2013 EATLP conference Lisbon Corporate Income Tax Subjects - Investment structures

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1 2013 EATLP conference Lisbon Corporate Income Tax Subjects - Investment structures Hein Vermeulen 1 Please note that this article is a first draft only prepared for discussion purposes at the 2013 Conference. It is still work in progress, needs to be completed and is therefore subject to amendment. It is partially based on the Country Reports which were prepared for the 2013 Conference and partially based on other sources available to the author. 1. Corporate taxpayers v. non-corporate taxpayers From the national reports it may be inferred that States make a distinction between entities that are treated as taxpayers for corporate income tax purposes and those who are not treated as such based on the criterion whether or not the owners are personally liable for the debts of that entity. One can broadly say that personal liability of the owners of an entity typically goes hand in hand with a disregard of that entity for corporate income tax purposes. Conversely, a limited liability of the owners of the entity results in the acknowledgement of a taxpayer for corporate income tax purposes. This broad division makes it that on the one side of the spectrum partnerships are treated as tax transparent and that limited liability companies are treated as opaque. The Greek government however treats partnerships as companies, so the dichotomy is not followed by all States Collective investment v. individual investment In the field of collective investment this distinction is highly relevant because the manner in which the property of individual investors is pooled may result in a disadvantageous tax treatment compared to the tax treatment of individual investment. If two or more investors invest collectively through an entity that is disregarded for corporate income tax purposes, then this collective investment will not result in an extra layer of (corporate) tax at the level of the investment vehicle. There will be one level of tax, which is the taxation at the level of the investor. It is clear that in this situation the tax effect of investing collectively is equal to the tax position of an individual investment. If on the other hand, two or more investors invest collectively through an entity that is treated as a corporate income taxpayer, then this collective investment results in an additional layer of tax at the level of the collective investment vehicle. Due to the general nature and application of the tax system of a State, tax will be due both at investment vehicle level and at investor level. This is different if States have an integration system which allows for a full relief of this double economic taxation. Absent States with such integration system, in states with a classical system it would make sense from a tax point of view that collective investment should always be structured 1 Prof.Dr. Hein Vermeulen Amsterdam Centre for Tax Law, Amsterdam School of Real Estate, University of Amsterdam and PricewaterhouseCoopers. The author can be contacted at h.vermeulen@uva.nl. 2 Theodore Fortsakis, Corporate Tax Subjects: National Report Greece. 1

2 through an entity which is disregarded for corporate income tax purposes. Keeping in mind the dichotomy between tax transparent partnerships and limited liability companies, a partnership should be the preferred entity of choice when setting up a collective investment vehicle. However, the benefit of tax transparency has a great disadvantage. It is based on the assumption that the owners of the entity, i.e. the partners in the partnership, are personally liable for the debts of the entity. This personal liability of the investors generally disqualifies a common partnership as a suitable collective investment vehicle from a non-tax point of view. Investors, the (small) savers and pension funds, are not willing to put more at risk than their investment. This non-tax condition requires that a collective investment vehicle is structured in such a way that there is no personal liability of the investors for the debts of the collective investment vehicle. Given this legal condition it makes perfectly sense to use a limited liability company as the collective investment vehicle. We have learned however that entities that bar personal liability of its owners, as limited liability companies do, are treated as corporate taxpayers. The general nature of the tax system thus leads to economic double taxation, i.e. corporate income taxation at the level of the collective investment vehicle and, assuming individual investors investing in the collective investment vehicle, personal income taxation at the levels of the investors. In order to reach a situation where collective investment through a collective investment vehicle from a tax point of view is not discriminated against individual investment, governments need to infringe their tax system. Leaving the State Aid question unanswered here, such infraction could take place at two levels, i.e. the two levels where the taxation exist. Firstly, States could eliminate the personal income taxation at the level of the investor, leaving the corporate taxation at the level of the collective investment vehicle intact. Secondly, States could eliminate the corporate taxation at the level of the collective investment vehicle as a result of which only personal income taxation at the level of the investor remains. Governments have different reasons for taking measures to facilitate collective investment. 3 Firstly, it is a tool for economic policy. It is used to stimulate and help savings in developed economies as it makes short money long. In an era of ageing societies, this saving for later will become of more importance. Secondly, it is used to create a stronger economy as a basis for wider share ownership and future savings in a less developed environment. Finally, collective investment vehicles may be used by governments for privatisation or (re)financing of pension retirement schemes and other social security systems. The typical and traditional approach is to eliminate corporate taxation at the level of the collective investment vehicle. This makes great sense from the point of view of the desire of governments to treat individual investment and collective investment equally. If an individual, direct investment only triggers personal income taxation at the level of the investors, a suitable remedy for putting individual and collective investment at par is to remove the additional taxation that is instigated by the collective, indirect investment. This means that is logical to eliminate the corporate taxation at the level of the collective investment vehicle. 3. Models for eliminating corporate income tax at the level of the CIV 3 Lynne Ed and Paul Bongaarts, General report, IFA Cahiers Vol. 82b. The taxation of investment funds. 2

3 Various techniques are used to take away the additional layer of corporate taxation at the level of the collective investment vehicle. Ed and Bongaarts mention the following models in their General Report of the IFA 1997 Report on The taxation of investment funds: 4 a) CIV is not subject to tax; b) CIV is subject to tax but wholly exempt; c) CIV is subject to tax but its object is not; d) CIV is subject to tax, its object is taxed, however, at a low or zero per cent rate. All these models will ensure that the taxation at the level of the collective investment vehicle is fully eliminated, albeit that in the fourth model such result is only achieved if the object of the collective investment vehicle is taxed at a zero rate. If in that model a low rate is applied, double economic taxation will remain to the extent of the rate used. A different technique is to allow a collective investment vehicle to deduct from its taxable base any distribution of income. If all income is distributed, there will effectively be no taxation at the level of the collective investment vehicle. This model is used for the US RIC, US REIT, Norwegian bond funds and Swedish investments funds. Sweden subjects its investments funds to corporate income tax. An exemption is available for capital gains and losses on shares and other equity related securities, such as convertible bonds. Distributions may be deducted from the taxable basis. [tbc] Another model is an integration system, whereby in the view of the author taxation is not eliminated at the level of the collective investment vehicle but rather at the investor level. Model 1 is used by the following States: 1. Belgium (FCP) 2. France (FCP) 3. Luxembourg (FCP) 4. Netherland (FMA) 5. Switzerland (FCP/SICAV 5 ) 6. [tbc] Model 2 is used by the following States: 1. Austria (Sondervermögen) 2. Finland (Investment Fund) 3. France (SICAF/SICAV) 4. Germany (Sondervermögen) 5. Ireland (Investment Undertaking) 6. Italy (Open-Ended Investment Mutual Fund/SICAVs) 7. Luxembourg (SICAF/SICAV) 6 8. The Netherlands (EII) 4 IFA Cahiers Vol. 82b. The taxation of investment funds. 5 Pierre-Marie Glauser, Corporate Tax Subjects: National Report Switzerland. 6 Subject to a subscription tax (taxe d abonnement). 3

4 9. Poland (REIT) [tbc] In Germany the exemption of the German Sondervermögen is not laid down in the domestic Corporate income tax act (Körperschaftsteuergesetz - KStG) itself. Instead the Investment Act (Investmentsteuergesetz - IStG) stipulates that Sondervermögen are personally exempt. Martini writes that the investors in a German Sondervermögen in fact are taxed on a transparent basis. 8 Model 3 is used by the following States: 1. Belgium (SICAF/SICAV) 2. France (SIIC) 3. Turkey (Securities Investment Association) 9 4. [tbc] Model 4 is used by the following States: 1. The Netherlands (FII) 2. Spain (Spanish SICAV and SOCIMI) 3. Sweden 4. UK 5. [tbc] From this enumeration it follows that some States use more than one model. The Netherlands for instance uses three models. Model 1 applies to the Dutch closed Fund for Mutual Account. If a Dutch closed Fund for Mutual Account is used, then the collective investment vehicle is simply ignored for Dutch corporate income tax purposes and Dutch personal income tax purposes. The income and capital is allocated to the investors in proportion to their investment in the Dutch closed Fund for Mutual Account. The income will keep its nature and is not re-characterised. This means that interest income received by the Dutch closed Fund for Mutual Account will be treated as interest income by its investors, rental income received by the Dutch closed Fund for Mutual Account will be treated as rental income by its investors, dividend income received by the Dutch closed Fund for Mutual Account will be treated as dividend income by its investors, and so forth. It also means that foreign tax credits are attributed to its investors, provided of course that the Source Country also disregards the Dutch closed Fund for Mutual Account. Model 2 is used for the Dutch Exempt Investment Institution. This collective investment vehicle is in principle a subject for the Dutch corporate income tax act but is then exempted through a subject exemption. It is therefore effectively not subject to Dutch corporate income tax and does not need to file a corporate income tax return. In addition, the Dutch Exempt Investment Institution is not a subject for Dutch dividend withholding tax either. 7 Hanna Litwińczuk and Karolina Tetłak, Corporate Tax Subjects: National Report Poland. 8 Ruben Martini, Corporate Tax Subjects: National Report Germany. 9 Basaran Yanavslar, Corporate Tax Subjects: National Report Turkey. 4

5 Model 4 applies to the Dutch Fiscal Investment Institution. This collective investment vehicle is a subject for the Dutch corporate income tax act but its object is charged with a rate of zero per cent. As a result, the Dutch Fiscal Investment Institution does effectively not pay Dutch corporate income tax although it needs to file a corporate income tax return annually. Contrary to the Dutch Exempt Investment Institution, the Dutch Fiscal Investment Institution is a subject for Dutch dividend withholding tax and will need to withhold Dutch dividend withholding tax on its dividend distributions. Model 4 is also used by Spain for its SICAVs albeit that Spain uses a 1% rate. Spanish SICAVs are subject to world-wide taxation. Norwegian equity funds are taxed at the statutory rate of 28%. However, an (97%) exemption exists for dividends and capital gains. Effectively, these funds are taxed at a low rate. Norwegian bond funds do not enjoy such exemption and are taxed at the statutory rate of 28%. A Norwegian bond fund may however deduct from its taxable basis distributions made to its investors. As a result, little to no corporate income tax is due in practice. The UK uses model 4 for its Authorised Investment Funds (AIFs), which take the form of an Open Ended Investment Company (OEIC) or Authorised Unit Trust (AUT). A rate of 20% applies to these collective investment vehicles, albeit that specific reliefs and exemptions, such as a dividend exemption and an exemption for capital gains, are available. As a result, the effective tax rate of the AIFs is usually much lower. The Tax Elected Funds (TEFs) have an improved regime to tax investors in the same way as if they had invested directly in the underlying assets of this particular collective investment vehicle. The income of a TEF is streamed to its investors as a dividend distribution and a non-dividend distribution. All three models used by the Netherlands achieve a result where taxation at the level of the collective investment vehicle is fully eliminated. In models 2 and 4 the nature of any income of the collective investment vehicle is re-characterise to dividend income, whereas model 1 leaves the character of the income, including foreign tax credits, intact. In France, for instance, not all income of the SICAV is transferred into profits of the SICAV. The nature of the underlying income and gains is kept based on so-called coupons. 6. CIVS in a domestic context In a domestic context, i.e. a situation wherein the investors, the collective investment vehicle and the investments are located in the territory of one State, there is no harm at all for the State at hand to eliminate taxation at the level of the collective investment vehicle. As personal income taxation will remain at the level of the domestic investors, there is no difference with an individual, direct investment by these domestic investors in the domestic investments of the domestic collective investment vehicle. This requires however that the income of the collective investment vehicle is taxed in the hands of the investors without too much delay in time. There is no bother with this issue in model 1 in which the income simply flows through the collective investment vehicle, provided however that the investors are taxed upon the moment the collective investment 5

6 vehicle receives the income. 10 However, in models 2, 3 and 4 the governments will need to design a mechanism to ensure a more or less immediate taxation at the level of the investor for the income and capital gains earned by the collective investment vehicle. A technique commonly used here is that the collective investment vehicle must distribute its profits on a periodical basis as a result of which the receipt of income due to this distribution creates a taxable moment for the investor. The following countries use this approach: a) Denmark (Distribution Fund) b) The Netherlands c) Spain d) [tbc] If fiscal neutrality is achieved through the deductibility of dividend distributions from the taxable base of a collective investment vehicle, such as in in the US, Norway and Sweden, there is a natural distribution obligation that ensures a taxable event at investor level. A different approach is to personally exempt the collective investment vehicle but to tax the investors on a transparent basis. The tax liability of the collective investment vehicle in this case is of an administrative nature. The income of the investors is determined at the level of the collective investment vehicle. Germany uses this technique. It is referred to as quasi-transparency. France uses this partial transparency approach for partnerships, which means that the profit of the partnership is determined at the level at the partnership, acknowledging its legal personality but taxing it at the level of its members. 11 For its FCP, the French use an approach whereby income of the CIV is taxed in the hands of the investors upon distribution/redemption. This mechanism is used in the following countries: a) Austria b) France c) Germany d) Switzerland 12 e) [tbc] Another possibility is to have a provision in the tax law that requires the investors to re-valuate his investment in the collective investment vehicle on a periodical, typically annual, basis. This mark-tomarket-technique resembles a technique used for taxpayers holding controlled foreign companies and would be suitable for collective investment vehicles that are not obliged to distribute its profits on an annual basis. The following countries use this approach: a) Denmark (Investment Company) b) The Netherlands 10 The French FCP seems to have a system where French investors are taxed upon distribution by the FCP, which means that the income does not simply flows through the collective investment vehicle. 11 Polina Kouraleva-Cazals, Corporate Tax Subjects: National Report France, who refers in this respect to Article 8 and Article 238 bis K of the Code Général des impôts. 12 Pierre-Marie Glauser, Corporate Tax Subjects: National Report Switzerland. 6

7 c) [tbc] 7. CIVs in a cross-border context In a cross-border, i.e. a situation wherein the investors, the collective investment vehicle and the investments are located in different territories of two or more States, specific issues arise when States eliminate corporate income taxation at the level of the collective investment vehicle. (a) State perspective From the point of view of the State where the collective investment vehicle is established, the worry is whether the State will not lose out of tax proceeds when a foreign investor invests in the collective investment vehicle. The carve out of corporate income tax at the level of the collective investment vehicle presupposes that its income is taxed in the hands of its domestic investors. In case of a foreign investor, it is not always sure whether the State at hand has a taxing right vis-à-vis that foreign investor either based on domestic law or a double tax treaty. And if the State has such right, whether it is limited. (b) Collective investment vehicle perspective From the perspective of the collective investment vehicle, the question arises as to whether or not the collective investment vehicle has access to tax treaties if it makes an outbound investment. If the answer to this question is negative, then the question arises as to whether or not treaty benefits are lost per se or that the investors in the collective investment vehicle are still eligible to claim treaty benefits that would be available if these investors would have invested directly, i.e. without the collective investment vehicle. To examine whether a collective investment vehicle has tax treaty access, the so-called three tier test must be applied. That is, for treaty purposes, can the collective investment vehicle considered to be a person, resident and, if the collective investment vehicle receives dividend income, interest income or royalty income, the beneficial owner. The first two tiers, person and residency, stem from article 1 of the OECD Model, which prescribes that a tax treaty only applies to persons who are resident in one of the contracting states. The third and last tier, beneficial ownership, is derived from articles 10, 11 and 12 of the OECD Model, which in short demand that the person receiving the income is the beneficial owner of that income. In case this three tier test is met, the collective investment vehicle will itself have access to treaty benefits. Person Although collective investment vehicles come in various forms, such as companies, trusts, partnerships, contractual arrangements and fiduciary arrangements, usually the first step does not constitute a problem. A collective investment vehicle, even if structured as a contractual arrangement, is mostly regarded as a person given that the OECD MTC employs a rather broad definition of person. Resident The second step of residency, however, is more cumbersome. Due to the general nature of regimes for collective investment vehicles, which typically eliminate taxation at the level of the collective 7

8 investment vehicle, the liable to tax requirement in article 4 OECD MTC raises questions. The question is whether the condition liable to tax should be interpreted as actually paying tax or not. In this respect the Commentary notes that in many States, a person is considered liable to comprehensive taxation even if the Contracting State does not in fact impose tax. 13 If this reasoning is followed, a collective investment vehicle would be regarded as a resident. However, there are also States, as the Commentary notes, that do not consider entities to be liable to tax if they are exempt from tax under domestic laws, unless expressly covered by a tax treaty. 14 Beneficial owner If the first two hurdles are taken, it needs to be established whether the collective investment vehicle is a beneficial owner in case of the receipt of dividend income, interest income or royalty income. The issue here is whether the collective investment vehicle should be regarded as a type of intermediary that simply serves as a conduit. One of the elements to address here in the view of the author is which powers the collective investment vehicle has in relation to the income concerned. 15 Given the nature of collective investment vehicle of investing collectively in such a way that an investment fund manager selects the investment for the investors, the author takes the position that the powers of the collective investment vehicle are so broad that it should be regarded as a beneficial owner. It is noteworthy in this respect that in the OECD Discussion Draft of 29 April 2011 on the meaning of beneficial owner specific attention has been given to collective investment vehicles. 16 It is stated that a statutory distribution requirement which is a condition for a collective investment vehicle to make use of a tax regime for collective investment vehicles, should be regarded as an unrelated obligation. As a result, a collective investment vehicle that is under a requirement to distribute its income does not disqualify as the beneficial owner. 8. OECD: specific attention for collective investment The IFA has put collective investment on the agenda in 1962 (Athens), 1971 (Washington) and 1997 (New Delhi). In 1971 IFA suggested the OECD Committee on Fiscal Affairs to prepare proposals for upholding the principle of tax neutrality in a cross-border context. The OECD took up the glove and addressed the position of entities that are not organised as companies in the 1990s. This work has led to the Partnership Report (1999) 17, the REIT report (2008) and the CIV report (2010). The REIT report will be dealt with later. The CIV report dealt with the issues raised above on whether or not the collective investment vehicle has access to tax treaties. It considers two approaches: a) in its own right approach b) look through approach 13 Cf. 8.6 of the Commentary of the OECD Model to Article Cf. 8.7 of the Commentary of the OECD Model to Article Cf. 12 of the Commentary of the OECD Model to Article OECD Discussion Draft Clarification of the meaning of beneficial owner in the OECD Model Tax Convention, OECD, Paris, The Application of the OECD Model Tax Convention to Partnerships, OECD, Paris,

9 In the in its own right approach the collective investment vehicle is considered to be a person, resident and beneficial owner. This means that the collective investment vehicle may claim treaty benefits on its own behalf. As such, this solution may be regarded as direct treaty application. The collective investment vehicle is not ignored at all: it is the collective investment vehicle that invokes the treaty benefits in its own right. In the look through approach the collective investment vehicle may not claim treaty benefits on its own behalf but rather on behalf of its investors. As such, this solution may be regarded as indirect treaty application. The result is that the collective investment vehicle may only claim treaty benefits in so far as its investors are eligible to treaty benefits had they invested directly. The collective investment vehicle is thus ignored for examining the answer to this question. However, it is the collective investment vehicle that invokes the treaty benefits and not its investors. The collective investment vehicle is thus not ignored for claiming the benefits. In general, both approaches have two variants having regard the extent of the treaty application: a. the bilateral variant b. the third country variant In the bilateral variant, treaty application is limited to a bilateral context. This means that treaty protection is limited to the investors who are resident of the state in which the collective investment vehicle is established. In the third country variant treaty application is extended to other countries that are not the states that concluded the tax treaty at hand. In this third country variant, treaty protection is also offered to investors who are not residents of the state in which the collective investment vehicle is established, provided that the residence state of these investors concluded a tax treaty with the state where the investment is made by the collective investment vehicle. In the latter variant, the scope of the tax treaty between the state in which the collective investment vehicle is established on the one hand and the state where the investment is made on the other hand, is extended to the states of the investors who are not residents of the state in which the collective investment vehicle is established. The authors notes that according to the Commentary of the OECD Model it is, however, necessary that the tax treaty between the state of the investments and the state of the investors provides for an effective method for the exchange of information. This will give the state of the investments the opportunity to check whether the collective investment vehicle rightfully invokes, directly or indirectly, treaty application. 9. Approaches of countries The in its own right approach and the look through approach are used in tax treaty practice. (a) In its own right approach The in its own right approach is embraced by Luxembourg for its SICAV (Société d'investissement à capital variable). The Luxembourg Tax Authorities publish a list on its website which countries do accept this approach. 18 This list inter alia includes Austria, Denmark, Germany, Hong Kong, Portugal and Spain

10 It is also adopted by France in the US-French DTC for the French FCP. [tbc] The German-US Treaty contains a provision [tbc]. Spanish SICAVs are subject to a 1% corporate income tax rate. Spain takes the position that its SICAVs are eligible for tax treaty benefits. In addition, the Netherlands seeks to apply the in its own right approach for its Fiscal Investment Institution. One may say that the technique of applying a 0% rate is used by the Dutch government s desire to make sure that the Fiscal Investment Institution is characterised as a resident under a tax treaty. The Double Tax Treaty between the Netherlands and Belgium contains the in its own right approach. Pursuant to article 25, paragraph 1, second sentence, of the Double Tax Treaty between the Netherlands and Belgium, a UCITS may claim treaty benefits on its own behalf if at least 75% of its interests are held by investors who are resident of the state where the UCITS is established. 19 In the Dutch policy Notice on tax treaties, the Dutch government notes that, in the future, when negotiating tax treaties, the objective will be to address explicitly the residence for treaty purposes of tax exempt corporate entities, as it is according to Dutch government unclear under the OECD Model as to whether or not such entities would be eligible for treaty benefits, as they are not subject to tax in their residence state. 20 The Dutch government intends to include a resident article in the tax treaties, which would state that a person is assumed to be subject to tax in a contracting state if it is subject to the laws of that state or if its effective management is located in that state, i.e. regardless of whether or not it is actually subject to tax 21. As a result, persons that are not subject to corporate income tax, such as associations and foundations, would be considered to be treaty resident. The same would apply to entities that are (effectively) tax exempt under the Dutch special regimes for collective investment vehicles. The Dutch government thus takes the view that that the Dutch Fiscal Investment Institution is a resident under the treaties it has concluded and still concludes. 22 (b) Look through approach The Luxembourg authorities adopt the look through approach for its FCP (Fonds commun de placement) at least in as far as these investors are Luxembourg residents Double Tax Treaty between the Netherlands and Belgium of 5 June 2011, Dutch Treaty Gazette No Appendix to the letter of the Netherlands State Secretary of Finance, 11 Feb. 2011, IFZ/2011/100 M1, available at ( Dutch policy notice on tax treaties ), para Cf. Article 4(1) of the Convention between the Republic of Panama and the Kingdom of the Netherlands for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income of 6 October 2010, Dutch Treaty Gazette No The same holds true for the Dutch Exempt Investment Institution. The result is that the Netherlands is allowed to levy Dutch dividend withholding tax on distributions

11 For its FCP France has negotiated the look through approach with its following treaty partners: South-Africa, Germany, Austria, Canada, Spain, Estonia, Iceland, Israel, Japan, Leetonia, Lithuania, Namibia, Norway, Uzbekistan, The Netherlands, Sweden, Switzerland, Ukraine, Trinidad and Tobago. The Netherlands uses the look through approach for its Dutch closed Fund for Mutual Account. In the Dutch policy notice on tax treaties the Dutch government notes that the resident article in the tax treaties concluded by the Netherlands should explicitly exclude entities that are transparent for tax purposes as residents. 24 However, for the fiscally transparent Dutch mutual fund, the Dutch government embraces the look through approach. 25 In the Dutch policy notice on tax treaties it is stated that the Dutch government wishes to create clarity on the treaty position of the Dutch mutual fund. 26 It contains an intention for the Dutch government to undertake to concluding competent authority agreements with the competent authorities of its treaty partners so as to offer the look through approach as stated in the Commentary on the OECD Model. In particular, the Dutch government will seek to agree with its treaty partners that a fiscally transparent Dutch mutual fund is recognized as fiscally transparent and that this collective investment vehicle may make a claim for treaty benefits on behalf of its investors through its manager or custodian. Such competent authority agreements will be published in the Netherlands Official State Gazette. Regarding the application of tax treaties to fiscally transparent Dutch mutual fund established in the Netherlands in the past years the Dutch government have entered into competent authority agreements with an increasing number of states: a) United Kingdom 27 b) Canada 28 c) Denmark 29 d) Norway 30 e) Spain Dutch policy notice on tax treaties, para H. Vermeulen, The implications of treaty application for a Netherlands closed fund for mutual account, Bulletin for International Taxation, 66(1) (2012), pp and M. Beudeker, Update on the Dutch fund for joint account ( closed FGR): asset pooling vehicle for international investors and pension funds, Intertax 39 (2011), no. 8/9, pp Dutch policy notice on tax treaties, para Competent Authority Agreement between United Kingdom and the Netherlands Concerning the Fiscal Qualification of a Fund which Qualifies as a Closed Fund for Mutual Account under Netherlands Tax Law (25 Aug. 2010) IFZ2010/534M, Off. St. Gaz (2010). 28 Competent Authority Agreement between Canada and the Netherlands concerning the Fiscal Qualification of a Fund which Qualifies as a Closed Fund for Mutual Account under Netherlands Tax Law (1 June 2010) IFZ2010/284M, Off. St. Gaz (2010). 29 Competent Authority Agreement between Denmark and the Netherlands Concerning the Fiscal Qualification of a Fund which Qualifies as a Closed Fund for Mutual Account under Netherlands Tax Law (20 Jan. 2011) IFZ/2011/35M, Off St. Gaz (2011). 30 Competent Authority Agreement between Norway and the Netherlands Concerning the Fiscal Qualification of a Fund which Qualifies as a Closed Fund for Mutual Account under Netherlands Tax Law (21 March 2012) IFZ/2012/41M, Off St. Gaz (2012). 31 Competent Authority Agreement between Spain and the Netherlands Concerning the Fiscal Qualification of a Fund which Qualifies as a Closed Fund for Mutual Account under Netherlands Tax Law (1 February 2013) IFZ/2013/26M, Off St. Gaz (2013). 11

12 f) United States 32 The competent authority agreements concluded with the United Kingdom, Canada, Denmark, Norway and Spain are examples of the implementation of the look through approach with a thirdcountry variant. The competent authority agreement concluded with the United States, however, is an example of the implementation of indirect treaty application with a bilateral variant. In addition to these competent authority agreements the look through approach is also adopted in the Double Tax Treaty between the Netherlands and Belgium and the Protocol to new Double Tax Treaty between the Netherlands and Germany. Based on article 25, paragraph 1, first sentence, of the Double Tax Treaty between the Netherlands and Belgium, an Undertaking for Collective Investment in Transferable Securities ( UCITS ), which is not a legal person, may claim treaty benefits on behalf of its investors in so far these investors are resident of the state where the UCITS is established. 33 This is the bilateral variant of the look through approach. The Protocol to new tax treaty concluded with Germany contains two provisions that are relevant here. 34 Firstly, article I, second paragraph, of the Protocol stipulates that a fiscally transparent entity is ignored for treaty purposes, if the entity is considered fiscally transparent from the view of one of the states, and to put it briefly that the income and property is allocated to the participants of that fiscally transparent entity. Secondly, on the basis of article XIX, first paragraph, of the Protocol, the manager or managing partner of a fiscally transparent entity that lacks legal personality may claim treaty benefits on behalf of its investors or partners. In addition, the look through approach with a third-country variant is available for fiscally transparent mutual funds pursuant to article XIX, second paragraph, of the Protocol. 10. Collective real estate investments: REITs Many countries have designed regimes for the collective investment in real estate. Typically, the acronym REITS is used. This stands for Real Estate Investment Trusts. REIT legislation is in place in the following countries: a) France (SIIC) b) Germany (G-REIT) c) Italy (SIIQ) 32 Competent Authority Agreement between the Netherlands and the United States Concerning the Fiscal Qualification of a Fund which Qualifies as a Closed Fund for Mutual Account under Netherlands Tax Law (11 June 2012) IFZ/2012/334M, Off. St. Gaz. No , (2012). There is also an older agreement: Competent Authority Agreement between the Netherlands and the United States (6 Aug. 2007) IFZ 2007/537M, Off. St. Gaz. No. 154, chapter 4 (2007). 33 Double Tax Treaty between the Netherlands and Belgium of 5 June 2011, Dutch Treaty Gazette 2001, No Protocol dated 12 April 2012 to the Double Tax Treaty between the Netherlands and Germany of 12 April 2012, Dutch Treaty Gazette No

13 d) The Netherlands (Dutch REIT) 35 e) Poland (Polish REIT) 36 f) Spain (SOCIMI) g) Switzerland (SICAV owning real estate) 37 h) United Kingdom (UK REIT) i) United States (US REIT) j) [tbc] In Spain at reduced rate of 19% applied to its Spanish SOCIMI. As per 2013 this rate has been lowered to a 0% rate. In the case of a collective investment in real estate a point of attention surely is the unlimited taxing right of the source state. It is without doubt that the state where the real estate is situated has an unlimited and primary taxing right for real estate income, capital gains that stem from real estate and capital invested in real estate. Cf. Article 6, paragraph 1, OECD MTC, Articles 13, paragraph 1, OECD MTC and Articles 22, paragraph 1, OECD MTC. In addition, since the 2003 update of the OECD MTC it is now clear that the same holds true for capital gains on the alienation of shares in real estate companies, i.e. whose assets consist primarily of source state real estate. Cf. Article 13, paragraph 4, OECD MTC. This general idea of an unlimited and primary taxing right for the Source State conflicts with a provision whereby the corporate income tax at the level of the real estate collective investment vehicle is eliminated under the assumption that the real estate income is eventually taxed in the hand of the investor, where the investor is not resident of the state where the real estate collective investment vehicle is established. Switzerland takes a different route here. A SICAV investing in real estate is not exempt from CIT. 38 However, its investors are not taxed. As a result, one layer of tax exists at the level of the collective investment vehicle. One can say that Switzerland adopts a reverse approach. Within the EU no harmonisation has taken place in this field. The European Public Real Estate Association (EPRA) has made a proposal for mutual recognition of REITs in this respect. [tbc] 11. EU: no harmonisation in the field of direct taxation From a direct tax point of view, the regimes for collective investment vehicles, including REITs, have not been harmonised at all. Only in the field of indirect taxes a measure exists for collective investment in Article 135, paragraph 1, letter g, of the VAT Directive. It follows from this exemption, that promoting, or at least the non-hindering of collective investment is on the agenda of the European legislator. In the proposal for the CCCTB there is no specific attention for collective investment vehicles. 35 In fact, the Netherlands do not have a special REIT regime. It is rather the regime for the Dutch Fiscal Investment Institution that is employed for investments in real estate and real estate companies. In this case the Dutch Fiscal Investment Institution is called the Dutch REIT. 36 Hanna Litwińczuk and Karolina Tetłak, Corporate Tax Subjects: National Report Poland. 37 Pierre-Marie Glauser, Corporate Tax Subjects: National Report Switzerland. 38 Pierre-Marie Glauser, Corporate Tax Subjects: National Report Switzerland. 13

14 Harmonisation initiatives are not absent in the field of collective investment vehicles at all. Since 1985 there is a directive for UCITS, Undertaking for Collective Investment in Transferrable Securities, which provides for a harmonisation of the regulatory landscape of these collective investment vehicles. UCITS IV has seen the light in Recently, the AIFMD, Alternative Investment Fund Managers Directive was adopted. [tbc] However, the both the UCITS Directives and the AIFMD do not contain harmonisation measures in the field of taxation. Any harmonisation stems from negative integration as a result of the EU fundamental freedoms, especially the freedom of capital and establishment. The most relevant cases in this respect are (a) Stauffer 39, (b) Aberdeen Alpha Oy 40, (c) Santander 41. A similar basis for case law can be found in non-discrimination clauses in double tax treaties, such as Article 24 OECD MTC. The author us not aware of any case law in this respect. 42 [tbc] 12. Conclusions Many countries have legislation in place to treat collective investment from a direct tax point of view the same as individual investment. This is necessary because the general nature and application of the tax system of a State will lead to economic double taxation, i.e. both at collective investment vehicle level and at investor level. These pieces of legislations are built on the principle of tax neutrality on collective investment. Based on this principle, investors who invest collectively may not be placed in a worse tax position than that which they would be in had these investors invested directly, i.e. without a collective investment vehicle. The background of these regimes is economical. Traditionally, the main driver is to have the population save for later (make short money long). In an ageing society, this maxim even gains more importance. Taxation at the level of the collective investment vehicle is typically eliminated, so only one level of tax remains. Various models exist to so carve out corporate income tax at collective investment vehicle level. In a domestic context this does not give rise to problems as long as the income earned by the collective investment vehicle is taxed in the hands of the investors. In that case the government does not lose tax proceeds. Various techniques are available to create a taxable event at investor level. A cross-border context does give rise to issues. 39 ECJ, 14 September 2006, Case C-386/04, Centro di Musicologia Walter Stauffer. 40 ECJ, 18 June 2009, Case C-303/07, Aberdeen Property Fininvest Alpha Oy. 41 ECJ, 10 Mau 2012, Case C-338/11, Santander. 42 Other than a Dutch case in which it was the question whether an entity established under foreign law could be regarded as an eligible entity for entering a fiscal unity. Based on a non-discrimination argument the Dutch Supreme Court held that a Netherlands Antilles public liability company could also make use of the Dutch Fiscal Investment Institution regime, even where the law required such a company to be established under Dutch law. 14

15 One issue is that governments lose tax proceeds if a collective investment vehicle has foreign investors and the government typically cannot tax that foreign investor. The loss of tax income may be counterbalanced by a dividend withholding tax. Another issue is the application of double tax treaties in a cross-border context. Due to the fact that corporate income tax is eliminated at the level of the collective investment vehicle, the general application of a double tax treaty makes it difficult to determine whether a collective investment vehicle is a resident and, sometimes, the beneficial owner. The OECD, a club of governments, has embraced the principle of tax neutrality on collective investment in an international context. In the CIV report, incorporated in the Commentary of the OECD Model, two solutions are offered to secure this idea. These are the (a) in its own right approach and the (b) look through approach. Recent double tax treaties contain specific provisions for collective investment vehicles. The author predicts that this practice will continue to grow. Future research efforts should in the opinion of the author focus on the harmonisation of tax regimes for collective investment vehicles and a sustainable solution for governments that singular taxation is effected correctly. 15