OECD Seeks Additional Proposals on Treaty Benefits for Non-CIV Funds

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March 25, 2016

On March 24, 2016, the Organization for Economic Co-operation and Development (OECD) issued a consultation document soliciting public comments regarding treaty entitlement of non-collective investment vehicle (non-CIV) funds. While collective investment vehicle funds are defined under the 2010 OECD Report and are entitled to treaty benefits subject to specific rules, commenters have sought treaty benefits for non-CIVs, which have yet to be defined.

The consultation document states that the OECD will continue to examine policy considerations regarding treaty entitlement of non-CIV funds. Further, the OECD plans to address two key concerns of OECD members about granting treaty benefits with respect to non-CIV funds. In particular, these concerns are that non-CIV funds should not be used to obtain treaty benefits for investors not otherwise entitled to such benefits and that investors should not be able to defer recognition of income on treaty benefits that have been granted.

The consultation document also asks commenters to clarify how non-CIV funds work, e.g., what types of vehicles would be defined as non-CIV funds; whether these funds are able to determine the identities and tax-residences of the beneficial owners; what is the intermediary-level tax; and at what point would taxation occur. In particular, the consultation document focuses on proposals concerning the impact on non-CIV funds of new limitation on benefits (LOB) rules, the principal purpose test, anti-conduit rules, and special tax regimes. Regarding the LOB rules, the document raised questions to commenters’ requests that: (a) treaty benefits be granted to regulated and/or widely-held non-CIV funds; (b) non-CIV funds be allowed to elect treatment as fiscally transparent entities for treaty purposes; (c) certain non-CIV funds be granted treaty benefits where a large proportion of the investors would be entitled to the same or better benefits; (d) the LOB rules not deny benefits to a non-CIV resident of a State with which the non-CIV has a sufficiently substantial connection; and (e) a “Global Streamed Fund” regime be adopted.

Fundamental objectives of the OECD include combating international tax avoidance and evasion by preventing multinationals from artificially shifting profits to low or no-tax jurisdictions and developing and encouraging the promulgation of clear guidance that identifies which country’s tax should apply under particular arrangements. The OECD’s analysis of how non-CIV funds should be taxed is part and parcel of this core mission.