Sovereign Wealth Funds (SWFs) and supranational organisations may well be the world’s largest investors, with the top three SWFs alone responsible for more than $2.8trn in assets. They also receive beneficial tax treatments that mean they are – in theory – immune or exempt from local taxes. Nevertheless, many of them still end up paying dividend WHT, which puts a drag on performance, because they are not using tax efficient fund structures.
This is partly the result of using investment managers who are not always sufficiently tax aware to provide them with the correct WHT outcome, and partly because they often invest in pooled funds that are not tax transparent. There are many reasons, not least administrative efficiency and confidentiality, why SWFs and supranational entities choose to invest through pooled funds. Yet too often this leaves their equity holdings exposed to dividend WHT on equities in different jurisdictions.
AMX makes a point of being tax aware and getting the best outcome for all our investors, including SWFs and supranational entities that may use our Irish-domiciled Common Contractual Funds (CCFs). These tax transparent vehicles enable us to ‘see through’ the fund to the beneficial investors and apply the appropriate dividend WHT relief, as set out in relevant tax treaties, for each one. For investors in European equities, we can also obtain fund level relief (without needing to identify individual investors).
However, we have a third way of achieving the right WHT outcome for SWFs and supranational entities – and that is by simply looking at the relevant domestic tax code in each jurisdiction. For instance, Section 892 of the US Tax Code sets down that sovereign entities are exempt from US income taxation once the necessary conditions are met. That means we can reduce the WHT on US equities to 0% for qualifying sovereign entities investing through our CCFs, simply by applying the Section 892 ruling to their holdings.
A similar situation has now arisen in Europe where the Spanish Supreme Court has ruled that Spanish tax authorities cannot impose WHT on Spanish-sourced dividends going to non-Spanish SWFs. The judgement hinges on the fact that such discrimination is against the EU (Article 63) and EEA (Article 40) rules on the free movement of capital. Once again, by using the tax transparency of our CCFs, we can ensure that any SWF investing with us will get the tax relief to which they are entitled.