Jolande Svensson-Klijn, director and head of Aztec Group’s Sweden office, speaks to unquote” about the key factors that Nordic fund promoters take into consideration when choosing where to domicile a fund
Which fund jurisdictions tend to be most popular among Nordic promoters?
Over the last few years, we have seen Nordic funds established in several jurisdictions – the most popular being the so-called traditional fund jurisdictions, such as Guernsey, Jersey and Luxembourg, as well as locally in Sweden.
The Channel Islands, particularly Guernsey and Jersey, have always been among the preferred locations for Nordic fund promoters. In fact, when looking at funds under administration in Jersey by promoter origin, Sweden ranks second behind only the UK. Luxembourg, which is the leading investment fund domicile by assets under administration in Europe, offers an equally attractive environment for the establishment and administration of funds, so expect to see them on a promoter’s shortlist too.
Outside this group of “traditional” fund jurisdictions, we’re also seeing more domestic structuring, whereby the funds are domiciled and administered in the location in which the promoter is based. The convenience of having all of your operations in one location and the positive perception it generates locally are among the main drivers of this trend.
How are the so-called “traditional” fund jurisdictions perceived in the Nordic countries?
Jurisdictions such as Guernsey, Jersey, Luxembourg, the UK and other major fund domicile locations across Europe are recognised not just for being innovative and adaptable to industry trends and developments, but well-regulated and transparent. The international community, quite rightly, demands this.
We’ve seen these jurisdictions remain steadfast in their commitment to the transparency agenda, through their compliance with such measures as OECD directives, the recommendations of FATF, FATCA and BEPS. Indeed, in recent times, we’ve even seen key political figures such as the UK chancellor publicly commend the Channel Islands for being early adopters.
Despite these jurisdictions being fully transparent, there is a perception among some Nordic promoters that undertaking fund structuring in their home country will enhance their reputation locally, which, in turn, may act as a catalyst for attracting capital.
What makes for a good fund jurisdiction?
Promoters want to be able to set up their fund structure as seamlessly as possible and ensure that the ongoing administration is done efficiently in line with relevant legislation. A political and fiscal environment that offers stability and certainty, and access to an appropriately qualified and skilled workforce, is obviously critical.
In terms of the legislative and regulatory aspects, Luxembourg and Jersey are two examples of jurisdictions that have finely tuned their fund legislation over many years to appeal to private equity managers.
Luxembourg, for example, reinvented its partnership legislation in 2013 in conjunction with the transposition of AIFMD, amending the SCS regime and introducing the SCSp – special limited partnerships with no separate legal personality, which have been hugely attractive in the closed ended funds space, effectively replacing the SCA regime in terms of popularity. At the same time, the Luxembourg authorities took the opportunity to deregulate the depositary market for SIFs, SICARs and Common Funds, meaning administration firms (in addition to credit institutions) could fulfil this role. The combination of legislative change and market deregulation has been very powerful in attracting EU-focused business to Luxembourg.
Jersey and Guernsey, for example, both recently introduced private funds regimes in order to simplify and round out their regulatory offerings. In this context, both regimes are aimed at closely held open or closed ended funds that are looking for maximum flexibility under a sensible and proportionate regulatory umbrella. Both regimes have already proved popular for managers targeting smaller numbers of both EU and non-EU investors.
How does fund structuring in the Nordic region differ?
Each jurisdiction offers very different options when it comes to structuring. Limited partnerships are generally used in Luxembourg and the Channel Islands, but not in Sweden. Instead, the more effective and efficient option for structuring a fund is generally considered to be ABs, which are the equivalent of limited companies. The implication of structuring funds as ABs is that the funds are simply treated as another business for tax purposes.
It’s worth mentioning there has also been some uncertainty around the treatment of carried interest, following the decision of Sweden’s Administrative Court of Appeal to count it as income. This impacts Swedish promoters on a personal level through income tax, independent of the jurisdiction in which the fund is located. However, many Swedish managers have mitigated the impact of this by structuring their funds across multiple jurisdictions.
How will Brexit impact choice?
Luxembourg and the Nordic countries, as EEA members, will continue to have passporting rights.
The Channel Islands, while not part of the EEA, have cooperation agreements in place with the vast majority of EU member states, granting access to National private placement regimes through Article 42-based marketing. To the extent that Brexit is made a reality, Channel Islands-based funds will have been marketing under this regime for almost five years and, unless a third country marketing passport is introduced, this will not change.