VP Fund Solutions: Redomiciling of Funds to Luxembourg

VP Fund Solutions: Redomiciling of Funds to Luxembourg

Due to negative press as well as a number of regulatory initiatives, offshore funds and jurisdictions continue to face growing pressures in Asia and around the world. The solution: create or redomicile an existing fund into a member state of the European Union (EU) such as Luxembourg.

Historically, funds were domiciled in offshore jurisdic-tions to achieve tax neutrality at the level of the fund as well as to ensure maximum flexibility for the asset allocation policy. Through the choice of a suitable domicile, asset managers of these funds were able to maximise the potential for tax optimisation on the one hand while limiting liability risks on the other.

European Fund Structures

European fund structures differ from their offshore counterparts. Usually, a Management Company (ManCo) is appointed to delegate functions such as distribution and invest-ment management to the third parties handling the fund’s central functions, namely management and marketing. Currently, these functions are usually performed by the on-shore entities managing the offshore fund.

The risk management, administration and back office distribution functions are the responsibility of the ManCo. Since the ManCo is not a pure administrator, to which it is often compared, this arrangement ensures independent operations, separation of powers and a reliable, flexible and scalable infrastructure, which are the keys to growth and higher returns for both the asset managers and investors. An onshore fund therefore offers many advantages over an offshore structure.

Advantages Through Redomiciliation

Of course, European regulators use a carrot-and-stick approach. Asset managers must bal-ance the challenges of complying with regulatory and fiscal requirements while at the same time satisfying the everincreasing needs of investors.

Onshore investment fund structures should be seen as a valid and highly attractive out-sourcing opportunity for asset managers. By establishing and continuously managing an investment fund structure in a member state of the European Union, the asset manager will be able to transform previously fixed costs into variable ones, thereby reducing overheads. Asset managers can also use their existing resources to focus entirely on their key functions, namely managing the assets in accordance with their mandate and distribution.

Apart from the reasons as described above, onshore funds offer a variety of advantages that are self-explanatory:

• Reducing complexity when it comes to distributing fund units trough the European passporting system - also for many Asian countries;
• Well-known, reputable and regulated service providers that meet the high standards of European fund regulators on a continuous basis, therefore enabling lean corporate structures;
• Strong corporate governance environment for European fund structures;
• Reduction of liability and reputation risks;
• Simplified handling of fund units through electronic trading;
• Cost advantages.

Luxembourg: A Pioneer in Europe

Since July 2016, Reserved Alternative Investment Funds (RAIFs) can be launched under Luxembourg law. This structure allows fund managers to exploit the benefits of an unregulated fund structure while complying with the legal framework of the Alternative Investment Fund Managers Directive (AIFMD). In order to meet the full needs of offshore fund managers, Luxembourg has modernised the rules applied to limited partnerships with the introduction of new legal vehicles such as the SCS and SCSp. This provides innovative solutions for asset managers who want to avoid a double layer of regulation.

Luxembourg is the largest jurisdiction host-ing Undertakings for Collective Investments in Transferrable Securities (UCITS). All investment strategies of offshore funds ful-filling the requirements set out by the le-gal framework of UCITS can thus be launched as a UCITS fund.

Onshoring – Implementation

There are different solutions for changing the domicile from an offshore to an onshore jurisdiction such as Luxembourg. The following list describes the most common ways to execute such a transaction:

1. Contribution in kind

• Option 1: The offshore fund makes a subscription in-kind of its positions into the onshore fund. The offshore fund then receives the units of the onshore fund, which will be distributed to the unit holders of the offshore fund via redemption in due course of the liquidation of the offshore fund.
• Option 2: The shares of the offshore fund are transferred as a subscription in-kind into the onshore fund. The investors of the offshore fund therefore switch their units of the offshore fund for units of an onshore fund. Once the transaction is completed, the offshore fund will be liquidated and the positions will be transferred to the onshore fund.

2. Transfer of domicile

• Relocation of the company’s headquarters by transferring the registered office or the effective place of management from an offshore to an onshore domicile.

3. Cross-border merger

• The offshore fund needs to invest in an onshore fund in return for the issuance of shares to the investors of the off-shore fund, which will thus be resolved.

4. Master-feeder structure

• A feeder fund established in a member state of the European Union invests at least 85% into an offshore fund, which pools the assets of the various feeders accommodating the needs of the different investors.

Conclusion

Onshore investment funds offer a variety of advantages that can help asset managers grow their business organically by providing tailor-made solutions while still enabling lean operating structures. Meanwhile, investors benefit from the advantages offered through the professional operation of an onshore investment fund by making the best use of available tools and resources. Both investors and fund managers therefore benefit from an onshore investment fund structure.

In Luxembourg, depending on the needs and expectations as well as the type of clients, investors can be offered optimal and individual fund structures. This may involve creating a new structure, transferring the domicile of an existing one, a merger or a master-feeder construction in accordance with European regulations.

The range of legal forms and distribution possibilities currently available under Lux-embourg laws allow fund managers to fully exploit the opportunities arising from the decision to choose an onshore location.

Given the aforementioned circumstances as well as considering that EU fund structures are accredited for facilitated distribution processes in Asia, these advantages are of particular interest to Asian asset managers.

Eduard von Kymmel is the Head of VP Fund Solutions – the funds competency centre of the internationally active VP Bank Group – as well as a member of the Board of Directors of VP Fund Solutions (Liechtenstein) AG and the CEO of VP Fund Solutions (Luxembourg) SA. He pre-viously held several functions and man-agement positions at Credit Suisse in Luxembourg and Zurich. He has a masters in law degree from Johann-Wolfgang-Goethe University in Frankfurt and an MBA in Finance from the University of Wales, Great Britain.

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