Seminar takeaways - Investment funds

On Tuesday 8 March, Dilpreet Dhanoa, Barrister at Field Court Tax Chambers presented our first in-person Technical event since 2020. We discussed what encompasses an investment fund and the various structures along with their inherent nature that means they are likely to fall within the ambit of being termed an ‘investment fund’. The discussion progressed to the interplay of taxation at different levels (fund, investment manager and taxpayer) as well as various policies affecting the taxation of investment funds, the purpose and function of double tax treaties and how states seek to implement both horizontal and vertical tax neutrality. Key points from the talk are as follows:

What is an investment fund?

• an entity which collects capital from a number of investors to create a pool of money that is then re-invested into other assets;
• the range of assets invested into is growing ever broader and includes financial products from vanilla shares to complex derivative and non-financial products including real estate.

When setting up or investing in an investment fund there are a number of issues to consider and from different perspectives:

• the fact that investment managers want to minimise tax exposure to attract clients (that is, investors);
• nowadays, tax planning can have borderline negative connotations and/or certain stigmas associated with it, so reputation needs to be balanced against tax efficiency;
• governments want to make it more attractive to invest in domestic markets and tax regimes can reflect this, though it also makes the taxation of the various assets in funds more complex;
• governments also need to take into account the need to avoid double taxation and treaties have been drafted accordingly;
• residency of an investment fund can be a challenging and complex matter which investment managers tend to prioritise as one of the key issues to be determined when setting up a fund;
• the term ‘beneficial ownership’ is fundamental to this topic, but its meaning can vary greatly from jurisdiction to jurisdiction.

Taxation specific issues

• As mentioned previously, jurisdictions enter into double tax treaties to ensure taxpayers are not double taxed. Issues arise where different jurisdictions have different interpretations of certain words – for example, ‘beneficial ownership’ or ‘person’ – and those words can be key in identifying where the tax liability arises.
• The nature of the investment fund will determine the tax consequences. However, different states may subject the same income to different taxes, again giving rise to potential double taxation. Thus the importance of defining the character of the income.
• For the investment manager, remuneration can be taxed differently depending on whether it is employment income, a profit share or carried interest. New legislation was brought in in 2015 regarding carried interest to detail how exactly it should be taxed in the UK.
• Ideally, the residence of the taxpayer should be taken into account when deciding which funds to invest in. Since investment funds often have global investments, this can be very tricky.

Tax cases/further reading

Relevant tax cases and recommended reading in relation to investment funds include:

• the OECD model tax convention (2017)
• the US Model Tax Convention (2018)
• Switzerland v. DK Bank, May 2015, Federal Supreme Court, Case No. BGE 141 || 447
• CJEU Cases: Joined Cases C-116/16 (Skatteministeriet v T Danmark) and C-117/16 (Skatteministeriet v Y Denmark Aps); and, Joined Cases C-115/16 (N Luxembourg 1 v Skatteministeriet), C-118/16 (X Denmark A/S v Skatteministeriet), C-119/16 (C Danmark I v Skatteministeriet) and C-299/16 (Z Denmark ApSv Skatteministeriet)
• Walewski v HMRC [2020] UKFTT 0058 (TC) and [2021] UKUT 0133 (TCC)

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