Possible divergences between the OECD
and EU treatment of economic substance and those of the "offshore"
jurisdictions in matters of Investment Fund and Investment Fund
management and administration.
This article is not about treating the two salient
organisations as hostile to offshore fund management in general,
but rather to indicate to what extent the offshore jurisdictions
concerned might feel required to go further and in fact act against
their own and their clients' interests, believing that bringing in
tougher measures of economic substance is "compliant". It is as
much of a warning as an analysis.
Rewriting the measurement of such substance could be
detrimental not only for their indigenous fund industry but more
importantly to their onshore clients.
I propose to address the matter from certain of the
documentation produced by the EU and the OECD, who appear nowto be
regulatory competitors run by two French ENArque's, at least at
There are a few relevant primary documents, but the majority of
each document is not germane:
EU's guidance on funds, dated 27th May 2019, which
builds out the 'four pillar' approach that the EU has adopted to
OECD BEPS Action 5 report, which states, "The work of the FHTP
is focused on fund management and not the taxation of the fund
itself" (at footnote 27 on p43).
EU scoping paper, published in 2018, which states, on p47,
"Collective investment funds (CIVs) are of a different nature,
except in rare circumstances where the manager and the CIV form one
legal entity. Therefore, the usual substance requirements
cannot automatically be applied to CIVs. Thus, and in part
similar to pure equity holding companies, reduced substantial
activities requirements adapted to CIVs should apply.
Requirements in this regard can be paralleled with EU legislation
on investment funds, in particular [AIFMD]."
Pascal Saint-Amans and Pierre Moscovici are both career
civil servants, with Pierre Moscovici having defined a political
trajectory and a superficially attractive mission for the latter
part of his career.
In short, both men have a set of predisposed political
ideas which have economic consequences and have achieved the
institutional means of carrying these out.
Against that backdrop, one is forced to conclude that it
is French ideas and conceptualisation of
what money and its creation is about which prevail, as opposed to
other conceptions of what both men would doubtless confront as
"anglo-saxon" financial demonology.
However, there is a limit to such francisisation of the
World economy, as since the 1970s France has been obliged to adapt
its own theories of monetary creation, conservation and policies
firstly to the EU Euro and then to the world order, or as they
would see it chaos into which France has to project itself to
attract capital. I refer particularly to the working capital which
those such as Saint Amans and Moscovici mistakenly consider to be
in constant flight from France, rather than into it.
Working Capital is firstly produced by and in response to
men and women working in an organised economic environment
Hence my concern that the offshore fund centres might feel
that they are being forced to adopt regulatory positions which are
over-zealous, as a matter of governmental policy rather than of
In order to attempt to resolve territorial issues as to
investorship, the EU has attempted to put in place a series of
measures staring with OPCVM which provide a mutually recognisable,
but inherently cumbersome European Fund model. The initiative
taken since in the Mifid field have been fraught wtih issues as to
the balance of the need for capital, and the perceived need to
avoid tax evasion, and perhaps now as an added accessory political
Money Laundering , through such vehicles. The whole question of
banking secrecy and Saint Amans' distaste for it have
recently led to Offshore centres having to rephrase their laws of
property to cope with the French falsehood that a trust, and
therefore a unit trust is a form of contract as opposed to the
property law vehicle which it actually is, and prior to
Saint-Amans' and Senator Marini's arrival on the scene was treated
as by French legal theorists and University lecturers.
What is the point?
The point is that the current trend toward economic
substance arguments is facing the same obstacle to logical analysis
of the fact that all structures involving monetary finance are by
their very nature a subjective reality. The attempt to introduce a
supposedly objective reality of economic substance is therefore a
non sequitur of which an French studying for the Baccalaureate
would have been educated to detect and abhor.
The economic substance to any legal structure is the
interplay between the law and the documentation putting it into
practical application. There is therefore a serious reality issue
with the notion of holding companies and the attempt to distinguish
equitable holding companies from financial holding companies in
order to corrall out base erosion. How can an international
group function without a holding company, how can it function
without being able to place its future earnings as a revenue steram
to guarantee its future working capital requirements? There
is therefore a considerable gap arising between the normal
definition of French fonds de roulement and the concept of
working capital as the remainder of the planet understands
it. The Banque de France is still religiously pumping Euros
into areas of France where French commercial paper could default,
rather than indirectly shoring up balance sheets.
For some reason both Brussels and Paris are seen, if not
presumed to be treating Investment funds and fund
management on a par with holding companies, even though they have
both admitted that the two areas are distinct for one another and
more importantly from the holding company concept.
That intellectual complacency, being "we, as its
instigators, do not have to address the pseudo-reality created",
risks over spilling to the investment fund, and insurance fund
market, let alone the current misshaping of pension funds into life
The truth of the matter is that whilst Europe is playing
within its regulatory playpen and attempting to regulate Malta
Cyprus and Luxembourg, these jurisdiction's fund managers are being
faced with a deleterious effect upon their investment management.
In the past, such Fund managers were able to place their investment
advice requirements elsewhere , for example in an offshore
jurisdiction which was able to take its real advice from onshore
professionals. That in turn led to economies being made
in relation to servicing he funds under management for the European
clientèle which they were servicing. Ask yourself a question should
FCPs Sicavs and Sicafis really pay corporation tax as an economic
imperative? How does that assist in creating working capital
What s now happening is that as the European Funds are
being passively required by their regulators to bring back that
investment expertise into a more expensive compliance context
within the EU. That will worsen after Brexit. The funds
themselves are becoming more expensive to regulate.
It is uneconomic, and therefore stupid to expect offshore
jurisdictions capable of servicing the less expensive offshore
funds into which these EU Fund managers can invest to in turn
submit to the same "rules" as Europe, without any appreciable
increase, but rather a decrease in regulatory security for the
monetary creation concerned on a purely Samuelson economic
One simply does not create a Euro note or any other
banking medium involving domestic currency and its creation by
snipping off its edges, and value in regulatory
expense. That is pure inflation, albeit hidden by the current
economic modes of thought.