The problem, to the extent that it does exist, is seen as affecting US taxpayers who are asset managers in particular, due to the tax difficulties US taxpayers encounter when they own non-US funds. Under US tax rules, “offshore” funds are considered passive foreign investment companies, or PFICs, the growth of which can be taxed by as much as 39.6%, according to Maseco managing partner Josh Matthews.
The new regulations outlining how UCITS fund managers are to be remunerated were unveiled last week, after the European Parliament and European Council reached an agreement on some outstanding issues in relation to the draft UCITS V directive that had been under discussion since the first draft UCITS V proposals were released in July 2012.
As of this morning, all of the European funds industry and asset management associations contacted by International Adviser over the past two days declined to comment officially on the EU bonus regulations issue, with most saying that they were awaiting further clarification.
Spokespersons for fund management companies contacted also declined to comment.
However, one source, who requested anonymity, said that their organisation was of the opinion that the new bonus requirements contained in the final UCITS V draft agreed last week would “not constitute a major change”, since similar provisions are already in use under the Alternative Investment Fund Directive (AIFMD) and European Securities and Markets Authority (ESMA) guidelines.
“What [the new UCITS regulation] says is that there is requirement for bonus payments to be paid “50% in fund units, or equivalent instruments,” this source added. “And as we see it, the phrase, ‘or equivalent instruments’ provides a degree of flexibility – for example, if you’re in a jurisdiction that has a different tax regime, or that kind of operates in a different way – as to how the component elements in that bonus may be paid.
“In other words, the ‘or equivalent instruments’ phrase provides a kind of flexible get-out clause.
“Clearly, it would be open to interpretation, and this is what people are looking at right now."
The new UCITS V rules are due to take effect in 2016. As finally set out on 25 February, after months of negotiation and industry consultation, they call for fund managers to defer 40% of their bonuses for at least three years – or 60%, in the case of particularly large bonus packages – in addition to the 50% in fund units requirement.
The new bonus rules were introduced in an effort to deter excessive risk-taking by UCITS fund managers and to increase transparency.
The US way of taxing Americans who own non-US mutual funds has long been a disincentive for that nation’s investors to own UCITS funds. According to Maseco’s Matthews, not only are PFICs taxed on their growth at US income tax rates, which can run as high as 39.6% (as opposed to the lower maximum capital gains tax rate of 20%), there may also be “annual penalties, and interest on those penalties as well”.
For Matthews, whose company has been helping expatriate Americans cope for the past five years with the fact that growing numbers of non-US financial institutions, including European fund managers, are unwilling to have American clients owing to FATCA and other tax and reporting issues, there is a certain irony in the proposed bonus rule.
“This legislation may end up forcing [American clients] upon ‘offshore funds’ that specifically prohibit US taxpayers from becoming investors,” he noted.
As reported here in 2010, EU lawmakers have sought for years to link European fund managers' remuneration to the performance of their funds, in order to better align their interests with those of their investors.