A report released this week by EFAMA and KPMG’s European Investment Management practice has highlighted a number of tax issues that will prevent UCITS IV from establishing a truly homogeneous European fund industry. The report focuses on three enabling measures of UCITS IV in which it feels taxation can be improved upon: cross-border fund mergers, Management Company passport and cross-border master/feeder structures. Dealing first with mergers, the report found that 90 per cent of fund managers considered tax to be a significant factor; more specifically, for their investors. Mergers simply aren’t happening because of the tax efficiencies between Member States. It recommends that a UCITS tax directive be pursued to remove existing tax barriers, with fund mergers treated as “tax neutral” at both the fund and investor level.

Speaking to Hedgeweek, EFAMA Director General, Peter De Proft (pictured), said: “A neutral cross-border merger is only to the benefit of the investor. What we’re saying to the commission services is ‘here’s a hurdle, please remove it’.” On the passporting issue, the report states that tax problems lie at a fund level. Presently, the activities of a Management Company outside of the fund domicile could cause the UCITS to become a tax resident in that country and be subject to tax. The report recommends that tax only be applied to the UCITS in the country it’s registered in, irrespective of where the Management Company is located to create a unified tax framework. The third element, master/feeder structures, is a potential tax obstacle if a manager chooses to set up a master fund in a country that imposes taxes on master/feeder transactions. The report recommends that taxes on such transactions be removed. “We’re very glad with the UCITS IV efficiency package but there are a number of hurdles to overcome,” says De Proft. “We’re just asking for a tax neutral initiative, which seems fair and logical. It’s necessary if we want simplification of the fund industry.”