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The impact of BEPS on private equity
First published in International Tax Review, 17 June 2014
On 14 March 2014, the OECD released a discussion draft on treaty abuse under its Action Plan on Base Erosion and Profit Shifting (BEPS). Marc Sanders, Taxand Netherlands, provides guidance on the BEPS project's impact on the private equity sector.
Investors into private equity funds are typically pension funds, family offices, educational endowment funds, charities, and other investment funds in a broad range of jurisdictions. Many of these investors can, in general, benefit from tax treaties in their jurisdictions of residence. From a tax perspective, it is therefore important that the structure of the fund is tax neutral for the investors. The pooling of the investments through the fund entity should not trigger additional tax for investors when compared with a situation in which the investors would have invested directly.
Private equity funds typically invest in companies in multiple jurisdictions, to diversify risk and maximise investment opportunities. It is therefore critical to private equity funds that they can operate effectively cross-border and tax is not a barrier to invest into another country. The funds use holding companies to avoid any double taxation.
BEPS is largely focused on multinationals. However private equity operates very differently from multinationals. Many of the issues the private equity industry faces with the proposed changes are because the document does not (yet) consider the position of collective investment vehicles (CIVs). It is clear from previous OECD publications that the OECD is aware of the particular challenges faced by CIVs in relation to treaties. During a webcast by the OECD on 26 May it was stated that the tax position of CIVs should be taken into account but no details were provided.
Private equity funds need to adapt to the new environment and reconsider their standard structures. A cookie cutter approach should not (or no longer) be taken, especially considering the fast changing rules. The necessary substance in the structure should be tailored to the business strategy and the tax requirements of the source jurisdiction and the treaty.