The European Parliament published a briefing on the impact of Brexit on the financial services industry. It concludes that access to EU markets for UK fund managers is likely to be negatively impacted by the loss of the EU passport. It explains the third country passport regime in the Alternative Investment Fund Managers Directive (AIFMD) and notes that UCITS funds must be domiciled in the EU and managed by an EU management company.
1.2 Brexit: House of Lords report and our report with the International Regulatory Strategy Group: EU’s Third Country Regimes and Alternatives to Passporting
The House of Lords EU Financial Affairs Sub-Committee published its report "Brexit: financial services". The oral and written evidence provided to the Sub-Committee has also been published. This includes evidence from the Bank of England, the Financial Conduct Authority and HM Treasury.
The report highlights the importance of agreeing a transitional period for financial services, so that a "cliff edge'" is avoided, both at the moment of withdrawal following the Article 50 process and as the country moves to a new relationship with the EU. It finds that the third-country equivalence provisions in EU legislation are not a substitute for the passporting arrangements, which UK-based firms can currently use, as they are patchy and vulnerable to political influence.
Similarly, our joint report with the International Regulatory Strategy Group (co-sponsored by TheCityUK and the City of London Corporation): "EU’s Third Country Regimes and Alternatives to Passporting" is a comprehensive analysis of EU's current third country regimes (TCR) for financial services, including funds. In short, the TCRs are provisions of existing EU law that provide certain rights and protections, subject to conditions, to funds and managers based outside the EU (third country firms); see summary report (see EU regimes relevant to investment services and funds and fund management on pages 19-21) and full report.
The AIFMD contemplates a third country passport, but the timing and scope of this is uncertain. As for UCITS, ELTIFs, EuSEFs and EUVECAs, these must all be managed by EU managers and the funds must be EU domiciled and no TCR are contemplated, see further our note Brexit – potential impact on funds and practical steps.
The House of Commons Exiting the EU Select Committee announced the publication of its first report, on what the Government needs to do before triggering Article 50 of the Treaty on European Union, including:
- ministers should seek an outline framework on the UK's future trading relationship with the EU as part of the Article 50 negotiations, including appropriate transitional arrangements, if it is not possible to reach a final agreement by the time the UK leaves the EU; and
- the Government should commit to Parliament having a vote on the final Treaty.
In its decision in Miller and another v Secretary of State for Exiting the European Union  UKSC 5, the UK Supreme Court upheld the decision of the UK High Court earlier in 2016 and held that an Act of Parliament (approved by the House of Commons and the House of Lords) will be required before the UK is able to trigger Article 50. It also held that the devolved governments of the UK will have no right to be consulted, which means that the Scottish Parliament will not be able to prevent or delay the triggering of Article 50; see further judgment and press summary. For further Brexit insight, please visit our Brexit hub.
The European Commission published a press release confirming that the EU Parliament, Council and the Commission have agreed the text of a new EU Prospectus Regulation, see also the EU Council's press release. The latest Prospectus Regulation Level 1 compromise text dated 16 December 2016 is now subject to, amongst other things, jurist linguist checks before being finalised.
Of importance to listed funds is that the latest compromise text does not take closed-ended investment funds out of the scope of the prospectus regime. This means that the position for closed ended funds will be the same as under the current prospectus regime, namely that they are in scope of the regime (unless they can rely on any exemptions). The relevant article 1(2) reads:
"This Regulation shall not apply to the following types of securities:
(a) units issued by collective investment undertakings other than the closed-end type;"
This is contrary to the Parliament's proposal which, controversially, removed all AIFs and UCITS from the scope of the regime (see our September Funds Bulletin).
Even if the final text is yet to be published, any substantive changes to the level 1 text at this stage (that would again take closed-ended investment companies out of scope) would be highly unlikely. This means that listed funds such as closed ended investment companies and investment trusts will almost certainly remain in scope of the EU prospectus regime.
The prospectus regulation is expected to be published in Q1 2017 and apply 24 months thereafter. We will report further once the final text has been published.
2.2 PRIIPs Regulation: update
The Regulation postponing the application date of the Regulation on key information documents for packaged retail and insurance-based investment products (PRIIPs) (PRIIPs Regulation) was published in the Official Journal. This Regulation states that the PRIIPs Regulation will now apply from 1 January 2018 instead of 31 December 2016.
Another PRIIPs development is that the European Supervisory Authorities (ESAs) (that is the European Securities and Markets Authority (ESMA), the European Banking Authority (EBA) and the European Insurance and Occupational Pensions Authority (EIOPA)) have not provided an agreed opinion on the amended draft Regulatory Technical Standards (RTS). The ESAs and the Commission will work further on performance projections that are clear and not overly optimistic; see further the ESA's letter and our article "PRIIPs and KIDs – How are they relevant to Funds?"
The Financial Stability Board (FSB) published a document containing 14 final policy recommendations to address the following structural vulnerabilities from asset management activities:
- liquidity mismatch between fund investments and redemption terms and conditions for open-ended fund units;
- leverage within investment funds;
- operational risk and challenges at asset managers in stressed conditions; and
- securities lending activities of asset managers and funds.
The FSB has taken into account various proposals it has received during the consultation process.
The FCA published a MiFID II application and user guide to help firms decide which FCA applications and notifications they should make under MiFID II (which takes effect from 3 January 2018). These include article 3 MiFID exempt firms, passport notifications and tied agents. Complete applications for authorisation of investment firms and data reporting service providers (DRSPs) or variation of permissions (VoPs) must be submitted by 3 July 2017 and notifications of cross-border service passports must be submitted by 2 December 2017. Notifications of establishment passports for branches must be submitted to the FCA as early as possible after the passporting gateway opens on 31 July 2017.
As reported in our September Funds Bulletin, the FCA has proposed that certain MiFID II conduct of business rules, including inducements rules, should be gold-plated and extended to AIFMs even when they don't conduct MiFID business; see further our MiFID II microsite.
ESMA published an opinion regarding the scope of the product intervention powers under Articles 40 and 42 of the Markets in Financial Instruments Regulation (MiFIR). These powers can be exercised by both national competent authorities (NCAs) and ESMA from 3 January 2018.
Currently, the powers will only apply to MiFID investment firms marketing products which pose risks to retail investors, market integrity, and financial stability in the EU, but do not cover UCITS management companies and alternative investment fund managers. ESMA is concerned about the potential for regulatory arbitrage and the potential reduction in effectiveness of future intervention measures, and believes that the EU institutions should address this issue.
The opinion outlines the potential consequences linked to the exclusion of fund management companies from the scope of the powers, including the risk of arbitrage where a type of fund that is restricted or banned under MiFIR could be distributed through fund management companies if they decided to market or distribute the funds themselves.
The Commission intends to publish its mid-term review of the CMU action plan in June 2017. In the consultation, the Commission seeks views from stakeholders on potential revisions to the action plan on any additional actions that could:
- improve financing for innovation, start-ups and non-listed companies;
- improve the ability of companies to enter and raise capital on public markets;
- foster long-term infrastructure and sustainable investment;
- foster retail investment;
- strengthen banking capacity to support the wider economy; and
- facilitate cross-border investment.
The deadline for responses is 17 March 2017.
The Maltese Presidency of the Council of the European Union published its work programme for 1 January 2017 to 30 June 2017, which includes:
- capital markets union: the Maltese Presidency will continue to push forward discussions on the capital markets union. In particular, it will aim to finalise discussions with the European Parliament on the common rules on securitisation;
- venture capital: the Maltese Presidency will organise meetings with the Parliament to negotiate revisions to the European Venture Capital Funds Regulation and the European Social Entrepreneurship Funds Regulation and aims to reach a political agreement during its Presidency.
HM Treasury published a revised draft Legislative Reform Order on proposed amendments to the Limited Partnerships Act 1907 related to the introduction of a new private fund limited partnership (PFLP). A related explanatory document and impact assessment have also been published.
HM Treasury has proposed various changes to the Limited Partnership Act 1907 which would apply to PFLPs. Any new and existing limited partnership that qualifies as a "collective investment scheme" under the Financial Services and Markets Act 2000 (FSMA), as well as any limited partnership that would qualify were it not for one of the statutory exceptions made under section 235(5) of FSMA, will be able to elect to benefit from the new regime.
Key aspects of the PFLP regime - and areas where the PFLP differs from the English limited partnership - include:
- There will be no requirement for capital contributions by limited partners and the prohibition on withdrawal of capital contributions will be removed. However, it will still be possible for limited partners to make capital contributions if they wish. Current law will continue to apply to capital contributions that were made to existing limited partnerships before they opted into the PFLP rules.
- There will be a proposed non-exhaustive white list of permitted limited partner activities (which limited partners can perform without being deemed to be involved in the management of the limited partnership). Similar whitelists exist in a number of other countries (e.g. Luxembourg and the Channel Islands). There are also various administrative improvements, for example:
- removal of various Gazette notice requirements (e.g. in relation to transfers);
- removal of registration requirements for changes in the limited partnership (eg term, capital and general nature);
- relaxed rules on winding-up of limited partnerships; see further our client note.
The draft SI contains the PFLP-related changes to the Limited Partnerships Act 1907, a consolidated text (see page 20) and new forms:
- LP7 - for registration of a new limited partnership as a PFLP; and
- LP8 - when designating an existing limited partnership as a PFLP.
The current forms LP5 and LP6 have also been amended.
The draft Legislative Reform Order will be considered by the Parliamentary Regulatory Reform Committee and the Delegated Powers and Regulatory Reform Committee. The government is recommending that the revised draft order and accompanying explanatory document be laid in Parliament under the affirmative resolution procedure. The intention is that the order will come into force on 6 April 2017.
The Department for Business, Energy and Industrial Strategy (BEIS) published a call for evidence on a review of limited partnership law. BEIS says that it is aware of concerns that some limited partnerships registered in Scotland are being used for criminal activity. Also, there has been a recent increase in the number of limited partnerships registered in Scotland in comparison to those registered in England, Wales and Northern Ireland.
BEIS is seeking views and evidence on:
- the possible reasons why registration of limited partnerships in Scotland has increased;
- the value limited partnerships bring to the UK economy as a whole;
- how the wider limited partnership framework operates and whether any changes need to be made.
In addition, BEIS is looking more broadly at various aspects of the Limited Partnership Act 1907, including:
- transparency requirements;
- a limited partnership's principal place of business for the purposes of registration and service of legal documents;
- the arrangements for the ending of a limited partnership; and
- the role of formation agents, including law firms.
The deadline for responses is 17 March 2017.
3.3 Cost Transparency in European Listed and Non Listed Real Estate
AREF and INREV commissioned a paper on the important topic of cost transparency. The aim is to move towards a better industry-wide understanding of the composition and calculation of selected fee and expense metrics. While the issue is global and affects all asset classes, this report concentrates on Europe and real estate, and in particular, the comparison between the listed and non-listed sectors.
- Transparency requires clarity, completeness, comparability and convenient access to data;
- Expense ratios satisfy many though not all cost transparency needs;
- For many closed end funds a measure of gross to net IRR is a more useful measure than TER; and
- Expense ratios differ in the non-listed and listed sectors but an approximate common measure is possible.
The FCA updated its Regulation on over-the-counter (OTC) derivatives, central counterparties and trade repositories (known as EMIR) notifications and exemptions webpage to confirm that it started accepting applications for intragroup exemptions from the margin requirements for non-cleared derivatives under Article 11 of EMIR from 4 January 2017. The FCA has also published a Margin IGT user guide.
The webpage gives details of the circumstances in which a firm may be exempt from the obligation to exchange margin when entering into non-centrally cleared OTC derivatives transactions with other group entities, and the FCA has published two types of application form for firms wishing to apply for an exemption:
- a single pair application form which should be used if a firm requires an exemption with just one other group entity;
- a multiple pairs application form which should be used if a firm requires an exemption within its group and the details in section 1 of the form (risk management procedures) are the same for all the entities within the application. A maximum of 20 intragroup pairs can be submitted within the multiple pairs application form.
The FCA has three months to assess each application. Within this period, it will email firms to confirm whether they can use the exemption (subject to the decision of the other relevant EU national competent authority in the case of intragroup transactions between a UK counterparty and an intragroup counterparty established in another EU Member State).
The EMIR margin requirements are onerous as only cash (and certain highly liquid assets) can be used as margin. Funds often use derivatives, usually in the form of interest rate swaps, to hedge their cost of debt finance. The fund would then pay the swap (fixed) rate instead of the floating rate on its debt. Traditionally, the debt and the swap would be secured against for example a real estate fund's property portfolio. However, EMIR requires funds to use cash as collateral (or certain other highly liquid assets such as allocated gold, debt securities issued by government entities, corporate bonds, convertible bonds and equities) to cover their derivative positions. This will require funds to deposit significant amounts of cash in margin accounts with central clearing houses.
3.5 Proposal for a Prospectus regulation: House of Commons statement
In a House of Commons written statement, the Economic Secretary to the Treasury said that the Government has decided not to opt in to a provision of Article 31(1) of the proposed new Prospectus Regulation.
Article 31(1) of the proposal requires that where Member States have chosen to pursue a criminal sanctions regime for breaches of elements of the proposals, those Member States must ensure that information can be shared between competent authorities across the EU. As the provision requires co-operation involving law enforcement bodies, the Government believes these are Justice and Home Affairs (JHA) obligations and therefore the UK's JHA opt-in is triggered. The Government will inform the Council of the European Union of its decision not to exercise its right to opt in to the relevant provision.
The statement says that the Government has decided not to opt in to these provisions as there are no significant benefits to be gained from doing so. The obligation to share information will fall on Member States who have a relevant criminal sanctions regime, and UK competent authorities will be in a position to access this data irrespective of the decision to opt in. The Government has no intention to introduce a criminal sanctions regime in a way that would lead to this regulation imposing an obligation on the UK or on its competent authorities.
The Financial Conduct Authority (FCA) published Handbook Notice 40 which introduces the Handbook and other material made by the FCA Board pursuant to the Alternative Investment Fund Managers Directive (Reporting) Instrument 2017 which comes into force on 29 June 2017.
The changes to FCA Handbook, Investment Funds (FUND) Sourcebook make it clear that above threshold non EEA AIFMs must report to the FCA on their master funds not marketed in the UK, but only if:
- the relevant feeder fund is marketed in the UK; and
- both the feeder fund and the master fund are managed by the same entity; see further FCA's Handbook Notice No 40. Page 10 -11.
The OECD published a discussion draft regarding the interaction between BEPS Action 6 (preventing the granting of treaty benefits in inappropriate circumstances) and the treaty entitlement of non-CIV (collective investment vehicle) funds. The draft is in response to the inclusion within the BEPS Multilateral Instrument (which will amend the effect of many tax treaties) of a principle purposes test and limitation on benefits clause, with concerns that these may inadvertently affect non-CIV funds. There are also concerns about the compliance and administrative burden that the new rules may place on non-CIV funds; particularly as such funds may need to consider the treaty statuses of their investors and the purposes of their actions.
In the discussion draft the OECD has proposed three examples to clarify the application of the principle purposes test to non-CIV funds. These cover in particular regional investment platforms, securitisation companies and immovable property non-CIV funds. Comments on the draft examples are requested by 3 February 2017, with an expectation that these will be included in the commentary on the Multilateral Instrument to assist in the interpretation of its provisions.
The draft Finance Bill 2017 has been published, including provisions which will restrict the deductibility of interest payments. This is in response to BEPS Action 4 and will apply for corporation tax purposes from 1 April 2017.
Existing financing will not necessarily be grandfathered. The regime will create potentially significant reporting requirements, as well as restricting interest deductibility for groups with net interest expense (taking into account other similar financing costs) above £2 million per year. The existing Debt Cap rules will be replaced. Groups will need to apply a fixed ratio method whereby 30% of the group's aggregate tax-EBITDA will be deductible or a group ratio method where a proportion of the UK tax-EBITDA that reflects the worldwide net interest expense to EBITDA ratio will be deductible. In both cases there will be a de minimis allowance of £2 million per year.
Specific rules will apply to qualifying infrastructure companies where income and assets refer to defined public infrastructure assets, which can include buildings let on a short-term basis to unrelated parties (as part of a UK property business). A number of additional requirements will apply to taxpayers seeking to make use of this regime.
In recently published further draft legislation HM Treasury has set out further rules on the application of the new regime to insurance companies. Portfolio investment subsidiaries of insurance companies that are members of worldwide groups will not be included in the group for the purpose of the interest deductibility rules (including when determining consolidated subsidiaries).
The draft Finance Bill 2017 also includes provisions relating to the carry-forward of losses. This is designed to ensure that companies making substantial UK profits pay corporation tax and increases flexibility over the profits that future carried-forward losses can relieve.
Under the new regime the amount of annual profit that can be relieved by carried-forward losses will be limited to 50% of particular "relevant profits", subject to an allowance of £5 million per group (or per company not in a group). This will apply from 1 April 2017. Different restrictions will apply depending upon the type of loss and when it was incurred, and taxpayers within the regime will need to carefully consider how best to use their carried-forward losses. In increasing flexibility, losses that arise from 1 April 2017 will be able to set against taxable profits of different activities within a company and the taxable profits of its group members.
In December, HM Treasury published its response to its 2016 consultation on reforms to the Substantial Shareholding Exemption. In addition to removing the investing company trading requirement, the post-disposal investee trading condition and extending the period over which the substantial shareholding requirement can be satisfied, a new broader exemption will be introduced for qualifying institutional investors ("QIIs"). These will include certain classes of authorised investment funds and exempt unauthorised funds that meet a diversity of ownership condition throughout the relevant accounting period. Draft legislation was published in the draft Finance Bill 2017.
The effect of the changes for QIIs is to reduce the capital gain on disposal for such QIIs, potentially up to 100%. If the QII seller acquires shares for over £50 million, the exemption may be available even if it owns less than 10% of the total shares in the investee company (an exception to the usual regime). These changes are designed to make the UK a more attractive location for qualifying institutional investors to locate their investment holding platforms.
The draft Finance Bill 2017 includes measures designed to reduce the tax complexity for operators of and investors in CoACS.
The draft legislation will introduce an elective regime for capital allowances to be claimed at the level of CoACS, with allowances apportioned on a just and reasonable basis to unitholders. Part-disposals will not occur when investors dispose of units in CoACS. The Treasury will also be able to make regulations providing that, where CoACS invest in offshore funds, the operators will be able to allocate amounts of that investment to participants, with allocated amounts being treated as income of the participants. Draft regulations have not yet been published.
The Treasury is also granted a power to make regulations requiring operators of CoACS to provide participants with sufficient information to meet their UK tax obligations with respect to their investment. The regulations may also require operators to provide HMRC with various specified information and, on request, with any other information HMRC may consider necessary. Draft regulations have again not yet been published.
Further draft regulations are awaited on the calculation of capital gains on disposals of units in transparent funds more generally. These are expected to clarify how to establish allowable expenses and how to apply capital allowances expenditure. These are expected to be effective later this year.
The Investment Association has summarised HMRC's position on the VAT exemption for special investment funds under Items 9 and 10 of Group 5, Schedule 9 VAT Act 1994, following recent cases and with an eye to the implications of Brexit. HMRC has suggested that a rewrite to expand the exemption is not imminent. It is also uncertain whether such a rewrite in the future would be limited to giving effect to European case law regarding defined contribution pension funds or if the exemption will be extended to include other funds, such as those in the life sector, that are similar to defined contribution pension funds.
The Investment Association suggests that the first of these options is more likely, given the cost implications for the Treasury. It advises that, at present, taxpayers should follow HMRC's guidance to directly apply the relevant case law, whilst keeping abreast of developments in Brexit negotiations. These have the potential to broadly affect VAT exemptions and other VAT matters across the funds sector.
The BVCA has reported that HMRC has expressed concern over certain advisors' "aggressive and incorrect" interpretation of commencement provisions in the 2016 carried interest rules, which concern the tax treatment of performance-related payments benefitting those involved in investment management services. HMRC has warned that they will challenge tax returns where this approach is adopted and suggests that the issue is undermining the effective working relationship between it and the industry's representative bodies. HMRC has suggested that aggressive planning and interpretations of the rules will increase the chances of further legislative changes.
HM Treasury has announced that the Chancellor will deliver the Spring 2017 Budget on Wednesday 8 March 2017. This will be the final Budget to take place in the Spring, following the announcement in the Autumn Statement 2016 that the Budget will be moved
Of particular update for funds clients that are or are connected to registered investment advisers is the SEC’s announcement of its inspection and examination priorities for 2017, announced on January 12, and available here.
In the private fund space, a key examination priority in private fund adviser examinations will continue to be conflicts of interest, disclosure of conflicts of interest, and other actions that appear to benefit the adviser at the expense of investors. While not currently subject to SEC examination, exempt reporting private fund advisers should also remain attentive to these issues. The SEC also indicated that it would be conducting focused, risk-based examinations of newly registered advisers and other advisers that have been registered for a longer period of time but have not yet been examined by the SEC.
Cyber security is also an issue of examination concern for all registered investment advisers. This is discussed further in a client bulletin available [here – hot link to cyber bulletin]. This bulletin also addresses anti-money laundering compliance, which is currently a concern principally for registered broker-dealers, but will become of increased concern for registered investment advisers if and when rules proposed by the U.S. Treasury some time ago take effect. We cannot currently predict whether the new Administration’s efforts to reduce regulatory burdens will affect finalization of these rules, given that their subject matter and relation to terrorist activities.
Also, in an enforcement order issued earlier this month, a private fund adviser was sanctioned for not disclosing to fund investors that its principals had a financial interest in a company that provided back office information technology services to fund portfolio companies. The central point of the matter was that the disclosure around the relationship with the service provider did not contain full and adequate disclosure of the fund adviser’s principals. The enforcement order made clear that the principals had not financially benefitted from these arrangements. There did not seem to be a concern that the principals had benefited at the expense of the fund investors. This is yet another example of the very expansive approach that the SEC will take in reviewing conflicts of interest by principals of private fund advisers and related disclosures.
The final regulations retain the basic approach and structure of the proposed regs and withdraw temporary regulations issued in December 2013 with some changes. The final regs implement the PFIC reporting requirement added in 2010 and also clarify the application of the PFIC ownership and reporting rules.
The final regs provide helpful reporting exceptions for (1) stock held through certain foreign pension funds with respect to which the U.S. persons are eligible for deferral under U.S. income tax treaties, regardless of the structure of the foreign pension fund (eliminating the previous requirement that the foreign pension fund be treated as a trust); (2) certain PFIC shareholders that are tax-exempt organizations or hold their PFIC interests through a tax-exempt investment vehicle; (3) certain domestic partnerships when none of its direct and indirect owners are subject to PFIC rules; (4) certain U.S. persons that own PFIC stock that is marked to market under a non-PFIC provision, provided that they are not otherwise subject to report under other provisions; (5) certain PFIC shareholders that owned the PFIC interest for a short period of time during which no PFIC tax was imposed on the shareholders; and (6) certain dual-resident taxpayers and bona fide residents of U.S. territories.
The final regs also establish a new “non-duplication rule” to avoid double counting ownership. Under the ownership attribution rules, a person is deemed to own a proportionate amount of the value of any PFIC stock held directly or indirectly by a non-PFIC foreign corporation that the person directly or indirectly owns 50% or more of (by value); and (solely for the purposes of determining ownership of PFIC stock through a non-PFIC foreign corporation), a person is deemed to own a proportionate amount of the value of any PFIC stock owned directly or indirectly by any domestic corporation that the person directly or indirectly owns 50% or more of (by value). The non-duplication rule provide that a U.S. person would not be deemed as owning stock of a PFIC through a domestic corporation that is directly or indirectly owned by another U.S. person without regard to the attribution through the domestic corporation.
The final regs also include various procedural rules, such as filing procedures and valuation and holding period thresholds for Sec. 1291 funds. A U.S. person is not permitted to file a consolidated Form 8621 containing all of the person’s PFICs, rather than filing individual Form 8621s for each PFIC. Nor is a shareholder is permitted to file a “protective” Form 8621 if uncertain of a foreign corporation’s PFIC status. The final regs also clarify how a Form 8611 must be filed when a US tax return is not filed.
7.2 Proposed Partnership Audit Regulations Released
On January 18, the IRS issued proposed regulations that implement the centralized partnership audit regime enacted by the Bipartisan Budget Act of 2015 and amended by the Protecting Americans from Tax Hikes Act of 2015. The much-anticipated new rules (see former coverage in the November 2015 Funds Bulletin) assess and collect tax at the partnership level, replacing the former rules enacted by the Tax Equity and Fiscal Responsibility Act of 1982. However, following a government-wide presidential action from new President Donald Trump freezing all new and pending regulations (with some exceptions), the rules were withdrawn. The rules are likely to be re-proposed in 60 days, possibly with changes. We will follow this development closely and report back—please stay tuned.
7.3 Treasury Working to Develop Procedures for Funds to Claim Treaty Benefits
As more countries deny treaty benefits to U.S. investment vehicles such as private equity funds and hedge funds on the basis that the fund is not a “qualified resident”, Treasury Associate International Tax Counsel Quyen Huynh indicated that the Treasury takes the position that U.S. regulated investment companies are residents of the United States for treaty purposes, and should be entitled to benefits if they can satisfy the limitation on benefits provision in the applicable treaty. The Treasury is working to develop a method to help a fund prove that more than 50% of its interests are beneficially owned by U.S. residents.
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