Comments are requested on examples of how the Principal Purposes Test rule will apply to common transactions involving non-CIV funds.
In March 2016, following the final version of the report on Action 6 (preventing the granting of treaty benefits in inappropriate circumstances), the OECD published a consultation document on the treaty entitlement of non-Collective Investment Vehicle (CIV) funds with comments received. A follow up discussion draft has now been released to give an update on subsequent developments in this area.
The final version of the Action 6 report 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). The OECD Working Party concluded that, since the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent BEPS, would not include the provisions of the detailed LOB rule, this removed the pressure to design a multilateral solution to the issue of the treatment of non-CIV funds in the detailed LOB provision. The Working Party noted that a statement concerning the need to address the issue bilaterally could be included in the next update of the OECD Model Tax Convention on Income and Capital, which is tentatively expected in mid-2017.
Regarding the application of the PPT rule, the March 2016 discussion draft requested examples of common arrangements or transactions entered into by non-CIV funds. The January 2017 discussion draft contains three chosen by the Working Party, and requests comments on whether they usefully clarify the application of the PPT rule to common transactions involving non-CIV funds. KPMG in the UK, as well as key pension, sovereign and infrastructure/real estate funds, contributed to the examples submitted to the Working Party, particularly regarding intermediary investment platforms (such as those in Luxembourg and the Netherlands). At first sight, the examples selected by the Working Party are very similar to those suggested by those who commented, albeit less detailed. Nevertheless, they should provide some comfort to the fund investor community that intermediary platforms will not necessarily fail a PPT, even though it still remains subjective and open to source country interpretation.
Comments on the examples in the discussion draft should be sent by 3 February 2017 and will be discussed by the Working Party at its February 2017 meeting.
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