The European Securities and Markets Authority has published an updated version of its questions and answers (Q&As) on market structures and transparency topics under MIFID II and the Markets in Financial Instruments Regulation (MiFIR).
The updated Q&A on market structures amends the answer to a question on direct electronic access and algorithmic trading and adds a new question on multilateral and bilateral systems
BEPS Multilateral Instrument Ratified
More than 100 jurisdictions concluded negotiations on 24 November 2016 on the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (the “MLI”) in order to implement the tax treaty-related BEPS recommendations (which amongst other action points include BEPS Action Point 6 (Treaty Abuse). The MLI was signed on 7 June 2017 and was structured to enter into force when ratified by at least five countries and in theory amends more than 1,200 tax treaties worldwide.
Last month, Slovenia became the fifth country to ratify the MLI. As such, the MLI will come into force on 1 July 2018 and will enter into effect for a specific tax treaty after all parties to that treaty have ratified the multilateral instrument.
In summary, BEPS Action Point 6 recommends certain changes to standard double tax treaty provisions with the intention of preventing the inappropriate granting of treaty benefits. This could have the impact of limiting the circumstances in which investment funds or intermediate vehicles established by investment funds can benefit from tax treaties. In particular, Action 6 requires the adoption of minimum standards by participating jurisdictions. This requires either the adoption of a so called principal purpose test (“PPT”) or a limitation on benefits test (“LOB”) together with an “anti-conduit” rule, or a PPT and simplified LOB.
The intention of most European jurisdictions (including the UK) is to apply the PPT to treaties once the MLI has been ratified.
No withholding Tax on “Loyalty Payments” Paid by Investment Platforms to Investors
In the case of Hargreaves Lansdown v HMRC ([2018] UKFTT 0127 (TC)) the First-Tier Tribunal decided that “loyalty payments” or “loyalty bonuses” (a discount to a fund’s management fees) are not subject to UK income tax or subject to UK withholding tax as an “annual payment”.
In summary, the UKFTT were of the view that the loyalty payments do not constitute “pure income profit” in the hands of the investors and therefore did not constitute an “annual payment” as it is defined in case law and accordingly is not subject to UK withholding tax. At its most basic “pure income profit” is essentially income that is received without the person in receipt of that income having to do anything in return i.e. no outgoing/expense has been incurred for receipt of the income. The UKFTT accepted the argument that as investors were required to pay ongoing management costs with respect to their investment in order to qualify for the loyalty bonus, the loyalty bonus is not “pure income profit”. In addition, in any event, the UKFTT explained that the evidence made it plain that the nature and quality of a loyalty payment as described in Hargreaves Lansdown fund fact sheets is that it is not a “profit” to an investor, but a reduction of their net cost.
HMRC have two months to appeal the case. To the extent a platform provider has withheld amounts from investors pending the conclusion of the case, it would be prudent to ascertain whether the case will be appealed before paying such withheld amounts to investors.
Fund distribution resources
Dechert maintains two services designed to assist managers with global fund distribution and registration.
World Compass - A global web-based service offering investment firms 24/7 access to detailed information on fund marketing, separate accounts and beneficial ownership reporting
World Passport - An outsourced solution for fund registration globally for both UCITS and AIFs
