Important tax changes for Irish investment funds were announced in Dublin yesterday. The provisions of the Finance Bill 2010 (the “Finance Bill”) introduce specific new measures which serve to enhance Ireland’s competitiveness as an investment funds domicile, and as a location for UCITS IV management companies. As such, these new developments will be of significant strategic interest to asset managers considering Ireland as an international centre for global funds distribution, and for fund managers who may be seeking to avail of the new re-domiciliation procedures for corporate funds to Ireland announced in December.
The Finance Bill, which must be enacted by 9 April 2010, provides for the following new measures:
- TAX TREATMENT OF UCITS IV MANAGEMENT COMPANIES - IRELAND GAINS FIRST MOVER ADVANTAGE
Pursuant to the UCITS IV Directive, which is due to become law next year, UCITS management companies will be permitted to passport their services on a cross-border basis throughout the European Union (“EU”), ie a UCITS management company established in one EU member state would be permitted to manage a UCITS fund domiciled in another member state. Tax concerns had surrounded these proposed arrangements, specifically in relation to the spectre of double taxation - the fear that if a fund domiciled in member state A is managed by an entity in member state B, the tax authorities of member state B could consider that all of the fund’s activities actually take place in member state B, with the potential consequence that the fund could be taxed twice. In the absence of legislative clarification, asset managers have been understandably concerned.
Against this backdrop, a most welcome development for the Irish funds industry, and one which will give Ireland first mover advantage over other EU fund domiciles, has been initiated by the Finance Bill. In advance of the introduction of the UCITS IV Directive, the Finance Bill has clarified that UCITS funds which are established in other member states, but which are managed by Irish domiciled management companies, should not come within the charge to Irish tax. This confirmation provides much-needed certainty around the issue, and ensures that a UCITS formed under the law of a member state other than Ireland will not be liable to tax in Ireland by reason only of having a management company that is authorised under Irish law. The specific section within the Finance Bill dealing with this point provides that such a UCITS fund is not chargeable to tax in Ireland in respect of its relevant profits, and it also provides that unit holders in such a UCITS fund are to be treated in the same manner as unit holders in an offshore fund.
- NON-RESIDENT TAX DECLARATIONS NO LONGER REQUIRED FOR CERTAIN FUNDS
Another welcome measure in the Finance Bill relates to reducing the administrative burden associated with the collection of non-resident tax declarations within the funds sector, on the basis that this could be regarded as a disproportionate measure in circumstances where all of the unit-holders in the relevant fund are non-resident, and the fund is not marketed within Ireland. A new exemption from the completion of non-resident declarations for foreign investors in Irish-domiciled funds will now operate, where appropriate equivalent measures have been put in place by the investment fund to ensure that unit holders in the undertaking are not resident or ordinarily resident in the State, and the fund has received the relevant approval in this regard from the Revenue Commissioners.
- STAMP DUTY RELIEF EXTENDED TO MERGING FUNDS AND FUND RE-ORGANISATIONS
The Finance Bill contains an exemption from stamp duty in relation to fund re-organisations, reconstructions or amalgamations to capture situations where an Irish fund, in exchange for assets transferred, issues units directly to a foreign fund, rather than to the foreign fund’s unit holders. This represents a significant change that facilitates the master/feeder structures envisaged under UCITS IV, and the re-domiciling of investment funds more generally.
A further amendment included in the Finance Bill extends the exemption from stamp duty for transfers of assets within certain unit trusts. This eliminates the technical exposure to stamp duty for the transfer of assets from one sub fund to another within an investment fund structured as a unit trust (the same technical exposure does not exist for companies due to their different legal structure).
- NEW PROCEDURES FOR RE-DOMICILING INVESTMENT FUND COMPANIES TO IRELAND
Last December, new provisions were signed into Irish law which streamlined the process of re-domiciliation of investment funds structured as corporate vehicles, which can now migrate to Ireland through a re-registration. The tax changes referred to in this note which are proposed by the Finance Bill will also apply to the tax environment for such funds re-domiciling to Ireland.
- ADDITIONAL COMPETITIVENESS MEASURES ANNOUNCED
The package of measures contained within the Finance Bill extends to a number of areas of financial reform, and some of these relate to the following:
- Provisions to develop and facilitate Islamic finance in Ireland: the tax treatment applicable to conventional finance transactions will be extended to embrace Islamic finance. This is consistent with the development of Shari’ah compliant investment funds, and the establishment by the Financial Regulator of a dedicated regulatory unit for the authorisation of Shari’ah funds in Ireland.
- Provision for the ratification of a further six double taxation treaties: bringing the total of double tax treaties signed by Ireland to 56, with a further 11 treaties close to being finalised.
- Provisions to attract highly skilled, value-added individuals to work in Ireland: tax measures are introduced through the Finance Bill to enhance Ireland’s ability to attract highly skilled and qualified individuals to work in Ireland.
With the introduction of the new tax measures through draft legislation yesterday, the Irish Government has followed through on its public commitment last December to strengthen Ireland’s international standing as the jurisdiction of choice for investment funds, and for UCITS IV management companies. The new provisions will become effective with the passing of the Finance Bill as an Act.
With a robust, well-understood, common law legal infrastructure and unparalleled expertise and experience in sophisticated fund structures and strategies, Ireland has always offered significant advantages for asset managers seeking a regulated jurisdiction for their funds. This most recent package of reforms increases Ireland's profile as a place to do business, and underlines its attractiveness for the international funds industry.