Spanish Fund Tax Change 'Discriminatory' Say Foreign Managers

by Ulrika Lomas, Tax-News.com, Brussels

04 June 2002

The Spanish Government has introduced a concession allowing investors in mutual funds to switch their holdings between funds without paying capital gains tax. This in an attempt to reverse the slide in savings formation which has resulted from the poor performance of the Madrid bourse in the last two years.

However the concession applies only to closed-end funds, which constitute the bulk of the $170 bn Spanish fund sector and are marketed primarily by large domestic operators such as Santander and BBVA; open-ended funds are excluded, which has caused an outcry among foreign fund managers using the EU's new 'passporting' rules to sell fund investments to Spaniards. The foreign companies offer primarily Luxembourg SICAVs which pay very low taxes in Luxembourg, although for a Spanish resident they are of course still subject to Spanish capital gains tax on a disposal.

The SICAV, or Societe d'Investissement a Capital Variable, is an open-ended vehicle having a variable capital which is always equal to the net asset value of the fund. They are formed in Luxembourg under a law of 30th March 1988 which codified Luxembourg legislation for Undertakings for Collective Investment (UCIs). Many of them fall under the EU's UCITS legislation (Undertakings for Collective Investment in Transferable Securities) and are therefore allowed to be marketed throughout the Union.

Taxation of UCIs is very low, and no withholding tax is levied on distributions to investors. The various forms of UCI are all exempt from all Luxembourg taxation, and pay only a capital duty of LUF 50,000 on start-up, plus an annual tax on net assets which varies between 0.01% and 0.06% depending on the type of fund.

More than 2,100 SICAVs are registered with the Madrid stock exchange, having a total of about $17 bn under management, although this figure has been rising fast. Foreign asset management companies such as Schroders Investment Management, Templeton and Fidelity have specialised in offering Sicavs to wealthy individuals but don't have the scale to compete effectively against the larger Spanish banks in main domestic market.

Foreign fund managers say that the new law, which takes effect from 2003, is discriminatory and have complained to the government that the new tax law will make Sicavs less attractive to investors, compared with mutual funds. The finance ministry, however, denies this, saying that the distinction is between mutual funds as such and companies such as SICAVs in which shareholders hold voting rights.

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