COMMON CONTRACTUAL FUNDS

The Tax Efficiency in Asset Pooling

irishfunds.ie COMMON CONTRACTUAL FUNDS

What is a Common CCF – Key Tax Benefits CCF – Non-Tax Benefits Contractual Fund? The tax efficiencies within any asset As the CCF is tax transparent it allows The Common Contractual Fund (“CCF”) pooling solution are critical to the funds and other institutional is an Irish tax transparent structure success of the solution to meet investors pool their investments, first established in 2003. It was investor demands. The CCF has creating economies of scale resulting specifically developed to enable asset firmly established its’ tax transparent in lowered costs, while maintaining managers and asset owners pool their credentials over the last 10 years and withholding tax benefits which could investments (primarily in the context of a number of large asset managers and otherwise be lost through traditional assets) in a tax efficient asset owners (including multinational ‘opaque’ investment vehicles. The keys manner. corporations with pension assets) benefits of a CCF as an asset pooling have established CCFs benefiting from structure are as follows: The CCF is an unincorporated body their tax efficiency and other non-tax established by an Irish management benefits. • The CCF offers economies of scale company pursuant to which investors compared to fragmented investment participate and share in the underlying • The CCF benefits from Ireland’s products and strategies with different investments of the CCF. Each investor competitive tax regime providing investment managers, administrators/ in the CCF is deemed to hold an certainty, stability and transparency. and custodians resulting in lower undivided co-ownership interest in the • Over 70 funds have been established costs and enhanced investor returns. underlying investments of the CCF as since its creation in 2003. • It also facilitates more efficient tenant in common with other investors. • It is transparent for Irish legal and governance and risk management Units issued in a CCF are not shares tax purposes. for pension trustees and other but serve to determine the proportion • The CCF can avail of tax transparency stakeholders. of the underlying investments of in over 20 markets of investment. • Solvency II also gives rise to the CCF to which the investor is • Similar to all Irish regulated funds, opportunities to use the CCF, beneficially entitled. the CCF benefits from a tax neutral especially for insurance companies regime; no subscription/financial who will be looking to manage their A CCF can be established as a UCITS transactions tax or other capital capital adequacy requirements. pursuant to the European Communities taxes, no taxation of income/gains • CCFs can also be used as an efficient (Undertakings for Collective Investment and no tax. pooling master vehicle under UCITS in Transferable Securities) Regulations, • The CCF is best placed to meet the IV allowing direct investment for 2011, as amended or as an Alternative demands of institutional investors institutional/pension funds seeking (“AIF”) pursuant and asset managers for a tax tax transparency and opaque feeders to the EU ( efficient and flexible cross border for retail investors. Fund Managers) Regulations, 2013. asset pooling solution. • The CCF is a flexible structure to Tax transparency is the main feature, • VAT efficiencies can be created for meet the demands of asset owners which differentiates the CCF from other institutional investors pooling assets such as multinationals and can types of Irish funds structures. CCFs in a CCF compared to maintaining be established as a single or multi- established as UCITS or as AIFs are assets in segregated or separately fund vehicle, with single or multiple authorised and regulated by the Central managed accounts. managers. Bank of Ireland. • Intellectual and IT infrastructure dealing with asset pooling from a custodial, fund accounting, legal and tax perspective is based in Ireland. This allows asset managers and institutional investors implement complex asset pooling structures in an efficient and timely manner. COMMON CONTRACTUAL FUNDS

CCF – An Illustration of the Tax Transparency Benefits

The tax efficiencies within any asset addition, it is a key policy goal of the investment returns. The table below pooling solution are critical to the Irish tax authorities to enshrine tax illustrates the withholding tax cost success of the solution to meet transparency into all new double tax or “drag” in a traditional “opaque” investor demands. The CCF is treated agreements. corporate vehicle relative to the as tax transparent in over 20 markets benefits of using a CCF including Australia, Canada, , The tax transparency benefits of a Italy, and the US. In CCF are real and provide enhanced

Withholding Tax Cost (“Tax Drag”) (The withholding tax cost is illustrated as a percentage of the dividend yield of the MSCI World and MSCI Europe indices.)

PENSION INVESTORS DIRECT INVESTMENT CORPORATE UCITS CCF UCITS CCF BENEFIT

MSCI World UK 0.06% 0.44% 0.06% 0.38% 0.07% 0.44% 0.07% 0.37% Switzerland 0.08% 0.44% 0.05% 0.39% MSCI Europe UK 0.14% 0.24% 0.06% 0.18% Netherlands 0.18% 0.24% 0.08% 0.16% Switzerland 0.30% 0.24% 0.09% 0.15%

A simple but important example of compared to a traditional ‘opaque’ investment vehicles (e.g. , Spain this is US equities. Generally, pension collective investment vehicle. and Sweden). This has provided the funds in key markets such as the UK, Considering the scale and relative potential of additional tax efficiencies Switzerland and the Netherlands are importance of the US equity market being created for and entitled to a 0% rate of withholding (i.e. US equities constitute 54% of other institutional investors pooling tax on US dividends while investments MSCI World Index), the benefits of investments in a CCF authorised as a made through corporate vehicles using a CCF are clear. UCITS. (e.g. VCCs, , ICVCs) and other tax opaque vehicles would incur While the benefits of tax transparency For example, a UCITS CCF investing withholding tax at a rate of 15% or in the US market have been well in global equities would generate an 30% (depending on the domicile of publicised in the past, the broader annual withholding tax cost of 0.06% the fund and the respective double tax recognition of the CCF has meant compared to 0.44% for a UCITS treaty with the US). that the benefits of tax transparency corporate vehicle. On an investment of go well beyond the US market. In $1bn with an annual dividend yield of For example, taking an investment of addition, some European investment 2.428%, this equates to a withholding $1bn in US equities with an annual markets have updated their domestic tax cost of $0.6m for the CCF and dividend yield of 2%, using a CCF laws to reduce and/or eliminate $4.4m for the VCC resulting in an would create annual tax savings of the withholding taxes on dividends annual saving of $3.8m when utilising either $6m (30%) or $3m (15%) paid to UCITS or similarly regulated a UCITS CCF. COMMON CONTRACTUAL FUNDS

Withholding Tax Cost CCF – Summary (“Tax Drag”) With a ten year track record the CCF 20 global markets to date. Unlike some Due to the long term investment has established its tax transparency other pooling products which only have requirements of pension plans (and credentials in the global investment some of the legal or tax characteristics schemes), the cumulative benefit of markets making it the tax efficient of transparency, the benefits of tax the tax savings generated by a CCF over asset pooling structure of choice. transparency within the CCF make it the life of an investment increases the The key characteristic of a CCF is its best placed to service complex asset net returns. The table illustrates the transparency in Ireland both from a pooling needs now and into the future. increased return generated over the legal and tax perspective (it is tax long term from investment in a UCITS transparent from an income and capital CCF compared to a UCITS corporate gains perspective), resulting in its vehicle for global equities. The recognition as tax transparent in over illustrated benefit is exclusively due to reduced withholding tax costs and does not incorporate any of the non-tax benefits associated with CCFs.

Global Equities: Net Dividend Return ($ Millions) on $1bn Investment

3 YEARS 7 YEARS 10 YEARS 15 YEARS 20 YEARS

Corporate 60.90 147.90 217.80 343.89 483.04 CCF 72.69 177.91 263.54 420.32 596.54 Benefit 11.79 30.01 45.74 76.43 113.50

Over a 20 year investment period the reduced tax costs associated with a UCITS CCF would create additional investor returns of $114m based on a $1bn investment (ignoring capital appreciation).

Pat Lardner – Chief Executive Irish Funds Kieran Fox – Director, Business Development Ashford House, 18-22 Tara Street, Dublin 2 twitter.com/IrishFunds linkedin.com/company t: +353 (0) 1 675 3200 /irish-funds-industry-association e: [email protected] June 2015 w: irishfunds.ie