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The Impact of BEPS on Tax Treaty Relief for Alternative Funds

The principal aim of the OECD project on Base Erosion and Profit Shifting (“BEPS”) was to tackle perceived aggressive tax planning by multinationals. It was not aimed at hedge funds, private equity funds, real estate funds or other alternative investment funds (“AIFs”), yet they find themselves impacted. In particular the OECD and its member governments have used BEPS to revisit how companies claim relief from double taxation on income and gains arising in the “source countries”in which they operate and invest. The upshot is that such tax relief may be denied if obtaining that relief is considered by those source countries as being one of the main purposes of establishing a company in the treaty claimant jurisdiction. AIFs operate and invest internationally, so the ability to benefit from international tax treaties is critical. A key principle underlying collective investment is that the investors should not be subject to additional taxation beyond what they would have incurred through investing directly.

Accordingly, it is important that an AIF be entitled to rely on double tax treaties in the same way that their investors could have if investing on their own. Otherwise these investors could be subject to an additional layer of tax because of investing collectively, which would undermine the rationale and economic basis for the collective investment.

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