Saturday, November 27, 2010

UK Will Introduce Tax Transparent Funds to Take Advantage of Master-Feeder Structures under UCITS IV Directive

The UK will launch a new regulatory regime for tax transparent mutual funds to align with other EU jurisdictions taking advantage of the UCITS IV Directive, said UK Finance Minister Mark Hoban. In recent remarks, he said that the new fund vehicle the UK plans to authorize will be suitable for both the pooling of pensions, and for use within the new UCITS IV master/feeder fund structure. A tax transparent fund is one where the taxing authorities disregard the fund entity and look to the shareholders as the source of the income

UCITS IV, or more formally the tongue-twisting Undertakings for Collective Investments in Transferable Securities Directive IV, will usher in the widespread introduction of a master-feeder fund structure across the EU, noted the Minister, and its is currently unlikely that firms will establish master funds in the UK due to a lack of a suitable tax-transparent vehicle. Since other Member States in the EU already have suitable vehicles, and are well-positioned to take advantage of firms wanting to establish master funds, the UK must act or find itself left behind. The Minister also indicated that tax transparent funds are fast becoming the preferred mechanism for cross-border pooling of pension funds. Also, firms operating life insurance funds are looking for alternative options as the EU approaches final agreement on the Solvency II Directive.

According to the Investment Management Association, the UCITS IV Directive includes a number of measures designed to improve the efficiency of European funds, allowing for the first time master-feeder structures to be marketed across Europe as an alternative to merging fund ranges. Feeder funds in different domiciles will invest in the same master fund, thus allowing a single portfolio of assets to be offered in multiple jurisdictions and for different types of investors.

Welcoming the Minister's announcement, Deloitte estimated that around £20billion of additional multinational pension fund investments would be made in the UK each year as a result of the authorization of a tax transparent fund vehiclen entity, which Deloitte described as allowing beneficial double tax treaties between investors and investments to be accessed. The potential for third party investment management funds to be transferred to such vehicles will be far more significant. This is due to the ability of the tax transparent vehicle both to support a master-feeder fund structure, and allow asset managers to realise economies of scale through fund rationalization.