Global FS tax newsflash: Impact of EU Financial Transaction Tax on the asset management industry

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In our earlier Newsflashes, we have considered the content, form and timing of the draft proposals to implement an EU Financial Transaction Tax (“FTT”) and the implications for the Financial Services sector. In this Newsflash, we look specifically at the impact of the EU FTT on the asset management industry. On 14 February 2013, the European Commission issued a new draft Council Directive to implement an EU FTT in 11 countries. In our Newsflash of 14 February, we highlighted that the Directive has a very broad scope and will impact both EU and non-EU Financial Institutions. The costs of the tax, coupled with the major operational changes that will be required to comply with the regime, will result in the EU FTT being a significant cost for Financial Institutions and their clients. Investment firms, UCITS and their management companies, alternative investment funds and their managers, pension funds and their investment managers can be heavily impacted by the Directive.

There remains much uncertainty about the timing and form of the ultimate EU FTT. However, the asset management industry will be affected by the proposed tax. In this Newsflash we highlight how funds could fall within the scope of the tax, explain the impact that we expect the FTT to have on asset managers and advise on what actions institutions in this sector should be taking now.

The latest EU FTT Directive (“the Directive”) classifies fund vehicles and management companies as Financial Institutions for the purposes of the FTT. Financial Institutions resident in EU FTT countries1, Financial Institutions trading with other Financial Institutions located in EU FTT countries or Financial Institutions dealing in securities issued within an EU FTT country are all chargeable to EU FTT on in-scope transactions. Under the Directive, also trading in fund units or shares in funds (including UCITS and alternative funds) can be subject to FTT. In addition, the fund’s trading of its own underlying investment portfolio can also be subject to the tax. This means that the FTT needs to be considered both at the investor level and the fund portfolio level.

However, as the Council Directive 2008/7/EC prohibits the imposition of taxes on the raising of capital, the initial issuance of interests in investment funds will not be subject to the FTT under the revised proposal. Placing funds within the scope of the EU FTT would seem to breach the principle that investing via investment funds should be tax neutral as compared with direct investment in the underlying fund assets. As a result of the breach of this principle, investing via funds will become more expensive than investing directly.