Overcrowded?

The race to domicile new funds in Luxembourg could put pressure on the country’s financial and social infrastructure, industry pundits warned.

Speaking at Invest Europe’s CFOs Forum in Berlin, held in late May, a panel of private fund operations professionals said that while the country currently offers a “huge range” of service providers, there is a risk of overcrowding.

“There’s only so many people and funds the country can accommodate,” a general counsel on the panel said. “Service providers currently line the road from the airport to the centre of town but they could easily become overwhelmed.”

The discussion followed a poll of delegates in which just under half said they are considering domiciling their next fund in the country – far more than were considering other destinations, including their own countries (“other” – 26 percent) and the Netherlands (9 percent). 

Most tax authorities require firms that domicile in Luxembourg to have an office and staff there to benefit from tax treaty eligibility. Whether that means hiring a new team or moving existing staff is down to the individual firm. 

The latter is certainly being considered by a number of London-based firms, as a consequence of the Brexit vote, the managing director of a fund management platform said. A Luxembourg-based partner at an accountancy firm said it could become a tough sell as more and more people move to the country. 

“There’s only a finite number of people that can move to Luxembourg, where will we put people? If you want to attract the top talent, encourage them to leave London, the facilities have to be top quality, not overstretched,” the partner said.

The panelists agreed, however, that Luxembourg was taking action to tackle the emerging risk. 

There was also consensus that despite any negatives attached to domiciling in Luxembourg, the country was still head and shoulders above neighbouring jurisdictions because of its political stability, favourable tax regime and its forward-looking approach to European regulation.

PRICEY DUCHY

One of the negatives investors are willing to put up with is the perceived high cost of domiciling in Luxembourg. 

As mentioned earlier, just under half of delegates polled at the Forum said they were considering domiciling their next fund in Luxembourg, despite 57 percent saying they thought it was the most expensive jurisdiction in which to run a fund. 

“There is a perception Luxembourg is an expensive place to set up and run a fund, but really, it’s the cost of the Alternative Investment Fund Managers’ Directive – it’s not Luxembourg-specific,” a senior vice-president from a Swiss-based private equity and infrastructure manager said during a panel discussion.

Fund managers are used to dealing with offshore and non-regulated funds which are, in comparison, much cheaper to run, the panellist added. 

On the appeal of Luxembourg as a fund domicile, one fund manager who has been running a Luxembourg fund for a few years said the country’s regulatory stability, favourable tax regime and progressive attitude to the AIFMD from the outset has helped it to establish itself as a domicile of choice in Europe. 

A second fund manager said a recent update to the limited partnership law – which reduced both registration time and the administrative burden on fund managers – had been “helpful”, adding the regulator had also been making an effort to improve the efficiency with which it processed applications.

“There was previously an issue with timing, but that has improved a lot now and the time it takes to get a license has fallen. I know they’re also recruiting to reflect the influx of applications for licenses it has received lately,” the fund manager said. 

The panel agreed that these attributes meant Luxembourg, out of all European jurisdictions, would benefit the most from Brexit. 

“Other jurisdictions have their benefits, but Luxembourg has the fewest drawbacks. It’s going to be the real winner from Brexit,” the second fund manager said.