Apparently, very frequently! It’s a complex but very important issue for the European economy. The broad category of ‘non-CIVs’ highlighted below generates huge amounts of investment in Europe as well as promoting savings, economic growth and capital markets efficiency. However, there is concern that such non-CIVs may be subjected to restrictive and inappropriate anti-tax abuse measures that would greatly dampen investment activity and hurt the European economy.
The OECD is currently mulling over the definition and tax treaty entitlement of non-CIVs and the outcome will be strategically very important for Europe. We cannot assume that the right result will be achieved, as the EU has already applied onerous capital charges on securitised assets, part of a series of measures that have all-but killed a sector that is widely seen to be essential to any properly-functioning economy.
The UCITS and AIFM directives address two substantial, fairly homogenous and well-defined categories of CIV with large bodies of regulation. However there is a third category of ‘unrecognised CIVs’ or non-CIVs that includes many types of securitisations, private equity, venture capital, real estate, private debt, pension fund, infrastructure and other investment vehicles that are also widely held, are highly varied in structure and asset classes, and are regulated by diverse frameworks that are tailored on a country-by-country basis.
Like UCITS and AIFs, these non-CIV structures are created for genuine commercial reasons, and have the critical pooled-investment characteristics of a CIV. Investment activity in these structures is dominated by institutional investors such as pension funds, private equity, insurance, sovereign funds, local authorities and charitable endowments.
It is important that these non-CIVs enjoy tax neutrality in the country in which they are established in order to avoid double taxation and maintain the same tax situation for investors as if they had invested directly in the underlying assets. Our view is that this should not be confused with ‘treaty shopping’ and any tax deferment issues should be dealt with by the investor’s home country.
It is difficult to defend the potential application of special anti-abuse measures - such as Limitation of Benefits (LOB) and the Principal Purpose Test (PPT) - to these non-CIVs when they are almost identical to AIF CIVs. Rather than focusing at the investor level, it is hoped that a well-defined list of eligible types of non-CIVs will be developed by the OECD, that can be self-certified as ‘deemed compliant CIVs’ and, like AIFs and UCITS, will not be subject to harsh anti-abuse measures. We suggest that in-country supervisory bodies be asked to provide rulings on the eligibility of particularly complex or non-standard structures. The results of the OECD’s work are awaited with a more than a little trepidation..