An Introduction to Mutual Funds Worldwide

Chapter8

TAXATION

This chapter describes the typical taxation treatment of a mutual fund and the taxation implications for individual participants or investors as share- or unit holders.

8.1 INTRODUCTION

The general aim of taxation laws is to produce the same outcome in relation to the tax position of an investor in mutual funds as would arise from direct investment. Investment via a mutual fund should not give rise to any double taxation of income or gains. Any tax that is withheld or deducted from proceeds of sale, or from distributions that would not ordinarily be due from the recipient on a direct investment, can either be recovered from the relevant tax authority, or offset against any associated liability.

This applies equally to investment by residents and nonresidents of the mutual fund's home state or country. To facilitate cross-border investment, most Governments have entered into double taxation agreements with each other, whereby tax suffered in one country is recoverable or capable of offset by a resident of another country. Some countries go further to encourage investment in local funds by agreeing to pay distributions to nonresidents free of any tax. France, Germany, Luxembourg and the US, for example, allow mutual funds to choose to be treated as a conduit for most tax purposes, and not pay taxes themselves on net income and capital gains that are distributed to shareholders or reinvested for them. The individuals are then liable to account to the authorities ...