Financial transaction tax
The idea of a Financial Transaction Tax (FTT) has gained traction in recent years, as policymakers looked for ways to recover the costs of the financial crisis from the sector it deemed responsible, and looked to use the tax system to create incentives. In February 2013, having received the support of 11 participating EU member states, the European Commission published its Proposal for a Directive implementing enhanced cooperation in the area of a financial transaction tax.
In the proposal, AIFs and AIFMs qualified as financial institutions that are potentially liable for the tax. As the proposal provides a carve-out for primary transactions, fundraising for private equity funds appears to be outside the scope of the tax (issuance is exempted, but redemption falls within the scope of the FTT). The exchange of shares and bonds would be taxed at a minimum rate of 0.1% and for derivative contracts at a minimum rate of 0.01%.
Although discussions on the proposed FTT are continuing at the level of the Council of Ministers, there are several areas of contention among participating states on how to structure and implement the tax. There is also widespread opposition to the proposal from some non-participating member states.
Invest Europe position
Although the private equity industry is not opposed to the introduction of an FTT per se, it is important that any such measure does not jeopardise growth in the real economy such as the investments made in, and carried out by, private equity. It is imperative to ensure that primary transactions are outside of the scope of the FTT as far as possible.
Invest Europe published an independent study in late 2013 on the impact of the proposed FTT on Private Equity, which demonstrated that a significantly higher actual rate will be levied on private equity funds than the nominative rates contained in the proposal due to their application at various stages of private equity funds. As Invest Europe Position Paper on FTT makes clear, this tax will hamper long-term investment by increasing the cost of raising capital and investing that capital into portfolio companies. We urge that any rule does not place investors in a worse position by investing via a fund than they would be by investing directly in the same assets, i.e. fund neutrality should be protected.
Financial Transaction Tax
22 January 2014, Anita Millar