Alternative investment industries and tax
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Alternative investment industries and tax

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Ricardo Lopez Rubio of KPMG Abogados provides an insight into the alternative investment industry and considers the impact of prospective tax changes

There are multiple tax initiatives at present that are changing the way international tax principles would be applicable. This article describes how the new international and EU tax landscape may impact the use of special purpose vehicles (SPVs) by ‘alternative finance industries’, which will be referred to as non-collective investment vehicles (non-CIVs).

A starting point is understanding the particularities that make this sector different from multinationals or collective investment vehicles (CIVs).

The most notable differences of non-CIVs from CIVs include:

  • The long-term nature of the investment and the majority stakes considered in targets, which requires, among others, a distinct manner of managing corporate affairs;

  • The active management of the portfolio, which requires flexible structures to integrate add-ons/execute carve-outs and the accommodation of management incentive plans that align with investors, among other measures;

  • The different size of target investments, sector specialisation, and regulatory constraints (not only relating to the target but also concerning the investor, which can be subject to regulatory constraints);

  • The alignment needed with other stakeholders and unrelated parties as management, debt providers, or co-investors;

  • The need to return capital to investors within a given period through the divestment of the portfolio; or

  • The use of third-party debt, and the need to provide commercially viable structures, for enforcement purposes.

There are also similarities. As with CIVs, non-CIVs aim to provide the highest return possible to their investor base through effective asset selection, sector expertise, and diversification policies. Another common feature of alternative finance industries is competition on the remuneration paid to limited partners (i.e., management and performance fees) and a limited ability to transfer costs of all nature to the ultimate investors.

These differences and similarities imply a need for a deeper degree of flexibility, which requires the further consideration of structures that address these varying needs. In this context, the use of SPVs by non-CIVs is needed to, among others:

  • Set up a joint-venture vehicle with unrelated parties;

  • Have a vehicle through which an unrelated lender can agree a security package in an efficient manner;

  • Protect third-party debtors in a suitable jurisdiction;

  • Consider the SPV as the future vehicle for listing debt or equity in a suitable jurisdiction;

  • Isolate risks and comply with internal (or external) diversification or concentration requirements; and/or

  • Align the incentives of alternative finance industries with the management of portfolio companies.

It is reasonable to state that each case is different, and the balance of tax and non-tax considerations can vary, and different fact patterns may give rise to different tax considerations.

Set against this background, one can consider how non-CIV SPVs are impacted by international tax developments.


The most relevant development is likely to be the draft Anti-Tax Avoidance Directive 3 (ATAD 3, or the Unshell Directive), but there are also relevant references in, among others:

  • The OECD Multilateral Instrument agreement under the principal purpose test (and the reference under this principle to the well-known ‘regional investment platform’);

  • The application of ‘beneficial owner’ status to CIVs and non-CIVs; and

  • The OECD and EU Draft Pillar Two Directive and the EU DAC 6 Directive.

High court cases in different jurisdictions have also addressed and considered SPVs in many well-known cases. The European Court of Justice’s ‘Danish Cases’ are probably the most publicly known, but there are others on which it is suggested the non-discrimination rules could play a role within this industry.

While the aim of these initiatives is, in simplified terms, to offer tax authorities tools in the fight against tax avoidance, in practice it is likely that their fragmented and unharmonised application may have inadvertently created administrative and tax consequences for structures that are commonly used in the asset management industry. Let us begin with ATAD 3.

ATAD 3 is an ambitious proposal aiming to introduce an objective set of rules for an otherwise subjective criterion – the ‘substance’ any given entity should have – so that a given company, no matter in which sector it operates, can have access to benefits under tax treaties concluded between EU member states and specific EU directives (i.e., the EU Parent-Subsidiary Directive and the EU Interest and Royalty Directive).

With this objective in mind, the initial drafting of the directive (and the non-binding amendments proposed by the European Parliament in an opinion issued January 17 2023) provided a detailed set of rules based on a minimum degree of ‘substance indicators’ or ‘economic nexus’ within a given jurisdiction so that a given entity is not classified as a ‘shell’ company. Notwithstanding the above, EU member states could go beyond this minimum standard and within the transposition process consider additional requirements and restrictions.

At this stage, it is not clear if member states will be able to agree on the criterion to classify an entity as a shell and on the consequences of an entity being deemed a shell. The compromise text might be a combination of disallowing EU directive benefits and issuing a tax residency certificate with a notification that would act as a red flag for the receiving tax authority, therefore potentially prompting it to investigate the structure or payments made to the entity.

Setting aside the discussions held through the French, Czech, Swedish, and the ongoing Spanish presidency, the presumption of an SPV being a shell entity seems to rely on its material aspects that tie an entity to a given jurisdiction on a first instance (for example, premises, bank accounts, but also employees as the first exclusion criterion), and on the presence, expertise, and independence of directors, rather than on the business rationale or economic nexus of an SPV.

Nevertheless, an entity that fails to meet the fixed substance criteria could have the option of providing evidence as to the valid commercial reasons (i.e., business rationale or economic nexus) for which an entity has been established. However, a case-by-case analysis based on facts and circumstances would only be available as a secondary defence.

This method of addressing the issue could result in significant compliance risks if the rebuttal process is not administered in an efficient manner. For example, given the uncertainty surrounding the consequences of being deemed a shell entity, it is not clear at this stage whether any consequences would kick in despite the entity having submitted a rebuttal claim, meaning that an SPV that has failed the substance criteria may face consequences during the period of assessment of the rebuttal period, despite it being set up for valid business reasons that reflect economic reality.

To address these issues, guidelines on what is expected of taxpayers in terms of evidence and a well-defined administrative process, including clear deadlines for the taxpayer and tax administration, would be much welcomed and would serve to reduce the uncertainty inevitably associated with the process.


All in all, the discussion is broad and there are interesting academic literature debates in this respect.

One of these debates is about the concept of tax residency itself. There is support in relevant academic literature (for example, Escribano, Lipnieewicz) that suggests that one of the current challenges of the international tax framework is agreeing on a commonly accepted ‘tax residency’ concept that works in multiple situations in a world where the concept of the tax residency of corporate entities is diluting due to factors such as decentralised decision-making processes, digitalisation, remote working, and the future automatisation of business decisions within AI.

In the author’s view, the attempt of ATAD 3 to provide tax authorities in the EU with a harmonised set of criteria to test substance against – although a valid and brave one – could fall short in a few years if only material aspects linked to tax residency aspects are key to determine the access of tax treaties (and EU directives), and not a link to the business reasons or economic activity developed in each jurisdiction. The way to address this concern could be to design the rebuttal process in a much more efficient, and different, manner than that considered at present.

Another issue is the relationship between ATAD 3 and the existing OECD concepts, and notably with the OECD’s principal purpose test.

The commentaries to the 2017 OECD Model Convention have been enhanced to include several examples that address how the principal purpose test applies to alternative finance industries (for example, the so-called and well-known regional investment platform, securitisation vehicle, and real estate holding platform).

Although this guidance was welcomed, it has been widely criticised as insufficient. The absence of a list of commercially acceptable business reasons that support the consideration of SPVs and/or a hierarchy or list of minimum substance requirements is particularly problematic in practice as several common cases have not been addressed. ATAD 3 partially shares this uncertainty, as it does not address the considerations that should be referred to in a rebuttal file submitted by an SPV of an alternative investment fund. It does not refer to OECD guidance in this respect as a possible source of guidance and/or validation.

The risk of this apparent lack of coordination is that two sets of rules targeting similar objectives can produce a different outcome. The price to be paid would be a lack of legal uncertainty, and the costs of all kinds associated with this uncertainty, particularly in Europe.

The purpose of pillar two

The purpose of pillar two is different from ATAD 3. The OECD's pillar two proposals and the corresponding EU directive seek to introduce a minimum effective corporate income tax at an effective rate of 15% for large groups globally. The minimum taxation rules would apply to multinationals (and domestic groups, in the case of the EU directive) that meet a €750 million annual turnover threshold.

As an overarching comment, alternative finance industries may not be affected by the pillar two rules where the ‘qualifying funds’, or their qualifying SPVs, are not required to consolidate their portfolio investments for accounting purposes. Qualifying funds would comprise an investment fund, a pension fund, or a real estate investment vehicle, as defined by the Pillar Two Directive.

There is a rationale for this: investors in qualifying funds for pillar two purposes are generally taxed on the return that they obtain from the underlying investments. From a tax policy perspective, these qualifying funds were excluded from the scope of pillar two so that the ultimate investors do not suffer the additional tax and administrative costs associated with complying with the Pillar Two Directive.

With this rationale in mind, the definition and exclusions applicable to qualifying SPVs of qualifying funds can be summarised as follows:

  • An SPV would be excluded from the pillar two rules if it is at least 95% owned by, among others, qualifying funds, directly or through several such entities, and that SPV (i) operates exclusively, or almost exclusively, to hold assets or invest funds for the benefit of the qualifying funds, or (ii) exclusively carries out activities ancillary to those performed by the qualifying funds; and

  • An SPV that is at least 85% owned by one or more qualifying funds, directly or through one or several such entities, would also be excluded provided that substantially all its income is derived from dividends or equity gains or losses that are excluded from the computation of the qualifying income for pillar two purposes.

The Pillar Two Directive and OECD rules provide a broad definition of what is considered a qualifying fund under the rules; the majority of alternative finance industries referred to above would likely meet the relevant criteria to qualify.

Thus, an ‘investment fund’ for pillar two purposes would be an entity or arrangement where:

  • It is designed to pool financial or non-financial assets from several mostly non-related investors;

  • It invests in accordance with a defined investment policy;

  • It allows investors to reduce transaction, research, and analytical costs or to spread risk collectively;

  • It is primarily designed to generate investment income or gains, or for protection against a particular or general event or outcome;

  • Its investors have a right to a return from the assets of the fund or income earned on those assets, based on the contribution they made;

  • It, or its management, is subject to the regulatory regime for investment funds in the jurisdiction in which it is established or managed; and

  • It is managed by investment fund management professionals on behalf of the investors.

It has been reported that under the Czech presidency of the EU Council, a proposal on ATAD 3 was made to widen the list of excluded entities to SPVs of certain qualifying funds. It is not yet clear how much traction this proposal could receive, but an interesting aspect of the proposal is that it would align the role of the SPVs of alternative finance industries within the international tax framework. Note in this respect that the exclusion of SPVs for pillar two purposes is not linked to the concept of substance or residency, but to the wider treatment of qualifying funds for pillar two purposes. In the author’s view, this holistic approach is better aligned with the rationales that justify the use of SPVs.

Key questions on CIVs

A previous international tax debate shed some light on the question of whether, and to what extent, CIVs shall be the beneficial owner of income (i.e., the 2010 OECD CIV report referring to commentaries to Article 1 of the 2017 Model Convention).

In this commentary, the OECD concluded that “so long as the managers of the CIV have discretionary powers to manage the assets generating such income”, the CIV shall be considered as the beneficial owner of the income.

The debate on whether non-CIVs shall follow the same rationale as CIVs was more complex. As pointed out by authoritative literature (for example, Calderon), the critical aspect for non-CIVs (with a reduced investor base, compared to CIVs) would be to prove the effective discretionary powers to decide on investments (and divestments) and manage the assets generating such income are exercised by non-CIV managers, as well as being able to evidence that the non-CIV does not operate as a passive conduit without powers as regards the management of the underlying assets. Under these circumstances, a non-CIV should be considered as the beneficial owner of the income of its investments in a similar manner to CIVs.

Local rulings

Finally, many jurisdictions, including Spain, provide an exemption from the taxation of qualifying income for the local private equity industry within the local tax system.

There are recent pronouncements from high courts (such as in Spain, and the lower-level courts in Italy) relating to CIVs (but only on minority shareholdings) that have found that, for example, the Spanish tax rules that treated non-EU CIVs and non-CIVs differently in comparison to Spanish domestic CIVs were discriminatory from an EU law perspective. In this respect, it cannot be discounted that, in the future, an argument could be advanced that non-CIVs located outside the EU should be treated equally as domestic private equity funds.

Moreover, in certain cases, the ultimate members of non-CIVs may have been able to access a tax treaty that would have exempted certain income, resulting in no taxation where the non-CIV’s members had invested directly in the portfolio. In the author’s view, this is one of the most powerful arguments that the use of SPVs (when those SPVs are justified for non-tax reasons) is not abusive from a general tax avoidance perspective. Unfortunately, these arguments have not yet been accepted or included as possible escape clauses in the development of ATAD 3.


As discussions continue at pace on the design of ATAD 3, one of the main challenges faced is the need to achieve a wide consensus so that the initiative can be accepted and approved by each EU member state. This requirement for consensus is also seen in the development of other EU tax initiatives and creates risks of altering the main purpose of each initiative to find consensus, as well as creating at least an appearance of inconsistency and contradictions between initiatives that were intended to address similar issues. In some cases, the apparent inconsistencies can be justified by the different nature and objective of the new tax initiatives, but there is a risk that the lack of consistency results in distortions and costs.

It is difficult to predict the final wording of some of the OECD and EU initiatives that have been mentioned in this article and how these rules would impact the use of SPVs by alternative finance industries.

There are sound arguments to emphasise that the purpose and the role of the SPVs (notably when third-party interests of a stakeholder exist) shall be prioritised when examining their merits, although the issue may not yet have deserved the proper attention needed to entitle their access to tax treaties and EU directives in an efficient manner.

Read the original version of the article on KPMG’s website.

Click here to access more KPMG Future of Tax content.

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