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EU equivalence rulings are changing how dividend withholding tax applies to institutional funds

, Kevin Duggan


EU equivalence rulings are changing how dividend withholding tax applies to institutional funds


Too many institutional investors still pay more dividend withholding tax (WHT) than they should on their investments. 


AMX research found that UK DB Pension schemes alone risk losing more than £200m a year because they are not investing in tax efficient fund structures. Aaron Overy and Kevin Duggan describe why it’s important to consider fund level tax relief as well as the tax status of the underlying investor.


It may soon be easier for institutional investors to benefit from the relief to which they are entitled following a recent trend of countries interpreting and transposing European Commission equivalence rulings into domestic law. Here at AMX we strive to be tax aware; that means looking at the details of all relevant tax treaties to obtain the best possible outcome for our clients’ funds and their investors. 


One reason we chose to use tax-transparent, Irish domiciled, Common Contractual Funds (CCFs) was because they enable us to ‘see through’ the fund to the beneficial investors and apply the right WHT relief to every holding. By reducing this unnecessary tax drag, we help institutional investors reduce costs and enhance investment performance.


Free movement of capital prevents discrimination

Another aspect to consider is the effect of Brexit upon 'Fund Level Withholding Tax Relief'. This is where, because of a series of EU Court decisions on EU fund equivalency, EU funds should achieve the same outcome as domestic funds, for example in Spain, but also seen in Sweden, Norway, France and Greece. 


The UK formally left the EU on January 31, 2020 and the formal transition period ended on December 31, 2020. A Trade and Cooperation Agreement was signed by the UK and EU on December 24, 2020; however this agreement does not capture alignment with respect to direct taxes or ECJ rulings. As a result, the fund level exemptions based on EU/ EEA establishment that were previously accorded to UK Funds are no longer applicable in several EU markets. It is expected then for example, that UK UCITS Fund claiming Fund Level Relief (and not treaty relief to the underlying investor) could have 26.5% WHT imposed in France on French dividends (previously 0%), 5% in Greece (0%), 15% in Norway (0%), 10% in Spain (1%) and 5% In Sweden (0%). This will likely add some basis points of WHT drag to performance. 


In the future, as EU fund managers use EU rules to challenge discrimination and so build up a common understanding of equivalence, we won’t need to look at the beneficial investors in funds with EU and EEA equity holdings, instead we will simply have to look at the regulatory status of a fund and apply the relevant WHT to that type of fund. This has effectively given us an agile model for assessing WHT liability on Pension Funds, UCITS and Authorised Investment Funds: beneficial owner relief or fund level relief. When investing in, say, US equities using our Irish domiciled CCFs, we will need to continue 'looking through' to the beneficial owner because fund level relief doesn’t apply. At all times, we will be working to ensure the best outcome for investors regardless of their equity investments’ domicile.


What now for UK funds?

Of course, the UK is no longer in the EU or the EEA – it is a third country much like the US. However, US funds can still achieve good WHT outcomes because the EU has granted equivalence in certain areas of financial services. That has not yet happened for the UK – in fact, a recent memorandum of understanding between the UK and the EU suggests we may not get EU-wide equivalence for some time, if ever. Consequently, the WHT treatment of UK funds is now a matter for tax authorities in individual European countries. France has already said it will grant equivalence to UK funds but other EU nations may still choose to discriminate, which could affect investment returns. As such, institutional investors in the UK with equity exposure should, for the time being, think about investing through tax efficient funds domiciled in the EU, such as CCFs

Get in touch with us to find out more about investing in or launching a CCF on the AMX platform.   


Photo credit: Louise Griffiths

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