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Mensuel : Edition de juin 2010
Rubrique : Economie/Conseil
Titre : Fund managers, don’t get overwhelmed:
Surf the AIFM wave by migrating to Luxembourg (continued)
Article : Part 2: After migrating management companies (AGEFI Luxembourg, May 2010), let’s witness the higher benefits of migrating foreign UCIs.

Luxembourg-based management companies of foreign UCIs can rarely benefit from an attractive tax regime in Luxembourg, and may even bring a risk of taxation of such UCIs in Luxembourg when only their management company is migrated to Luxembourg(1). It is then pretty advisable to consider the option which, although not easier to implement than a migration of a management company, can offer significant tax benefits: migrating a foreign UCI to Luxembourg.

1. Getting set for a move

1.1 Pick up a fund type

A fairly wide range of alternative investment funds types are available in Luxembourg. Depending on their investment policy, regulatory framework or tax treatment, a fund initiator can be tempted to either create a UCITS or other UCIs of the like, specialized investment funds (either in corporate or UCI form), SICARs (companies for investment in risk capital) or other securitization vehicles (either corporate or funds form as well). Sometimes, even a straight forward holding company (so-called SOPARFI) can fit, but most of the time a foreign fund manager landing in Luxembourg feels home with a regulated vehicle like one of those listed above. It is however unlikely that a hedge fund would migrate to Luxembourg and adopt a lighter regulatory regime than UCIs’, because this is closer to its previous functioning rules, and offers more adequate and powerful governance and marketing opportunities, and this is why the following will limit its scope to UCIs.

1.2 Get on stage

Transferring a fund to Luxembourg can be done through different routes. The first one, as we have seen, is to migrate the registered office of the fund’s management company, if that option is available. Although the transfer of the management company itself is not complicated, its sole transfer on the Luxembourg soil will not make it qualify as a true, chartered and supervised management company: the constitutive documents of the fund itself will need to go through a parallel and necessary approval process. Another option is to merge funds, but in order to do this as of today, the foreign fund must first be transformed into a domestic fund. The future implementation of the UCITS IV Directive into Luxembourg domestic law should somehow ease the process by allowing cross-border mergers; Luxembourg has proved to be fast in implementing UCITS directives in the past, and also has a good track-record of innovative corporate cross-border mergers, then hopefully a mix of the two should make it all a manager-friendly process. It could also be envisaged to contribute the units of the foreign fund to a newly created domestic investment fund under a corporate form, while waiting for the UCIs cross-border merger option to come into force. Then the foreign fund can be wound-up according to its domestic regulations. Finally, the last option to envisage when transferring a fund is actually…not to transfer the fund, but its assets: selling them to a newly created domestic fund may be of interest if the foreign fund is not at risk of making a gain and is owned by a very limited number of investors. That’s akin to a contribution, but the foreign fund is no longer in the chain.

1.3 Checked up...

UCIs must be approved and continuously supervised by the CSSF. This implies submitting to the CSSF a comprehensive set of constitutive documents of the fund and its management company (or the regulated company itself, if not a fund) like articles of incorporation, PPM or prospectus, management regulations, managers resumes, shareholding etc. The most common conditions of approval are an investment strategy that suits the fund’s legal purpose, a central administration located in Luxembourg, a proof that the fund’s managers are experienced and have a good reputation, an appropriate level of capital in the fund and the management company, the hiring of Luxembourg-based, CSSF-approved custodian and independent auditor. Depending on the retained type of fund, certain policies and reporting principles must also be disclosed.

1.4 ...and good to go

On the distribution and marketing side, once CSSF-approved, the funds capabilities in that matter depend on their regulatory regime: some may be opened to qualified investors and/or institutional investors only, whatever their location, whereas others may offer their units to the public in Luxembourg and/or EU countries subject to abiding by local regulatory constraints. In this respect, the UCITS IV Directive should somehow ease the units’ distribution process across the EU. In a near future, should the AIFM Directive be implemented substantially in its current form(2), an EU-based fund manager will be able to market units of EU-based funds to professional investors residing in the same state as the fund manager. Each EU member state will have the option to authorize the marketing to retail investors of the EU state where the fund manager is established. Last but not least, the draft AIFM Directive provides for the introduction of a “passport” that should allow marketing EU-managed and -based funds to professional investors across the EU subject to certain conditions. Where either the fund or the fund manager is not EU-based, the marketing of units of that fund remains a highly debated issue for now, but will hopefully become clearer in a couple of months.

2. Enjoying the funds tax-friendly environment of Luxembourg

As mentioned above, it is very unlikely to have the migrating UCI taking the legal form of a Luxembourg SOPARFI, securitization vehicle or a SICAR and that’s why the scope of this section has been limited to the tax aspects of connection with the migration of a foreign UCI to Luxembourg. Indeed, in addition to a special legal and regulatory environment, the transfer, whatever its modalities, could also trigger tax consequences, not only in Luxembourg but also in the departed country.

2.1 Migration: an expected neutral move from a tax perspective

Whatever the form of the migration (i.e. cross border merger, migration or contribution of all assets and liabilities possibly followed by a liquidation of the foreign UCI), the transfer of a UCI should be considered in the departed country as liquidation from a tax perspective, with the consequence that all latent gains will have to be disclosed and taxed accordingly. In case there is no actual transfer of the UCI but instead a transfer of its assets, any latent gain would also have to be disclosed. In practice, the risk of taxation should be close to nil as UCIs are in principle tax exempt in their country. The tax consequences deriving from this transfer will obviously depend (i) of the legal form of the UCI – contractual or not and (ii) on the applicable domestic tax regime and should be analyzed on a case by case basis

2.2 Migration: Mind collateral damages

In addition, it is questionable whether the transfer of the UCI to Luxembourg may disclose taxation at the level of the jurisdiction where the underlying assets are located. Double tax treaties could help in such situation but a case by case analysis would have to be realized. A similar analysis would have to be done at the level of the investors. Indeed, the migration of the foreign UCI may trigger the disclosure of the latent gain attached to their unit / shares in said UCI which may trigger liability depending of the tax regime applicable to the investors. In such hypothesis, the double sentence is that the investors in the UCI would have to pay the tax without receiving any proceeds.

2.3 Arrived in Luxembourg – Finally some benefits

With respect to the migration of a UCI with legal personality, and whatever the route taken, it will entail the creation of a new Luxembourg UCI (cross border merger and contribution) or at least the assimilation to the legal form of a Luxembourg UCI in accordance with the Luxembourg legal and regulatory framework. Besides that and whatever the form of the migration, the UCI will only be subject to EUR 75 fixed registration duty(3) (and also EUR 75 for its management company). Further to the migration, the management company of the foreign UCI should benefit from the specific tax exemption to the extent it manages only one single FCP. The new Luxembourg UCI should be exempt from Corporate Income Tax, Municipal Business Tax and Net Worth Tax, and from Withholding tax on distributions. Luxembourg SIFs and UCIs (Part II of the Law on UCIs) being only subject to an annual subscription tax (“taxe d’abonnement”) at a rate of 0.01% (SIFs) and 0.05% (UCIs) p.a. of their NAV with a potential reduction to 0% for investments made into Luxembourg funds themselves subject to subscription tax. According to the speech of the Luxembourg Prime Minister dated May 5th, 2010, the subscription tax for exchange traded funds should be abolished in future.

Conclusion

As expected, migration ending in multiple jurisdictions and regulation maze should be avoided. This does not mean however that there should be no issues to monitor or to fix upon migration: one should provide for a suitable and sustainable alternative (i) to face the constraints of the AIFM Directive as to be implemented by the Luxembourg legislator and anticipated by all local domestic service providers, and (ii) benefit from the secure and flexible legal, regulatory and tax environment of our European premium location for the fund industry which is Luxembourg.

ATOZ - AIFM working group

Leaders:
Jean-Michel Chamonard
jean-michel.chamonard@atoz.lu - +352 26 940 233

Nicolas Cuisset (cf. portrait)
nicolas.cuisset@atoz.lu - +352.26.640 305

1) Part I of this article AGEFI dated May 2010 "Fund Managers, don’t get overwhelmed: Surf the AIFM wave by migrating to Luxembourg”
2) As voted by the Economic and Monetary Affairs Committee of the European Parliament on 17 May 2010 and the ECOFIN Council on 18 May 2010.
3) Law dated December 19, 2008
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