Investment funds and treaty abuse (BEPS)

The Organisation for Economic Co-operation and Development (hereafter “OECD”) released on May 22nd 2015 a revised discussion draft regarding Action Point 6 on the prevention of treaty abuse in the framework of the Base Erosion and Profit Shifting action plan (commonly referred to as BEPS). The original discussion draft published on November 21st 2014 identified 20 different issues to be addressed as part of the follow-up work on Action Point 6. The general anti-abuse rules based on a principal purpose test and the limitation on benefits provisions (hereafter “LOB Provisions”) were some of the aspects that needed further consideration.

Given that the introduction of LOB Provisions will have a significant impact on the fund industry and that the previous discussion draft left many unanswered questions regarding treaty entitlement for Collective Investment Vehicles (hereafter “CIVs”) and Non-CIV funds (i.e. alternative investment funds such as private equity, pension or sovereign wealth funds), the latest position of the OECD (which does not represent the consensus views of the OECD’s Committee on Fiscal Affairs) was expected to provide helpful insights. Especially since the OECD indicated its intention to publish its final report on Action Point 6 by September 2015.

"Only marginal improvements have been made on this topic."

The two main conclusions regarding investment funds remain largely the same as in the previous discussion draft:

  • the treaty entitlement of CIVs should continue to depend upon the CIVs treatment under the relevant double tax treaty. Thus the idea of providing for a “single preferred approach”, i.e. a treaty entitlement of CIVs, has been rejected. Additionally, the OECD emphasised that administrative simplification, especially with regards to withholding tax reclaims by CIVs and their investors, should come through the implementation of the recommendations of the Treaty Relief and Compliance Enhancement project (TRACE);
  • the question of treaty entitlement of Non-CIVs requires additional work, which may continue even after the adoption of the final report that is expected to take place in September 2015. With regards to pension funds however, the OECD agreed that they should be considered as residents for double tax treaty purposes and confirmed that a change to the OECD Model Tax Convention will be proposed during its June meeting.

While unfortunately the call from the industry for simplified rules and a uniform treatment of CIVs and Non-CIVs was not followed, one can at least take comfort from the fact that the OECD is taking the specificities of the fund industry into account.