Tax treatment of investment funds

An investment fund generates two types of resources that are treated differently for tax purposes:

• Capital gains on the sale of instruments in the portfolio,
• Income from the instruments held (interest from bonds, dividends from shares, etc.) that is paid out to investors, if the investment fund’s policy calls for distribution of income.

The tax treatment of these two types of resources is different:

• Capital gains are recognised as part of the investment fund’s capital and added to the net asset value of the fund. The tax treatment depends on the type of fund. Special tax rules apply to certain types of vehicle, such as employee savings funds, venture capital funds and futures funds.
• When the fund distributes income, the “transparency” principle applies, under which the final investor is directly liable for income tax, and not the investment fund. In this case, the tax treatment depends on which securities produced the income and where they were issued.

When investors sell their shares or units in investment funds, their capital gains are subject to the capital gains tax on sales of transferable securities.