SJ Berwin comments on double tax treaties

04 March 2004

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A recent release from SJ Berwin has reported on double tax treaties Â– the bilateral agreements that govern international tax law for private equity funds. The law firm commented on the importance of investors paying tax on the profits arising to the fund in one country only and that in the absence of mutual agreement between governments, this is often not the case.

The existing tax treaty between the UK and France was signed over 35 years ago (although it has been amended since) and in 1990 negotiations began to create a new one. It has taken nearly 14 years for the parties to agree, but in January this year a new treaty between the UK and France was finally agreed, and published in draft form. Although it has not yet come into force, the draft does include some positive news that aims to simplify European fund structures.

The position of a UK managed limited partnership is dealt with specifically. Under the new treaty, UK resident investors will be entitled to relief in respect of income or gains arising in France, and French resident partners will be entitled to relief on UK income or gains, in each case as if they had derived the income and gains directly. Consequently, French investors in funds investing in the UK, and British investors in funds investing in France, can avoid paying tax in both countries without complex structuring. In addition, it is also clear that a French partnership would be entitled to relief under the treaty in respect of UK income and gains.

Both these clarifications are the result of successful lobbying on both sides. Relief under the treaty may also be available where (to take an example), a UK investor in a non-UK structure (such as a Delaware partnership) received income or gains arising in France. The UK investor's relief in respect of the French income is dependent on such conditions that (in this particular example) the French tax authorities may determine, thus leaving the UK investor in an uncertain position. The BVCA is urging the Government to clarify that in such a situation, provided the UK investor could produce to the French tax authorities a certificate of UK residence and a copy of the partnership accounts, relief will be available without having to satisfy any further conditions.

The report concluded that treaty process is by no means complete and there will be further discussion and lobbying before it comes into force. There are many positive aspects of the new treaty that could facilitate investment in cross-border funds, but some of the grey areas (including the position of UK LPs) need to be dealt with in order to give the maximum possible certainty to international investors.