Many new tax developments and modifications have taken place in 2016 at the international and EU level. What were the main ones in your view?
For a few years now, the OECD and the EU have been very active in the fight against tax evasion and aggressive tax planning, leading to changes in the international tax landscape and to increased tax transparency. Some of the various initiatives launched at this occasion have already produced very tangible results. The most significant tax measures, as far as the investment fund industry is concerned, are undoubtedly (i) the publication of the multilateral instrument in November last year, which will enable some BEPS measures to be swiftly transposed into double tax treaties and which will be opened to signatures from the various participating countries on 7 June 2017, and (ii) the passing of the EU anti-tax avoidance directive in July last year, which introduced five anti-abuse rules that will have to be implemented by all EU Member States generally from 2019. A political agreement on an amended version of this directive for hybrid mismatches has already been reached this year.
Another important development has been the OECD’s efforts to reinforce tax transparency by introducing the “Common Reporting Standard“ (CRS), an agreement to share on an automatic basis financial accounts holders’ information between participating jurisdictions. In order to comply with Directive 2014/107/EU and the joint reporting standard of the OECD Common Reporting Standard, the European Member States and the CRS Member States are obliged to apply these provisions and the new measures as of 1 January 2016.
What impact do they have on Luxembourg and on the Luxembourg investment fund industry in particular?
Although the main focus of the BEPS action plan is, in principle, multinational companies, some of the new measures may also (inadvertently) affect investment funds. In this respect, one of the key elements is certainly the upcoming changes to existing double tax treaties in order to prevent treaty abuse which will be introduced through the multilateral instrument. This will have as a consequence that obtaining treaty access might become more difficult for investment funds and could thus ultimately affect the returns for investors due to a higher tax burden suffered by these funds. Indeed, contracting States might decide to insert provisions that will allow them to grant treaty access only to investment funds that meet certain conditions regarding the country of residence and treaty eligibility of their investors. But the practical application of these provisions raises a number of compliance and administrative issues for investment funds which have not been solved yet. Plus, the broad wording of the “principal purpose test” clause (PPT) could unduly exclude certain fund structures from passing the test and accessing treaty benefits. Interestingly, the conditions of applying the PPT clause to non-CIVs are still being discussed at the OECD level, although the industry is confident that practical examples to illustrate the application of the rule will finally be introduced in the OECD commentaries, thus hopefully reducing legal uncertainty for these funds.
Under CRS, the first information exchange takes place in 2017 and will refer to financial data from the 2016 financial year. Luxembourg investment funds need to submit their CRS reports prior to 30th June each year.
What will be the major tax developments in the coming year(s)?
In this context, it will be key to follow how the new OECD and EU measures are actually implemented into the domestic law of each Member State. Indeed, it will only be possible to precisely assess the actual impact of these new rules on the investment fund industry when the details of their transposition by the various countries are known—in this sense, the devil lies in the details. On a more general note, it will also be interesting to see what the outcome will be of the recent public consultation launched by the EU Commission on removing barriers to cross-border investments. Indeed, this initiative also includes some tax aspects, notably with respect to the withholding tax reclaim procedures applicable to investment funds. Furthermore, given the changing tax landscape and the increased tax transparency, one can expect that local tax authorities will put a greater focus on substance and on transfer pricing aspects from now on. Thus, having a proper transfer pricing policy and documentation in place will be key for asset managers.
Georges Bock (KPMG Luxembourg Société coopérative)
Chair of the ALFI Tax Committee