The CCF is the Irish version of what are commonly referred to as tax transparent funds (TTFs) and are available in Ireland, Luxembourg, the Netherlands and the UK. CCFs provide investors with the benefit of withholding tax savings ranging from 30 to 50 basis points.
The deep and longstanding relationship between BNY Mellon and Aon has enabled us to work closely together on the deployment of their CCF, Aon’s first in the Irish market. The BNY Mellon tax and operational teams have deep knowledge of TTFs, which, coupled with the latest technology, enables BNY Mellon to service Aon in a highly automated and operationally efficient manner.
What are the Benefits of a Tax Transparent Pooling Vehicle?
Pooling is the term used to describe the aggregation of different investors’ assets into a single fund vehicle. It offers investors the opportunity to diversify their portfolios and spread portfolio risk, achieve centralized administration, enhance governance and risk management, and extract cost savings from economies of scale.
Pooling can take place either through a vehicle that is opaque for tax purposes, or through a vehicle that is regarded as tax transparent. The pooling of assets in a fund that is transparent for tax purposes means that each investor’s gains accrue in proportion to their holding in the fund without changing their character, source and timing. In other words, the fund is “looked through,” and investors are treated for tax purposes as if they held their proportionate share of the underlying investments directly.
The benefit of transparency is that investors should be able to access the treaty benefits of their home jurisdiction, provided that the jurisdiction of both the investor and the investment view the fund as tax transparent. If viewed as tax transparent, investors can take full advantage of the relevant double tax agreement as if they had invested directly, while achieving the administrative benefits and scale efficiencies of pooling.
Where the pooling vehicle is regarded as tax transparent, withholding tax rates are applied based on the double taxation treaties concluded between the country of the investor and the country of the underlying investments. This allows investors such as pension funds, which are often eligible for a reduced withholding tax rate, to benefit from that rate as if they held the investments directly. A benefit can be seen, for example, with the difference of up to 30% withholding tax on U.S. income for pension funds investing in a tax transparent fund versus an opaque fund.
IRISH COMMON CONTRACTUAL FUND (CCF)
An Irish CCF can be suitable for large institutional investors, such as pension funds and insurance companies, looking to maximize their withholding tax treatment in a cost efficient pooled fund structure. It can also be attractive to charities and sovereign wealth funds looking to capitalize on the scale efficiencies of pooled fund usage.
The decision regarding what type of tax transparent fund to use is not only influenced by the advantages and disadvantages of each product, but also by other related factors. For example, the strategic location of the management company may be a determining factor, as may the location where the company has the most concentrated knowledge and expertise in tax transparent pooling.
It is important that the countries in which the TTF invests and the country of the investor recognise the vehicle as tax transparent in order to allow investors to obtain the full benefit of the relevant double tax agreements. For example, the Irish CCF has a strong crossborder appeal from an investor perspective, and is competitive in the market when compared to the other European products available.
Operating a Tax Transparent Pooling Vehicle
Various complexities arise from the operation of a tax transparent pooling vehicle and addressing these complexities requires the interaction and alignment of the global custodian, fund administrator and transfer agent.
BNY Mellon has extensive experience in pooling across Europe, and each pooling structure needs to be considered on a case-by-case basis to accommodate the requirements of each individual scenario, taking account of client requirements, jurisdictional laws and compliance, and current market nuances.