there are four lists) of investment transactions assists in the following areas: • Diversely owned UK authorised funds, UK-equivalent reporting offshore funds and investment trusts can treat trading profits as capital provided that their assets appear on the White List. • Non-resident entities employing an independent UK investment manager can benefit from the Investment Manager Exemption, provided that the investment manager manages White List assets. The Government is proposing to extend the white lists to include

investments in traded life policies and certain carbon credits. This is welcome as increasing the range of assets on the list can only assist UK funds and investment managers. The consultation runs until 16 September 2013 and draft legislation is expected in the autumn and more details are available via this web link: Proposal to modernising the taxation of corporate debt and derivative contracts HM Revenue & Customs (“HMRC”) has released a major consultation “Modernising the taxation of corporate debt and derivative contracts”. This article focuses on the proposals affecting the investment management industry contained within chapter 13 of the document, which is proposing changes to the treatment of “bond funds” and to the “corporate streaming” rules. The consultation will run until 29 August 2013 with a view to new legislation being introduced in Finance Bills 2014 and 2015. Corporate investors, fund managers and administrators should follow this carefully as significant changes are anticipated. Proposed changes to the “bond fund” rules The existing legislation affects UK corporate investors in authorised investment funds (“AIFs”), unauthorised unit trusts (“UUTs”) and offshore funds that invest 60% or more in debt or debt like assets at any time within the investing company’s accounting period. These holdings are treated as creditor loan relationships for corporation tax purposes with the result being that all distributions and

Fund News / Issue 105 / Developments in July 2013 / 21

Tax News

any fair value movements arising on holdings in such funds are taxed (or relieved) for each period. HMRC is proposing that the current rules be repealed and targeted anti avoidance provisions introduced but that modified rules are retained in relation to offshore fund investments. HMRC’s intention is to simplify the existing rules whilst ensuring protection against exploitation. Under the proposals, holdings in AIFs and UUTs which are invested in debt and debt like assets would therefore no longer be taxed as loan relationships and instead would be assets subject to corporation tax on chargeable gains, while distributions would be taxed according to the nature of the distribution (for example: interest distributions from AIFs are deemed to be annual payments). The change proposed in relation to offshore funds is to monitor the 60% threshold in line with the fund’s accounting period not that of the corporate investors (this would align the test with that for individual investors). The proposed amendments would simplify tax compliance for UK corporates (and for funds and fund administrators which need to provide the information) and could result in an improved tax position. This is because capital return from bond funds will become subject to corporation tax on chargeable gains which means that the

tax charge is deferred until realisation and relief can be claimed for indexation. However, the compliance burden is set to remain for individual and corporate investors in offshore funds – the 60% test is very difficult to monitor particularly for balanced funds and structured products. Proposed changes to the “corporate streaming” rules The corporate streaming rules affect UK corporate investors in UK authorised investment funds (“AIFs”) by apportioning dividend distributions from AIFs between exempt and taxable income depending on the source of the distribution. The rules aim to counter the possibility that a corporate tax payer could, by investing in debt through an AIF, pay tax on investment returns at a rate lower than the main rate of corporation tax. A further consequence of the existing rules is that they provide a tax credit to UK corporation tax payers in respect of corporation tax suffered at fund level. HMRC is proposing either for the corporate streaming rules to be abolished (their current preference) or replaced. Their view is that abolition can now be delivered because the main corporation tax rate is expected to converge with the special rate for AIFs (20%), and removing the rules would lead to a simpler regime less liable to abuse. If the regime is replaced rather than abolished, the new rules could:

22 / Fund News / Issue 105 / Developments in July 2013

• apply a tax charge on any unfranked income element of an AIF distribution equivalent to the rate differential between the rate applicable to authorised investment funds and the main rate of corporation tax; or • keep the rules as they exist but removing the right to the repayment of any tax credit. Abolition would lead to significant simplification and therefore benefit fund administrators and corporate investors. However, careful consideration is needed before responding to the consultation as there could be adverse implications. For example, without corporate streaming rules there will be no mechanism for exempt corporation tax paying investors (e.g. pension funds or insurance companies) to receive credit for any UK corporation tax suffered by AIFs (e.g. balanced funds). In addition, new rules would be needed if the main rate of corporation tax were to diverge from the special rate for AIFs – there would be a cost for administrators in these circumstances. The 109 page consultation document is available via this web link consultations/modernising-thetaxation-of-corporate-debt-andderivative-contracts

Tax News

Malta manner (reporting to the IRS starts on 30th September 2015 for 2014); and

Malta and US conclude FATCA negotiations Negotiations between Malta and the US concerning an Intergovernmental Agreement (IGA) in relation to US FATCA regulations have been concluded. The IGA has been negotiated on the basis of the latest Model 1 IGA (reciprocal version) issued by the US. The basic purpose of this IGA is to ensure Financial Institutions (FIs), resident (or carrying on business) in Malta or the US, will comply with certain reporting obligations. The IGA will require FIs in both Malta and the US to submit the required information to their own tax authorities, which in turn will automatically share such information with the other tax authority. Such shared information will be used by the Maltese and US tax authorities in order to ensure that the relevant tax laws of the two countries are being complied with. Obligations of a Malta Reporting FI • Comply with the applicable FI registration requirements; • Identify U.S. Reportable Accounts and report annually to the Maltese Authorities required information on US accounts and recalcitrant accounts in the prescribed time and

• After a period of enquiry noncompliance would not have been rectified.

• Report annually to the Maltese Authorities payments made to NPFFIs in 2015 and 2016 (interim solution to pass-through payments).

Registration will take place as follows:

Malta FIs that comply with the registration, due diligence and reporting requirements as laid down in the proposed IGA will be treated as Deemed Compliant Foreign Financial Institutions (DCFFI).

• On or after 1 January 2014, each FI will be expected to submit its registration on the IRS portal

DCFFI are: • Not subject to FATCA withholding on US source income; • Not required to withhold upon payments made to recalcitrant Account Holders; and • Not required to close recalcitrant accounts. Where an IGA FI is non-compliant it will only be classified and listed by the IRS as a Non – Participating Foreign Financial Institution (NPFFI) where: • There is significant noncompliance; and

• IRS portal is anticipated to open on 19 August 2013

• For the period from 19 August 2013 through to 31 December 2013, a FI will be able to access its account to modify or add registration information. In this respect, any information entered into the system before 1 January 2014, even if submitted as final, will not be regarded as a final submission, but will merely be stored until the information is submitted as final on or after 1 January 2014. • FIs should register by 24th April 2014 in order to avoid withholding in certain situations. Malta and the US will endeavor to sign the IGA as soon as possible. The text of the IGA will be made available upon such signature.



Evolving Investment Management Regulation Light at the end of the tunnel? June 2013

Evolving Investment Management Regulation

Frontiers in Finance For decision-makers in financial services April 2013

Rethinking operations: Embracing transformation in a rapidly-changing market Page 14

Unlocking the opportunity within: Predictive analytics and modeling in insurance Page 16

Frontiers in Finance

Growth in difficult times: Breaking new ground in Asia Page 8

Growth in difficult times: Breaking new ground in Asia

Evolving Distribution Models in Asset Management

Fund News / Issue 105 / Developments in July 2013 / 23


Zurich Markus Schunk Partner T: +41 58 249 36 82 E:

Astrid Keller Partner T: +41 58 249 28 82 E:

Pascal Sprenger Director, Legal T: +41 58 249 42 23 E:

Christoph Groebli Partner T: +41 58 249 29 76 E:

Dominik Rüttimann Partner T: +41 58 249 20 56 E:

Grégoire Winckler Partner, Tax T: +41 58 249 34 95 E:

Pierre Zäch Partner T: +41 22 704 15 30 E:

Jean-Luc Epars Partner, Legal T: +41 22 704 17 59 E:

Geneva Yvan Mermod Partner T: +41 22 704 16 61 E:

Lugano Lars Schlichting Partner, Legal T: +41 91 912 12 32 E:

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 endeavor 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. © 2013 KPMG Holding AG/SA, a Swiss corporation, is a subsidiary of KPMG Europe LLP and a member of the KPMG network of independent firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss legal entity. All rights reserved. Printed in Switzerland. The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International.

Fund News - Issue 105 - July 2013  
Fund News - Issue 105 - July 2013  

In our latest edition of Fund News we provide you in the Regulatory News part with different updates from the ESMA: the translation of guide...