What should fund managers consider when deciding where to domicile a fund?
While reputation and market access have become two of the most important considerations, careful consideration needs to be given to balancing factors such as tax neutrality, increasing regulations and meeting ESG investor expectations, all while keeping an eye on expenses to protect the investment return as much as possible.
A shifting global tax landscape
In 2016, the European Commission first published a list to help determine if a country is following “fair taxation” principles.
Since then, different jurisdictions have been added to the authority’s grey and blacklists, while others have been removed.
Tax neutrality has come under increasing scrutiny and a territory’s inclusion on these lists is well worth considering when picking a fund domicile from the perspective of reputational management and investor expectations.
Legal flexibility and expertise in the chosen jurisdiction, as well as the ability to access targeted investors are important considerations for fund domicile.
The Alternative Investment Fund Managers Directive introduced in 2013 led to the creation of “passporting”, where funds registered and domiciled in the EU are able to access investors in the region.
EU domiciles are popular for fund managers looking to market in Europe. However, for managers running sophisticated strategies such as private equity or hedge funds, accessing investors through the passport might not be the most cost-effective strategy.
In addition, since Brexit, while UK-domiciled funds can still market across EU member countries, doing so involves significant red tape, including measures such as applying to individual EU member states for marketing rights.
Regulation and product choice
Oversight and scrutiny in the global investment space has gained increasing attention from global standard setters over the past few years. This is a positive progression, offering additional protection for investors across the board.
Concurrently, investment strategies have become increasingly complex. These more complex structures and increased scrutiny are putting additional pressure on financial regulators, who need to be proportionate and flexible.
The need for a simple, easy-to-understand regulatory framework that avoids unnecessary bureaucracy is clear.
Investment managers want a domicile jurisdiction where regulation is risk-based and trusted to have an adequate degree of investor protection; a good reputation is critical to investor confidence.
Trusted financial centres are those that adhere to the highest standards of international tax, regulation and transparency around fund operations.
Equally, fund managers need practical solutions and a good choice of structures to choose from. Increasingly, that also means “green” fund products to meet the growing market demand for sustainable investment opportunities.
With greater awareness of good governance practices, increasing geopolitical risk and a growing social consciousness, investors are becoming much more hands-on with the management of their money, and that extends to the fund domicile.
More and more, investors want to know that their money is based in a jurisdiction that is well known, and has a positive or neutral relationship to the country in which they live.