Taxation of CIUTS in other Member States.
Summary of Capital Gains Tax position.
In Belgium, Investment Funds are not considered taxable entities but, in common with other European countries, are deemed an extension of the Unitholder’s assets. Tax assessment on income is therefore applied directly to the Unitholders. One feature of the way in which the principle of fiscal transparency is applied is that income distributed to Unitholders is deemed to have been subject to 20% movable “prepayment” which, in the case of taxable entities, is a form of withholding tax. A Belgian Fund is not subject to Capital Gains Tax and, in fact, a Unitholder is not liable on the realization of his holding, provided that the units form part of his non-business property.
On the basis of experience from the largest Fund in Denmark, it appears that income is paid after deduction of a 30% coupon tax (according to the same rules as those applied to limited liability companies). The Unit Trust, however, is not liable to pay tax. It therefore obtains from the Tax Authorities a refund of the coupon taxes withheld by the Companies. The Unit Trust itself does not pay Capital Gains Tax, although it is understood that the Revenue Authorities watch closely the level of trading. The Unitholder pays Capital Gains Tax in the normal way on any profit made from the sale of his units.
A SICAV is a legal entity and subject in the main to the same rules which govern joint stock companies—Société Anonyme. SICAV’s enjoy a number of tax concessions denied other French financial institutions—the most important is the SICAV’s exemption from Corporation Tax.
The tax rules applicable to SICAV’s are based on the principle of “transparency”, the aim of which is to put Unitholders in a position as near as possible to that of direct owners of the securities and other assets of the company in question. To this end, a SICAV is exempt from taxation provided that it distributes all the income received each year from investments. In effect, this means that it pays no Corporation Tax.
A SICAV is not liable to Capital Gains Tax on realization of assets, but it appears that from 1 January, 1978, the Unitholder may be liable to some form of Capital Gains Tax on any profit made from the realization of his holding in the SICAV.
With regard to dividends on their holdings, Unitholders can take personal advantage of the tax credits attached to the Trust’s income as if they had received them directly, emphasizing the principle of “transparency”.
GERMANY (Federal Republic):
West German Open End Investment Funds have been declared “taxable entities” within the meaning of the West German Corporation Tax Act but, at the same time, the relevant tax legislation aims at treating the investor in Funds on more or less the same terms as a direct investor in securities.
To this end, the Funds are exempt from tax on income passing through them while Unitholders are liable for tax only on that part of the Funds distributions that consist of dividends and interest, although they would also be assessed for tax on income not distributed insofar as they could be expected to have received it.
Realized capital gains, both within the Trust and distributed, and proceeds from the sale of units are also exempt from tax. This provision places the Unitholder in more or less the same tax position as a direct shareholder with the difference that in the case of Capital Gains Tax, the Unitholder is treated slightly more favourably. This is because the Unitholder can never be subject to Capital Gains Tax while a direct shareholder may be liable if the securities on which a capital gain is made are sold within six months. Tax legislation has made allowance for the fact that the purchasers of units are small investors and frequently are not liable to income tax at all.
As regards taxation, the only liability of an Open End Fund is to a tax of 0.06% payable quarterly on the total assets of the Fund at the end of each quarter. There is no Capital Gains Tax liability on either the Fund or the Unitholder.
In Holland there exists side by side both Open End Investment Funds and Investment Companies. The effect to the Unitholder or Shareholder in either, however, is much the same.
Currently, Investment Companies are exempt from both corporate income tax and dividend withholding tax on dividends received, provided that their shares are quoted on the Amsterdam or Rotterdam Stock Exchange, or that they distribute at least 60% of the dividends received (for this to apply, however, the dividends must be derived from financial securities). Capital gains arising from the sale of securities, shares, and bonds can be placed in a tax-free reserve, but may—in theory—be taxed at a later date. In practice, this would not arise since it depends on the liquidation of the company and allocation of the reserve to participating shareholders whose shares are, anyway, held in bearer form.
Investment Funds are not considered taxable entities, but are viewed as an extension of the Unitholder’s assets. The effect is that no Corporate Income Tax is due on any income derived by Investment Funds, and this applies to both the Funds themselves and their Managing Companies. Instead, the Unitholders are subject to tax on any distribution from the Investment Funds, and are treated in this respect as if they had received the income directly. Those Unitholders who are not generally subject to tax on capital gains are not subject to tax on the capital gains derived by the Funds from the sale of securities, be the gains accumulated or distributed to the Unitholders.
For reasons which are now no longer so appropriate, Unit Trusts in the U.K. have their income charged at the Corporation Tax rate. However, any gains made are charged at half the normal U.K. Capital Gains Tax rate—i.e. 15%. On selling their units, Unitholders receive a credit for this charge but at half the basic Income Tax rate—i.e. 17½%. This credit is available whether or not the Unit Trust has itself realized or been taxed on any gains.
It is understood that the Unit Trust Association will wish to try and bring the U.K. system into line with other European counterparts.
Although the treatment of income to Corporation Tax means that income from companies is effectively franked, it has prevented the U.K. industry from forming Bond or Government Stock Funds such as the Irish Gilt Edged Unit Trust. Such Funds are quite common on the Continent, and it is interesting to note that having launched the first Bond Fund in Germany in 1966, Bond Funds in that country now total nearly DM 6.0 billion out of total industry assets of nearly DM 20.0 billion.