PERSPECTIVE

A fund domicile refers to the jurisdiction where a fund is legally established.

Domiciles vary considerably in terms of:

• Regulatory requirements and obligations
• Local tax regimes
• Available fund products
• Global Marketability
• Service provider markets

Different European jurisdictions possess diverse regulatory frameworks. For instance, domiciling in Luxembourg offers a robust yet flexible regulation structure, often gaining a level of investor trust and easier access to European markets.

On the other hand, Ireland’s AIFMD (Alternative Investment Fund Managers Directive) framework is an attractive option for those looking to manage and market their funds to European investors, given its transparent and well-defined rules.

However, regulatory challenges and the costs associated with running funds can dissuade start-up managers from initially domiciling in Europe. These challenges can be mitigated, and if a non-European fund is established, one must contemplate the future possibility of investors seeking an EU-regulated version of the fund.

Pro Tip: Engage a local expert – such as a legal counsel or a regulatory consultant. They are able to provide specific, relevant advice, ensuring you comply with all requirements and avoid any legal or regulatory pitfalls.

Furthermore, these experts often have relationships with local regulatory bodies and understand their workings, priorities, and concerns, which can help speed up processes like obtaining licenses or permits.

Tax considerations undoubtedly play a major role in determining a fund’s domicile. Different domiciles can significantly impact the tax obligations for the fund, its investors, and its investments. Thoroughly researching tax treaties and structures in potential domiciles is pivotal for maximising post-tax returns and ensuring smooth international operations.

Pro Tip: Keep abreast of tax treaty networks and changes in tax laws between the domicile country and investors‘ countries to effectively manage withholding taxes and avoid double taxation.

Beyond the tangible benefits, the choice of domicile can dramatically influence the perception of potential investors. Establishing a fund in a jurisdiction with a sterling reputation can heighten the fund’s credibility. This can make all the difference, especially when targeting discerning institutional investors or high-net-worth individuals.

Pro Tip: Understand your target investor base’s preferences and perceptions regarding fund domicile to align your choices with their expectations.

Beyond legal and tax considerations, practical elements like language, proximity to investors or investments, and availability of skilled service providers can influence the decision.

A domicile with a thriving financial sector can be of immense value. This means easier access to fund administrators, auditors, and other key service providers. Finding a hub for fund service providers can streamline operations and reduce operational frictions.

In today’s ever-shifting geopolitical landscape, stability becomes a considerable factor. Establishing a fund in a politically stable environment ensures that regulatory and tax structures remain consistent, allowing for long-term planning and strategy formulation.

However, nothing is guaranteed.

Unforeseen events can necessitate fund relocation. Brexit, for instance, altered the categorization of UK UCITS, making them non-EU AIFs and potentially limiting their accessibility to the EU’s retail investor market due to the loss of the UCITS marketing passport.

While it’s essential to consider the regulatory and reputational aspects of a domicile, it’s also necessary to weigh the associated costs. Registration fees, ongoing compliance costs, and professional service fees can vary widely across jurisdictions. Hence, a careful cost-benefit analysis should drive the final decision.

In conclusion, the fund domicile decision in Europe encompasses a myriad of factors ranging from regulations and taxes to practicalities and reputations. As the alternative investment industry evolves, understanding and weighing these considerations is fundamental for fund success.

Re-domiciling a non-European fund to certain European jurisdictions as a UCITS or AIF is an alternative. But this move generally requires shareholder approval and substantial operational change and is often pursued for long-term strategic marketing reasons.

Optimal scenarios involve re-domiciliation by way of migration, which helps avoid a potential „mark-to-market“ tax event for investors and allows continued marketing of the original fund’s track record.

Luxembourg has long been a popular choice for venture capital fund domiciliation because of its flexible regulatory environment, political stability, and a significant number of double tax treaties. Here are some key aspects:

Legal Structure: Luxembourg offers a variety of structures for venture capital funds, like the SICAR (Investment Company in Risk Capital) and the SIF (Specialized Investment Fund), both of which offer high flexibility in terms of the types of assets they can invest in and their distribution policy.

Tax Benefits: The tax environment in Luxembourg is friendly to venture capital. For example, SICARs are exempt from corporate taxes, and SIFs are only subject to a subscription tax of 0.01%.

Regulatory Environment: Luxembourg’s financial regulator, the Commission de Surveillance du Secteur Financier (CSSF), is known for its accessibility and constructive approach towards fund regulation.

Investor Confidence: Luxembourg is known for its strong investor protections, which can help to attract investors to a venture capital fund.

Ireland is also a well-known hub for fund domiciliation, particularly for its favorable tax environment. Here are some key features:

Legal Structure: Ireland offers a variety of structures, such as the Irish Collective Asset-management Vehicle (ICAV), which is specifically designed for investment funds, and the Qualifying Investor Alternative Investment Fund (QIAIF), which provides a high degree of flexibility.

Tax Benefits: Ireland’s tax environment is quite beneficial for venture capital funds. For example, QIAIFs are exempt from Irish tax on income and gains and there are no net asset value-based taxes on the establishment or valuation of the fund.

Regulatory Environment: The Central Bank of Ireland provides a streamlined regulatory approach for QIAIFs, and these funds can typically be authorized within 24 hours of application.
Access to EU Market: Being an EU member state, Ireland provides access to the European Union’s passporting rights, allowing funds to be marketed across the EU.

Estonia is not as traditional a choice as Luxembourg or Ireland, but it offers certain unique benefits, especially for digital and technology-focused funds:

Legal Structure: Estonia offers fund structures under its public limited company laws, and private limited company laws.
Tax Benefits: Estonia has a unique corporate income tax system where corporate income tax is charged on profit distribution only.

This can be advantageous for venture capital funds, as it means that no tax is levied until profits are distributed.

Digital Infrastructure: Estonia is known for its advanced digital infrastructure and its e-residency program, which can be beneficial for managing a venture capital fund.

Startup Ecosystem: Estonia has a vibrant startup ecosystem, which could provide plenty of investment opportunities for a venture capital fund.

ACE Alternatives (“ACE”) is a leader in managed services in the Alternative Assets sector like venture capital, private equity, fund of funds, real estate, and more. Leveraging a proprietary tech platform and extensive industry experience, ACE offers 360 degree tailored solutions for fund administration, compliance and regulatory, tax and accounting, investor onboarding and ESG needs. The fintech was founded in Berlin in 2021 and has since established itself as one of the fastest growing alternative investment fund service providers in Europe. ACE is currently used by over 45 funds. In 2024, ACE received seven-figure funding from Bob Kneip to expand into new markets. ACE’s vision is to redefine fund management by demystifying complexities and promoting transparency.