Analysis of Tax Obstacles in Cross-Border Private Equity Investments

This report delves into the tax obstacles encountered in cross-border private equity investments, with a specific focus on the jurisdictions of Luxembourg and Ireland. The introduction highlights the growing significance of private equity funds, particularly in supporting Small and Medium Enterprises (SMEs) in Europe, and the challenges posed by the financial crisis. The report examines the benefits and regulation of private equity investment funds, including different types, organizational frameworks, and the roles of investors, funds, and management firms. It analyzes the tax treatment of these funds, including ideal jurisdictions, with detailed discussions on Luxembourg and Ireland. The core of the report addresses key tax issues, such as double taxation arising from inconsistent tax treatments across countries and withholding tax relief obstacles. Furthermore, it explores the tax implications of the Alternative Investment Fund Managers Directive (AIFMD), including its aim, scope, and impact on residency and domestic tax developments. The report concludes by summarizing findings and suggesting potential solutions to the identified tax restrictions, aiming to enhance understanding of the tax landscape for cross-border private equity investments.

TAX OBSTACLES TO CROSS-BORDER INVESTMENTS THROUGH PRIVATE EQUITY
INVESTMENT FUNDS FOCUSING ON LUXEMBOURG AND IRELAND
Name of the Student:
Name of the University:
Author’s Note:

Table of Contents
I. Introduction..........................................................................................................3
II. Private equity investment funds and their tax treatment............................................5
2.1 Background........................................................................................................5
2.1.1 Explanation and the benefits of private equity investment funds............................5
2.1.2 Regulation of private equity investment funds.....................................................6
2.1.3 Types of private equity investment funds............................................................8
2.1.4 Organizational Framework of a private equity investment fund.............................9
2.1.5 Analysis of the functions performed by the investors, the fund and the management
firm/fund manager..................................................................................................13
2.2 Tax Treatment of private equity investment funds................................................15
2.2.1 Taxes payable by the private equity funds........................................................15
2.2.2 Ideal jurisdiction for creating private equity investment fund.............................15
2.2.3 Luxembourg as a private equity investment fund jurisdiction.............................17
The Part III UCI Law and the CIF Law....................................................................18
3.2.4 Ireland as a private equity investment fund jurisdiction.....................................22
3.2.5 Conclusion..................................................................................................26
IV. Main Tax issues related to cross-border private equity investments......................27
4.2Double taxation caused by mismatch in tax treatment of investment funds by different
countries...........................................................................................................28
4.3 Withholding tax relief obstacles.....................................................................30
V. Tax implications of the Alternative Investment Fund Managers Directive...........32
5.1 Aim, scope and impact of the Alternative Investment Fund Managers Directive.32
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5.2 Tax implications of the Alternative Investment Fund Managers Directive..........35
5.2.1 Issue of residency......................................................................................35
5.2.2 Domestic tax developments introduced as a part of the implementation of the AIFMD
............................................................................................................36
VI. Conclusion.................................................................................................38
Reference List and Bibliography........................................................................41
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I. Introduction
In the current time period, there has been growth in the significance of investment funds
especially in the private equity funds. In the current era, several Europe based“Small and
Medium Enterprises” (SMEs) are having issues in generating income for the growth and
development. As cited by the “European Commission”, the strengthening of the credit
circumstances in the time of calamity has created entrance to difficulty in finance even in the
SMEs. In such scenario, the business capital and the private equity are the key sources which can
assist in addressing the requirements of the SMEs and thereby contributing to their
development1. The SMEs on the other hand can create economic development and generate new
jobs and help in the designing and the exploitation of new technologies and knowledge. For these
factors, the business capital and the private equity investments have a significantjob in the
enhancement of the economy in Europe and thereby require to be cultivating and giving
extensive extent of attention.
Additionally, in the current period, the business capital and private equity in the
European market still functions lower than their actual prospective. The financial crisis has
revealed an unfavorable impact on the private equitymarket in Europe. The entire raising of fund
of the vehicles of private equity in the European Union has lowered in the year 2012 by 43%.
The overall investment in the companies in Europe has even declined and it can be observed that
“EUR 6.5 bn” was paid in the firms of Europe in the year 2012 along with a decline of 19% in
relation to the last year.
The financial atmosphere is a key reasonthat can reinforce and condense the development
of the venture capital and the equity sector that is private in nature. There has been an
observation that as the investment funds undertake investments in a pool of global organizations
and thereby develop several issues related to tax due to the interaction between jurisdiction of
taxing of the associated states, i.e the nation of the construction of the deposit and the nation
where the indented company functions and the nation of the investor2. To make sure the
1Directive 2009/65/EC of the European Parliament and of the Council of 13 July 2009 on the
coordination of laws, regulations and administrative provisions relating to undertakings for
collective investment in transferable securities (UCITS);
2OECD revised public discussion draft, Interpretation and application of article 5 (permanent
establishment) of the OECD Model Tax Convention, 2011. Retrieved from:
http://www.oecd.org/ctp/treaties/PermanentEstablishment.pdf; 74
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enhancement of the investment region associated to private equity, the key obstacles of taxation
requires to be recognized and suitable answers requires to be discovered.
By locking at the general introductory assessment that is concerned with the character of
the operations of the equity funds that is under the Chapter I of this thesis, the researcher will
undertake a comparison of the treatment of taxes of the private equity funds by considering one
as the appropriate venture fund authority i.e. Ireland and Luxembourg as instances. In the
comingsection the researcher will concentrate on the issues of the claim of the tax agreement of
the personal equity funds that is essential for recognizing the key tax restrictions to the cross-
border personal investments that are equity in nature. In “Section IV”, the researcher will assess
the key research questions by highlighting the significant tax restrictions to the cross-border
personal equity investments. In general, the researcher will concentrate on the topic of unrelieved
double taxation that takes place due to the various classifications of the personal equity
investment fund tool by the various territories and with the creation of the risk of enduring
creation of the stakeholders in the nation in relation to the funds or the investors in the country of
the organization that has been targeted. Furthermore, the researcher will assess the restrictions
endured by the stakeholders of fund that is tax translucent when looking to receive a tax credit
with respect to the withheld tax in the nation of the firm that has been targeted. In the conclusive
section, the researcher will explain the present topics of the substitute fund sector, the current
incorporation of the “Alternative Investment Fund Managers Directive” which looks to attain
coordination of the managers of substitute venture funds and explicitly has a vital effect on the
business equity. Even though the Directive does not unswervingly control the tax problems of
the alternative venture funds, the researcher will disclose the implication of tax, the Directive had
and how much the nations are able to explain them theconjugal laws. By looking at the
performed assessment, the researcher will bring out the outcomes and give out prospective
solutions to the recognized restrictions.
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II. Private equity investment funds and their tax treatment
2.1 Background
2.1.1 Explanation and the benefits of private equity investment funds:
The venture funds are fiscal mediators which gatherprofit from the financiersthat can be
corporations or individuals and connect them thereby undertake investments within extend of
ventures with the intention of accomplishing venture development and attaining gains for the
investors. The investors specifically in developed nations, observes it more beneficial to invest
their money in an indirect manner which means constructing their investments with the help of
communal investment tools rather than the frankly purchased shares in the organizations that
have been targeted3. There are several factors that make the funds an eye-catching tool from the
point of view of the investors in comparison to the direct investments, specifically,
 Investment facilitation: It can be hard for the investors to select the precise goal for
venture due to lack of essential expertise, resources and time. This is the reason why it
has become easier to allocate the job of managing and selecting ventures to the skilled
investment fund managers.
 Risk Spreading: The process of spreading of risk is attained with the help of the
categorization of investments undertaken by endowment. An aggregate investor can
generally give in order to capitalize in a small level of money. Therefore, it will become
tough for them to purchase any holdings in various organizations in a direct manner. The
investment of money with the help of funds permits the investors to be the shareholders
in various firms. The holding of shares of various organizations terminates the risk of
losing all the money of the investors with respect to the straight investments in scenarios
of insolvency of one of the marked organizations and reduces the danger in accordance to
the gain.
 Lowering of expense for investors: The transaction cost of the investors on minor sales
and purchases of shares are specifically much bigger than as a fraction of the price of
every business deal than those for the fund that deals with huge amount.
The processesexplainedabove are applicable to the private equity investment funds.
3Commission staff working document of 30 April 2009 “Impact assessment” accompanying the
Proposal for a Directive of the European Parliament and of the Council on Alternative
Investment Fund Managers and amending Directives 2004/39/EC and 2009/…/EC;
5

2.1.2 Regulation of private equity investment funds
Conversely, to gain knowledge about the specifications of this kind of funds, it is
significant to differentiate decisionsfor the combined investments in the securities that are
transferable from the other activities for the purpose of combined investments which are called
the substitute investment funds4.
A “UCITS” fund is a Europe based product that is regulated by the Directive
2009/65/EC3” which is even known as the “UCITS IV Directive”. The aim of “UCIT IV
Directive is to permit for the funds that are open ended that invest in manageable securities to the
topic of similar regulations in every “Member State” that facilitates the fractious border offer of
the investments that contributes to the founding of the solitary investment fund market as a
section of the distinctmonetary European market. Due to these reasons, the “UCITS IV
Directive” looks “UCITS” having a passport that is of Europe in order to become profitable
throughout the European Union. The “UCITS”directive is reliant on the principle of solitary
license that explains that the “UCITS” that have the authority in single member state can sale
their units in other “Member State” without looking to put on for the approval in the later period.
The substitutes of “UCITS”, “AIFs” in general are inclusive of the hedge and private
equity investment finance and real estate are the focus of the thesis. The another investment
funds can be explained as a tool for the purpose of combined investment that gathers the assets
from various stakeholders in order to empower in such assets with respect to a specific approach
for the profit of the investors and it does not function a commerce that is outside business sector
and even does not succeed as “UCITS”5. These frameworks like the holding organizations and
securitization tools can be clearly omitted from the definition of “AIF”.
With respect to “UCITS”, the “AIFs” are not controlled by the “UCITS IV Directive” as
it does not require having a passport of Europe and therefore is not able to market in a free
manner in the European Union. On the contrary to “UCITS”, there is no management for “AIFs”
within the European Union; in one pole there exists nations which implement a distinct
4OECD Income and Capital Model Tax Convention and Commentary, as of 22 July 2010;
5EVCA comments on the discussion draft on “Interpretation and application of article 5
(permanent establishment) of the OECD Model Tax Convention”, 8 February 2012. Retrieved
from: http://www.oecd.org/ctp/treaties/49637906.pdf;
6

lawmaking for the “AIFs” that controls specifically in the lawfulaspect of the funds, the investor
rights and incorporates special regimes of taxes6. At the other pole, certain nations put down to
the funds the benefit of selecting their permissible form and the stipulations that are in
association with their investors which has been generated.
The reason that “AIFs” are regulated fewer than the “UCITS”or even omitted by the
administrator from the guideline can be defined by the factor that generally do not have an
increased intensity ofdirective. “AIFs”dissimilarto “UCITS” does not pact with the common
public investing that attracts specific qualified investors like the richpeople and even in asset
organizations. The extent of their operations needs utmostelasticity of structuring and a restricted
revelation. In the current period regulations of “AIFs” at the European Union point is
accomplished at the extent of the investment managers with the help of the “Directive” on the
guideline of optional investment managers. Thecomponent is constructed even in Chapter V of
the current thesis.
A personal equity fund may be explained as a kind of equity venture within the personal
organizations that have not been disclosed with a stock exchange. The private equity is
differentiated by their venture framework that is active in nature in which it looks to deliver the
operational enhancements within their organizations over the previouscertain years.
The personal equity fund is different UCITS with respect to the kind of stakeholders and
the sort of ventures and their strategies of the firm. Generally the personal equity ventures are
reticent for the investors who are well informed and on the other hand the investors of UCITS
can be inclusive of the full continuum of the type of investors. By looking at the type of
investments, the private equity ventures may undertake investments in any kind of property
whereas the investments of the funds of UCITS shall only consist of the manageable securities
and the instruments of the wealth market that have admitted to or have been dealt on market that
is regulated of the units that is permitted UCITS or the other collective investment undertakings
and the deposits with the financial derivative tools in the credit organizations. The UCITS
6OECD public discussion draft, the granting of treaty benefits with respect to the income of
collective investment vehicles, 2010. Retrieved from:
http://www.oecd.org/tax/treaties/45359261.pdf;
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business strategy looks at the investments that are increasingly profitable in nature in specific
kinds of assets that have been explained earlier in order to allocate the income to the investors or
purchasing of the units at the request of the investors7. The personal equity investment strategy
additionally, in certain scenarios is focused in order to nurture development and establish extra
goodwill in the firm that has been targeted like for example with the enhancement of innovative
technologies and products, growth of the working fund by taking a product that is existent in the
new market, ownership resolution and the management problems with the main aim to sell the
targeted organization after certain years for an increased price and to create profit for the investor
fund.
2.1.3 Types of private equity investment funds
The personal equity investments can be classified into the following kinds:
Leveraged buyout funds: Conventionally they gain power of the ranks with the help of the
majority of the ownership and representation of the board for the companies that are undervalued
or have matured as underperforming. The funds that are buyout have specifically required to
influence their equity investments in debt bankrolling and even more which are concerned with
the capability of a firm to create sustainable cash flow than the venture capital funds.
Venture capital funds: These kinds of funds acquire least amount of stakes in a start-up or
relatively young private organizations with a prospective development that are driven
specifically by the technological development and give both management skills and equity
capital. It is common for an investment capital investment fund to take as a scenario within their
asset which gains position on the boards of the directors of a firm that has been targeted, which is
useful for giving out management skills for supervising the investment8.
Growth equity funds: They undertake investments in latter stages in the IPO organizations and
even in the PIPE transactions with the private organizations. The private equity funds can
undertake investments in various firms by overlooking their size but most of the companies that
has been targeted for the private equity funds that are “SMEs” are 83% of the private equity
funds that have been made into the “SMEs”.
7Commission staff working document of 30 April 2009 “Impact assessment” accompanying the
Proposal for a Directive of the European Parliament and of the Council on Alternative
Investment Fund Managers and amending Directives 2004/39/EC and 2009/…/EC;
8Luxembourg law of 17 December 2010 on Undertakings for Collective Investment;
8

Custodian/
Depository
Fund Manager/
Management
Company
Target
Company
Target
Company
Auditor
Target
Company
Investors
Investment
Fund
2.1.4 Organizational Framework of a private equity investment fund
The secretive equity funds in certain scenarios do not have staffs as they allocate several
roles to various facilitygivers. The chart beneath reveals a characteristic general framework of a
personal equity investment.
Picture 1:
(As Created By Author)
Investment funds and Investors
The investors have been looked upon as the corporations and the individuals which invest
their money to the investment funds. With respect to their investments, the investors gain shares
of the funds and components that characterize a section of the overall possessions. The investors
can receive the income that is created by the money in the kind of deliveries that are periodic in
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nature or the kind of principal gains from the substitution of the asset of the funds9. The
investment funds generally comprises of the financial assets that have been acquired by the fund
with the help of the fund that is gained from investors along with the prospective cash reserves.
Fund manager/ Management Company
The management firm or even the account manager is the individual or the entity that
generally makes the money to be generated so it generally accomplishes the roles of the
promoters or the fund originator.
The management of the reserve can be undertaken with the help of the external managers
of a management firm or by the fund itself that is in the legal aspect can allow the in-house
administration and the place where the stakeholders look to not to choose an exterior
administered firm. For instance, Luxembourg SICAFs and SICAVs that is generated in the
corporate aspect must both be selected a managing firm or allocate itself as a self-administered
asset firm10. Conversely, the reserved equity funds generated in the lucid form like for example
Irish bonds and the “CCFS” that are needed to select an exterior administration company.
The firm is the entity that manages the equity funds as a general business which increases
the capital from various investors with an idea to invest in the money for the profit of those
financiers with respect to an explained investment policy. In reality, management firms generally
manage various investment funds. The management firm functions with respect to the service
agreement that has been contracted with the financiers. During the time of the center
management, the endowment generally incorporates administration team that consists of entities
who have competent expertise11.
The characteristics of the operations of the fund managers of the management firm are
inclusive of the following:
9P. Behrens, Residence of Companies under Tax Treaties and EC Law, G. Maisto edition, fifth
volume in the IBFD "EC and International Tax Law Series", IBFD Publications BV, 2009;
10Luxembourg law of 15 June 2004 relating to the Investment Company in Risk Capital (SICAR)
as amended by the law of 24 October 2008;
11The Luxembourg Bill of law No.6471 of 24 August 2012 transposing the AIFMD;
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 Servicing the investors of the funds by explaining the strategies and objectives of the
investment, sustaining the research, investment assessment, evaluation and recognition
of the prospective investment opportunities, selection of the portfolio and undertaking
the transactions related to the investment.
 Administration operations that is inclusive of the fund assessment and pricing, managing
and functioning the accounts of the funds that is inclusive of the income that is received
and the losses and the gains that has been realized, liaison with the auditor and
custodian. Due to these facilities, the administration firm is given a fee for management.
The management company personnel and even the endowment managers generally get a
remuneration fee that is reliant on the presentation of the endowment that is called the approved
interest. Carried interest permits the personnel of the endowment organizations or the center
managers of the funds to receive a part in the profit that is created by the investment of the
funds12. Generally in additional to the administration services, the administration organizations
function as the ventureconsultant of the fund that provides the goal organizations and the fund
with the consultancy services with respect to an investment consultative contract. For these
services, the administration firm gains fees that are additional in nature.
Custodian (depository)
The custodian is accountable for the management of the assets that are available in the
funds. This is inclusive of the safeguarding of the assets of the funds and the daily supervision of
the assets that is dependent on the instructions that have been established from the administration
firm or the endowment manager until they struggle with the legitimate reports. In aarrangement
that dematerialized in nature, the asset of the funds are recorded in the minimal ownership of the
stockpile and it has been observed that in a materialized process, the certificates are held
physically with the cooperation or approval of the depository13. This is constructed in order to
restrict the assaulting of the investment assets by the administration firm or by the management
executives. For their facilities the collection levies a fee that is reliant on the proportion of the
ordinary net assets of the funds.
12OECD public discussion draft, Clarification of the meaning of “Beneficial owner” in the OECD
Model Tax Convention, 2011. Retrieved from: http://www.oecd.org/ctp/treaties/47643872.pdf;
13Report of the EC Expert Group, on removing tax obstacles to cross-border Venture Capital
Investments, 2010. Retrieved from: http://ec.europa.eu/venture-capital/index_en.htm;
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It is vital to comment that the currently incorporated AIFMD needs the executives to
select self-governing depositories for each AIF. With the vital accountabilities of the depository
emphasized by the AIFMD are confirmation of the ownership and maintenance of records,
monitoring of the cash flow and overlookingactions. This need will motivate the personal equity
fund companies before the AIFMD custodian have not exploited in an intense manner14. In
certain authorities, for instance Luxembourg were familiar previously with the idea of depository
for their personal equity assets, and the explained one is a new restriction for the endowment
managers in the other nations like Netherlands, Ireland and Cyprus. Hence, the assortment
procedure for an appropriate depository assisted by the suitable attentiveness process that would
be needed for the personal investment funds in the coming time that may lead to rise in extra
expenses.
Auditor
In certain authorities for instance, Ireland, Cyprus and Luxembourg need a
yearlyendowment audit that requires to be done by the qualified and the independent auditors.
The audit values are constructed by the bookkeeping standards that are domestic in nature. As
the operations of the fund cannot be compared with the general organizations, unique accounting
standards are constructed generally for the investments.
2.1.5 Analysis of the functions performed by the investors, the fund and the management
firm/fund manager
The differentiation of roles completed by the stakeholders for the endowment and the
administration firm justifies a distinct consideration as it contains a significant effect on
additional assessed subjects like the agreementprivilege of the endowment and generation of a
perpetual incorporation of the funds or the investors in the nation of the target organization and
14Responses to the EC public consultation on “Problems that arise in the direct tax field when
venture capital is invested across borders” provided by the Tax and, the Finnish Venture Capital
Association and KPMG Oy Ab, the EVCA Association, the Association of the Danish Tax
Lawyers and the Cyprus Department of Inland Revenue. All responses are retrieved from:
http://ec.europa.eu/taxation_customs/resources/documents/common/consultations/tax/
double_non_tax/tax_ problems_venture_capital_investment_en.pdf;
12

of the financiers in the nation of the endowment. Even though these components will be regarded
additional in the individualsegments in explicit particulars, it is vital having a primary
appreciation of the extent and the nature of the obligations and rights of the endowment, the
management firm and the investors.
As explained in the earlier “Section 2.1.4” of this thesis, there exist two prospective
administration frameworks for personal investment funds: the extrinsic administration
undertaken by the administration firm or the in-house management that is undertaken by the in-
house managers who have been appointed by the endowment. In this scenario of in-house
administration, and thereby can be stated evidently that roles of the endowment manager
represents the tasks of the investment actually. It can be said that the fund undertakes the
business operations by them.
The scenario of the external management is not that simple and increases the level of
uncertainty in the practices. Form this viewpoint, it can is debated that the administration firm
functions on behalf of the financiers and the endowment under the agreement and thereby the
functions of the administration firm generally arrives from the functions of the investors and
funds. These kind of cognitive leads to the completion of the operations of the financiers and the
endowment goes outside the clear and unreceptive investment operations but discloses the
administration that are active that has been employed to the extrinsic management firm15. This
process brings forth prospective dangers of actualization of a perpetual creation for the financiers
or the endowment within the nation where the corporation operates.
The other viewpoint which is assisted by the researcher is that the function and the
operations of the administration firm are variant from different functions and the businesses of
the endowment and their financiers. The investor of the endowment themselves do not undertake
the management operations; they do not have the authority for daily rheostat over the functions
of the administration firm. The financiers in a general manner capitalize their cash into the
endowment and the endowment is extensively exploited for the unreceptiveinvestment that is
15COM (2011) 642 final, Communication from the Commission to the European Parliament, the
Council, the European economic and social Committee and the Committee of the regions;
Secondary sources: Books
13

creates income that is passive in nature that means that their operations is not commercially
concerned with. The endowment itself does not undertake any operations and is exploited like a
means of transportation in order to simplify the investments. On the other hand, the management
firm undertakes their own business; the workers of the administration firm but not the financiers
or the staffs of the endowment have adequate experience in the arena of investment16. A contract
among the investors and the management firm or the company specifically deliberate vast
authorities on the management firm, for instance to enter within the transactions with respect to
the investment products. Accordingly, the management firm has the obligations, powers and
rights to undertake decisions with respect to the distribution strategy and investments in the fund.
Undertaking a position with respect to which the characteristic of the operations of the
management firm does not comprise of the operations of the fund and hence it is said that neither
the endowment nor the financiers undertake any commercial operations17. As an outcome, there
will be no challenges related to the generation of a perpetual creation of the endowment and the
financiers in the nation of the business that has been taken into consideration and even the
investors in the nation of the fund.
The question associated with the ascription of the administrationvigorous roles to the
financiers and the endowment and to the management firm has an effect on the enterprise notion
which is very crucial for ascertaining the existence of a permanent establishment18. The
researchers does not share a vast process and takes a place that the explanation to the local law
explanation of a corporate is not permitted as the idea of double tax agreement is needed
otherwise.
The process that recognizes lucid investment unreceptive environment of the operations
of the investors and the funds conversely brings in various problems to the identification of the
endowment as an advantageous proprietor.
16J. Barenfeld, Taxation of cross-border partnerships, IBFD Publications BV, 2005;
17T. Viitala, Taxation of investment funds in the European Union, Volume 8, Doctoral Series
IBFD – Academic Council, 2005;
18M. Lang, The Application of the OECD Model Tax Convention to Partnerships, Vienna: Linde,
2000; Journals
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2.2 Tax Treatment of private equity investment funds
2.2.1 Taxes payable by the private equity funds
The key procedures of taxes which can be allocated by the international funds are:
 Income Tax: This is unsettled on various kind of income of the investment for instance
on the dividends that has been gained from the organizations that have been targeted.
 Taxes on the capital gains: This is levied on the profit that is incurred on the sale of the
assets that has been controlled by the investment.
 Taxes on net worth: It is charged over the resources that are under business equity and
assets. The treasuries are generally exempted from the net taxes as the scenario in
Luxembourg and in Ireland as an instance
 Registration duties: This is charged with accordance to a variety of transactions that is
inclusive of the creation and the rise in investment by the contribution of the assets and
the transmissions of the workplace that has been registered or in places of an efficient
management. They are generally unimportant and do not undertake a huge pressure on
the tax.
 Subscription taxes: These are the quarterly or the annual taxes that is charged on the net
assets of the funds.
2.2.2 Ideal jurisdiction for creating private equity investment fund
The fund assessment forms an essential question in accordance to the reserves and the
administration firms as it has an impact on the fund’s attractiveness in comparison to the direct
investments or any kind of investments.
When establishing an asset strategy, it is essential to have knowledge about effective
venture framework from the commencement so that if the revenue from the businesses that have
been targeted is gained or principal gain from the target organization’s auction of shares is
undertaken in the upcoming time, the financiers will not be facing any additional tax pressure.
In order to avoid such issues, various dominions internationally apply and accept the idea
of tax detachment of the endowment which explains that the investors should in a condition of
compensating the same and not going above the tax amount as he had bought the fundamental
asset of the endowment directly19.
19K. Vogel, On Double Tax Conventions, Kluwer Law International, 3rd ed., 1997;
15

Since the financiers are attentive in gaining as much profits as conceivable, when
constructing their framework for asset, they move ahead with the purpose to discover a
prerogative which will usually because of the basic features of the tax permits zero or low
corporation tax on the dividends or the capital gainsthat has been comprehended by the
endowment and even for zero or low paymentsuppression taxes during the forward distribution
of the bonuses to the investors20. In circumstances of the locallegislature of the nation where the
endowment is generated does not give out tax unbiased management, the network of tax
agreement of the jurisdiction of the endowment and therefore can be a dominant significance in
terminating or at the minimum decreasing the tax problem.
The completion of what is the most appropriate jurisdiction in order to generate the fund
should be reliant only on the tax implication assessment. These components as a practical
experience and legal certainty should be considered. It is not suggested to create anendowment in
the authority where the new and fresh tax rules were incorporated. This can lead to the danger
that the tax establishments will undertake a variant method on the significant subjects than the
tax consultants21. It is always suggested to assess if the tax establishments are contented with the
assets that are under the jurisdiction and their situation in accordance to the utilisation of the
contract benefits to the investments. It can be anticipated that if a jurisdiction of generally used
as a fund control and this area has been examined by various worldwide tax consultants and
discovered to be in arrangement.
In the current research paper, the researcher will concentrate on Ireland and Luxembourg.
As an worldwide substitute fund residences, these dominions rank between the most beneficial
and flexible aground jurisdiction due to an extensive diversity of speculation fund tools that may
be generated under their controllingstructure and the advantageous tax rules that are obtainable
for these tools22. Furthermore, the infrastructure of a developed country an increasingly capable
and experienced labor force, radical steadiness and most significantly the will on the aspect of
20J. Afakir and P.Dukmedjian, Implementation of the Alternative Investment Fund Managers
Directive (2011/61) into Luxembourg Law: a full legal and tax beneficial package, Bulletin for
International Taxation, Vol.67, no.6, 2013;
21J. Bieber, G. Auger and L. Taing, Private Equity structuring in Luxembourg – key tax aspects,
Tax Planning International Review, Vol. 38, no.5, 2011;
22L. Banfi and F. Mantegazza, An update on the concept of beneficial ownership from an Italian
perspective, European taxation, Vol. 52, no. 2/3, 2012;
16

the tax and regulatory establishments in order to incorporate and matureguidelines in order to
maintain speed with the worldwide developments and makes Ireland and Luxembourg
reasonable authorities for the creation of the funds. In the end of initial quarter in the year 2013,
over 3500 personal investment fund tools are existent in Luxembourg that has net assets of
around “720 billion Euros”. On the other hand, Irish personal equity fund firms consist of over
2000 personal equity funds of around 280 billion Euros in the net assets for the similar time.
2.2.3 Luxembourg as a private equity investment fund jurisdiction
Even though during the last 20 years, Luxembourg has constructed their location as the
most precise residence for the takings of UCITS and it has even enhanced a firm path record in a
substitute venture products and modified investment framework like in general the personal
equity transportations. In Luxembourg, the “non-UCITS” investment funds that are inclusive of
the secluded equity venture funds can be established in the following ways:
 Within the part II of the law of “17th December 2010” on the “Actions for the
Cooperative Investment” or even under the law of 13th February 2007 on a particular
investment fund; or
 With respect to the law of 15th June 2004 which was rectified on 24th October 2008
The entire sequestered equity investment funds that have been generated under one of the
laws that have been explained above that are supervised and authorized by the “Commission for
the Management of the Financial Sector”.
The Part III UCI Law and the CIF Law
The key difference among the resources that have been generated under the “Part II UCI
Law and the SIF Law” associates with: (i) the kind of savers and (ii) the purpose to increase the
principal from the market. Any kind of investors can be disclosed to a “Part II UCI” whereas a
“SIF” can be undertaken by one and various investors who have been well-informed as
explained under the “SIF Law”. A “Part II UCI” requires to have the idea to increase their
wealth from the community with the help of public offering- freely from the kind of investor it
concentrates on and freely whether or not it will prosper in creating wealth from the market.
However, it is not permitted for a SIF to generate wealth from the market23. The law of
23EC public consultation paper, Problems that arise in the direct tax field when venture capital is
invested across borders, 3 August 2012. Retrieved from:
17

Luxembourg does not specifically explains the public offering idea but on the other hand it is
regarded that the units that have been positioned within the team of financierswith lesser than 20
persons do not comprise of a communal offering. This is why it has been understandable that the
reserved equity funds generated under the “SIF Law” are more renowned within Luxembourg in
contrast to the “Part II UCIs”: in the end of March 2013 the “SIFs” have shown close to 40% of
the overall market there were 1505 funds that were registered under the SIF Law but only 543
are under the UCI Law24. The benefit of funds that have been generated under the SIF Law with
respect to the other UCIsis that that they gain advantage from enhanced elasticity till the
regulatory system and especially their policies of investment that is being taken into
consideration.
The private equity funds that are available in Luxembourg under all the systems can be
established in contractual manner or in the panache of the venture organizations, a financial firm
with adjustable amount or SICAF- and a financial firm with fixed capital.
A part II UCI making use of the variable capital framework can be organized as joint
stock firm. If a “Part II UCI” incorporates the fixed wealth framework and it may even
implement permissible procedure that is with respect to the Luxembourg law.
3.2.3.2 The SICAR Law
The other endowmentcommand which is a substitute to the traditional tools explained
earlier is theSICARrule. In this regime, which was incorporated in the year 2004, the SICAR
entity can be generated.
The SICAR regime requires special attention as after the enactment of the SICAR Law,
the Luxembourg representative looked to generate a distinct lawful model indorsing the
enhancement of the venture capital andprivate equity in the European Union which will permit
bendable potentialities of arranging and would create neutrality of tax. The administration of
http://ec.europa.eu/taxation_customs/resources/documents/common/consultations/tax/
venture_capital/cons ultation_document_en.pdf;
24Responses to the EC public consultation on “Problems that arise in the direct tax field when
venture capital is invested across borders” provided by the Tax and, the Finnish Venture Capital
Association and KPMG Oy Ab, the EVCA Association, the Association of the Danish Tax
Lawyers and the Cyprus Department of Inland Revenue. All responses are retrieved from:
http://ec.europa.eu/taxation_customs/resources/documents/common/consultations/tax/
double_non_tax/tax_ problems_venture_capital_investment_en.pdf;
18

SICAR did not substitute the administrations that are existent but actually closed the gap by
providing tailored venture capital and cloistered equity capital investment tool looking at the
international and domestic investors who are skilled and qualified. The Luxembourg regime of
SICAR differentiates themselves from the other personal equity and the scheme capital regimes
within which the SICAR regimes requires to be entrusted to a depository bank that is established
in Luxembourg.
With respect to the SICAR Law, the SICAR may actually invest in the values that have
been risk bearing. It actually explains that the risk capital investments means the equity
investments with respect to their establishment and development of the initial public offering.
3.2.3.3 The New Luxembourg partnership SCSp
The “SCSp” requires distinct consideration as this an innovative endowment vehicle that
was incorporated very newly in the year 2013. Luxembourg undertook the decision to
incorporate it as one of the remunerations that have been implemented within the incorporation
procedure of the AIFMD with the goal of appealing the journeying funds aground. This
distincttool was calculated by looking at the Anglo-Saxon limited partnership structure25. To
explain, “Anglo-Saxon limited” ventures are regarded as the appropriate vehicle for collecting
the financiers and framing the “carried interest” and the “fees” related to management. The
Anglo-Saxon Limited partnerships give out confidentiality, flexibility, tax transparency and
limited investor liability. They are even subjected to certain regulations and benefits from the
aspect of reporting the obligations and the requirements, which addresses their accomplishment
in the fund management sector.
3.2.3.4 Taxation
The Luxembourg assessment on the personal equity funds is reliant on a permissible form
of their incorporation and distinct necessities in the regulation in accordance of the regimes that
are applicable. The funds that have been generated in the pledged form (FCP) are lucid for the
intentions of Luxembourg and accordingly all the principal gains and income that are treated as
25J. Bieber, G. Auger and L. Taing, Private Equity structuring in Luxembourg – key tax aspects,
Tax Planning International Review, Vol. 38, no.5, 2011;
19

accruing and arising to every investor26. Furthermore, the establishment of a UCI under the
predetermined form do not pull out any registration and principal duties. Conversely, the
establishment of anadministration firm as well as every modification of the articles of
connotation of that administration firm and activates a secure duty of registration of EUR 75.23.
Even though averageconcealment tax degree of Luxembourg is 15%, there exists
generally no silencing taxes on the paid dividends by the endowment of Luxembourg to their
foreign and local investors in the exceptions of the EU Savings Directive are applicable27. This
has been due to the “EU Parent Subsidiary Directive” application and for the circumstance that
Luxembourg has expanded the assistances of the “Directive” to the father businesses citizens in
the non-EU tax agreementnations in case the conditions are similar to those that has been under
the exemption of Luxembourg participation have been contented and the parental firm is
subjective to a tax that is equivalent to the corporate income tax of Luxembourg28.
3.2.3.5 Application of the EU Savings Directive to private equity investment funds
There has been an excitement to note that “EU Savings Directive” may be applicable in
certain situations of payments that have been undertaken by the Luxembourg endowment to each
investor who are residing in a diverse member state.
In reality, the aim of the EU Savings Directive is to make sure that the minimum efficient
assessment of savings revenue in the way of imbursement of interests that have been made in one
EU Members of State to each valuable owner who are the citizens in any other EU State. The
goal in a standardized manner should be accomplished with the help of exchange of data among
the Member States29. Conversely, Luxembourg has chosen otherwise for a tax that is withholding
arrangement for a transformational time in association to such expenditures.
26L. Borucki, Luxembourg's plan for AIFMD puts tax in the spotlight, International tax review,
Vol. 24, no. 4, 2013);
27D. Burke, Collective investment vehicles – issues in cross border investment, Tax planning
international: European tax service, Vol.14, no.8, 2012;
28The Luxembourg Bill of law No.6471 of 24 August 2012 transposing the AIFMD;
29Luxembourg law of 13 February 2007 on specialized investment funds;
20

Under various scenarios, “Article 6 (1) (c) and (d) of the EU Savings Directive” to become
qualified as any interest imbursement income given or the earnings that have been realized on
the deliverance, the refund or the share sales or the components of:
 A “UCITS” permitted with respect to the “UCITS Directive”
 A “UCI” generated outside the EU.
 An individual that has looked to be preserved as a “UCITS” permitted with respect to the
“UCITS IV Directive”
The proceeds that have been discovered by the stakeholders on the redemption or the sale of
the units and the sharesin the fund of Luxembourg which has explained that “UCITS” will be
subjected to the “EU savings Directive” and the “Luxembourg Law of SD” if it is over 25% if
these assets of the endowment are capitalized in the claims related to debt.
Furthermore, it needs to be explained that none of the tax related to withholding will be
withdrawn by the reimbursing agents of Luxembourg if the precise single financier either has
authorized expressively by the disbursing agent to disclose data to the establishments of tax with
respect to the demands of “EUSD Law” or has given the disbursing agent with a
credentialconstructed in the arrangement that is needed by the “EUSD Law” by the skilled
specialists of the “State” for the intention of tax30.
3.2.3.6 SOPARFI
Other than semi-controlled reserve tools depicted before, Luxembourg has developed its
piece of the overall industry in private value and investment stores on account of its non-directed
uncommon reason organizations, (for example, the “SOPARFI - Societe de Participations
Financiers”, monetary cooperation organization). The most essential qualification among the
assets built up under the “SICAR/SIF/Part II UCI Law” and the “SOPARFI” is the absence of
administrative omission of the “CSSF” if there should arise an occurrence of them SOPARFI.
Entirely, it is off base to mark a SOPARFI as a store as it is a common completely
assessable Luxembourg business organization which may be joined under the authoritative
documents of “SA”, “SCA” or “Sàrl”, and which essential action is land and backingpersonal
30R. Galea, The Meaning of “Liable to Tax” and the OECD Reports: Their Interaction and
Ambiguous Interpretation, Bulletin for International Taxation, Vol.66, no.6, 2012;
21

value and funding speculation31. The achievement of the SOPARFIcomes from the way that,
because of its non-control, SOPARFIs are speedier to consolidate, less expensive to oversee and
less subjective to announcing commitments.
3.2.4 Ireland as a private equity investment fund jurisdiction
Irish “non-UCITS” stores inclusive of the personal value assets may be set up as trade
financial specialist elective venture reserves, proficient speculator stores (PIFs) and qualifying
financial specialist elective venture stores (QIAIFs). The overall “non-UCITS” Irish assets are
approved and directed by the “Central Bank of Ireland”32.
Ireland has been keen on maintaining the location of the one of driving purview for
AIFsand elective venture subsidize directors (AIFMs), as of late improved its administrative
elective speculation stores administrations. Inside the usage procedure of the “AI”FMD, the
Central Bank of Ireland” issued the “AIF Rulebook” which cliques out the circumstances
relevant to finance chiefs and assets. The AIF Rulebook” supplanted the past “Central Bank's
NU” arrangement of “Notices and Guidance Notes" with the exemption that the longstanding
enactment will even now be applicable to prevailing Irish AIFMs with currentAIFs until the point
that AIFMs are approved or until the point that the provisional period closes in the year July
2014.
3.2.4.1 Professional investor fund (PIF)
“PIF” is a classification of “non-UCITS” aggregate venture plot approved by the
“Central Bank of Ireland” which needs a base membership of EUR 100,000 for each financial
specialist. There are restricted special cases to this membership prerequisite, specifically, where
the financial specialist is the administration organization. Also, this administration forces certain
venture and obtaining confinements for the reserve which are lower than if there should be an
occurrence of the retail finance administration yet can speak to snags for private value financial
specialists33. At present the “Central Bank of Ireland” permits interest in recorded and private
31Prof.Dr. R. Danon, Clarification of the Meaning of "Beneficial Owner" in the OECD Model
Tax Convention - Comment on the April 2011 Discussion Draft, Bulletin for International
Taxation, Vol.65, no.8, 2011;
32Companies Act of Ireland, 1990;
33Investment Funds, Companies and Miscellaneous Provisions Act of Ireland, 2005;
22

securities subjective to anoverall greatest of 20% of net resource esteem in any one issuer.This is
the reason organizing finds as PIFs is not famous these days as the following administration.
3.2.4.2 Qualifying Investor Alternative Investment Fund (QIAIF)
Before the presentation of AIFMD, the succeeding speculator support (QIF)
administration occurred and was the important European controlled store item for a wide range
of elective techniques. Gazing from the year July 2013, Ireland has built up the Qualifying
Investor Alternative Investment Fund ("QIAIF") which supplanted theQIF. Theoretically, the
new administration is like the past one: the majority of the major favorable circumstances, for
example, venture adaptability, speed to advertise and no getting limitations stayed set up. Be that
as it may, the Central Bank loose it considerably more, specifically, by expelling the promoter
administration, presenting more adaptable guidelines in regard of offer classes, expanding the
underlying offer time frames for private value funds34. Importantly, similar to its forerunner, the
approval of the QIAIF should even now be possible on a most optimized plan of attack premise,
i.e. the QIAIF can be approved inside single business day after accommodation of finished
reserve credentials and accreditation that specific administrative prerequisites have been
done.The QIF/QIAIF is, by a wide margin, the most well-known kind of non-UCITS support
built up in Ireland particularly for private value speculation stores.
The key benefit of the QIAF is that it takes knowledge from the higher policies than the
various Irish funds: QIAF is not subjective to borrowing or investment limitations and there is no
need for divergence. There are even no limitations on the kinds of assets within which this
money can be invested.
3.2.4.3 Legal forms of Irish private equity
AIFsin Ireland in any of the administrations portrayed above might be built up as:
 Unit trusts, under the Unit Trusts Act, 1990;
 Investment organizations under the Companies Act, 1990 Part XIII;
 Investment constrained associations under the Investment Limited Partnerships Act,
1994;
34Taxes Consolidation Act of Ireland, 1997; OECD publications and documents related to them
23

 The general contractual assets under the Investment Funds, Companies and
Miscellaneous Provisions Act, 2005
As an organization, a venture organization is a different lawful element, oversaw and
controlled by its top managerial staff, which may enter into agreements in its own particular
identity. Like Luxembourg speculation organizations SICAV and SICAFwithin Ireland there
additionally two sorts of venture organizations: mutable capital organization and settled principal
company35.The Irish venture organizations can have the type of personal or open restricted
organization.
Unexpectedly, a unit trust, venture constrained association (ILP) and authoritative assets are
not distinct lawful elements. The Unit trust is a tool made by a trust action went into by the
executor and the supervisor of the conviction and, as said over, the utilization of an
administration organization in this configuration is a need. Personal value support built up as
ILPs speaks to an organization between at least one general accomplice and at least one
constrained accomplices the primary trade of which, as communicated in its association
assertion, is the venture of its assets in resources36. The mutual contractual funds are a
construction for general management and pooling of the assets established and administered by
the private contract.
3.2.4.4 Taxation
Treatment of tax of the funds that are regulated in Ireland is a key purpose behind the
achievement of the Irish fundbusiness.
Reservedequity investments built up as venture organizations are hazy for the purpose of
tax. The Unit trusts are not organizations but rather for the motivations behind Irish tax
legislationsand are dealt with though they are organizations. Venture organizations and the unit
trusts in fall inside the meaning of "Investment Undertakings" under Section 734that is under
theTaxes Consolidation Act, 1997 (TCA) and in this way are liable to a similar tax assessment
35R. Galea, The Meaning of “Liable to Tax” and the OECD Reports: Their Interaction and
Ambiguous Interpretation, Bulletin for International Taxation, Vol.66, no.6, 2012;
36A. W.G. Lamers and T. J.A. Stevens, Classification conflicts: the cross-border tax treatment of
the profit share of limited partners, European taxation, Vol.44, no.4, 2004;
24

regime. In light of this administration “Investment Undertakings” are not subjective to Irish tax
assessment within any gains and revenue up they may gain from their reserves.
Under the common instruction the fund is in charge of a 20% reserve impose in regard
ofexpenditures (for instance, if there should be an occurrence of dividend circulation or recovery
of units) undertaken to convinced unit holders in a fund. In any case, there is sure special cases
from this regulation, one of which is where the speculators, which has been non-occupant or
non-customarily inhabitant in Ireland and have given the endowment the proper important
revelation of residencewho are non-Irish or the endowment has fulfilled and benefited of
convinced proportional aspects. It is intriguing to take note of that the “Irish Revenue
Commissioners (IRC”), following extensive transactions within the Irish fundsector, brought
new trials into the year 2010 “Finance Act” to correct the rules as to pertinent presentations for
non-occupants37.
“Common Contractual Funds (CCFs”) being an independent body built up by
aadministration organization, are straightforward for taxation intentions. Accordingly, financial
specialists in CCFs take part and offer in the possessions of the endowment as co-proprietors of
the assets of the reserve. The outcome of CCF’sframework is thegains and incomes of such tools
are dealt with as emerging or collecting to the element holders or speculators and not to the tool
itself.
3.2.5 Conclusion
Luxembourg and Irelandis one of the primary European houses of decision for venture
resources. In view of the examinationabove of the prevailingadministrations and taxmanagement
of personal value venture finances in the two wards, it may be inferred that the degreeof tax set
up in the purview isn't critical for the motivations behind creating of investment technique.
It is exceptionally hard to finish up which one of the authorities that are competitive,
IrelandorLuxembourg, is additionally gainful and thewriter is of the sentiment that inquiry ought
to be replied on a case premise considering many elements including accountancy factors, for
example, specifically, business destinations. Being diverse in their ways to deal with control of
speculation finance administrations, i.e. Luxembourg has instituted isolate directions appropriate
37Y. Liu, Private investment fund formation: an introduction to organizational forms, Derivatives
& Financial Instruments, Vol. 13, no. 5, 2011;
25

to various sorts of UCIs while Ireland tends to the UCI's action in its general enactment relying
upon authoritative document, the outcomes they offer are the same.
IV. Main Tax issues related to cross-border private equity investments
The issues of cross-border investments of personal value and investment stores are
recognized at the EU level. The supervision of the significance towards lucidity and assurance in
the field of tax collection for the advancement of anenergeticpersonal value and funding arcade
and for the motivations have been behind encouraging cross-borderinvestment the European
Commission to set up an Expert Group on cross-borderrestrictions to Venture Capital (VC)
interest in the year 2007. The VC Tax Expert Group had an order to recognize instances of
twofold tax collection and various direct expense connected hindrances experienced by cross-
border VC ventures and to think about conceivable methods for conquering such obstructions38.
The consequences of the Group's work were condensed in its report given in the year 2010 (VC
Report). The disclosure gave an outline of the duty matters which may emerge for cross-fringe
ventures of VC in the EU.
38W. Oepen, K. Lievens, T. van den Bruel, Belgium-Luxembourg Income and Capital Tax Treaty
(1970) Resolves Double Taxation on Net Assets of Luxembourg Investment Funds with Belgian
Investors, Bulletin for International Taxation, Vol.67, no.8, 2013;
26

In view of the VC Report and public discussion paper, the accompanying expense
obstructions to cross-border investments by means of private equity and funds associated to
investment capital can be distinguished:
1. Constant twofold tax collection created by confound in assess conduct of venture funds by
various nations and consequent troubles in the use of twofold tax collection arrangements. This
issue will be explained in area 4.1 of the present paper.
2. The danger of an esteemed changeless foundation for the endowment or its speculators in
some other authority other than that within which they are founded or occupant unitedly with the
subsequent twofold tax assessment. This problem will be explained in section 4.2 of the current
paper.
3. The danger of non-relief from the suppressiontaxes on bonuses gained from the target
organizations. This issue will be explained in section 4.3 of the current paper.
4.2Double taxation caused by mismatch in tax treatment of investment funds by different
countries
The idea of the endowment is utilized by every nation in view of its own legitimate and
duty framework. In this way, issues may emerge when the different states included achieve
diverse conclusions as respect the portrayal of the fund for the purpose of taxation. This is
particularly significant in case the fund is built up as a partnership: a few nations take entity
approach and regard partnership as independent legitimate elements and taxable people, though
different nations applying the average approach don't remember them as having any lawful status
isolated from their proprietors and regard associations as straightforward for the purpose of
taxation39. The last method is the supreme widely recognized and connected, for instance, in
Australia, Sweden and Germany. The cases of the objectmethod can be discovered in Hungary
andBelgium where the companies are commonly exhausted by an indistinguishable trendas
organizations. By looking at the domestic laws of the involved nations, the issues may take place
if for instance the endowment is identified as impervious in the nation of their formation but the
39J. Schaffner and J.Wantz, Luxembourg Investment Funds: a status report, European Taxation,
Vol. 51, no.1, 2011; 52. P.Borsje and W.Specken, Tax implications of the amended UCITS and
the AIFM Directives: a general overview from a Dutch perspective, Derivatives&Financial
Instruments, Vol.14, no.4, 2012;
27

Investors
Investment Fund Target Company
nation of the depositors or the corporation that has been targeted looks at it as transparent. This is
seen in the picture below:
Picture 2
(Source: As Created By Author)
Accepting that the store gets pay from the offer of offers of the objective organization or
profits from the objective organization, twofold tax assessment may emerge. As the reserve is
dealt with as obscure in its condition of living arrangement, salary will be burdened in the
condition of the store. Be that as it may, as the financial specialist's state regards the reserve as
straightforward, a similar wage will be burdened in the hands of the speculator. Accordingly, the
two countries, i.e. the condition for the financial specialist and condition of the endowment,
would charge a similar salary from the source nation twice.
Conversely, in the feeling of the author there is a twofold taxation from an alternate point
of view: bonuses are taxed in the nation of the financier when they are seen as obtained
specifically from the distinct organization yet similar bonuses are overtaxed again on
conveyances in the nation of the fund40. Subsequently, the bonus tax collection forces a twofold
tax assessment in the wisdom that the de facto comprises a section of the tax that has already
40Prof. J. Sharman, Corporate transparency and beneficial ownership, Offshore Investment,
no.237, June 2013;
28

been incurredby the nation of the financier in the time when bonuses are disseminated by the
district organization. Notwithstanding, if within the local law of the endowment’snation dividend
conveyed by the endowment are excluded from suppressiontaxes, twofold tax assessment
portrayed above won't be an problem. In any case, twofold taxation may at present emerge if the
financial depositor’s state regards the endowment as misty and expense profits gained from the
endowment. For this situation the financierwill have the capacity to get tax credit for the
withheld tax by the endowment. In any case, the nation of the distinct organization regarding the
endowment as straightforward will likewise suppresstax as though paid specifically to the
financial investor. The financier for this situation won't have the capacity to get atax recognition
for the withheld tax by the distinct organization.
Furthermore, when the endowment circulates the returns gained from the trade of the
target organization to the financier, the condition of the fund would perceive this dissemination
as a bonus from which it could taxwithhold.
Therefore, the twofold tax collection isn't alleviated by the use of the separate twofold
taxation settlements in the assessed scenario. Hypothetically, twofold tax collection coming
about because of the denial of twofold tax treaty get to cause by the diverse characterization of
assets by various nations could be kept away from by method for a shared agreement
processamong the taxation experts of the nationsassociated under article 25 of the OECD MTC.
The issues related to permanent establishment may take place in the practice of two
various cases: endowment in the home nation of the target firms and the permanent
establishment for the investors and perpetual establishment for the foreign financiers in the home
nation of the endowment.
29

Investors Investors
Investment Fund Investment Fund
Target Company Target Company
Pictures 3 and 4
(Source: As Created By the Author)
4.3 Withholding tax relief obstacles
On a fundamental level, in a normal circumstance when bonuses are paid, they are
subjective initially to taxwithholding in the nation of the payee and after that in the hand of the
beneficiary with an outcome that authority twofold tax collection emerges. Such twofold tax
collection generally maintained a strategic distance from by twofold tax agreements by
arrangement of a recognition permitting to balance the suspendedtaxfortax liability to be paid out
in the nation of the beneficiary41. In any case, when used to the funds, definitesubjects may
emerge in regard of the tax withholding balance impacted, specifically, by the issue of
agreementprerogative of the venture funds.
In the scenario when the fund is murky for tax determinations and qualified for advantage
from the appropriate tax settlement insurance, hypothetically it is qualified for receiving a credit
for the tax withheld. Conversely, as it was portrayed above by and large nations, attempting to
41J. Sheehan, Tax treatment of Irish investment fund and SPV structures, Derivatives & Financial
instruments, Vol. 13, no. 5, 2011;
30

accomplish neutrality of tax amongst indirect and direct investment, distinct tax regimes for
reserves which accommodate exception. Therefore, there is absencetax liability that can be
counterbalanced for the withholding tax charged in the condition of the allocating organization42.
V. Tax implications of the Alternative Investment Fund Managers Directive
5.1 Aim, scope and impact of the Alternative Investment Fund Managers Directive
Factually, “AIFMs” were controlled by a mix of nationwide directions and overall
arrangements of EU law, complemented in a few territories by industry ethics. AIFMs on a basic
level force many jeopardies on the business sectors which has been particularly obvious in
circumstance of the economic catastrophe that started in 2007 and 2008. They added to inflation
of asset prices in various markets. Certainly, in unfavorable economic situations of the financial
catastrophe, numerous AIFMs were looked with augmented demands for redemption from
financial specialists and with snuggeradvancingcircumstances from banks. Confronted with such
42B. da Silva, Granting tax treaty benefits to collective investment vehicles: a review of the
OECD Report and the 2010 Amendments to the Model tax Convention, Intertax, Vol. 39, issue
4, 2011;
31

tensions, reserves were regularly compelled to wholesale assets into deteriorating markets – in
this way apprehending losses and accumulation further force to deterioratingasset costs43. This
conduct with no questions added to an extension of the crisis in the meantime the effect of
AIFMs on the business sectors in which they function can be to a great extent valuable since they
may help to feast or open up riskswith the help of the money related system. However, because
of absence of coordination within the “European Union”, the productive administration of those
risks gave off an impression of being hard to effectuate.
AIFMD directs both outer AIFMsperforming under service treaty with the financiers of
the endowment and if there should be an occurrence of an inside managedAIF – the AIF itself. In
spite of the fact that the preface of the AIFMDobviously says that it does not plan to direct AIFs,
by methods for controlling the administration organizations it successfully manages the assets
themselves.
When it arrives to the evaluation of the effect of AIFMD on the AIMs and their AIFs,
AIFMs should assess their structures in order to guide where their AIFMs, investors and AIFs are
situated as this will course how the AIFMD rules are applicable to them and as an outcome what
their selections could be when it is related to the acting to the requirements of the Director.
AIFMD gives out two distinct rules for the purpose of fund marketing: (i) one is for the managers
of EU who are taking care of the EU funds and (ii) the other one is for non-EU managers who
are taking care of the EU funds or the non-EU funds to the investors in the EU and the managers
of EU who are taking care of the EU funds.
The primary class of AIFMs will profit by an EU passport and might be completely
agreeable and approved under the AIFMD until 22 July 2014. EU identification will allow EU-
based AIFMs to advertise units or shares of its EU-based AIFs to the investors in the entire EU
like the UCITS44.
In the second category of AIFMs regulations that is under the AIFMD category is lower.
An EU AIFM that manages the non-EU AIF requires being compliant with and even be
43C. du Toit, The evolution of the term “Beneficial ownership” in relation to international
taxation over the past 45 years, Bulletin for International Taxation, Vol.64, no. 10, 2010;
44IFA Cahiers 1997 - Vol. 82b, The taxation of investment funds - General Report, L. J. Ed and
Dr. Paul J. M. Bongaarts; 61. B. McDermott and M. McKenna, Ireland - Investment Funds &
Private Equity, Topical Analyses IBFD, 2003;
32

authorized under the AIFMD, except for the fact that it can gain benefit from the softer
depository needs. Conversely, it will not have the entrance to the EU passport till the year 2015.
The access to the EU skilled investors will sustain under the regime of national private
placement.
The non-EU managers explained in the second category are even able to market their EU
and their non-EU AIFs to the EU investors by making use of the current private placement rules.
Even though the AIFMD does not adapt to the existing private placement rules, there is still
certain requirement that has to be met with respect to the AIFMD in case the AIFs are to be
marketed in EU by the non-EU AIFMs with the help of the private placement rules. The
requirements are as follows: (i) Suitable cooperation treaties should be existent among the
regulator in the EU Member State within which marketing is undertaken and the supervisory
regulators of the nations within which the AIFs and the non-EU AIFMs are established: and (ii)
the third nation where the non-EU AIFM is addressed need not be listed as a non-cooperative
motion and the area by the FATF and (iii) the non-EU AIFM need not comply with the lucidity
requirements of the AIFMD. From the year 2015, a non-EU AIFM can be given access to the EU
marketing passport with the responsibility to be complied fully with the AIFMD. Conversely, it
would be on the voluntary basis and the AIFMs may take decisions with respect to the
continuation of the AIFs marketing in the EU with the help of the national private placement
rules till the year 2018. In the year 2018, the European Security and Markets Authority (ESMA)
is anticipated to report on whether this rule should remain a course that is available in order to
access the investors in EU.
It is seen that EU AIFs with EU AIFMs can gain the access to the passport under the
AIFMD, permitting them with more conviction of being able to market all over the EU.
Conversely, in the initial phase of AIFMD incorporation, the non-EU AIFMs cannot be
sanctioned under the AIFMD and must gain access to the EU market through individual nation
private placement regimes. The AIFMs of the AIFs will require satisfying few of the AIFMD
needs and simultaneously gaining access through through the private placement rules which can
bring in various complexities as these rules vary from nation to nation. The managers need to
examine the requirements in each every nation prior to marketing in that nation to ensure that
they are able to increase their new capital in that nation or whether they require to satisfy the
33

extra needs initially. This is the reason why the non-EU AIFMs which concentrates on marketing
their AIFs to the investors within the EU and thereby restrict such problems and thereby may
decide that will be more advantageous for them to be reliant on EU. This can even be observed
as a policy issue as the European investors being cautious of the safeguards they can attain from
the AIFMD and they may prefer to undertake investments into the EU funds that are
administered by the EU managers. In order to to stay competitive in the European market, the
non-EU managers may look for re-domiciling in Europe.
Furthermore, even though AIFMD does not make modifications to the private placement
rules currently, therefore all the AIFs that get access to their market in the future will have to
undertake with respect to the AIFMD passport. This can be an extra initiative for the purpose of
relocation. Even if the managers look at it suitable to administer their non-EU fund from any
non-EU authority and in certain cases the problem of re-domiciling to the EU or any another
non-EU nation may develop, specifically in case the essential cooperation treaties are not entered
into by precise managements or the non-EU nation within which the non-EU AIF or the non-EU
AIFM is domiciled and is listed by the FATF as a country or territory that is non-cooperative in
nature.
5.2 Tax implications of the Alternative Investment Fund Managers Directive
In spite of the fact that the AIFMDdoes not unswervingly control taxes, as observed
above so as to conform to its principles the endowment managers should adjust and change their
working framework to guarantee consistence with the Directive. Key and operative issues which
endowment managers need to look in this regard may have noteworthy tax insinuations.
5.2.1 Issue of residency
A standout amongst the most critical matters which can emerge from the AIFMmigration
is the subject of residency as it might prompt twofold tax assessment or create anunpredictable
and complex tax command for the endowment and its investors. Under the normally
accepteddirective, numerous EU Member States decide the placement of a substance for
taxationdeterminationscreated on its place of viable organization and, therefore, transmission of
the administration organization may bring about a difference in impose placement of the AIF. It
34

might prompt diverse unfriendly results45. For instance, if the fund in the dominion of the region
profited from the status of tax-exemption, the transmission of the administration organization to
other state which does not give particular tax unbiased regimes or such regimes is liable to
particular scenarios the fund does not satisfy will prompt tax collection of the endowment. In the
event that one country decides residency of the fund as per where the fund has been enlisted and
another smears the process as per which the residency is characterized as a place where
successful administration is worked out, double residency may emerge46.
In circumstances when there is no double taxation agreement among the nations
answering the issue, it can lead to constant double taxation. With respect to Article 4(3) of the
OECD MTC where an individual other than an entity is an occupant of both contractual states,
then it would be looked down upon as a resident only of the state within which their place of
efficient management is located. Conversely, even in scenarios when double taxation agreement
is existent and it may not include the corresponding provision that is comparable to the Article
4(3) of the OECD MTC. Furthermore, even if it has it, this cannot safeguard the fund and their
investors from any adverse tax results in case the nation of the efficient management creates
poorer tax rules for the fund.
The other issue which is pertinent is accessibility of precise tax agreementwelfares under
a relevant tax agreement. In view of article 1 of the OECD MTC the use of tax agreement
requires a man to be an inhabitant in either of the contracting nations. The outcome of
transformation of residency and subsequently the transformation of applicable tax agreement can
be that the new contract signed between the nation of the target organization and the nation
where the place of viable management of the fund is found does not accommodate a similar
mitigation or relief of withholding taxes on the payments that has been received from the target
organization47.
45J. Fisch, P. Goebel and P. Berna, Luxembourg - Investment Funds & Private Equity, Topical
Analyses IBFD, 2013;
46AIFMD Implementation Guide, GFM Special Report, July 2013. Retrieved from:
http://www.hedgeweek.com/sites/default/files/GFM_AIFMD_13.pdf;
47Excellence in Alternative Investments: Ireland knows Investment Funds, Irish Fund Industry
Association booklet. Retrieved from:
http://www.irishfunds.ie/fs/doc/publications/alternative_investments_brochure_web.pdf;
35

The problem may become even more complex in scenarios when the nation where the
area of efficient management is located categorizes the fund differently for the purpose of tax
considering it, for instance as non-transparent more than being transparent. In this scenario, the
distributions by the fund to its investors may become subjective to the withholding taxes with
respect to the legislation of the nation where the place of efficient management of the fund is
situated. Furthermore there is a future sale of the shares or the units may lead to extra taxation at
the extent of the investors. Therefore, looking at the explanations that have been given above it is
precise that issues related to tax should form a segment of the general framework assessment of a
relocation of the management firm which has been an effect of AIFMD.
5.2.2 Domestic tax developments introduced as a part of the implementation of the AIFMD
AIFMD concentrates just on administrative questions and does not organize tax concerns
which imply that every Member State chooses what fluctuations if required it will make in its
residential lawmaking regarding the intervention of theAIFMD. That is the reason nations which
are interested with fascination of AIFMs, monitoring such unwantedtaxation obstructions coming
about because of movement ofAIFMs, straightforwardly tended to this issue in their household
legislation presented as a piece of the execution of the AIFMD48. For instance, Netherland
revised general Dutch tax residency rule which verified that an objectis thought to be a tax
occupant of Netherlands if its viable place of administration is located in Netherlands. The new
change gives an exemption to the rule of taxplacement under which the AIF ought not to be
viewed as a Dutch tax residentif it is enrolled in additional state yet controlled in Netherlands by
a Dutch AIFM. Luxembourg likewise found an answer for this subject by presenting a tax
exception for remote AIFswhen their focal organization or place of powerful administration is
situated in Luxembourg.
Furthermore to the answer to the issues that have been addressed earlier, the nations that
are interested in giving out a secured and flexible and safe atmosphere for the AIFMs and AIFs
that have incorporated tax benefits. The suitable instance of the nation looking to turn the
incorporation of the AIFMD for the profit of the managers and the fund has been Luxembourg.
48W.Fry, Asset management & investment funds news: Significant Enhancements to Ireland’s
AIF Regime in advance of AIFMD Implementation, November 2012. Retrieved from:
http://www.williamfry.ie/Libraries/test/Asset-Management-Investment-Funds-News---Nov-
2012- 1.sflb.ashx;
36

Furthermore to the introduction of a new limited partnership with comparable features and
benefits as an offshore partnership and solutions to the residency problems, it has incorporated
many tax incentives that are vital for AIFMs. Specifically, it incorporated a status of Vat-
exemption for the AIFs and exemption of VAT for the management services undertaken by
AIFMs. Furthermore, by the Bill of Law No. 6471 on 24th August 2012, Luxembourg
incorporated a distinct tax rule that is intended for the employees of AIFMs that has been newly
incorporated in Luxembourg. The Bill has differentiated among the remuneration strict sensu,
which is the counterpart of the management aim and the carried interest. The strict sensu of
remuneration comes under the scope of employment salaries, while the carried interest comes
under the scope of the short term capital gains. For the new Luxembourg tax occupants, the
carried interest remuneration will be regarded to be an extraordinary income and as such would
gain from a reduced taxation. The tax will only be applicable at the rate of 25% of the rate of
income tax that is inclusive of the solidarity surcharge of 10.9%. This beneficial aspect is
subjective to various scenarios and will be available till the tenure of 10 years after the year
during which the precise professional operations that initiated in Luxembourg.
VI. Conclusion
Tax assessment of investment fund is a critical perspective that straightforwardly affects
the advancement of SMEs and development of the European economy. The significance of this is
particularly critical in the current financial downturn and turbulence. With respect to the
currentpaper the researcher concentrated on the instances of Ireland and Luxembourg that
taxconduct that is favorable in nature of personalequity and investments in venture capital is a
key to fruitful development of the fund business. Undeniably, there has been aextended history
of prevailingtax inducementsin combination with perpetual endeavors to make their assets more
aggressive by making innovativenichetools and adjusting legislature because of the current
formation of a solitarymarketplace for elective ventureendowment managers that is
safeguardedfor Ireland and Luxembourg the domain'sleadinglocations in theendowment
business.
37

Investigation of the accessible tax systems for reservedequity venture funds of the two
locales demonstrated that it is important to guarantee the impartiality of tax of the endowment
tool independent of the type of its firm. Regardless of whether it has been built up as tax-
exempted fund, afinancier ought not get a tax benefit or endure a tax advantage by utilizing
aventureendowment as opposed to making aundeviatingventure.
In this thesis the researcher created an understanding to the key tax issues of the
reservedequity funds. To begin with, the researcher dissected the settlement powerof the reserves
and demonstrated that these days no assurance is there in such manner: there exists distinctive
perspectives among nationswith respect to whether the fund ought to be dealt with as a local,
man and valuable proprietor of the gains and income and, in this manner, qualified for claiming
benefits for tax treaties. In fact, this issue makes the states to look for arrangements
smearingnational methods or discussions;conversely, the general explanation for this issue
needsto bediscovered at the European aspect.
Furthermore, the researcher has concentrated on the key restrictions that are associated to
the cross-border personal equity investments. The initial restriction generates from the fact that
investment funds can be looked upon differently in various states in various ways for the purpose
of tax i.e non-transparent vs the transparent. This kind of mismatch may create difficulties in the
implementation of the double taxation agreements and the subsequent unrelieved double
taxation. In the opinion of the researcher, the recommendations advised by the European
Commission in the VC Report i.e the mutual identification of the categorization implemented by
the host nation of the fund for the intention of tax and therefore it is difficult to incorporate in
reality. This is the reason why till the time EU reaches the general approach, the problem should
be highlighted in the agreement of double tax.
The next restriction generates because it is usually essential for the fund managers to be
present personally in the nation of the target organization. The nation of the target firm may look
at such domestic occurrence of the fund manager as generating a permanent establishment if the
fund or their investors and implement taxation with that respect. If the nation of the fund and the
investors also implies taxation to the return on investment, the authentic double taxation
agreements might not give out any sort of credit.
38

The researcher underpins the answer for this issue recommended by the European
Commission to receive in the regulation that the endowment manager needs to be regarded as a
self-governing representative. Moreover, the subject of the risk of establishinga
perpetualfounding of financiers in the nation of the endowmentwas raised by the researcher. The
researcher arrived at the deduction that the unreceptive characteristic of the activities of the
endowment along with the investment facts undertaken by the financiers may not lead to the
establishment of perpetualcreation.
The final restriction assessed in the paper is that the stakeholders in most of the scenarios
are unable to claim for the double tax agreement relief for the withheld tax in the nation of the
target firm in the scenarios of transparent and opaque funds. The position of the researcher is that
the permission of the fund to claim for the agreement relief on behalf of the investors can vitally
facilitate cross-border personal equity investments. In the final chapter the researcher has
assessed the effect of the currently incorporated AIFMD on the taxation of the private equity
funds in Europe. The fact that the AIMD generates subjective reviews of the business
frameworks may generate issues of residency transformations for the funds as an outcome of re-
domiciliation of the location of the fund managers. The researcher has given instances of
Luxembourg and Netherlands with respect to the answers the nations would undertake in order to
highlight the adverse tax results which may generate due to this. Furthermore, the researcher by
giving an overview of the most key tax modifications incorporated by Luxembourg revealed how
investment peaceful authorities have exploited the necessity to abide by the provisions of the
AIFMD to effectively enhance their investment attractiveness.
39

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