Will Luxembourg lose prime spot as fund domicile?

Luxembourg is Europe's onshore tax haven. Like Ireland, the small country offers a whole array of tax exemptions, including duties charged on capital gains, dividends and VAT. But European fund structures are about to be subjected to new externalities: pan-European regulation. Luxembourg's position as a preferred onshore fund location could be jeopardised by GPs' motivation to circumvent additional costs.

Even though the EU's prime private equity regulation, the AIMFD, does not touch taxation per se, it is laid in such a way as to reach further than extant investment regulations. Fund structuring will be impacted as well, mostly due to the directive's bearing on fund domiciliation. The question whether to set up a fund onshore or offshore has gained in importance because from next year, a number of costs and benefits will apply to either option, thereby threatening Luxembourg's current status.

"Clearly the hope of Luxembourg throughout all the negotiations on the AIFMD has been that the directive, and barriers erected against third country funds and managers, will bring Luxembourg a further competitive advantage. It is an open question whether that will prove to be the case, bearing in mind the introduction of the management passport, which will enable the use of other EU jurisdictions including the UK, for the crossborder management of AIF, including Luxembourg AIF," said Tamasin Little, partner in the financial markets group at SJ Berwin in London.

Historically, Luxembourg-domiciled funds have had to use Luxembourg-established custodian banks, which means the infrastructure for AIFMD-imposed depositaries is already in place in the country. A depositary passport, though efficient, could ultimately take business away from the country and will not be introduced any time soon.

Luxembourg fund structures may have gained an advantage, but new regulation will impose more requirements on EU funds. Capital requirements, organisational restructuring and restrictions on remuneration are only some of the reasons against domiciling a fund offshore. Guernsey structures remain attractive; despite their increased requirement of transparency, they continue to be more or less tax neutral, with regulation being implemented in a much more careful fashion.

Yet, their regulatory future is far from certain. For the Channel Islands, much depends on the way the British FSA will deal with the issue, as the UK is most likely to be the country of reference for Channel-based funds.

Luxembourg could turn the undesirable EU regulation into a marketing opportunity, considering the uncertainty of tax havens in a financial climate that cracks down on tax avoidance.

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• Topics
• Benelux
• Funds
• AIFM Directive
• SJ Berwin