The beauty contest for where to domicile a fund is ferocious – should it be Jersey or Guernsey?
Is Luxembourg still the go to funds hub in Europe or are Cyprus and Ireland gaining advantage? We explore the key fund domiciles for fund promoters and fund managers in Europe in 2021.
Whether considering the fund manager’s interests or those of the fund investors or unit holders – one of the quintessential criteria for a fund to be a lucrative investment vehicle is where it is domiciled. Apart from the ongoing battle with Covid, Brexit is another key change that is impacting the funds sphere this year. Many fund jurisdictions are keen to attract former UK based funds to their shores to ensure that they continue enjoying EU Passporting rights.
What are the key factors considered when selecting a fund domicile?
- The reputation of the fund industry/domicile
- The fiscal benefits for the fund vehicle – and all key participants in the fund including the unit holders
- The availability of fund vehicles – regulated/unregulated/lightly regulated
- Location of current and target investment and investors
- Fund establishment costs and time frames
- Fund administration costs and reporting requirements
- Quality of professionals with funds industry experience
- Other reporting and compliance requirements
We highlight some of the leading European fund’s jurisdictions below.
Luxembourg – the European Fund Star
For decades, Luxembourg has been the main EU fund location, acting as an attractive fund jurisdiction for investments both in Europe and beyond to over 70 jurisdictions. According to E&Y Luxembourg funds come in second only to US funds.
Having maintained its position as a funds market leader for so long, Luxembourg has an established trust with both fund promoters, managers and investors which fortifies its reputation. Being an EU Member State, it enjoys EU Passporting rights and offers UCITS (Undertaking of Collective Investment in Transferrable Securities) and AIFs (Alternative Investment Funds).
With an experienced fund regulator and skilled local funds industry, Luxembourg is at the helm of innovation. It is also usually one of the first adopters of fund relevant EU wide regulations. By way of example, Luxembourg was the first EU Member state to adopt the UCITS Directive into its national law and then to swiftly implement the AIFM Directive which offers investor protection to retail and professional investors.
Recently though Luxembourg’s funds ecosphere has been under close watch. Journalists from Le Monde, Le Soire, the Miami Herland and Sudeddeutsche Zeing have reported in an investigation called the US Luxembourg Report stated that about 4/5 of the private funds scrutinized failed to publish, as per the local requirements – who their end-investors or beneficial owners were casting a long shadow on the integrity of Luxembourg from a transparency perspective.
Sven Giegold, quite a formidable European Parliament voice on all thing’s compliance stated: Luxembourg’s head in the sand policy does nothing to end the damage caused by tax evasion and tax avoidance
Ireland – Europe’s Runner Up?
Ireland is the runner up in terms of European funds this year with circa 7000 funds registered.
Whilst almost all funds’ hubs have English-speaking professionals, Ireland does have a closer historic societal and cultural affinity to the UK and the US. As such it has been drawing increasing attention from prospective fund promoters in these jurisdictions keen to set up their funds at a lower cost than Luxembourg.
Ireland offers shorter fund establishment time frames in a flexible fund jurisdiction that also benefits from EU passporting rights.
Dublin is renown for being the HQ jurisdiction for a myriad of global corporates including Google thanks to its low corporate tax rate and attractive fiscal regime and incentives. It also has one of the largest networks of Double Tax Treaties which fortifies its position as an attractive funds hub for investors and fund promoters.
In terms of being proactive about adopting and implementing benchmark legislation, the Central Bank of Ireland authorized the first AIFM in Europe soon after the early implementation of the AIFMD in Ireland.
Read more: More Funds in Ireland and a growing demand for ESG investing
The Channel Islands – Funds with a Global Reach
The Bailiwicks of Jersey and Guernsey both have attractive fund offerings to fund promoters with an international perspective and are adept for funds with an emerging market focus.
Although they are not part of the EU, or the UCITS market they have established treaties with many jurisdictions that allow them to market their funds cross-border. Both Channel Islands also offer fund solutions that have numerous tax advantages include no income or capital gain tax for the unit holder/investor, no withholding tax etc.
Guernsey has over GBP 300 billion in funds under management and is an established offshore financial center with a large US investor base. Despite its exclusion from the UCITS market, Guernsey has set up bilateral agreements with various countries around the globe, enabling Guernsey funds to be marketed internationally.
It also provides a regulated capital raising environment and listing facility for open and closed investment funds and Real Estate Investment Trusts (REITS) under GIFA.
Jersey funds, whilst having a reputation for having a somewhat stricter approach when approving funds, has drawn in substantial investment from emerging markets in the Middle East, Far East and Africa, it also has a considerable Japanese base. Jersey ticks numerous compliance boxes in terms of being OECD white listed, a signatory to FATCA, CRS, BEPS and a staunch proponent of transparency with its central register of UBOs.
Cyprus – an Emerging Funds Jurisdiction
Funds are an emerging industry in Cyprus that is being fortified by the multilateral efforts of both players, agencies and regulators. During 2020, as the pandemic shocked the world, there was a marked increase in demand for Cyprus funds vehicles.
The Cyprus Securities and Exchange Commission (CySec) is committed to strengthening the transparency and utilizing funds vehicles to draw in more FDI moving forward.
AIFMs and AIFs benefit from the network of Double Tax Treaties, and low tax framework which exempts (subject to certain criteria) dividends, capital gains from the sale of foreign shares/property abroad from tax.
Being an EU Member, Cyprus funds can enjoy passporting rights in Europe giving it a competitive advantage.
