While most non-EU alternative investment fund managers (AIFMs) seem rather reluctant to even talk about the possibility of domiciling within the EU for Alternative Investment Fund Managers Directive (AIFMD) purposes, the reality is that some may have no other option.
With many EU member states having already changed or closed their private placement regimes and there are few positive signs that the non-EU passport will be ready for use by July 2015, domiciling within the EU may be a hard reality for those non-EU managers with significant investors, products or future plans in the EU.
Selecting an MSR or domicile for your fund will be no easy task and will require fund managers to seriously consider a range of issues and factors. Some, such as language and cultural considerations, will largely depend on the capabilities and comfort of the specific manager or management group.
Other issues may take more careful consideration. For example, some non-EU managers may think that – to achieve a potentially lower compliance burden – they will look to markets such as Gibraltar or Malta where regulators have indicated they may take a more ‘flexible’ approach to AIFMD. However, managers should note that this is not a shell-game; the European Commission’s view on MSR requires significant ‘substance’ be put on the ground and anything less will likely draw rigorous challenges from other EU regulators or from the European Securities and Markets Authority (ESMA).
Tax considerations should also be central to selecting an MSR. France, for example, has stated that management entities on-shored in their country could be subject to French corporate taxation, whereas lower-tax jurisdictions (like, again, Malta and Gibraltar) will likely carry less of a tax burden. Again, however, managers will need to balance the risks that the perception of tax avoidance carries against the benefits of enjoying a lower overall tax rate. The recent Organization for Economic Co-operation and Development (OECD) publication on tax domicile will undoubtedly be an important resource going forward.
Of course, non-EU fund managers will also want to carefully consider which location makes the most sense for their current investor base. Institutional investors may prefer alternative investment funds (AIFs) domiciled in Sweden or Germany; pension funds may prefer funds domiciled in the Netherlands. Non-EU fund managers will therefore need to ensure they have a clear picture of both their current and their future investors (and their respective views on fund domicile and regulated status) before they decide where to domicile their funds.
While many non-EU managers (particularly from the US) seem reluctant to consider the domicile option, we have noted growing interest in exploring how the approach may allow US managers to maintain the confidentiality of their remuneration while still remaining AIFMD compliant in the EU. Simply put, by creating an EU-based AIFM, managers could work within the proportionality requirements to ensure that US activities are not significant enough to bring the US staff into the scope of the AIFMD remuneration requirements.
Those following the domicile route will also enjoy a host of other obvious benefits such as improved access to investors in EU markets through the marketing passport, greater control over the management of their EU funds and reduced regulatory risk from operating in the EU.
Clearly, non-EU fund managers will need to balance a wide range of considerations when selecting their preferred market approach and – potentially – member state of reference. But time is running out as the July 22nd registration deadline has passed; those that have not yet started developing and executing their plan may well already be too late to register in the jurisdiction of their choice.
With significant evidence to suggest that reverse solicitation and private placement will not be a viable strategy going forward – and with major doubts about the availability of the non-EU passport in 2015 – non-EU managers will now need to make some very difficult – but very quick – decisions.