A lack of focus on tax considerations may mean the objectives of UCITS IV (a harmonised and more efficient UCITS market across Europe) will be undermined, finds a new research report from KPMG International, Fill the glass to the brim: Analysis of the tax implications of UCITS IV and the impact for funds operating cross border.

“To-date, regulation has taken centre stage when it comes to UCITS IV. Changes in tax legislation have not kept pace. As a result, tax considerations specific to individual member states may obstruct successful implementation of the Directive,” says Rachel Hanger, Head of Investment Management Tax at KPMG.

The UCITS IV directive is to be implemented in 2011. The main tax constraints associated with UCITS IV in the UK are on the three crucial areas related to cross-border fund structuring:

• The cross-border merger of two or more EU-domiciled funds
  
• The management company passport and cross-border management of fund structures
  
• The establishment of cross-border Master-Feeder structures
  

“While the UK is already an attractive location for master funds because it provides access to over a hundred tax treaties, we urge HM Treasury to exempt UCITS funds from the tax residence tests. Such changes would put beyond doubt the risk that foreign funds could be taxed in the UK when managed by a UK single management company,” says Hanger.

Hanger continues, “In order for the objectives of UCITS IV to be realised we need tax consistency across all EU member states. A merger directive, which is based upon the principle of tax deferral – meaning that investors would only be taxed once the money truly hits their pockets, is one solution. Only once solutions are found to these tax obstacles will the UCITS industry truly be able to flourish in the UK and across Europe.”