Overseas Chambers of Peter Harris

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Jersey, JE2 7ZW

22. Investment Fund Management in the new "Economic Substance" environment

July 15th 2019

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 present.

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 funds.


  • The 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).



  • The 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  not otherwise.

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 international obligation.

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 insurance mechanisms.

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 for  investment?

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 basis.

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.