The blockchain to alleviate the taxation of UCIs abroad

Article taken from -AGEFI Hebdo of the 11th of July 2019 by Delphine Charles-Péronne, former director of tax and accounting affairs at the AFG, now General Delegate of the Federation of Real Estate and Property Companies.

Due to their total exemption from corporate income tax or their tax transparency, undertakings for collective investment (UCIs) are generally not considered as residents of France within the meaning of tax treaties. Unless specific provisions are made, UCIs do not therefore benefit from treaty advantages reducing withholding tax rates on dividends, interest and capital gains received from abroad. They are subject to withholding tax at the domestic rate provided by the States (generally 30%) instead of the conventional rates (0% to 15%).

However, some twenty tax treaties protect UCIs and, according to the path opened by the OECD in its latest comments on the model convention (summer 2017), a new clause, on the model of the one in the new convention between France and Luxembourg, should gradually be included in the conventions signed or renegotiated by France.

This clause provides that treaty benefits are granted to the UCI up to the percentage of its assets held by investors resident in France, in the contracting State or in States having signed a tax treaty with France containing an administrative assistance clause. Its application therefore presupposes that the management company of the UCI knows the tax residence of the unit holders or shareholders of the UCI.

However, the vast majority of UCI securities have been dematerialized since 1984 and circulate in Euroclear.

In France, they can be held either in bearer form, in which case they are registered with the financial intermediary chosen by the investor; or in administered registered form, in which case the custody and day-to-day management of the securities account is handled by a financial intermediary; or finally in pure registered form, in which case the ownership rights are registered in a register kept by the issuer of the security, often the management company. This type of holding is rather reserved for UCIs with a limited number of holders.

Direct relationship

Only in the latter case does the portfolio management company know the identity of the final holders of the UCI. Otherwise, it is only aware of the financial institution holding the account. In the case of UCIs for the general public, the portfolio management company does not usually have any information to certify the tax residence of the holders.

However, it appears that pure registered shares, hitherto generally reserved for UCIs with only a few holders, will experience a new boom thanks to the blockchain.

Indeed, some twenty French management companies have joined forces to participate in a pan-European platform for marketing UCI securities and maintaining the register of UCIs. This platform, called Iznes, uses blockchain technology and creates a direct link between the member management companies and the investors in the UCIs.

This online management eliminates the various intermediaries in the current circuit and puts the management company in a position to provide foreign tax authorities at any time with a perfectly reliable statement specifying the tax residence of all holders and thus to calculate the percentage of the payment benefiting from the treaty advantage, for example a withholding tax at a rate of 15% instead of 30%, or even an exemption.

In the future, this development will be combined with another advance from the work of the OECD: the TRACE project. Finland has just announced its intention to set up the TRACE project in 2021. It is a procedure based on the regime of "qualified intermediaries" introduced by the United States in the 2000s and facilitated by the self-certification forms collected in the framework of the CRS (common reporting standard): a financial intermediary signs an agreement with a tax administration that authorizes it to directly apply the conventional withholding tax rates on the basis of the information in its possession. The procedure is thus simplified and accelerated, with the immediate benefit of conventional advantages. This presupposes, however, that the tax residence of the holders is known by this intermediary and therefore necessarily combines with the holding of the UCI's securities in pure registered form, including by blockchain.

Thanks to these advances, and to the fact that some States fully exempt foreign UCIs from withholding tax on a non-discriminatory basis with respect to local UCIs, UCIs investing abroad should see the withholding taxes levied on their foreign-source income and gains considerably reduced in the future.

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