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FUND NEWS Financial Services / Regulatory and Tax / Issue 110

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


Regulatory Content

Tax News

European Union 3 COREPER agrees position on UCITS V proposal to support progress early in 2014 3 ESMA updates UCITS Risk Measurement Q&A 3 ESMA consults on revision of Guidelines on ETFs and other UCITS issues 3 Joint Committee Consultation Paper on draft guidelines for complaints-handling for the securities (ESMA) and banking (EBA) sectors

Luxembourg 10 VAT exemption of risk management services 10 Luxembourg tax treaty update 10 Aberdeen e-Alerts

Ireland 4 CBI Publishes 6th Edition of AIFMD Q&A and Forms on the Marketing of AIFs 4 CBI Amends UCITS Notice 10 for EMIR 4 New Corporate Fund Structure for Funds – ICAV 4 ISE launches Pre-LEI Codes 5 ISE Listing Conditions for Closed Ended Funds 5 CBI Cooperation Agreement with FINMA on the distribution of Irish funds in Switzerland 5 Key Dates Reminder International 6 IOSCO issued Final report on Regulation of retail structured products

Switzerland 7 New requirement regarding fund distribution according to the Collective Investment Schemes Act (CISA) as per 1 January 2014

UK 8 FCA consults on extending electronic communication with unitholders 9 FCA publishes additional guidance on use of the terms “absolute return”; “total return” and similar

2 / Fund News / Issue 110 / Developments in December 2013

UK 10 Draft Finance Bill 2014 – measures relevant to the management of funds

Accounting Content UK 11 AIC issues the Exposure Draft for the revision of the SORP for financial statements of ITCs and VCTs. 10

Regulatory News

European Union COREPER agrees position on UCITS V proposal to support progress early in 2014 On 4 December the Permanent Representative Committee (“COREPER”) agreed the legislative position, on behalf of the Council, on UCITS V. This should enable the Trilogues to take place early in 2014 with the goal of reaching agreement with the European Parliament at first reading.

of the assets and the treatment of claims on these assets in the event of bankruptcy of the clearing member or central counterparty. In light of the provisions of EMIR (European Markets and Infrastructure Regulation) ESMA plans to publish more detailed guidance on this issue, dealing with such aspects as the status of the central counterparty and the level of segregation to be put in place by the UCITS, early in 2014. The Q&A is available at the following link:

Both the rapporteur and the Greek Presidency (January to June 2014) are keen to see progress and there are not considered to be major differences between the Parliament and Council and it has been reported that there is a strong qualified majority support to the text amongst member states. This indicates that there is a reasonable expectation that UCITVS V will be legislated ahead of the next European Parliamentary election in May 2014 and so mitigate the risk that a new Parliament could seek to reconsider certain of the proposals.

ESMA updates UCITS Risk Measurement Q&A On 19 December ESMA issued an update of his Questions and Answers on Risk Measurement and Calculation of Global Exposure and Counterparty Risk for UCITS, to include a new question 5 on the calculation of counterparty risk for exchange-traded derivatives and centrally-cleared OTC transactions. According to the Q&A UCITS should look at the clearing model used to determine the existence of counterparty risk and, if any, where the counterparty risk is located. When analysing the clearing model used, UCITS should review the existence of segregation arrangements Risk-Measurement-and-CalculationGlobal-Exposure-and-CounterpartyRisk-UCITS

ESMA consults on revision of Guidelines on ETFs and other UCITS issues On 20 December ESMA issued a consultation to amend provisions of their Guidelines on ETFs and other UCITS issues on the diversification of collateral received by UCITS in the context of efficient portfolio management techniques and OTC transactions. The proposed revision comes from the fact that ESMA has been asked by stakeholders to reconsider its position given its adverse impact on UCITS collateral management policies, in particular MMF that place their money in reverse repos. The consultation closes on 31 January 2014 and is available at the following link: files/2013-1974_cp_guidelines_ etfs_and_other_ucits_issues_for_ publication_0.pdf

Joint Committee Consultation Paper on draft guidelines for complaints-handling for the securities (ESMA) and banking (EBA) sectors The European Securities and Markets Authority (ESMA) and the European Banking Authority (EBA) launched a consultation on draft guidelines for complaints handling addressed to authorities that would apply in relation to complaints about activities carried out by UCITS Managers, AIFMs that provide investment services of individual portfolio management and non-core services, investment firms, payments institutions and banks. These purpose of the guidelines is to clarify expectations relating to firms’ organisation relating to complaints handling; provide guidance on the provision of information to complainants; provide guidance on procedures for responding to complaints; ensure the adequate protection of consumers by harmonising the arrangements of firms for the handling all complaints that they receive; and ensure that firms’ arrangements for complaints-handling are subject to a minimum level of supervisory convergence across the EU. The consultation is open until 7 February and and is available at the following link: consultation/Draft-guidelinescomplaints-handling-securitiesESMA-and-banking-EBA-sectors

Final guidelines are expected in Q1 2014.

Fund News / Issue 110 / Developments in December 2013 / 3

Regulatory News

Ireland CBI Publishes 6th Edition of AIFMD Q&A and Forms on the Marketing of AIFs On 13 December the Central Bank of Ireland published a sixth edition of the AIFMD Q&A. Three new questions (ID 1066 – 1068) make clear: i That Article 20 AIFMD does not permit the delegation of portfolio/ risk management to a third country undertaking in a jurisdiction without a cooperation agreement between the CBI and the relevant competent authority; ii That Article 9 AIFMD does not prohibit internally managed AIFs from using shareholder funds to meet initial capital requirements; and iii The conditions for marketing AIF in Ireland with and without a passport. The Central Bank has also published guidance and forms on the marketing of AIFs to professional investors in Ireland and in other Member States available at the following link: regulation/marketsupdate/Pages/ AIFMD.aspx

Question ID 1021 has been clarified to provide additional guidance in relation to Article 36 of the AIFMD (i.e. marketing non-EU AIF managed by EU AIFM in the EU without a passport) and the eligibility criteria for entities seeking to provide “depositary lite” services. The sixth edition of the AIFMD Q&A is available at the following link: regulation/industry-sectors/funds/ aifmd/Documents/AIFMD%20Q%20 and%20A%2013%20December%20 final.pdf

CBI Amends UCITS Notice 10 for EMIR The Central Bank has made an important change to UCITS Notice 10 regarding the valuation of OTC derivatives on the basis that EMIR requires counterparties to value outstanding non-centrally cleared OTC derivative contracts on a daily basis on a mark to market basis or, where market conditions determine otherwise, a “reliable and prudent marking to model” may be used. Regarding the novation of OTC derivative contracts, UCITS Notice 10 has also been amended by adding a requirement that in the case of the subsequent novation of an OTC derivative contract, the counterparty is either an EEA/non-EEA credit institution/MiFID/US investment firm or a central counterparty (CCP) under EMIR or a CFTC/SEC derivatives clearer.

4 / Fund News / Issue 110 / Developments in December 2013

New Corporate Fund Structure for Funds – ICAV Legislation is expected in 2014 that will provide for a new corporate structure for Irish investment funds; the ICAV. The ICAV (once available) can be used for both UCITS and Non-UCITS funds and will complement other structures available for funds such as the public limited company (PLC), the unit trust, the common contractual fund and the investment limited partnership with existing PLC structures having the option to convert to the new ICAV structure. The main benefit of the ICAV will be that it can elect its classification under the US “check-the-box rules” allowing it to be treated as a partnership for US tax purposes and thereby avoid certain tax consequences for US taxable investors if the structure is deemed to be a “passive foreign investment company” (PFIC) under US federal income tax rules. Also, as the ICAV will have its own legislative regime it will not be subject to aspects of company law legislation that would not be relevant or appropriate to a collective investment scheme.

ISE launches Pre-LEI Codes The Irish Stock Exchange has launched Pre-Legal Entity Identifier Codes which will ultimately convert to permanent legal entity identifier (LEI) codes and are available at

Regulatory News

A Legal Entity Identifier (LEI) is a code which uniquely identifies a legal entity that engages in financial transactions and will assist regulators in analysing financial transactions data from across different jurisdictions. Funds are among a range of entities which will ultimately require a LEI.

ISE Listing Conditions for Closed Ended Funds On 29 November 2013 the Irish Stock Exchange updated its listing conditions for securities issued by closed ended funds contained in Chapter 14 available at the following link: choose-country

CBI Cooperation Agreement with FINMA on the distribution of Irish funds in Switzerland The Central Bank has concluded a cooperation agreement with the Swiss regulator (FINMA) on the distribution of Irish funds to non-qualified investors (i.e. retail investors) in Switzerland from March 2014. FINMA’s statement on the cooperation agreement is available at the following link: Documents/mm-mou-fondsvertrieb20131115-e.pdf

Key Dates Reminder • 31 December 2013 – Corporate Governance Code: annual reviews for directors. • 31 December 2013 – Fitness & Probity: Collective investment schemes, management companies and other regulated financial service providers, assuming they have not already done so, will need to obtain their annual certification from persons performing PCFs (e.g. directors) and CFs (e.g. Money Laundering Reporting Officer (MLRO and Company Secretary) that they are aware of the fitness and probity standards, agree to continue to abide by those standards and will notify the relevant entity if they no longer comply. • 31 December 2013 – UCITS Business Plan: UCITS management companies and Self-Managed Investment Companies, assuming they have not already done so, may need to obtain annual confirmations from service providers and relevant persons in accordance with their business plans.

• 28 January 2014 – ESMA’s Guidelines on remuneration policies and practices under MiFID come into effect with all relevant firms complying with the Guidelines from this date. • 12 February 2014 – EMIR reporting to trade repositories commences. • 19 February 2013 – Where required the annual update of the UCITS KIID must be filed with the CBI and, if necessary, translated and filed where the UCITS is registered to market. Finally the KIID must be uploaded on the UCITS’ website. • 21 February 2014 – The latest date by which applications for authorisation as an AIFM, self/ internally managed AIFM, or “Registered AIFM” must be submitted to the Central Bank of Ireland.

• 1 January 2014 – UCITS management companies and AIFMs must meet CRD IV requirements from 1 January 2014 on initial capital, own funds and fixed overheads.

Fund News / Issue 110 / Developments in December 2013 / 5

Regulatory News

International IOSCO issued Final report on Regulation of retail structured products On 20 December 2013 IOSCO published their final report on “Regulation of Retail Structured Products”, which provides a toolkit outlining regulatory options that securities regulators may find useful to regulate retail structured products. The Toolkit has five sections with 15 regulatory tools that are organised along the value chain of the retail structured product market, from issuance to distribution to investment. They cover: • A potential regulatory approach to retail structured products (including possible regulatory arbitrage and a whole value chain focus);

• Potential regulation of product design and issuance (including intended investor identification and assessment; use of financial modeling; product approval processes; and products standards tools); • Potential regulation of product disclosure and marketing (including disclosure standards; short-form or summary disclosure; costs and fees; use of fair value assessment; hypothetical scenarios; backtesting; enhancement of informed investment decision making tools); • Potential regulation of the product distribution; • Potential regulation of post-sales practices. The final report is available at the following link: pubdocs/pdf/IOSCOPD434.pdf  

6 / Fund News / Issue 110 / Developments in December 2013

Regulatory News

Switzerland New requirement regarding fund distribution according to the Collective Investment Schemes Act (CISA) as per 1 January 2014 1. New duty to keep records according to CISA As of 1 January 2014, licensees and third parties engaged in the distribution of units in collective investment schemes are obliged to record in a written protocol the client’s needs as well as the reasons behind each recommendation for buying units of collective investment schemes. The protocol must be handed out to the client. The duty to keep written records applies to all activities that qualify as distribution as per CISA and, thus also for distribution aimed exclusively at qualified investors There is no duty to keep records if advice or marketing activities are targeted at financial intermediaries such as banks, securities dealers, fund management companies, asset managers of collective investment schemes and central banks as well as insurance institutions (cf. art. 24 para. 3 CISA, art. 34a CISO). There is no duty to keep records if the recommendation is not related to collective investment schemes, e.g. bonds, shares, structured products.

2. Key points of the new SBA Guidelines The new provisions are demanding in terms of time and resources and are a severe tightening of the rules. The new SBA Guidelines outline several topics regarding the duty to record. In particular, the following key points are to be considered: • The duty to keep records concerns solely distribution activities in terms of Swiss collective investment schemes law (cf. also FINMA-Circular 2013/9 “Distribution” with specifications of the legal term “distribution”, particularly the terms “offering” and “advertising”, including exceptions which do not qualify as distribution). • The duty to keep records is imposed in connection with a personal recommendation for the purchase of collective investment schemes. There is no duty to keep records if the recommendation is targeted at a number of persons or a personal recommendation relates solely to holding or selling collective investment schemes.

• The needs of a client (investment objectives and risk profile) as well as the reasons for the personal recommendation of the client advisor for the purchase of collective investment schemes. • With regard to formal matters, it is required that the records can be produced and submitted to the client as a written document. Therefore, preparing the records in electronic form is admissible. Basically, the record is to be written in the language of the meeting when advice was given or the correspondence language chosen by the client. • The client is to be informed about the content of the records by a written document which can be submitted directly or by letter, email or other web-based form etc. A signature is not necessary. A waiver regarding the duty to record is admissible to the extent such waiver is specifically and clearly stated.

The revised Collective Investment Schemes Ordinance (CISO) stipulates that the form and content of the protocol are to be regulated at the self regulation level which must be recognized by FINMA as a minimum standard. The Guidelines of the Swiss Bankers Association on protocol requirements (“SBA Guidelines”) were recognized in November 2013 by FINMA as a minimum standard under supervisory law.

Fund News / Issue 110 / Developments in December 2013 / 7

Regulatory News

UK FCA consults on extending electronic communication with unitholders On 6 December the Financial Conduct Authority (“FCA”) issued its miscellaneous quarterly consultation paper (“CP 13/18”) which, in section four, proposes amendments to the Collective Investment Schemes sourcebook (“COLL”) in relation to extending the ability for authorised fund managers (“AFMs”) and others to communicate with unitholders electronically, including the use of web-based communication. If an investor wishes certain communications such as short reports and accounts these may be sent in electronic form, but the FCA recognises that that COLL does not currently allow all notices and documents to be communicated electronically, including by publication on a website. It has received representations from AFMs that some investors prefer the convenience offered by electronic communication and it can reduce costs, and that, subject to conditions, this flexibility is allowed under the Companies Act 2006. As a result, in CP 13/18 the FCA proposes rules and guidance relevant to AFMs, depositaries, platform service providers and administrators to enable them to communicate electronically to investors, including web-based communication provided the investor agrees.

It is proposed that the change and investor’s consent will be achieved by either: a resolution at a meeting of unitholders; or the change is treated as a “significant change” under COLL 4.2.6R. In either case investors must still have the right to receive paper copies of documents if they prefer. The consultation proposes two questions: Q4.1 Do respondents agree that notices and documents should be allowed to be communicated by making them available on a website? Q4.2 Do respondents agree with how AFMs should obtain consent of unitholders and are there other measures the FCA should take to ensure unitholders are treated fairly when the change is introduced? The proposals also reflect the FCA’s expectation, albeit deferred until the end of 2015, that intermediate unitholders such as nominee holders should notify the underlying beneficial unitholders of documents and notices to unitholders. These proposals could help to facilitate this by allowing the document to be published on a website and the intermediate unitholder sending the underlying investor an electronic notice containing a hyperlink to the website.

8 / Fund News / Issue 110 / Developments in December 2013

The FCA considers that the Companies Act 2006 provides an indirectly relevant precedent and that regulatory documentation such as the KIID can currently be made available in a durable medium under the UCITS Directive, this includes a web-site provided it meets certain conditions. The FCA proposes the use of electronic communication could be agreed by a resolution of unitholders and then each unitholder would be invited to agree on an “opt-out” basis. Alternatively, and reflecting that authorised funds do not have regular meetings and there could be disproportionate expense, the AFM could amend the prospectus and use the significant change procedure to notify investors. However the FCA consider that if this approach is adopted it would be wrong to assume consent on an opt-out basis as the investor may not have given due regard to the significant change event. Therefore the AFM would have to ask for and obtain investor’s consent on an opt-in basis. There are a number of “other elements” to the proposals and these include that where the significant change approach relates to the provision of the report and accounts the notice should be given before the end of the relevant accounting period. This is to allow investors who sell their units after the accounting period to optin to receiving the report and accounts through a website.

Regulatory News

The consultation is for two months to 6 February 2014. The rationale and proposal are set out on pages 18 to 22 and the proposed amendments to COLL are in Appendix 4 of CP 13/18 (78 pages) which is available here:

FCA publishes additional guidance on use of the terms “absolute return”; “total return” and similar On 9 December the Financial Conduct Authority’s (“FCA”) Collective Investments department issued supplement guidance regarding the implementation of COLL 4.2.5R (3)(ca) as to how it is seeing and expecting to see this new rule applied. This new rule was implemented in July 2013 and applies to funds that use terms such as “absolute return”, “total return”, or similar in the funds name or literature correlated to the intention, stated or implied, of delivering positive returns in all market conditions.

This new guidance reconfirms that: • the rule applies to all UCITS and non-UCITS retail schemes where the fund’s name; objectives or literature indicate, expressly or by implication, an intention to deliver positive returns in all market conditions where there is no guarantee of said return; • it is the AFM’s responsibility to ensure that, when required, the fund’s literature makes the additional statements set out in (i) to (iii) of COLL 4.2.5R(3)(ca). i.e. that: capital is at risk; the investment period over which the fund aims to achieve a positive return; and that there is no guarantee over that period or any other time period; and • the additional disclosures are required from the earlier of revision of the fund’s prospectus or 26 January 2014.

Additionally the FCA provides two paragraphs explaining what it is seeing in practice for: 1. Funds that are managed to produce a combined return of capital and income which together comprise a “total return” but not with the aim of this being positive in all market conditions. Some AFMs opt to achieve compliance with the rule by either removing reference to “total return” or by qualifying the objective so it is clear to investors that a consistently positive return is not implied. 2. Funds that do not use the terms but do imply a positive return in all market conditions as a consequence of objectives to exceed benchmarks that are perceived as always positive, such as: base rates; price indexes; or interest rates. These funds would need the disclosures required by the new COLL rule 4.2.5R(3)(ca).

As discussed in Fund News issue 106, via Handbook Notice 4, on 25 July 2013 the FCA made new COLL rule 4.2.5R(3)(ca) setting out the required additional disclosures to retail investors where a fund, through use of terms such as “absolute return”, “total return”, or similar, indicated an intention to deliver positive returns in all market conditions. In response to questions from authorised fund managers (“AFMs”) and its observations of the application of the new rule by AFMs, the FCA has provided a one page explanatory note available here: implementation-of-coll-425r

Fund News / Issue 110 / Developments in December 2013 / 9

Tax News

Luxembourg VAT exemption of risk management services On 7 November 2013, the Luxembourg VAT authorities published a Circular (36kb) specifying the scope of VAT exemption applicable to the management of investment funds. It has been confirmed that services of risk management are part of fund management services as stated in Article 44, 1, d) of the Luxembourg VAT Law (VATL). Therefore, the risk management services provided by the management company should, in principle, be VAT exempt. This should apply equally in the case of management of alternative investment funds. The Circular also confirms that in the case of management services provided by a third party (outsourced services), these services should, viewed broadly, form a distinct whole, be specific to and essential for the management of funds in order to be VAT exempt. The exemption does not apply to purely material or technical services. Furthermore, a single isolated type of service (“un seul type isolé de services”) supplied by a third party cannot benefit from the VAT exemption under article 44, 1, d) VATL.

UK Luxembourg tax treaty update Luxembourg further expands its Asian tax treaty network by concluding a tax treaty with Laos which is expected to become effective very soon. A new tax treaty with the Seychelles entered into force on 1 January 2014.

Aberdeen e-Alerts 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/aberdeene-alerts.aspx

Alert 2013-11 – Claiming interest on already paid WHT refunds in Finland Alert 2013-12 – No Dutch withholding tax refund on dividends paid to Finnish investment fund

The full text of the VAT Circular is available via the following web link: actualites/2013/11/fcp_gestion_ risque/Circ_723ter_07_nov_2013.pdf

10 / Fund News / Issue 110 / Developments in December 2013

Draft Finance Bill 2014 – measures relevant to the management of funds On 10 December HM Treasury (“HMT”) published draft legislation which will be included in the Finance Bill 2014 and which are due to come into effect in 2014. There are several important measures including: the repeal of Schedule 19 SDRT; other stamp duty changes and proposals; and an extension of existing provisions to allow non-UK AIFs to be managed from the UK without the fund becoming UK tax resident. In addition a number of anti-avoidance measures will also be introduced, including: changes to the taxation of partnerships; new measures to prevent the abuse of the retained “bond fund” rules; and measures to prevent the use by VCTs of converted share premium accounts to make tax-free payments to the VCT’s investors. While much of what was presented had already been announced, the Chancellor also made a number of new announcements in the Autumn Statement on 5th December, these are considered further below.

Tax News

Abolition of Schedule 19 SDRT Finance Bill 2014 will abolish the 0.5% Stamp Duty Reserve Tax (“SDRT”) which applies on the surrender of units in authorised funds. Schedule 19 SDRT is currently a significant administration cost for the industry, and its abolition signals the Treasury’s commitment to enhancing the marketability of UK funds. The change will take effect from 30 March 2014. Details are available here (11 pages): uploads/system/uploads/ attachment_data/file/264469/17._ Abolition_of_Stamp_Duty_ Reserve_Tax_applied_to_collective_ investment_schemes.pdf

In addition, legislation will be introduced in Finance Bill 2014 to abolish stamp duty and SDRT on transfers of listed securities on a recognised growth market, which includes both the Alternative Investment Market (“AIM”) and the ICAP Securities & Derivatives Exchange (“ISDX”). These measures will take effect from 28 April 2014. Further details are available here (18 pages): uploads/system/uploads/ attachment_data/file/264607/18._ Abolition_of_stamp_duty_and_ stamp_duty_reserve_tax_on_ growth_market_shares.pdf

The Finance Bill 2014 introduces measures that, with effect from 5 December 2014, will extend the existing exemption to include all nonUK Alternative Investment Funds (“AIFs”). By extending the definition to non-UK AIFs this will cover closedended vehicles and umbrella funds that may not otherwise have fallen within the definition of an offshore fund. There will also no longer be a requirement for a UK AIF manager (“AIFM”) which will provide certainty to self managed AIFs and branches of non-EU AIFMs carrying out management functions. More details are published here (five pages): uploads/system/uploads/ attachment_data/file/264459/14._UK_ management_of_offshore_funds.pdf

Management of non-UK AIFs Other stamp duty changes The Autumn Statement announced that from April 2014 the stamp duty and SDRT charge on purchases of shares in Exchange Traded Funds (“ETFs”) that would apply if the ETF were domiciled in the UK will be removed. This will support the establishment of such funds in the UK, which to date have largely been domiciled offshore. In the light of this development ETF providers should analyse the impact the UK’s tax treaty network could have on returns of ETFs if UK domiciled.

A long running concern of the UK funds industry has been that where a UK manager manages an offshore fund that fund could become UK tax resident due to the activities of the manager. There is currently an exemption for offshore funds that are UCITS, this allows for management company passporting under the UCITS IV Directive. However the current law does not extend to other types of offshore funds.

Taxation of Partnerships The Finance Bill 2014 will introduce significant measures to counter tax driven allocation of partnership profits and disguised employment arrangements. Legislation will also be introduced to tax partnership income at the level of the partnership if this income is required to be deferred under the AIFM Directive. Further details are available here (117 pages): uploads/system/uploads/ attachment_data/file/264620/4._ Partnerships.pdf

Fund News / Issue 110 / Developments in December 2013 / 11

Tax News

Corporate debt consultation and the “bond fund” rules Following the consultation on the taxation of corporate debt and derivative contracts and the concerns raised by the industry, in particular that abolition could result in funds becoming less tax efficient for certain investors, in particular life companies, the Government has decided that the bond fund rules will be retained. Instead of abolition of those rules the Chancellor announced that new legislation on corporate debt and derivative contracts will be introduced in the Finance Bill 2014 to enhance existing anti-avoidance provisions and prevent the abuse of the “bond fund” rules. This legislation will also permit corporate investors to disapply the bond fund rules in certain prescribed cases. Draft legislation in respect of the bond fund rules is expected to be released in January 2014.

Venture Capital Trusts (“VCTs”)

The options to be considered include:

On 10 December, HM Treasury (“HMT”) and HM Revenue & Customs (“HMRC”) published a separate document summarising the responses received on the VCT share buy-backs consultation document which had raised concerns regarding the use by VCTs of converted share premium accounts to make tax-free payments to the VCT’s investors.

1. A company losing its VCT status if capital is returned before at least 70% of the funds raised have been invested in qualifying holdings.

HMT and HMRC view such payments as more akin to a return of capital than a dividend and are concerned that a VCT is currently able to convert its share premium account to distributable reserves and return funds to its investors tax-free during the minimum holding period. There is also a concern that returning funds to investors in this manner reduces the cash that a VCT has available to invest in the intended target enterprises and that VCTs could potentially return capital before making qualifying investments. The Government has announced that it intends to amend the VCT legislation to address these concerns. The document published on 10 December contains three possible options, however, before the draft legislation is published, technical workshops will be held to consult on appropriate solutions.

12 / Fund News / Issue 110 / Developments in December 2013

2. Treating distributions from converted share premium accounts of VCTs as taxable amounts for the recipient. 3. Limiting the level of distributions payable by VCTs from converted share premium accounts. The intention is to include legislation in the Finance Bill 2014 to address this issue. Further information is available here (eight pages). uploads/system/uploads/ attachment_data/file/264618/3._ Venture_capital_trusts.pdf

Accounting News

UK AIC issues the Exposure Draft for the revision of the SORP for financial statements of ITCs and VCTs On 20 December the Association of Investment Companies (“AIC”), the body responsible for the maintenance and development of the Statement or Recommended Practice for the financial statements of Investment Trust Companies (“ITCs”) and Venture Capital Trusts (“VCTs”) (“the SORP”), issued the exposure draft (“SORP (Draft)”) for revision of the SORP with a consultation period of three months to 19 March 2014.

This is the first revision of the SORP since January 2009 and it reflects not only the fundamental revision by the Financial Reporting Council of financial reporting standards for the UK (“UK GAAP”), that was completed in March 2012; but also changes in company law and tax legislation that have allowed for the distribution of capital profits by way of dividends. The changes also embrace issues and best practice identified since 2009.

The SORP (Draft) is aligned to the revision of UK GAAP and, subject to due process, will be applicable for accounting periods commencing on and after 1 January 2015. The ED with the invitation to comment questions on pages 6 to 9 is available on the AIC website, here: default/files/hidden-files/ AICSORPExposureDraftDec2013doc.pdf

As with the SORP for Authorised Funds the SORP (Draft) has to deal with the challenge that with FRS 102 requires the disclosure of fair value measurements of instruments into levels with the fact that the levels in FRS 102 paragraph 11.27 differ from the current FRS 26 and those required by IFRS. Accordingly the SORP (Draft) proposes that investments held at fair value which fall within paragraph 11.27(c) of FRS 102 should extend the disclosure to separate these values between valuations with observable inputs and those with unobservable inputs (see paragraph 25A SORP (Draft)).



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Fund News / Issue 110 / Developments in December 2013 / 13


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 110 - December 2013  
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