Tax

Mutual funds transformed by Northern Trust into tax efficient structures could save 50 basis points

Northern Trust can transform Fonds Commun de Placement (FCP) mutual fund structures used by investment managers into tax-efficient structures which optimise tax transparency and reduce withholding tax drag.

According to Northern Trust’s proprietary calculations, dependent on the mix of assets in the portfolio, mitigating taxation on dividend income for institutional tax-exempt investors in FCPs through its solution could save investors up to 50 basis points per annum.

An FCP is a tax transparent entity established in Luxembourg through which investors may qualify for reduced withholding tax rates on equity dividends. This transparency can help investment managers improve performance, increase investor returns, and increase assets by aggregating tax exempt investors from multiple jurisdictions.

“By their nature, all FCPs are tax transparent, however we are seeing a number of FCPs which are not fully optimised to access the benefits of withholding tax transparency,” says Martin Shah, partner at Simmons & Simmons, an international investment funds law firm working with fund managers looking to optimise the tax transparency of their investments. “Northern Trust’s solution to change the structure of these funds to enable them to access the benefits of tax transparency is, in our experience, a much simpler solution than moving investors into an alternative fund vehicle.”

“Withholding tax efficiency can be a performance differentiator, particularly in the current market environment,” says Aaron Overy, head of asset servicing pooling business development at Northern Trust. “Our pooling platform has been specifically created to remedy the technical obstacles to tax transparency for FCP mutual funds, without the disruption of a fund migration, and with all operational, legal and tax considerations causing little to no disruption to the day-to-day business of fund management.”

This latest solution to optimise the fiscally transparent nature of FCPs follows proprietary research announced earlier this year which found that a tax-transparent asset pooling vehicle can enhance returns by as much as USD81m on a USD1bn portfolio invested in broad market indices over a 10 year period.

As of 30 June 2012, Northern Trust has 25 clients on its tax-transparent, global pooling platform, with more than USD62bn of assets under custody. Earlier this year it announced it had become the first custodian to work with a client to secure reduced withholding tax rates for Swedish investors holding equities through a tax-transparent, cross-border asset pooling vehicle.

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