The OECD has concluded that it needs more information to progress their work on how base erosion and profit shifting (BEPS) Action 6 will apply to investment funds which do not qualify as collective investment vehicles (non-CIV funds) and has issued a consultation document. Non-CIV funds would include various categories of alternative funds including some private equity, credit, real estate and infrastructure funds.
The final version of the report on Action 6 (Preventing the granting of treaty benefits in inappropriate circumstances) recommended that treaties should contain a Principal Purpose Test (PPT’ and/or a Limitation on Benefits (LOB) article (similar to that already contained within US double taxation treaties), but indicated that the OECD would continue to examine how treaty entitlement for non-CIV funds would be addressed.
The public discussion draft, released on 24 May 2016, is entitled Treaty Entitlement of Non-CIV Funds and has been produced as part of the follow-up work required on this issue.
The document contains a number of specific questions. Some of the main headings are summarised below:
Concerns relating to the LOB provision
These questions include:
Suggestion of a global streamed fund regime
The Global Streamed Fund (GSF) approach has been suggested to the OECD, where investment income would be exempt from tax when derived by a GSF but the fund would be obliged to distribute its income on a regular basis and tax would be collected upon these distributions. The tax would be determined by the treaty entitlement of the ultimate investor under the treaty between the State of residence of that ultimate investor and the State of source of the income.
Concerns related to the Principal Purpose Test (PPT) rule
There have been concerns that the PPT rule might restrict the treaty entitlement of non-CIV funds in cases where a large proportion of the investors in a non-CIV are residents of States that are different from the State of residence of the fund.
Examples of common arrangements by non-CIV funds have been requested.
The next OECD Working Party meeting is in May, and the consultation document and responses will be discussed then.