Too many institutional investors are still losing out on returns because their funds are paying too much tax. Perhaps some fund managers and trustees think tax efficiency is not that important but there are other benefits to the Common Contractual Fund.  Kevin Duggan, Director, Client Solutions (Tax), outlines the benefits of CCFs and why we consider CCFs to be essential structures to consider in diversified portfolios.

Benefits for investors

The primary benefit of CCFs is their withholding tax transparency. This allows custodians/administrators, to see through the fund to the beneficial owners and apply the correct tax rates based on the investors own entitlements. That is particularly important for tax exempt investors in pooled funds who can end up paying dividend withholding tax that they might otherwise reclaim.

There are three levels at which to apply this tax transparency. First, we’ll look at which tax treaties the end investors may be entitled to apply. Next, we can look at fund level relief – in certain countries domestic investment funds meet qualification conditions for reductions or exemptions from local withholding tax on dividends received. Finally, we can look at whether we can apply Section 892 of the US tax code, which applies to certain US investments held by tax exempt organisations, such as Sovereign Wealth Funds.

The second benefit of CCFs stems from this tax transparency in that, applying the correct tax rates reduces a significant tax drag on portfolios. This helps improve the performance of the underlying investments without the investor taking on any additional risk.

The third benefit is that CCFs give investors more choice of investment strategies. Effectively they open a larger pool of portfolios operating in multiple jurisdictions. Where tax compliance issues once put these funds off-limits, CCF tax transparency now makes them a realistic option.

CCFs can encompass different asset classes, including alternative strategies and increasingly popular ESG mandates. This is a particular motivator for institutional investors in Nordic countries. That is why Carne is in ongoing conversations with various tax authorities to secure the necessary rulings and confirmations on tax transparency that enable our CCFs to operate effectively.

Benefits for managers

Aside from enhancing investment outcomes for existing investors by reducing the tax drag, CCFs offer managers increased distribution capabilities to sophisticated investors and markets. The CCF structure, combined with expert administration, servicing and reporting from a provider like Carne, makes it easier for managers to offer tax-efficient strategies through pooled vehicles in multiple jurisdictions. This gives them access to more investors while helping to reduce administration costs.

Benefits for Trustees

Essentially, CCFs enable trustees to demonstrate that they are always acting in the interests of their beneficiaries. The tax transparency and other administrative and reporting benefits, as well as Carne’s competitive fees, show that they take accountability and governance seriously. At the same time, the clear administrative procedures and processes support trustees when taking tax and investment decisions on behalf of their clients.

Next steps

To find out more about how a CCF could benefit you, please contact Ryan Tully, Business Development, Carne Group.

Disclaimer

Information contained herewith is for use only by (1) qualifying institutional investors (meaning Professional Clients as defined in Annex II of the Directive 2014/65/EU of the European Parliament and of the Council of 15 May 2014 on markets in financial instruments (“MiFID II”)) who are also non-US persons (US persons are not able to invest in the Fund) and (2) current and potential investment managers of Carne Global Fund Managers (Ireland) Limited funds.

Carne does not provide tax advice. You should consult your own professional tax advisor. Tax rules are complex, change frequently and depend on the individual taxpayer’s situation.

Investors and potential investors should be aware that the CCFs are not open to US investors.