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applicable laws and regulations, including in connection with investigations or any other regulatory actions initiated by securities regulators or other relevant authorities.”35 Table 3.9 presents a broad (but not exhaustive) list of laws that may affect SIFs (see also box 3.7). Specifically, the Santiago Principles, as set out in IWG (2008), state that the fund should: • Abide by any national securities laws, including disclosure requirements and market integrity rules addressing insider trading and market manipulation;
TABLE 3.9
Other laws affecting SIF cross-border activities
National security lawsa
• Regulations will typically require advance notice provided to the regulators on transactions that may have a material impact on critical infrastructure and assets in the recipient country or may otherwise affect national security. Box 3.7 sets out an example of such regulation. • Proposed investments are screened by regulators. As part of this process, many regulations will require that the regulators look through special purpose vehicles engaged in the transaction to determine the ultimate investors in the vehicle. • Where necessary, potential negative impacts are mitigated through changes to the deal structure. In some cases, the transaction may be blocked by the regulator if mitigation is not possible.
Securities laws, investment funds laws, and fund adviser laws
• Recipient countries will typically impose regulations on how fund interests, debt instruments, equity investments, and other securities are sold to their citizens. • Countries often impose separate regulatory regimes for selling funds and the fund advisers (Morley 2014), and regulations often require significant disclosures by funds and advisers. Such disclosures are subject to antifraud rules enforceable by the regulators or, in some jurisdictions, the investors themselves. The regulations may also require the registration of the securities intended to be sold, which may involve significant review and comment on disclosures by recipient country regulators. • Securities regulators may also impose rules governing specific types of transactions, such as mergers or acquisitions.
Tax laws
• Tax considerations drive many structuring decisions for the fund and its investors, particularly for mixed capital SIFs. The importance of maintaining favorable tax treatment is critically important, and tax laws and regulations must be carefully navigated to ensure continued favorable treatment.b • Tax issues arise at four different levels: at the level of the investor, the fund, the portfolio investment, and the fund manager (Fenn and Goldstein 2002). The goal in each case is to eliminate or minimize tax obligations. In most cases, the fund is structured so that the fund does not pay tax, but so that the gains and losses pass through to the investors, who are then taxed individually. Investors will also tend to prefer that their investments remain anonymous, both in the recipient country and in their home jurisdictions. In other jurisdictions, however, transparency will be required. For example, investors from France and the Netherlands must invest in vehicles that provide transparency to their home-country regulators. • For SIFs operating outside of their home jurisdiction, the taxation of the fund sponsor itself varies depending on the jurisdiction. Some jurisdictions exempt fund income from taxation through specific legislation, administrative practice, or a double tax treaty (PwC 2012). Jurisdictions exempting SIFs and other state-affiliated entities from taxation may do so through the application of sovereign immunity doctrines,c which traditionally limit the application of a recipient country’s laws to most areas of activity undertaken by sovereign entities within its borders. However, such grants of immunity are becoming increasingly narrow as cross-border investments by sovereigns increase. Some politicians, academics, and others have called for the elimination of sovereign immunity from taxation (Fleischer 2009).
Competition and ntitrust laws a
• Like private entities, SIFs will generally be subject to laws and regulations prohibiting anticompetitive behavior. • State-owned enterprises involved in anticompetitive conduct are regularly prosecuted in jurisdictions with established competition laws (OECD 2018a). In some jurisdictions, however, state-affiliated entities may be granted exemptions to these laws if they are engaged in activities in the general public interest. For example, Article 106(2) of the Treaty on the Functioning of the European Union provides a limited exclusion from competition laws for “services of general economic interest or having the character of a revenue-producing monopoly.” Such exemptions will usually be read narrowly by recipient-country regulators. continued
