The 'Snippet' series from our New York office regularly offers insights on a range of EU tax and legal topics for US fund managers ('FMs'). This snippet describes the key drivers for FMs to determine the preferred jurisdiction for an EU investment hub ('EU Hub') from a legal and tax perspective. This is the first snippet in a series regarding the legal and tax considerations relevant for FMs that wish to set up an EU Hub.
FMs with a European investment strategy need to decide where to organize their EU Hub and where the core functions to service their EU deal-making activity will be pooled. The preferred jurisdiction for an EU Hub depends on a variety of factors such as the FM's investment strategy, the location of the EU targets and the investor-facing fund entities, and the legal and tax climate and talent availability in the EU Hub's jurisdiction. Luxembourg ('𝐋𝐮𝐱) and the Netherlands ('𝐍𝐋') are typically the top jurisdictions and the choice between those two is usually driven by several legal and tax considerations.
From a legal perspective, the relevant factors include:
- ease of incorporation and dissolution of legal entities
- flexibility under corporate law (e.g., with respect to issuance of several classes of shares and governance structure)
- efficient financing and repatriation mechanisms
- employment law considerations (e.g., work permits for non-EU nationals)
- any need for (semi)regulated holding or service vehicles
From a tax perspective, the relevant factors include:
- tax efficient repatriation of proceeds to investors
- scope of participation exemption for income and gains from target companies
- eligibility for tax treaty benefits/network and access to EU tax directives
- VAT exemption on management fees
- wage tax position and tax incentives for employees
In practice, we often see that NL is the go-to place for FMs setting up EU deal-sourcing teams in the EU in and that NL is well positioned to accommodate asset (e.g., real estate and infrastructure) acquisition structures. Over the last decade, many FMs have set up Luxembourg fund vehicles ('𝐋𝐮𝐱 𝐅𝐮𝐧𝐝') to accommodate an EU capital raise. In case of a Lux Fund, the EU Hub is often set up in Lux. In addition, Lux has gained recognition as host country for deal-enabling functions (such as financing, accounting and special purpose vehicle management) and, more recently, deal-sourcing teams. When there is a need to relocate US team members to Europe, the quality of life and central location of the EU Hub's jurisdiction play a key role. Both Lux and NL score high in those areas and top the ranks of expat-friendly jurisdictions.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.