Almost all investment funds invest on a cross-border basis with the related investment level tax considerations normally depending on the complexity of the investment strategy. Where a fund holds a portfolio of investments such as bonds and equities, a key consideration is normally minimisation of withholding tax suffered i.e. ensuring the fund avails of any domestic or treaty based reliefs across its relevant investment jurisdictions to minimise the level of withholding tax suffered.
In addition, capital gains tax can arise based on local tax legislation in certain jurisdictions on disposal of securities by a non-resident. There is often a need to consider this legislation in determining whether a fund may be required to book a provision for tax for accounting purposes in accordance with IFRIC 23 (IFRS) or FIN 48 (US GAAP).
Alternative funds will often have more complex strategies and in some cases utilise an “under the fund” structure, depending on its underlying asset class and jurisdictions of investment. In such cases, it is important to ensure that any structure is not only tax efficient, but that it is also sustainable in light of an evolving international tax landscape.
How KPMG can help
Withholding taxes present both a risk and an opportunity. On one hand there is a risk of incorrectly self-certifying entitlement to a reduced rate of tax whereas conversely, there is often an opportunity to availing of a reduced rate of withholding tax or obtaining a refund of taxes suffered, both of which can have a positive NAV impact. Whilst reclaims would historically have been associated some uncertainty regarding refund likelihood, there is now a well-established approach to secure refunds in many investment jurisdictions.
In many cases, custodians and sub-custodians will request funds to complete documentation in relation to withholding taxes – in many cases to avail of reduced rates at source without any clear guidance in relation to whether / when it is appropriate for a fund to complete such documentation.
What we can do
We can help you to understand the range of withholding tax rates available in over 100 jurisdictions i.e. the domestic rate, any domestic exemptions / reductions and treaty rates, including scope to access such rates for different types of investment fund and the related documentation requirements.
We can carry out a cost-effective withholding tax healthcheck using data from fund administrators. This healthcheck leverages technology to identify any risk or opportunities in respect of the withholding tax rates being suffered by a fund, in addition to the potential amount of refund and difficulty expected in reclaiming such.
Certain investment jurisdictions have domestic capital gains tax rules which can impose a tax filing and payment obligation on a non-resident vehicle (including a fund) which holds and disposes of securities related to that jurisdiction. This can have a real NAV impact on a fund as a provision can be required for “uncertain tax positions” even where no payment of taxes is made in practice.
Evolving regulations and accounting standards across jurisdictions can give rise to additional compliance and requirements for funds in relation to foreign capital gains tax.
What we can do
We can support investment managers and funds understanding any overseas capital gains tax obligations they may have, typically using one of a number of different approaches:
- We can prepare investment level tax grids which provide a clear overview of the overseas tax position for a portfolio of investments, using a traffic light system to highlight risks;
- Our online tax database GloWTrack (document accessible at KPMG GloW Track, PDF, 304KB) is available for licence by clients, to allow consideration of risks on a real time basis in advance of positions being entered into;
In some cases we provide more detailed reports on particular investments, using our network of investment level tax experts in over 100 jurisdictions.
For more complex investment strategies, there are a myriad of potential tax issues that can be applicable including:
- Deductibility of interest for tax purposes
- Tax residency requirements
- Withholding taxes and treaty access
- Permanent establishment risk
- DAC 6
- Impact of international tax developments including ATAD 1 and 2, BEPS 2.0, etc.
These issues can impact on the tax efficiency of a structure from a short, medium and long term perspective.
What we can do
We can help you to understand the current and potential future considerations from a tax perspective in relation to any type of fund structure, investment position or jurisdiction of investment. We regularly advise on complex cross border transactions, co-ordinating advice from our extensive international network and distilling into clear key messages for consideration by managers.
Get in touch
We welcome the opportunity to discuss your needs. Contact our team below to discuss how our practice can be used to your advantage. We'd be delighted to hear from you.
