The Global Investment Hub: Where Funds Call Home

The choice of domicile for an investment fund is an important consideration for fund managers. The domicile country is where the fund is incorporated and where the administration and management of the fund take place. The most popular domiciles for investment funds are the United States, Europe, and Asia-Pacific. Within Europe, the most popular domiciles are Luxembourg and Ireland, which together are home to almost half of all European UCITS and AIFs net assets. The choice of domicile depends on various factors such as financial costs, market access, local corporate tax rates, legal transparency, and local regulations.

Why are Luxembourg and Ireland popular fund domiciles?

Luxembourg and Ireland are among the most popular EU member countries to be chosen as a fund domicile. Almost half of all European UCITS and AIFs net assets are domiciled in these two countries. There are several reasons why Luxembourg and Ireland are popular fund domiciles.

Firstly, both countries offer a large and diverse market of over 500 million consumers, one of the largest markets in the world. They also provide a stable investment framework, which is necessary for investor protection. This includes an established infrastructure of legal, tax, and financial professionals to assist clients from multiple jurisdictions in setting up investment funds.

Secondly, Luxembourg is strategically located in the heart of Europe, providing privileged access to European investors and sharing cultural and business customs with them. It has one of the highest GDPs per capita, a stable government, and a AAA credit rating. Additionally, with over 50% of its population comprising foreign residents fluent in multiple European languages, Luxembourg facilitates the distribution of funds within the EU and globally.

Thirdly, Ireland has the lowest headline corporate tax rate in the Organisation for Economic Co-operation and Development and has tax treaties with more than 70 countries. It is also recognised as an open and tax-efficient jurisdiction. Ireland is the fastest-growing fund domicile and has seen a significant increase in net assets in Irish-domiciled funds, reaching €3.7 trillion in 2022.

Lastly, the most commonly formed funds in both countries are private limited companies (SARLs) and special limited partnerships (SLPs). SARLs are straightforward to set up and have low costs, making them ideal for smaller funds. SLPs, on the other hand, are favoured by larger funds due to their flexibility and tax transparency.

What are the pros and cons of Dublin as a fund domicile?

Dublin is a popular choice for fund domiciliation, especially for English-speaking countries like the US and the UK. It is marketed as a more flexible, quicker, and lower-cost option compared to other jurisdictions. Here are some pros and cons of Dublin as a fund domicile:

Pros:

• Regulatory excellence: As a member of the European Union, Ireland offers harmonised EU financial services regulations, providing asset managers access to the EU-wide market. The Central Bank of Ireland (CBI) regulates the Irish funds industry, providing a transparent and efficient authorisation process with clear timelines.
• Legal and tax efficiency: Ireland's legal and tax regimes are favourable for fund managers. As the largest English-speaking common law jurisdiction in the Eurozone after Brexit, Ireland offers a broad range of fund structures. The Irish tax regime is compliant with OECD guidelines and EU law, making it attractive to fund managers and investors due to its efficiency and transparency. Irish-domiciled funds are exempt from Irish taxes on income and gains from their investments and are not subject to withholding taxes.
• Innovation and expertise: Ireland has a proven track record in the funds industry, combining regulatory pragmatism, tax efficiency, innovation, and seasoned professional expertise. It is recognised as a major hub for supporting global distribution, with Euronext Ireland being a leading regulated exchange for listing funds.
• Distribution and passporting: Ireland offers a full range of fund products, including UCITS, AIF, ETF, and private equity funds. Irish funds can be distributed and passported across the EU, providing access to a wide range of investors.
• Attractive for alternative investment funds: Ireland has long been associated with the alternative investment fund industry, including hedge funds. It was the first regulated jurisdiction to provide a specific regulatory framework for this industry, making it attractive for fund managers seeking a regulated environment.
• Strong talent pool: Ireland boasts an exceptional "homegrown" talent pool, with world-class academic institutions driving innovation and providing a skilled workforce for the funds industry.

Cons:

• Competition from other jurisdictions: While Dublin is a popular choice, it faces competition from other jurisdictions like Luxembourg, Jersey, and Guernsey, each offering unique advantages. For example, Luxembourg has a long-established industry and is favoured by Continental European investors.
• Limited middle management: While Dublin offers a massive and highly educated workforce, it has been criticised for a lack of middle management due to less competitive salaries for these positions.
• Potential tax harmonisation in the EU: The potential for tax harmonisation across the EU could impact the appeal of Dublin as a fund domicile. If tax advantages diminish, some member states may opt for other jurisdictions.

What are the Channel Islands' advantages as a fund domicile?

The Channel Islands, comprising Jersey and Guernsey, are distinct fund jurisdictions and are considered the real European offshore domiciles. They are known for their global financial centres and private fund destinations. Here are the advantages of the Channel Islands as a fund domicile:

Political and Regulatory Stability

The Channel Islands have stable governments and mature and trusted legal systems. Their regulatory frameworks are transparent and well-regarded, providing investor confidence. The islands also have a longstanding reputation as a safe jurisdiction, particularly among investors in the UK, Switzerland, and the Netherlands.

Taxation Benefits

The Channel Islands' tax regimes are designed to be tax-neutral, allowing non-resident investors to utilise double taxation treaties and pay tax only in their own countries and those they invest in. There is also no withholding tax on investment income when making distributions, and tax is paid in the jurisdiction where rental income arises. This tax neutrality allows for frictionless capital deployment to the investment market.

Skilled Workforce

The Channel Islands have a large and highly skilled talent pool with deep experience in fiduciary services. This includes a wide range of skilled professionals such as legal and financial experts, fund administrators, and fund managers who are familiar with the islands' regulations.

Flexibility and Efficiency

The Channel Islands offer dynamic, flexible, and efficient fund structures such as the Jersey Private Fund (JPF) and Guernsey's Private Investor Fund (PIF). These structures are relatively quick to set up and are transparently regulated. Additionally, Jersey and Guernsey's company laws offer greater flexibility in making distributions to investors compared to UK company law.

Access to Markets

The Channel Islands provide easy access to the UK and Europe due to their proximity. This makes them an attractive location for international business. Additionally, the islands have established international links through double-taxation treaties and listing agreements with international exchanges.

How does the UK's position as a fund domicile compare to pre-Brexit?

The UK is the second-largest centre for asset management globally, with the UK trade body, the Investment Association (IA), estimating that its UK members have assets under management of over £8.1 trillion. The UK has a stable legal regime, talent pools in centres such as London and Edinburgh, and is an international hub for all financial services. It also has one of the world's largest double tax treaty networks, with over 130 treaties, and competitive features such as no dividend withholding tax.

However, some barriers limit the broad use of UK funds and holding vehicles outside of the domestic market. The UK has experienced a decline in growth rates of Undertakings for Collective Investments in Transferable Securities (UCITS) net assets, and it is more difficult to market across EU member countries.

In comparison, pre-Brexit, the UK was a member of the European Union and had more ease in marketing across EU member countries. The UK was still an attractive option for fund domiciliation, with a stable legal regime, talented financial centres, and a large double tax treaty network.

While the UK remains a prominent centre for asset management, Brexit may have impacted its attractiveness for fund domiciliation, particularly regarding marketing funds across Europe.

What are the key considerations when choosing a fund domicile?

When choosing a fund domicile, there are several key considerations for firms to make. The fund domicile is typically where the administration and management of the fund take place, so this decision can have a significant impact on the fund's operations and performance. Here are some essential factors to consider:

• Financial Costs: Establishing a presence in the domicile country can incur relocation costs or expenses related to setting up an asset management company. Local corporate tax rates can also vary, adding to the financial burden. It is important to evaluate the financial implications of different domicile options and consider whether the benefits of a particular location outweigh the additional costs.
• Market Access: AIFs and UCITS domiciled within the European Union (EU) have free access to all EU investors. On the other hand, marketing funds across EU member countries from the UK involves significant red tape and complexities. Understanding the market access implications of different domicile choices is crucial for effective fund distribution and reaching target investors.
• Legal and Regulatory Environment: Local laws, regulations, and transparency requirements can vary across jurisdictions and have a direct impact on fund operations. Evaluating the regulatory framework, legal flexibility, and expertise available in the chosen jurisdiction is essential to ensure compliance and mitigate potential risks.
• Reputation and Investor Expectations: The reputation of the domicile country and its adherence to fair taxation principles can impact investor expectations and confidence. Tax neutrality, ESG principles, and the relationship between the domicile country and the investors' country of residence are also important considerations. A positive reputation can enhance investor trust and attract more investment.
• Product Choice and Complexity: Investment managers should consider the product choices available in different jurisdictions, including the availability of "green" or sustainable investment opportunities. As investment strategies become increasingly complex, a simple and easy-to-understand regulatory framework is crucial to avoid unnecessary bureaucracy and provide adequate investor protection.
• Operational Considerations: The cost of doing business in the chosen domicile should be evaluated, including the potential need for relocation or establishing a physical presence. Working with well-established and respected service providers, such as administrators, auditors, and custodians, can help reduce some of these costs. Additionally, considering the availability of skilled labour and the potential impact on overhead costs is essential.

By carefully weighing these key considerations, fund managers can make an informed decision about the fund domicile that aligns with their investment strategies, target market, and operational needs while also meeting investor expectations.

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