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Industry Comment
James Bermingham
Director and Group General Counsel
Private Equity Funds in Luxembourg
Wednesday, February 08, 2012
Luxembourg should not be discounted as a private equity funds’ domicile and 2012 promises significant change. By the autumn, the domicile debate could start to look very different.
Make no mistake; Luxembourg is an excellent European domicile for private equity funds and not just SPV’s. This small country at the heart of Europe (in every sense) is highly solvent, has low tax rates, is politically stable and, as we all know, has a very developed savings funds industry. This is perhaps the only truly safe environment within the EU for long-term investment funds.
A certain amount of EU interference is the price paid for EU membership and it is a multifaceted issue. On the one side, Luxembourg has immediate and unrestricted access to an increasingly harmonised, single financial services’ market and on the other side, is subject to its sometimes unhelpful rules (in particular with regard to regulation and taxation).
As a small country however, Luxembourg adopts a literal and no-nonsense approach to implementing EU rules which results in a refreshingly straightforward legal environment (notwithstanding a wide array of unhelpful acronyms mostly beginning with the letter ‘S’) in which it is perfectly possible already to replicate private equity industry funds (as opposed to other vehicles commonly confused with them).
The key to replication, however, is making an authentic copy of the existing model used by the industry. If the model recommended locally differs in legal form or it is managed in a different format or administered by different, more institutional providers, then the product will inevitably differ (and there are no local tax advantages with this asset class to offset the differences). The ‘product’ should always be understood as an amalgam of legal form, management and operational processes.
You need to get the right product, to get the right result. The Aztec Group, with its unrivalled track record for service delivery, is perfectly placed to replicate the private equity model in Luxembourg and its international team is totally familiar with the local legal environment and the advisers within it. With regard to custody, there are a handful of banks that have already moved away from the traditional ‘problematic’ business model and, AIFMD or no AIFMD, represent a compelling supervisory proposition. AIFMD should simply introduce greater choice and flexibility for those that want it.
VAT efficiency remains elusive; however, it can already be addressed on a fund-by-fund and investment-by-investment basis. This is obviously sub-optimal and the big challenge for 2012 is for the industry to move away from the simplistic exemption of all local management services (that may not remain effective in an increasingly harmonised environment).
Even the authorisation process may become more streamlined in the future with the adoption of more risk-transparent structures.
With a package of reforms planned, 2012 promises to be a threshold year for Luxembourg in achieving its stated aim of becoming a leading domicile for private equity industry funds. It is well worth watching it closely. Read more...
- Private Equity Funds in Luxembourg 08-Feb-2012
- No matter how complicated the consultation may seem, the outcome is looking clearer all the time ... 23-Sep-2011
- A new European regime for Venture Capital (as it seems the AIF does not fit all sizes after all!) 17-Jun-2011
- What direction should people be heading? 07-Jun-2011
Udi Vithanage
Financial Reporting Manager
FATCA draft regulations have arrived
Thursday, February 09, 2012
The long overdue US Foreign Account Tax Compliance Act ("FATCA") draft regulations have now been issued. Under this proposed FATCA regulations, IRS has introduced a "new government-to-government framework for implementing FATCA." The governments of France, Germany, Italy, Spain and the United Kingdom will work together to create a means to collect the information from their banks and send it to the United States. In the press release they issued on 08 February 2011 Treasury said that once these five "FATCA partner" countries finalised the framework, banks in those countries would not have to enter into separate data disclosure agreements with the United States' IRS tax collection agency.
Read more...
- FATCA draft regulations have arrived 09-Feb-2012
- FATCA - will FATCA be more user friendly? 08-Feb-2012
- Information Reporting Program Advisory Committee (IRPAC) view on FATCA 01-Nov-2011
- Foreign Account Tax Compliance Act (FATCA) 27-Sep-2011
Andy Brizell
Senior Counsel
BFH rules on the tax treatment of private equity funds, but fails to deal with long standing constitutional issues
Wednesday, February 08, 2012
1. The first Senat of the Bundesfinanzhof (the “BFH”) has ruled [1] that the purchase, ongoing administration and disposal of portfolio companies by a private equity fund qualifies as a ‘business activity’ as opposed to ‘non-commercial asset management’. The court however, failed to rule on the all important and long standing constitutional issue of treaty override.
2. The case in question concerned a UK based leveraged buyout fund (the “Fund”). The Fund was structured as a Scottish limited partnership and had a UK based corporate General Partner. The Fund was managed by a UK FSA registered management company (the “Manager”) which provided the Fund with basic corporate administration services in addition to standard management services.
3. In reaching its decision the BFH applied various elements of the guidance issued by the Federal Ministry of Finance in 2003 [2] concerning the tax status of funds (the “Guidance”). Although this decision is the first one which refers to the Guidance, the BFH did not rule on whether this should be applied in all cases. It will be interesting to see how if at all the German tax administration will react to this decision.
4. Central to this case was the BFH’s interpretation of the 1964/1970 German/UK double taxation treaty. The BFH ruled that the Fund was deemed to have a UK permanent establishment based on the Fund’s relationship with the Manager, and as a result of this the ‘business’ income and capital generated by the Fund was not subject to German tax under Article 18 of the relevant treaty. This, the BFH ruled, was not reversed by either the ‘switch over’ article in the treaty (in any case, only relevant to capital gains) or more importantly, the domestic ‘subject to tax’ provisions of the Income Tax Act, as this required an income qualification conflict which was not present. Accordingly, the BFH did not rule on this issue.
5. Due to the introduction of the new 2010 German/UK double taxation treaty, which contains a ‘subject to tax’ provision in Article 23, the dicta of this case concerning treaty interpretation will not be applicable to German investments in UK funds going forward.
6. The case does however raise significant questions surrounding the tax treatment of German domiciled private equity funds. In this regard, this decision adds to difficulties that German private equity houses are already facing in relation to the adaptation of their business models to future regulatory requirements under AIFMD and will doubtless detract from Germany’s position as a domicile of choice for international private equity funds.
Read more...
Unquote British Private Equity Awards, Fund Administrator of the Year 2011
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Simon Radford
Chief Financial Officer
Time is running out if you need to register ...
Wednesday, February 08, 2012
If you haven't yet determined your position in respect of this legislation you must act now!
The Dodd-Frank Act 2010 abolished the previous exemption on registration with the SEC for certain investment advisors and replaced it with three more limited exemptions: the private fund advisers exemption, the venture capital exemption and the foreign private fund advisers exemption.
The private fund advisers exemption is of most use and is applicable to both a US adviser (one which has its principal office and place of business in the United States) and a foreign adviser (one which has its principal office and place of business outside the United States).
What this means in practice is that a foreign adviser can take advantage of the exemption irrespective of the number of US clients that it advises and, provided it is not providing services to those US clients from a place of business in the US, the assets under management (“AUM”) that those clients have. Each of the US clients will however need to be a qualifying private fund.
If the private fund advisers exemption is to be relied on, the foreign adviser will need to complete part 1A of form ADV 1 and will need to file this with the SEC no later than 30 March 2012 registration deadline.
Relying on the exemption will mean that the foreign adviser will not need to register with the SEC nor will it be subject to routine SEC examination, but it will not exempt the adviser from any applicable state registration and as an exempt reporting adviser, the adviser will need to make an annual report to the SEC. Read more...