Common Contractual Fund - Tax Status of A Common Contractual Fund

Tax Status of A Common Contractual Fund

The CCF is a tax transparent vehicle under Irish law. Pursuant to the Finance Acts, 2003 and 2005, no Irish taxes will be payable in respect of income and gains arising to a CCF on the basis that the income and gains will be regarded as accruing directly to the participants in the CCF in proportion to the value of their interests in the CCF. The CCF is intended to preserve direct access to tax treaty relief currently enjoyed by certain types of investors such as pension funds. Although the Finance Act, 2003 provided that only pension schemes could invest in the CCF, the Finance Act, 2005 has now broadened the category of investor that may invest in the CCF to any investors who are not individuals. Accordingly, only non individuals (such as, for example, companies, partnerships, pension funds and unit trusts) may invest in the CCF.

While the CCF is treated as tax transparent under Irish law, it will be a matter for the jurisdiction in which the investor is resident for tax purposes to determine whether similar tax treatment will be granted in that jurisdiction to the CCF. Similarly, the tax authority of the jurisdiction in which the income arises must also recognise the tax transparency of the CCF.

In order to facilitate the tax transparency, it is considered that the CCF should have the following characteristics which would distinguish it from a typical unit trust or investment company structure:

• (a) no meetings of investors should be permitted;
• (b) units should not be freely transferable but should be redeemable; and
• (c) no redemption charge should be levied.

It is also necessary that income derived from the CCF be distributed annually, in proportion to each investor’s holding in the CCF. This will ensure that the income is both accounted for and taxed on a current basis. Investors will be provided with an annual breakdown of income by type and source.

Although tax advice should be obtained regarding the tax transparency status of any CCF in the jurisdictions in which the CCF’s investors and underlying investments are located, indications are that the CCF is likely to be treated as tax transparent in the following jurisdictions: Austria, Belgium, Canada, France, Germany, Norway, Switzerland, the Netherlands and the United States. (Source: Arther Cox (Dublin))

As discussed in a recent Finance Week article, there are huge performance implications alone in using a CCF, compared to the same investment via an Irish Variable Capital Company (VCC). In the example given, if a fund manager invested £1bn in the MSCI Euro index and performed only equal to that index, a CCF would have created an additional return of £57.5 million over the past 10 years.