Tax structuring developments for Luxembourg AIFs in an international context

​BEPS: impacts on the investment fund industry

BEPS (Base Erosion and Profit Shifting) is the OECD’s most significant initiative in recent decades. It is primarily intended to crack down on tax planning strategies used by multinational groups.  Although not a direct target of BEPS, the investment fund industry could however be a collateral victim. In particular, BEPS action item 6 on treaty abuse should result in giving tax authorities around the world more discretion in denying treaty benefits. While more thinking on the specific situation of non-CIV funds is still to come, the introduction of anti-abuse rules into tax treaties could result in greater treaty challenges for funds in the future.

GAAR: benefits to be denied if arrangements not genuine

The intended general anti-abuse rule or “GAAR” (which is known as the principal purposes test or “PPT” rule) will be included in the OECD Model Tax Convention. Under this rule, if one of the principal purposes of transactions or arrangements is to obtain treaty benefits, these benefits would be denied unless it is established that granting these benefits would be in accordance with the object and purpose of the provisions of the treaty.

Correspondingly, as from 2016, a similar GAAR will be applicable in the context of the EU parent-subsidiary directive. In essence, “benefits of the directive should be denied in the framework of an arrangement or a series of arrangements which, having been put in place for the main purpose or one of the main purposes of obtaining a tax advantage that defeats the object or purposes of the directive [main purpose test], are not genuine having regard to all relevant facts and circumstances. An arrangement or a series of arrangements shall be regarded as not genuine to the extent that they are not put in place for valid economic reasons which reflect economic reality [substance test]”. The application of this GAAR may also raise practical issues for funds.

Regulated AIF implies non-tax motive for being established in a given jurisdiction

These changes inevitably raise the question of the future model for private equity or real estate funds. It seems however obvious to state that a regulated AIF (with a regulatory regime applicable at the AIF level and/or at the AIFM level) has a non-tax motive for being established in a given jurisdiction and that element should clearly be highlighted when discussing treaty entitlement.

EU AIF vs local RE fund vehicles

As far as real estate funds are concerned, several EU countries have introduced beneficial tax regimes for real estate funds. A pan-European RE fund may thus choose to invest in local real estate funds rather than through classical property companies or partnerships. The proliferation of regulatory regimes raises the issue of efficiency and the question of how an AIFM can organise the management of both the AIF and local RE fund vehicles.

For more information, please do not hesitate to contact our Tax partnerThierry Lesage.

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