Issue 97 – Regulatory and Tax Developments in November 2012 pdf

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FUND NEWS
November 2012
Investment Fund Regulatory and Tax developments in
selected jurisdictions
Issue 97 – Regulatory and Tax
Developments in November 2012

Regulatory News

European Union

UCITS V Update

On 9 November 2012 the European
Parliament's ECON Committee
published a draft report on the
Commission’s proposal to amend the
UCITS Directive (UCITS V) in the areas
of custody, liability, remuneration and
sanctions.
The draft report contains a number of
amendments, including:
• Remuneration of management
companies should be aligned with
investor interests and therefore the
remuneration rules should also apply
to fees paid by the UCITS to the
Management Company. Any
variable remuneration paid by the
UCITS to the Management
Company should depend on the size
of the fund or the value of the
assets under management.
• The scope of personnel subject to
remuneration rules should be
extended to cover all decision-
making and influencing staff of the

UCITS.

















Regulatory Content
European Union
UCITS V Update Page 1

ESMA Opinion on UCITS portfolio
investments
Page 2

Ireland
Central Bank consultation on
implementing the AIFMD Page 2

Proposed changes to the regulatory
reporting obligations of Irish funds Page 3

Dear CEO letter on Anti-Money
Laundering (AML) Page 3

Luxembourg

CSSF Press Release on UCITS portfolio
investments Page 3

UK
FSA commences consultation on
implementing the AIFMD
Page 4

International
FSB consultation on Shadow
Banking
Page 5


Tax Content
European Union
Advisory services can constitute
exempt VAT management
– the GfBk opinion
Page 6

Luxembourg

Tax Treaty Update Page 7

Aberdeen E-Alerts
Page 7




Fund News – November 2012

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• The maximum amount of variable
remuneration should not exceed
50% of total remuneration (in line
with CRD revision).
• The share of variable remuneration
to be deferred should be 60%, up
from 40% (in line with CRD
revision).
• The remuneration committee should
include employee representatives.
• ESMA, in collaboration with the
national authorities should supervise
the implementation of remuneration
policies.
• The possibility to ban members of
management for breaches of
obligations of the Directive.

• Administrative sanctions of legal
persons up to 20% of total annual
turnover and unlimited sanctions for
natural persons.
• The possibility to impose sanctions
of up to 10 times the amount of
profits gained or losses avoided
because of a breach, where this can
be determined.
• Common standards and channels
for whistleblowers.

The draft report is available via the
following web
link:

On 16 November 2012 the Council of
the European Union released the first
Cypriot Presidency compromise text on
the UCITS V proposal. The document
contains new provisions:
• Prohibiting the re-use of financial
instruments held in custody by the
depositary for its own account or by
any third party to whom custody has
been delegated.
• Foreseeing that in addition to banks
and investment firms, other legal
entities subject to prudential
supervision and minimum capital

requirements can act as a UCITS
depositary.
• Extending the remuneration
provisions to amounts paid directly
by the UCITS itself, including carried
interest.
• Allowing Member States to provide
for higher levels of sanctions than
those set in the Directive.

ESMA Opinion on UCITS portfolio
investments
On 20 November 2012 the European
Securities and Markets Authority
(ESMA) issued an Opinion on Article
50(2)(a) of the UCITS Directive
2009/65/EC that deals with the types of
portfolio investments that are eligible for
the ‘other 10%’ bucket. According to
ESMA article 50(2)(a) refers only to
investments in transferable securities
and money market instruments and not
to units or shares of collective
investment undertakings. Therefore,
ESMA’s opinion is that UCITS may only
invest in units or shares of collective
investment undertakings as defined in
Article 50(1)(e) of the UCITS Directive.
ESMA expects that any portfolio
adjustments required to ensure

compliance with this opinion will be
made taking into account the best
interests of investors and at the latest by
31 December 2013.



Ireland

Central Bank consultation on
implementing the AIFMD
The Central Bank of Ireland has issued
consultation paper 60 on how it
proposes to implement the Alternative
Investment Fund Managers Directive
(AIFMD). The consultation paper which
is over 300 pages long sets out in detail
how the Central Bank proposes to
amend its current rules by replacing
them with a single ‘AIF Handbook’.
The consultation paper 60 gives the
Central Bank an opportunity to
rationalise its Non UCITS notices and
Guidance, and create one set of rules
‘AIF HandBook’ which would give
advantage of no overlapping of issues,
and avoid confusion and cost to
investors and issuers alike. The AIF
Handbook with evolve and change
overtime.

The AIF Handbook will be divided into
the following 6 chapters:-
1 Retail investor AIF requirements
2 Qualifying investor AIF requirements
3 AIFM requirements
4 AIF management company
requirements
5 Fund administrator requirements
6 AIF depositary requirements
The Central Bank has also sought
industry views on a range of issues
including abolishing the promoter
regime, discontinuing the professional
investor fund (PIF) structure, removing
Irish specific prime broker requirements
and removing the existing property fund
Fund News – November 2012

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rules.
The deadline for submission of
responses is 11 December 2012 but
worth noting that the final AIF handbook
will not be effective before July 2013.
AIF Interim Handbook will be published
in January, and by consulting early with
the industry it allows the Central Bank
and the funds industry to be aligned, and

allows the fund industry of Ireland to
provide constructive input on a new
regulatory framework. The industry will
be able to rely on this handbook while
the final AIFMD framework is put in
place in Ireland.

The consultation paper is available via
the following web
link:


Proposed changes to the regulatory
reporting obligations of Irish funds

In June 2012, the Central Bank of Ireland
issued a consultation paper (CP 59)
proposing changes to the regulatory
reporting requirements for Irish funds
including a requirement to file:
• the annual and interim financial
statements
• the auditor statutory duty
confirmation

• the Financial Derivatives
Instruments report
• the Key Investor Information
Document (KIID)
• two new regulatory returns.

The Central Bank has now published a
Feedback Statement on the submissions
it received on CP 59. While the Central
Bank has made some specific changes,
in general the Central Bank intends to
proceed as set out in the consultation
paper. At this stage, the Central Bank is
considering introducing this new regime
in the first quarter of 2013. However,
this date may be subject to change.

Dear CEO letter on Anti-Money
Laundering (AML)
In the last year, the Central Bank of

Ireland has carried out a range of
inspections to monitor compliance by
financial services firms with their AML
obligations. As a result, the Central Bank
has just issued a letter to all Irish
regulated firms including funds, fund
administrators and custodians. In this
letter the Central Bank provides an
overview of its key findings and asks
firms to consider these findings in the
context of their own AML control
environment.












Luxembourg

CSSF Press Release on UCITS
portfolio investments

On 23 November 2012 the

Commission de Surveillance du
Secteur Financier (CSSF) issued a
Press Release to draw to the attention
of Luxembourg UCITS to the ESMA
Opinion (see page 2) on the eligibility
of instruments under article 41(2)a) of
the law of 2010 on Undertakings for
Collective Investment. Luxembourg
UCITS will have until 31 December
2013 to liquidate any current non-
compliant fund holdings, and are not
permitted to make any new
investments in non-compliant funds.

The Press Release is available via the
following
link:

Fund News – November 2012

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UK

FSA commences consultation on
implementing the AIFMD
On 14 November 2012 the Financial
Services Authority (‘FSA’) issued a
Consultation Paper (‘CP12/32’) on the
proposed rules and guidance for
transposing the Alternative Investment
Fund Managers Directive (‘AIFMD’) into
UK law. It is the first of two instalments

and takes important policy positions on a
wide variety of areas that will impact
how the Directive applies in the UK to
managers of traditional investment
funds, hedge funds, investment trusts,
private equity, infrastructure & real
estate. The second instalment is
expected to be published in Q1 2013
and will explain in more detail the
AIFMD’s ‘regulatory perimeter’,
clarifying which firms will need to seek
authorisation as an AIFM, reflecting that
areas will need to be clarified after the
EU level 2 technical provisions are
released.
The key highlights are:
• The FSA does not expect to be in a
position to receive AIFM
applications or Variation of
Permissions (‘VoPs’) before 22 July
2013.
• HM Treasury will decide upon the
application of the AIFMD to smaller
AIFMs (paper to be published in
January 2013).
• The FSA confirmed that firms
seeking authorisation between 22
July 2013 and 22 July 2014, who
meet the definition of an AIFM,
must be fully compliant at the point

of authorisation.
• It will create a new section of its
Handbook, entitled FUND,
containing requirements for AIFs
and UCITS funds, and the
companies that manage them.
• The FSA reiterates key points from
the Directive regarding the
interaction of UCITS/MiFID/AIFMD
and the different combinations of
firms and the capital and
authorisation requirements of each.
The FSA is of the view that MiFID
activities of AIFMs should be
passportable in the EU, however the
FSA recognises that this view is not
shared by fellow competent
authorities in Europe.
• Investment managers structured as
limited partnerships subject to the
law of England and Wales will not
be able to become AIFMs. This is
because limited partnerships subject
to the laws of England and Wales,
unlike some other jurisdictions, do
not have separate legal personality.
• HM Treasury doesn’t intend to
require the External Valuer to be an
authorised person.
• The FSA does not intend to give

firms the option of using contractual
guarantees in lieu of regulatory
capital. Article 9(6) allowed a
Member State to let an AIFM
provide up to 50% of the additional
own funds required under Article
9(3) with a guarantee from a credit
institution or insurance undertaking.
• The FSA noted that they expect the
level 2 regulation will also allow
them to ask a firm to hold additional
own funds if they are not satisfied
the current level is sufficient to
cover appropriately professional
liability risk. They have not
commented on the extent to which
they will use this discretion.
• New reporting forms will be
required for different categories of
manager.
• The FSA has in general reiterated
much of the ESMA advice but has
said that it will consult on how the
transparency provisions (annual
report, disclosure to investors) of
the AIFM interact with current
requirements for NURS and QIS in
their second instalment. Both
regimes will continue, but the
AIFMs of these AIFs will need to

comply with the additional areas of
the Directive. It is difficult to read
between the lines and understand if
the FSA expect the Authorised
Corporate Director or the
Investment Manager to be the
AIFM, but it appears to suggest
both are a possibility.
• The FSA makes clear that the
definition of marketing within the
Directive is different from the
current definition of a financial
promotion. It intends to transpose
that definition into the Handbook but
have not at this stage issued
additional guidance in this area.
• It is not proposing to increase the
private placement obligations above
those within the Directive.
• The FSA has opened the door for
administrators to act as depositaries
to certain private equity funds and
real estate funds. They have set a
minimum capital requirement
(£125,000) for these firms which
may limit the number of firms
providing these services. It has
Fund News – November 2012

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indicated that there may also be
some changes to CASS as a result
of the Directive, but has not
provided detail.
• The FSA recognises that the extent
to which investment trusts can
delegate activities to investment
managers will be decided at level 2,
if they do not delegate then the
investment trusts will need to have
more substance to be compliant
particularly in relation to investment
decisions.
The FSA’s introduction to CP 12/32 is
available via this link:
/>012/12-32.shtml
This link includes a link to a pdf of
CP12/32 (232 pages).


International Developments

FSB consultation on Shadow Banking

On 18 November, the Financial Stability
Board (FSB) published for public
consultation a set of recommendations
to strengthen oversight and regulation of

shadow banking. The FSB has focused
on the following five areas:
1 to mitigate the spill-over effect
between the regular banking system
and the shadow banking system;
2 to reduce the susceptibility of
money market funds (MMFs) to
‘runs’;
3 to assess and mitigate systemic
risks posed by other shadow
banking entities;
4 to assess and align the incentives
associated with securitisation; and
5 to dampen risks and pro-cyclical
incentives associated with secured
financing contracts such as repos,
and securities lending that may
exacerbate funding strains in times
of ‘runs’.
The consultative documents comprise:
1 a report entitled ‘An Integrated
Overview of Policy
Recommendations’ which sets out
the FSB’s overall approach to
shadow banking issues and provides
an overview of its recommendations
across the five specific areas;
2 a report entitled ‘Policy Framework
for Strengthening Oversight and
Regulation of Shadow Banking

Entities’ which sets out a high-level
policy framework to assess and
mitigate bank-like systemic risks
posed by shadow banking entities
other than MMFs (other shadow
banking entities); and
3 a report entitled ‘Policy
Recommendations to Address
Shadow Banking Risks in Securities
Lending and Repos’ that sets out 13
recommendations to enhance
transparency, strengthen regulation
of securities financing transactions,
and improve market structure. The
main proposals are:
• to establish minimum standards
under which market participants
would calculate haircuts, in
order to limit the extent to
which haircuts are reduced in
benign market environments.
• improve regulatory reporting
and market transparency (in
particular through the
establishment of trade
repositories);
• improve corporate disclosures
for financial institutions’
securities lending, repo and
wider collateral management

activities;
• improve reporting by fund
managers to end-investors;
• limit liquidity risks associated
with cash collateral
reinvestment;
• address risks associated with
the re-hypothecation of client
assets. Financial intermediaries
should provide sufficient
disclosure to clients in relation
to re-hypothecation of assets so
that clients can understand their
exposures in the event of a
failure of the intermediary; only
entities subject to adequate
Fund News – November 2012

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regulation of liquidity risk should
be allowed to engage in the re-
hypothecation of client assets;
and client assets should not be
re-hypothecated for the purpose
of financing the own-account
activities of the intermediary;
• Strengthening collateral
valuation and management

practices; and
• Evaluate the establishment or
wider use of central clearing in
securities lending and repo
markets.
The consultation closes on 14 January
2013 and the Press Release is available
via the following web
link:

















Tax News

European Union
Advisory services can constitute

exempt VAT management – the GfBk
opinion
The Advocate General’s (“AG”) Opinion
in the GfBk case has been released. It
raises a number of interesting points
around the scope of the fund
management exemption, the extent to
which VAT interpretations ought to
follow definitions drawn from other
areas of law and regulation, as well as
some potentially instructive notes on
how EU exemptions ought to be applied
in practice. A full Court of Justice of the
European Union (“CJEU”) Judgment is
expected within a few months.
In his Opinion, the AG states that sub-
delegated investment advisory services
can qualify for VAT exemption on the
basis that they fall within the meaning of
“fund management”. The fact that
responsibility for implementing a
strategy is not delegated and these
services are not listed as an aspect of
management in the UCITS Directive
should not affect this.
Background
GfBk, a German investment manager,
provided various services to its clients,
being fund managers. It made buy and
sell recommendations within certain

parameters set by the manager. Whilst
responsibility for reviewing and
approving those recommendations was
retained by the manager, it effectively
‘rubber-stamped’ these (often within
minutes), only rejecting the
recommendation if it breached agreed
rules. In the fact pattern referred to the
AG, the manager did not undertake a
separate asset selection process and did
not have capacity to do so.
At its core, the GfBk case should clarify
the extent to which delegated fund
management services can fall within the
relevant exemption. The questions
referred to the CJEU focus on whether
an “advisory” service (i.e. where the
provider does not have a specifically-
mandated role) can fall within the
meaning of “management” and,
therefore, be a VAT exempt fund
management service.
AG’s Opinion
The AG stated that GfBk’s services
should fall to be VAT exempt. In
reaching his conclusion, the AG Villalon
argued that limiting “management”
solely by reference to functions listed in
Annex II of the UCITS Directive
(85/611/EEC) was too restrictive,

particularly given that Article 5 of that
Directive states that Annex II is “not
exhaustive”.
This stance is clearly good news for the
UK funds industry which since-“Abbey
National”, has largely exempted from
VAT this type of service. However,
whilst it is true that Annex II is not
exhaustive, investment advice is
specifically referred elsewhere in the
Directive to as a “non-core” service.
This would appear to distinguish
advisory services from management.
Whether or not the AG considered and
dismissed this point is interesting: if the
CJEU follows the logic, it may reinforce
the view that VAT concepts need not
slavishly follow definitions drawn from
other disciplines and regimes. Clearly,
greater clarity from the CJEU on this
point would be welcome.
The AG also considered other factors,
including whether an adviser needs to
be able to change legal and financial
Fund News – November 2012

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relationships. The AG argued that this

was not necessary, a view which
follows comments in the Abbey National
case that, were the fund management
exemption limited only to services which
altered the composition of a portfolio, its
scope would be reduced dramatically.
Pulling these strands together, the AG
concluded that advisory services
provided by a third party, which relate to
the management of a special investment
fund and the purchase and sale of
assets, do constitute an act of
“management”. The AG took the view
that the services can, where provided
autonomously and continuously, qualify
for exemption.
Why is this important?
Whether or not VAT should be charged
on bought-in advisory services is clearly
a major issue for the funds industry.
Had the AG concluded that VAT was
due, it is likely that the managers of
special investment funds, the
management of which is exempt, would
have faced an additional and significant
cost. The industry will, therefore, be
keen for the Judgment of the CJEU to
follow the Advocate General’s Opinion
(“AGO”) in full. It will be interesting to
see if the CJEU provides any further

guidance on the line between advice and
management.
What now?
Many UK managers have typically
applied the fund management
exemption to effectively flow through
the supply chain. It is likely that the
majority of these services would,
therefore, already have been treated as
exempt in the UK. We would not,
therefore, expect HM Revenue and
Customs to be inundated with claims
following the AGO. However, if UK
managers have incurred VAT on these
services, they should consider whether
to request that their suppliers submit a
claim for over-charged VAT or, as
required, submit a claim for over-
declared VAT where the supplier is non-
UK.
The full AGO opinion is available via this
link:
http://eur-
lex.europa.eu/LexUriServ/LexUriServ.do
?uri=CELEX:62011CC0275:EN:HTML

Luxembourg

Tax Treaty Update
Double Tax Treaty with Macedonia

The treaty with Macedonia was signed
on 15 May 2012 and has been ratified on
6 November 2012.
The details are now available and the
treaty generally follows the OECD
Model Convention (2008).
The maximum rates of withholding tax
are:
• 15% on dividends generally, but 5%
of the gross amount if the beneficial
owner is a company which holds
directly at least 25% of the capital of
the company distributing the
dividends for an uninterrupted
period of 12 months,
• 0% on interest,
• 5% on royalties.
Double Tax Treaty between Luxembourg
and Laos
On 4 November 2012 Luxembourg and
Laos signed a double tax treaty to
strengthen the co-operation between
the two countries. Details of this treaty
will be communicated when made
available.
Double Tax Treaty with Mongolia
Further to the revision of the tax treaty
between Luxembourg and Mongolia in
July 2012, the Parliament of Mongolia
decided to cancel the double tax treaty

on 2 November 2012. The effective date
of cancellation has still to be
determined.
Double Tax Treaty with Jersey
According to the Jersey Tax Authorities,
Jersey and Luxembourg have initialed
negotiations on a double tax treaty
between the two countries. Further
details will be provided when available.

Aberdeen E-Alerts
The Aberdeen E-Alert issue 2012-16
(here) (tax newsletter focusing on
withholding tax reclaims based on the
Aberdeen case law) discusses the
administrative practice in The
Netherlands in relation to the extended
period of 5 years for filing reclaims.








Fund News – November 2012

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Contact us
Dee Ruddy
Senior Manager
T: + 352 22 5151 7369
E:


Audit
Nathalie Dogniez
Partner
T: + 352 22 5151 6253
E:
www.kpmg.lu



Publications

Tax
Georges Bock
Partner
T: + 352 22 5151 5522

E:

Advisory
Vincent Heymans
Partner
T: +352 22 5151 7917
E:






Charles Muller
Partner
T: +352 22 5151 7950
E:





The evolution of
an industry –
2012
KPMG/AIMA
Global Hedge
Fund Survey
here:
The Perfect

UCITS report
September 2012
(KPMG survey)
here:
Evolving
Investment
Management
Regulation
here:






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