Collective Investment Trusts: Tax Exempt or Not?

There are investment funds specifically created for qualified retirement plans. These are called collective investment trusts (CITs) and they are investment funds that are operated by banks and trust organisations. CITs are gaining popularity as they are simpler to use and are an important instrument in creating a line-up for retirement plans. With the growing popularity of this fund structure, can CITs ensure their investors receive the total amount due to them? Let’s find out if CITs are exempt from withholding tax or not.

What is a CIT?  

A Collective investment trust, sometimes known as a commingled trust or a group trust, is an investment structure that is only accessible to specific kinds of tax-exempt retirement funds. Additionally, CITs are only available to institutions. Banks or trust companies, which serve as trustees, sponsor CITs and are in charge of the CIT’s management.

The goal of CITs is to combine participants’ funds to invest in stocks, bonds, and other mutual funds. Investors put their money into a range of mutual funds and can sell shares. Generally speaking, an investment fund is set up to assist its investors in achieving financial security and stability.

Due to the way each CIT is established, it’s possible to pool assets from various retirement plan accounts into one fund. These funds have a particular investing goal and as a result, take advantage of economies of scale. CITs invest in a broad range of active and passive investment options. For example:

  • Equities
  • Fixed income
  • Mutual funds
  • Exchange-traded funds
  • Other CITs
CIT Tax Exempt Status

To ensure that these structures can be used to group assets from unique policies and retirement plans without resulting in unnecessary income tax obligations, the Internal Revenue Service (IRS) has provided a special exemption for CITs from income tax. This means that CITs are exempt from withholding tax from foreign dividend income. The intention is to prevent income taxes from eroding money related to pension funds returns by investing that money.

As a result of retirement plans investigating the various investment alternatives, CITs have grown in popularity to increase efficiency — operationally and financially. IRS Revenue Ruling 81-100 discusses Collective Investment Trusts (CITs) in this regard. The Ruling allows retirement plan investments to keep their tax-exempt status when made through a CIT. However, when CITs invest abroad and pay withholding tax on their foreign investment income, their tax-exempt status is rarely applied.

Obstacles to CITs

Unfortunately, many foreign tax authorities do not view the group trust structure as a pension fund. Therefore, it is becoming more challenging for CITs to obtain these exemptions from pension plan-related withholding taxes. Investment through CITs can put pension plans in a worse tax position than direct investment plans if there is no practical way to recoup foreign withholding tax.

Investment jurisdictions require varying levels of information on the retirement plan investors within every CIT before giving withholding tax relief. A couple of examples of these various requirements include: Disclosing the underlying retirement plans and acquiring tax residence certification from the IRS for each retirement plan invested in the CIT.  When requests for disclosure of members in retirement plans that have investments in the CIT arise, the procedures may be significantly more demanding in some countries.

Therefore, many CITs are essentially not taking advantage of their tax-exempt status in foreign jurisdictions. This is a result of the administrative effort and complex nature associated with meeting these requirements.

The Solution

Despite the complexities of the withholding tax environment surrounding CITs, Global Tax Recovery can keep leakage to a minimum. At various levels of investor disclosure, Global Tax Recovery files claims on behalf of numerous CITs. Global Tax recovery will handle the entire administrative burden from beginning to end. We ensure investors get the most out of their investment returns. Our dedicated research team is constantly keeping up to speed with compliance and tax law amendments. Therefore, we strive for maximum recovery in the shortest possible time for our clients.

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