Ireland's Common Contractual Fund

As we all know, the ICAV was introduced in 2015, with one of the key tax benefits and therefore key attractions for investors and promoters alike being that an ICAV is entitled to “check the box” to be deemed a disregarded entity for US tax purposes. This means that US investors are taxed as if they had directly invested into the underlying assets held by the ICAV rather than via a corporate vehicle, thus entitling them to the benefits of pooling without an increased tax cost.
However significant benefits can also be obtained via the transparency that can be achieved using the Common Contractual Fund or (CCF). Not only that, a CCF also offers a number of other tax and non-tax benefits for both US and non-US investors alike.

However, whilst the “check the box” option is of course an attractive feature of the ICAV, our experience lately is that asset managers, pension funds and institutional investors are refocusing on the fact that significant benefits can be obtained via the transparency that can be achieved using the Common Contractual Fund or (CCF). Not only that, a CCF also offers a number of other tax and non-tax benefits for both US and non-US investors alike. As such, where a corporate fund vehicle is not an absolute requirement, the CCF can be an interesting alternative. From a Brexit context, fund distributors will likely be looking to EU fund vehicles to serve their EU markets, and a CCF can prove a worthy alternative to fund structures such as the UK TTF.

“A CCF is transparent from a legal and tax perspective in Ireland. This means that the CCF is exempt from tax on its income and gains”

Therefore this month, we are shining the spotlight back on the CCF and some of the benefits of launching/investing in same.

What is a CCF?

A CCF is a regulated fund structure in Ireland which is transparent for Irish tax and legal purposes. As the name suggests, it is a contractual arrangement and is established by a management company under a deed of constitution. Ownership in the CCF is by units with the unitholders owning the underlying assets in direct proportion to the number of units they hold in the Fund. From a regulatory point of view, a CCF can be either a UCITS or non-UCITS (AIF) thus offering that flexibility. However, it is important to note that investment in a CCF is restricted to institutional investors. Currently, there are approximately 50 authorised CCFs in Ireland, a number that jumps to over 200 with the inclusion of sub-funds.

The benefits of a CCF?

A CCF is transparent from a legal and tax perspective in Ireland. This means that the CCF is exempt from tax on its income and gains and, as mentioned above, the investors are deemed to own the underlying assets of the fund. Many other countries also recognise the fiscal transparency of a CCF. This essentially results in investors being able to benefit from economies of scale by investing through a fund vehicle without giving rise to increased tax cost i.e. the investor should not lose the benefits that would have applied had the investor invested directly in the assets. This can be particularly relevant for pension funds which in a number of countries tend to be eligible for lower withholding tax rates or exemptions under domestic law and/or double tax treaties.

Such benefits may be impacted where a pension fund invests in assets through a corporate vehicle and that vehicle is not able to qualify for the same benefits as a pension fund would otherwise be entitled. As such, investing through a transparent fund structure such as a CCF can protect against this, thus allowing pension funds (among other investors) to diversify their portfolios helping to manage risk without the increased tax cost. Further, it allows investors to benefit from economies of scale ensuring cost efficiency and, as a result, allowing for increased returns. In a period of negative interest returns and an increased focus by asset managers and investors on enhanced/increased returns, this can be important. In some cases, depending on the portfolio, we have seen increased returns in the portfolio of 20bps by using a CCF.

Taxation of the CCF and its investors

There is no Irish withholding tax on distributions from the CCF to its investors. How each investor is taxed in respect of an investment in a particular jurisdiction via a CCF will firstly be dependent on how that jurisdiction views the CCF from a foreign tax perspective. In many countries it is possible to obtain a ruling on the fiscal transparency of a CCF. Examples of countries which have recognised fiscal transparency (by ruling or otherwise) of a CCF include the Netherlands, Italy, the UK, Canada and the US. In fact, in certain countries, for example Germany and South Africa, recognition of the fiscal transparency of a CCF has helpfully been built into the double tax treaty between Ireland and those countries. Nevertheless, even where wording has been built into a double tax treaty, treaty access can be a complex area and therefore it is important that both the CCF and the investors take particular care and obtain professional advice on all matters relating to obtaining treaty benefits.

Where the foreign jurisdiction agrees that the CCF should be viewed as transparent, it is then necessary to look to either the domestic law or the double tax treaty directly between the investor and investment jurisdictions to determine the relevant tax treatment.

Alternatively, where the foreign jurisdiction deems that the CCF should be viewed as opaque, the domestic withholding tax rates of that country should be considered in addition to the potential to achieve a reduction or elimination of such withholding tax under EU law. However, in our experience, the number of OECD countries recognising the transparency of a CCF is far greater than those countries who do not currently recognise the transparency of a CCF.

“With over 16 years in existence, the CCF has built strong credentials in the marketplace. The key benefit of the CCF is its transparency from a legal and tax point of view in Ireland. However, there are a number of both tax and non-tax benefits.”

From an operational point of view, it is worth noting that a CCF is not subject to investment undertaking tax in Ireland. One benefit of this in particular is that the 8 year deemed rule, which for many can be tricky to navigate and track, is not applicable to a CCF. As with all Irish regulated funds, there should be no taxation on income/gains, no capital taxes and no net asset value tax. A CCF will be required to file a tax return, known as a Form CCF 1, with Revenue by 28 February each year. This is a disclosure whereby the CCF is required to outline the details of each unitholder in the Fund and the relevant profits attributable to such unitholder so typically the administrator will be able to prepare this.

Summary

With over 16 years in existence, the CCF has built strong credentials in the marketplace. The key benefit of the CCF is its transparency from a legal and tax point of view in Ireland. However, there are a number of both tax and non-tax benefits for establishing a CCF making it an attractive alternative to other fund structures in Ireland and indeed to other transparent fund structures and therefore it should not be overlooked in the decision making process. The next time you are considering launching a Fund or investing in an Irish Fund, if you have not considered a CCF, perhaps ask yourself why not – you could be missing out!

This article was first published in Finance Dublin and kindly re-published on Deloitte website with their permission.