One of the most important decision-making factors that an asset manager (General Partner – GP) considers in setting up a fund is to ensure that the investment structure is tax neutral for its investor (Limiter Partners – LPs) and provides for the most reliable regulatory framework. The complexity of setting up international investment vehicles pooling several classes of assets and investors historically led to the creation of offshore funds. Those funds were typically not subject to tax, but of course portfolio entities (in the private equity segment) and investors were subject to tax in their home jurisdiction.
The BEPS Action Plan and increasingly stringent regulatory requirements (AIFMD, FATCA, CRS etc.) imposed on the finance industry will in this context fundamentally change the way asset managers operate. While BEPS was initially aimed at establishing a wider tax transparency regarding the tax affairs of MNEs, it will have an even more dramatic impact on the financial services and funds industry. Consider, among other things, the new approach to substance, not only for funds and managers but also for portfolio entities, the new rules impacting double tax treaty benefits, hybrid financing, permanent establishment and country-by-country reporting.
Those changes will deeply impact the way in which governments and most institutional LPs will deal with GPs and their asset managers while negotiating future fund raising.
For more insights on fund structuring related items requiring special attention, mostly with regard to private equity, read our entire contribution here and follow our next publications on BEPS in M&A, which will each focus on a more detailed aspect of the Transactions continuum.