GLOBAL TAX CONSIDERATIONS IN PRIVATE FUND FORMATION · Edited by Jenny Wheater GLOBAL TAX CONSIDERATIONS IN PRIVATE FUND FORMATION Assessing the new tax landscape for private equity

Edited by Jenny Wheater

GLOBAL TAX CONSIDERATIONS IN PRIVATE FUND FORMATION

Assessing the new tax landscape for private equity fund structuring

Buy the book wwwprivateequityinternationalcomglobal-tax-considerations-in-private-fund-formation

BUY NOW

Published in August 2016 byPEI6th Floor140 London WallLondon EC2Y 5DNUnited Kingdom

Telephone +44 (0)20 7566 5444wwwprivateequityinternationalcombookstore

copy 2016 PEI

ISBN 978-1-911316-02-2

This publication is not included in the CLA Licence so you must not copy any portionof it without the permission of the publisher

All rights reserved No parts of this publication may be reproduced stored in a retrievalsystem or transmitted in any form or by any means including electronic mechanical pho-tocopy recording or otherwise without written permission of the publisher

Disclaimer This publication contains general information only and the contributors arenot by means of this publication rendering accounting business financial investmentlegal tax or other professional advice or services This publication is not a substitute forsuch professional advice or services nor should it be used as a basis for any decision oraction that may affect your business Before making any decision or taking any action thatmay affect your business you should consult a qualified professional adviser Neither thecontributors their firms its affiliates nor related entities shall be responsible for any losssustained by any person who relies on this publication

The views and opinions expressed in the book are solely those of the authors and neednot reflect those of their employing institutions

Although every reasonable effort has been made to ensure the accuracy of this publi-cation the publisher accepts no responsibility for any errors or omissions within thispublication or for any expense or other loss alleged to have arisen in any way in con-nection with a readerrsquos use of this publication

PEI editor Wanching LeongProduction editor Julie Foster

Printed in the UK by Hobbs the Printers (wwwhobbsukcom)

Buy the book privateequityinternationalcomglobal-tax-considerations-in-private-fund-formation

Contents

About the editor xiAuthor biographies xiii

Introduction xviiA note on Brexit xxi

SECTION I FUND STRUCTURING IN EUROPE AND THE USTRADITIONAL AND MODERN 11 Traditional fund structures 3

By Jenny Wheater and Hope P Krebs Duane Morris Limited partnership funds ndash general 3Transparency 3GP as manager 5English or Delaware limited partnerships 6Guernsey or Jersey limited partnerships 6Cayman limited partnerships 7Other limited partnerships 9The future of limited partnership fund vehicles 9

2 Non-resident investment in the United States 11By David A Sussman Duane Morris Key points 11

Effectively connected income 12Foreign Investment in Real Property Tax Act 13The PATH Act 14

A haven from CRS 16

3 Benelux structures The Netherlands 17By Michiel Beudeker Loyens amp Loeff Part 1 Structuring the fund 17

Dutch fund vehicles 17Dutch fundtax regimes 19VAT 21

Part 2 Structuring for the management team 21Tax treatment of Dutch-resident managers (of Dutch or non-Dutch funds) 21

Part 3 Holding companyinvestor concerns 23Minimising tax leakage via a Dutch holding company 23Dutch taxation of foreign investors investing into a Dutch fund

or a non-Dutch fund 25

iii


4 Benelux structures Luxembourg 27By Jochem van der Wal Frank van Kuijk and Matthijs Haarsma Loyens amp Loeff Part 1 The SIF and SICAR regime and the proposed RAIF regime 27

Taxation of the SIF and its non-resident investors 28Taxation of a SICAR and its non-resident investors 28Treaty entitlement 28Taxation of the RAIF and its non-resident investors 28

Part 2 Unregulated funds structured as limited partnerships 29Main legal characteristics 29What the limited partnership modernisation entails in tax terms 30

Part 3 Taxation of carried interest 31Part 4 Luxembourg tax ruling system 32

Luxembourg ruling procedure 32

5 Fund structuring in Italy 35By Emidio Cacciapuoti and Davide Massiglia King amp Wood Mallesons Domestic fund structures Legal and tax framework 35Tax regime of the investors 35Treatment of carried interest for Italian tax residents 36Selected issues for foreign AIFs investing into Italy 37Conclusion 41

6 Fund structuring in Spain 43By Alberto Ruano King amp Wood Mallesons ECRs 43SOCIMIs 46

SECTION II STRUCTURES FOR GLOBAL MARKETS 47

7 Investing in India 49By Saionton Basu Duane Morris Favoured jurisdictions for India-focused funds 49

Mauritius 49Singapore 49Other jurisdictions 50

Regulatory framework for India-focused funds 50Conditions for registration as an FPI 51Where can FPIs invest 51Tax environment 51Portfolio companies Types of instruments 52Other hurdles 53

8 Investing into Africa-focused funds The Mauritius route 55By Stephen Scali and Sonia Xavier Conyers Dill amp Pearman Overview of Mauritius 55

iv

Contents


Mauritius fund options 57Regulatory regime 59Conclusion 61

9 Navigating issues in seizing private equity opportunities in Latin America 63

By Rosa M Ertze Duane Morris Identifying targets and importance of relationships 63Informalities and public records 64Fund and target structuring 65

Chile 65Brazil 66Mexico 67Colombia 67

Do the issues outweigh the benefits 68

10 Australian fund structures 69By Linda Zeman McDermott Will amp Emery and Jenny WheaterUnit trust 69VCLPs and ESVCLPs 70Fund regulation and licensing 71Withholding taxes for foreign investors 71Conclusion 72

11 Fund structures in Asia 73By Krishna Ramachandra and Derrick Boo Duane Morris amp Selvam He Li Juan and Yin Nannan Shanghai Veritas Law Corporation and Jenny WheaterOverview 73Singapore 73China 77Conclusion 79

12 Fund and investment structuring ndash other issues 81By Jenny Wheater

SECTION III INTERNATIONAL ISSUES FOR SPECIFIC FUNDS 83

13 Real estate 85By Jenny Wheater Local law and general concepts 85UK issues 86French issues 88German issues 89Spanish issues 89US issues 89

Contents

v


Global trends 90Conclusion 90

14 Debt funds 91By Jenny Wheater Overview 91UK issues 92French issues 93German issues 95Spanish issues 96Global issues 97

15 Other specialist funds 99By Jenny Wheater Fund terms 99Management incentives 99Not a fund at all 100Conclusions 100

SECTION IV MANAGEMENT FEES AND INCENTIVES 101

16 Carried interest in the UK 103By Jenny Wheater Background and history 103DIMF rules and the start of change 104Carried interest overhaul July 2015 106Performance-linked awards to asset managers ndash lsquoincome-based

carried interestrsquo 108Navigating the new measures 111The future 112

17 US carried interest and management incentives 113By David A Sussman Duane Morris Carried interest tax overview 113Fee waivers 113Fee waiver changes 114Carried interest developments 117Conclusions 118

18 Carried interest developments in Germany 119By Tarek Mardini and Ronald Buge P+P Poumlllath + Partners Overview of fund structuring in Germany 119The golden age for carry recipients in Germany until 2004 119The new reality From capital gains to ordinary income treatment 120Current tax treatment of carried interest in Germany 121Carried interest vehicle 122

Contents

vi


International carried interest structures and German carry recipients 122Hot topics 123Impact of AIFMD 123Outlook 123

19 Global management incentive issues 125By Jenny Wheater

SECTION V THE IMPACT OF FATCA CDOT AND CRS 129

20 Navigating the rules challenges and procedures involved in global information exchange 131

By Jenny Wheater Overview 131FATCA 132CDOT 132CRS 133Application to funds 133Funds as reporting FI Obtaining information from investors 134Submitting the report 135Ongoingadministrative requirements 135Fundsrsquo obligations to other FIs 135Conclusion 136

21 Technical issues for investment funds 137By Jenny Wheater Adoption of CRS 137rsquoResidencersquo of a partnership 139Investment entities and the lsquomanaged byrsquo test 140Information reported ndash FIs and NFEs 141Non-participating jurisdictions and NFE treatment of certain FIs 143The lsquowider approachrsquo and the lsquonarrow approachrsquo 144Non-reporting FIs 145Status changes 145Foreign passthru payments 145Conclusion 146

22 Global issues going forward 147By Jenny Wheater Privacy 147Lack of uniformity in compliance 149Trusts 150Implementation barriers 152Non-participating countries as lsquoinformation exchange havensrsquo 153Conclusion 153

Contents

vii


SECTION VI THE IMPACT OF BEPS 155

23 An introduction to BEPS 157By Jenny Wheater Overview 157BEPS action items 157Application to funds 165

24 Action 6 Treaty abuse 167By Jenny Wheater General points 167Implications for funds 170Conclusion 173

25 Action 2 Hybrid mismatches 175By Jenny Wheater Overview 175Recommendations for domestic law 176Recommendations on treaty issues 185Interaction between domestic and treaty recommendations 185Application of AP2 to funds 186

26 BEPS Other actions 187By Jenny Wheater Limitations on interest expense deductions (Action 4) 187Transfer pricing 189Conclusion 190

SECTION VII INCREASED REGULATION 191

27 Global aspects of US regulatory issues 193By Scott Gluck Duane Morris Managing assets for US funds or non-US funds with US investors 193CEA and CFTC issues 196Broker-dealer issues 196Investment Company Act issues 199Securities Act issues 202The Volcker Rule 204Other 205

28 AIFMD Global issues 207By Jenny Wheater Background 207ESMArsquos advice on the application of the passport to non-EU AIFMs

and non-EU AIFs 208Global response to ESMA advice 210

Contents

viii


Current practice of non-EU managers 211Conclusion 211

29 Global regulation 213By Jenny Wheater

CONCLUSION 217

30 The future of funds on a global level 219By Jenny Wheater

About PEI 222

Contents

ix


About the editor

Jenny Wheater is a lawyer based in London and has significant experience in structur-ing private equity venture capital and other funds including holding companies car-ried interest and deal structures Jenny has practiced at high-profile law firmsincluding most recently Duane Morris and prior to that Proskauer Rose As a dualqualified lawyer admitted to practice in both England and Wales and New York Jennyis familiar with UKUS cross-border tax issues and regularly advises clients on crossborder matters including the establishment of UK operations and the application ofthe UKUS double tax treaty Most recently she has developed expertise in the area ofglobal information exchange and the application of the Foreign Account TaxCompliance Act (FATCA) and the Common Reporting Standard

Jenny is a member of the British Venture Capital Association Tax Committee and ischair of its Operations Sub-Committee She is a frequent speaker and writer on UK taxissues In the latter capacity she is lead editor of Business Law International an IBA pub-lication and editor of PEIrsquos Tax-Efficient Private Fund Structures A Practitionerrsquos Guidefor the UK and Europe published in 2013 n

xi


Author biographies

Saionton Basu is a corporate partner at Duane Morris in London He is a dual-qualifiedlawyer (England amp Wales and India) and advises international clients who are active inIndia including banks corporations private equity investors foreign governments andfinancial institutions as well as Indian companies doing business globally Saionton hasa particular focus on advising global corporations in highly regulated sectors such astelecoms infrastructure and defence in India In addition Saionton is routinely calledupon by ultra-high-net-worth clients in South Asia to provide advice on a range ofwealth advisory issues for ultra-high-net-worth individuals family offices and privatebanks in the areas of cross-border investments and wealth diversification He also regu-larly comments on current legal and business issues by various print and electronicmedia houses including Bloomberg and Thomson Reuters to speak on the legal andregulatory considerations of doing business in the USUKEurope-India corridor

Michiel Beudeker is a senior tax lawyer at Loyens amp Loeff in Amsterdam He is a memberof the international tax practice group He specialises in advising multinationals banksand private equity funds on among other things international financing transactionscorporate restructurings fund formations holding and financing structures and transferpricing Michiel focuses on among other things Italy and worked in the London officeof Loyens amp Loeff from 2008 until 2011 He is a member of the corporate restructuringamp insolvency team Michiel is also a member of the International Fiscal Association (IFA)and of the Dutch Association of Tax Advisers (NOB) and he frequently lectures and pub-lishes on various taxation matters He has degrees in Tax Law Business Economics andBusiness Administration from Vrije Universiteit and has taken various MBA courses atthe Mendoza College of Business at the University of Notre Dame

Derrick Boo is a Senior Associate of Duane Morris amp Selvam LLP in Singapore His prac-tice expertise includes MampA and capital markets investments funds private equity reg-ulatory and compliance

Ronald Buge is a partner in the private funds practice group in the Berlin office of P+PPoumlllath + Partners He specialises in providing legal and tax advice to institutional and pri-vate investors managers and initiators of foreign or domestic private equity and privateequity-type funds (such as mezzanine real estate infrastructure energy and naturalresources funds) with a focus on domestic and cross-border tax matters and tax litiga-tion Ronald publishes articles is a frequent speaker at conferences on tax matters andlectures at the University of Muumlnster He studied law at the Humboldt University of Berlin

Emidio Cacciapuoti is a partner at King amp Wood Mallesons in Milan Italy Emidio spe-cialises in private equity and investment fund structuring and formation carried interestscheme and co-investment arrangements He acts for both managers and investors and

xiii


covers a wide range of funds including private equity infrastructure and venture capitalfunds Emidio has also been involved in secondary transactions Emidio advises bothfund houses and investors and his clients include Coller Capital IDeA Capital FundsAmbienta Consilium Advanced Capital Fondo Italiano drsquoInvestimento Principia Hecompleted his Masters in Corporate Tax Law at Bocconi University He also took his LLMin International Taxation at the University of Leiden (cum laude)

Rosa M Ertze is special counsel at Duane Morris in New York She practices in the areaof corporate law and international business transactions advising domestic multina-tional and foreign companies on mergers and acquisitions private equity restructur-ings general corporate matters cross-border direct foreign investment joint venturesand financings Rosa works extensively with domestic and Latin American companiesdoing inbound and outbound investments and business in Mexico and other LatinAmerican countries She has experience in transactions involving stock and asset salesin the US and in Mexico Rosa is also a member of the firmrsquos Cuba Business Group Rosais a 2007 graduate of Georgetown University Law Center (LLM International LegalStudies) and a 2005 graduate of Universidad Iberoamericana (JD equivalent) She isadmitted to practice law in New York and Mexico and is fluent in Spanish and English

Scott Gluck is a special counsel at Duane Morris in Washington DC He practices in thearea of corporate law focusing on the regulatory compliance and corporate activitiesof advisers to private funds Scottrsquos practice includes the formation of private fundsimplementation and monitoring of their ongoing compliance programmes and corpo-rate transactions Scott is a graduate of Columbia University Law School He also holdsan MBA from the University of Southern California and a BA from the University ofCalifornia Berkeley

Matthijs Haarsma is an associate in the tax practice group at Loyens amp Loeff inLuxembourg He specialises in international tax law advising clients on among othersholding and financing structures corporate reorganisations securitisations and IPMatthijs is a member of the Dutch Association of Tax Advisers He has an LLM fromMaastricht University

He Li Juan is the Managing Partner of Shanghai Veritas Law Corporation She has morethan 20 years of working experience in both the Chinese and Singaporean legal indus-try specialising in banking amp finance capital markets FDI and MampA among othersShe assists local and foreign clients in cross-border transactions

Hope P Krebs is a partner in the Philadelphia office of Duane Morris and is co-chair ofthe firmrsquos International Practice Group Hope is the co-author of a Bureau of NationalAffairs Inc Tax Management Portfolio titled 915-1 TM US Income Tax Withholding -Foreign Persons and the author of numerous tax articles She is a frequent speaker oninternational tax topics at tax conferences across the United States Hope is admittedto practice law in New York and Pennsylvania and before the US Tax Court She is listedin Whorsquos Who in American Law Whorsquos Who of American Women and Whorsquos Who inFinance and Industry

Author biographies

xiv


Tarek Mardini is a counsel in the private funds practice group of P+P Poumlllath +Partners in Berlin He focuses on private investment funds asset management andrelated tax structuring Tarek regularly advises on complex secondary fund transac-tions and counsels German and international fund sponsors in structuring marketingand managing private equity private debt and other investment funds On theinvestor side he often advises German institutional investors and family officesregarding legal regulatory and tax aspects of fund investments His special expertiseincludes advising on fund governance issues (including ILPA Principles) as well as tai-lored reviews of fund terms Tarek regularly publishes on the tax corporate and reg-ulatory aspects of private investment funds and is a regular speaker at internationalconferences He studied law in Berlin (Germany) Glasgow (UK) and with a FulbrightScholarship at the University of Connecticut Law School (USA) He is a board memberof the German-American Lawyers Association

Davide Massiglia is an associate at King amp Wood Mallesons in Milan Italy Davide spe-cialises in investment funds international taxation corporate income taxation mergersand acquisitions and taxation of real estate investments He joined the firm after grad-uating (cum laude) in Business Administration and Finance at University of Genoa andcompleting his Master in Tax Law (with distinction) at IPSOA School of Law

Yin Nannan is a senior associate at Shanghai Veritas Law Corporation specialising inbanking amp finance capital market FDI and MampA among others She assists local andforeign clients in cross-border transactions

Krishna Ramachandra is Managing Director of Duane Morris amp Selvam in SingaporeHe is head of the Corporate Finance and Investment and Private Client PracticeGroups His practice expertise includes MampA and capital markets investments fundsprivate equity and telecommunications media and technology

Alberto Ruano is a partner at King amp Wood Mallesons where he is the head of tax inMadrid Spain He is an all-round tax lawyer with experience in civil corporate andlabour law and with a particular expertise in the tax planning of domestic and interna-tional business restructuring mergers and acquisitions and international financingand investment structures as well as in the tax analysis of derivatives and other finan-cial products investments and incorporation of collective investment schemes ven-ture capital funds and hedge funds IPOs e-commerce tax planning forhigh-net-worth individuals executive incentive schemes indirect taxation (VAT etc)tax due diligence and tax litigation In addition to his day-to-day tax practice withclients Alberto collaborates with tax-focused publications frequently lectures on allkinds of tax matters in seminars and conferences and is a professor in the DoubleMaster ICADE-ESADE in Madrid Alberto obtained both a law degree and an eco-nomics and business degree from the Universidad Pontificia Comillas (ICADE) inMadrid He has been a member of the Madrid bar since 1995

Stephen Scali is the head of the Mauritius office of Conyers Dill amp Pearman Foundedin 1928 the firm advises on the laws of Mauritius Bermuda the British Virgin Islands

Author biographies

xv


and the Cayman Islands Stephen advises clients on cross-border funds corporateand other transactions Educated at Harvard Law School Stephen formerly practicedwith Freshfields Bruckhaus Deringer and has also acted as in-house counsel at a lead-ing international investment bank as well as corporate Recognised as a leadinglawyer in various legal industry publications Stephen is a member of various profes-sional bodies

David A Sussman is a partner in the Newark office of Duane Morris and practices inthe area of corporate law with a focus on private equity capital markets and tax MrSussman co-chairs the firmrsquos Private Investment Funds practice Mr Sussmanrsquos privateequity experience includes launching investment funds including private equityhedge real estate and venture capital funds He regularly advises funds in connectionwith their operations including the acquisition and disposition of such investments Healso advises investors in connection with secondary market purchases and sales of pri-vate equity fund interests

Jochem van der Wal is a partner in the tax practice group at Loyens amp Loeff inLuxembourg He advises on all (international) corporate tax aspects particularly struc-tured finance financial instruments and the private and listed investment and realestate fund industry He was previously based in the London office Jochem is a mem-ber of the Dutch Association of Tax Advisers (NOB) and the International FiscalAssociation (IFA) He received a degree in tax law from the University of Amsterdamand a degree in European tax law from Erasmus University

Frank van Kuijk is a senior adviser in the tax practice group at Loyens amp Loeff inLuxembourg He specialises in international tax law predominantly Luxembourg-ori-ented He advises a wide range of multinationals and private equity funds with respectto their tax structure in Luxembourg His advice mainly relates to acquisitions projectfinancing structured finance securitisations corporate reorganisations and intellectu-al property Frank is a member of the International Fiscal Association Luxembourgbranch (IFA) and the Dutch Association of Tax Advisers He received degrees in tax lawand tax economics from Tilburg University

Sonia Xavier is a senior lawyer at Conyers Dill amp Pearman with a broad practice cov-ering all areas of Mauritius commercial and corporate law with a particular emphasison investment funds Sonia has advised several large hedge fund managers as well asglobal business companies offshore and international banks conducting business inMauritius and has also advised groups of companies Sonia obtained her LLB fromthe University of Mauritius in 1994 and was previously a member of a leading law firmin Mauritius

Linda Zeman is a senior associate in the London office of McDermott Will amp Emeryqualified in both England and Australia Her practice focuses on private equity and sherepresents clients on the corporate aspects of their fund and investment structuresLinda has experience in a variety of industries including entertainment energy manu-facturing and finance and has previously advised on general corporate taxation n

Author biographies

xvi


Introduction

Fund formation is becoming a global business As structures increasingly seek interna-tional investors and invest in international jurisdictions new issues present themselvesand new challenges constantly arise

In terms of emerging jurisdictions Asia especially Southeast Asia is regarded as high-ly active and is a hub of new private equity business This is not only in terms of invest-ment opportunities China has begun to relax its restrictions on external investment sothere is now a greater and growing number of institutional Chinese investors Thishas meant that US and pan-European funds have been targeting Chinese investorsand need to be aware of the different expectations of such investors Additionallysome unexpected jurisdictions such as Indonesia are embracing the concept of pri-vate equity

Beyond Asia there are a greater number of funds seeking to invest in Africa This canprove a challenge from a practical perspective because ways of doing business inAfrican jurisdictions is very different from the jurisdictions most commonly encoun-tered by the typical fund manager In this context many funds are using Mauritius as alsquogatewayrsquo to Africa The fact that Mauritius is an African country acquainted withAfrican business norms and more familiar to both target investee companies and theirgovernment authorities is extremely helpful

Latin American jurisdictions have historically embraced private equity more on alocal level with regional funds conducting the most significant activity Howeverthese countries too are becoming significantly more open to international invest-ment and structures

Tax and regulatory issues are also becoming more global FATCA has been in forcesince 2014 and the OECDrsquos Common Reporting Standard has now come into effect ina number of lsquoearly adopterrsquo jurisdictions The idea of a global exchange of taxpayerinformation raises a number of issues It is not clear how it will work in practice andreservations have been expressed about the protection of individual privacy TheOECD Base Erosion and Profit Shifting (BEPS) initiative is likewise of potential interna-tional impact Although it must always be remembered that BEPS involves a set of rec-ommendations that may or may not be adopted by various jurisdictions the initiativeis still likely to result in a more proactive approach to global tax avoidance Some juris-dictions such as the UK are keen to embrace BEPS and want to be seen to be imple-menting it early and actively Others such as the US are noticeably reticent and arelikely to exercise greater caution in adopting BEPS possibly perceiving it as an erosionof jurisdictional sovereignty Still others such as the Cayman Islands want to be per-ceived as adopting an open approach and being supportive of initiatives to encounter

xvii


Introduction

tax avoidance Accordingly they may wish to embrace BEPS and common reportingbut will also be conscious of the need to retain their status as an attractive investmentlocation In terms of regulation this has become a more significant international issueThe Alternative Investment Fund Managerrsquos Directive (AIFMD) has created unpopularobstacles for fund managers wishing to market in Europe It remains to be seen howthis will be managed from a practical perspective In the US regulation is becomingmuch more stringent and is a very significant compliance burden In other countriesregulation may vary but it can be somewhat unknown and emerge suddenly as anunwelcome surprise Therefore it is increasingly important to retain an awareness ofregulatory developments as they occur

Conventional funds are becoming more diverse Debt funds either through loan orig-ination or other investment in distressed assets remain an attractive alternative tobanks which remain reluctant to lend Real estate funds are on the increase especiallyin jurisdictions such as Eastern Europe Certain funds focus on more specialist areassuch as fine art or investment-grade wine Many if not most funds now invest by wayof a combination of debt and equity and this must be carefully considered in the con-text of the rules in the investee jurisdiction

In relation to structures the fiscally transparent limited partnership remains the mostfavoured fund vehicle However in terms of jurisdictions changes are emerging Mostimportantly the Luxembourg SCSp limited partnership has proved very popularenabling funds to operate in a single jurisdiction by locating both a fund and its hold-ing company or companies in Luxembourg Other jurisdictions are now offering a sim-ilar model an example being Malta Going forward funds may be influenced in theirchoice of location by factors such as information exchange or BEPS implementation

An area of continued controversy is the taxation of management carried interest andother economic incentives For some time now the conventional capital gains tax treat-ment of carry has been questioned In the US there appear to have been innumerableattempts to change this none of which have come to fruition Will this now change fol-lowing the presidential election in 2016 In Sweden the revenue authorityrsquos loss in thecourt system in relation to the treatment of carried interest has resulted in speculationthat legislation will be forthcoming to deal with this The UK has also seen significantchange In July 2015 new legislation changed ndash with immediate effect and no priorindustry consultation ndash the way that carried interest was taxed Further legislativechanges were introduced in the UK in April 2016 In terms of other incentives the UKeffectively eliminated the effectiveness of so-called lsquomanagement fee waiverrsquo structuresin April 2015 The US has also issued draft legislation in this area One interesting resultfrom the UK developments is the creation of a statutory definition of what constituteslsquocarried interestrsquo At first this was considered a useful exclusion from the rules applica-ble to fee waiver or similar arrangements However since then the definition has beenused to target the private equity industry generally Most recently the 2016 changes tocapital gains tax in the UK reduced rates from 28 percent to 20 percent but added backan 8 percent surcharge for lsquocarried interestrsquo using the definition thus negating theeffect of the change for carry holders Management incentive arrangements continue

xviii


to be the focus of certain tax authoritiesrsquo attention and this must be regarded as a devel-oping area

The global approach to investment funds is likely to continue It is commonly said nowthat the world is becoming smaller and while quite obviously this is not literally truethe increased ease of doing business globally has given the fund industry a more inter-national outlook This book explores in more detail the new global landscape that nowapplies to investment funds and examines the key reasons for specific changes andtheir consequences It also provides an updated perspective on ongoing issues andhow these are affected by the more international outlook investment funds are facing

Jenny WheaterJuly 2016

Introduction

xix

A note on Brexit

This book with its focus on globalisation is published very shortly after one of the mostdramatic displays of nationalism in recent times ndash the narrow vote by the British elec-torate to recommend that the country leave the EU

At the time of writing only one thing is certain ndash uncertainty Those who supported thecampaign to remain seem determined to condemn Britain to a self-imposed exile intothe economic underworld while the passionate leave campaigners extol the dawn ofa new utopia However as with any separation the reality is unlikely to be best repre-sented by those most closely and emotionally involved The issues are complex all themore so for being unprecedented with the lack of precedent being evident in severalways Apart from Greenland some time ago no country has ever left the EU thus howany exit will operate on a European level involves a step into the unknown EquallyBritain is not a country familiar with referenda and the unexpected result has alreadyled to questions about its mandate and to calls for provisions on turnout and majoritywhich would have been standard in most other jurisdictions Hence it is not clear howthe UK or the EU will take this forward in a practical sense

There are many elements of this book that may or may not be impacted by Brexit In viewof this no comment is made in any chapter regarding the possible scope of this issue andthere is simply a need to accept that there is no merit in groundless speculation Equallymuch of this book deals with jurisdictions outside the EU or with issues unaffected by apossible Brexit Indeed many of the international initiatives addressed are independentof the EU let alone Brexit While it is important to be mindful of a possible Brexit anydetailed analysis is premature in light of the number of unknown factors

To start any exit process the UK must invoke Article 50 of the Lisbon Treaty signallingits intention to leave the EU This will require a parliamentary vote and the referen-dumrsquos status as advisory only means that technically speaking parliament could pre-vent an exit through this means Members of parliament (MPs) have an overriding dutyto act in accordance with their conscience and in the best interests of the country Inthe circumstances with accusations of a misleading campaign by those looking toleave the threat of Scotland (which voted heavily in favour of remaining) leaving theUK the immediate impact on the value of the pound and the UKrsquos credit rating and thenarrowness of the result is it possible that MPs will defy the majority

An alternative is the prospect of Scotland preventing the actual exit from the EU via itsregional powers Could this be invoked Additionally could the UK even at this pointnegotiate its terms of membership and stay in the EU following a further referendumof a general election The leaders of France Germany and Italy have said there will be

Will it evenhappen

xxi


no informal discussions on the terms of Brexit until the UK actually invokes Article 50However negotiations on possibly remaining following a further referendum or elec-tion would not technically be a discussion regarding the terms of Brexit Does that ren-der this a possibility

The foregoing options are open Generally speaking they are considered about aslikely as a Brexit vote was considered at 10pm on Thursday 23rd June Hence it wouldbe a mistake to rule them out

If Brexit happens then the terms of exit are vital The analogy to a divorce has frequentlybeen given and currently the parties are at the stage of bitter reproaches extreme sen-timents and minor matters playing a disproportionate role This will hopefully changeand since the UK and the rest of the EU have common interests to protect (the equiva-lent of children in a divorce) they are likely to be pragmatic in the longer term beingaware that an ongoing relationship is necessary and that continued acrimony is of nobenefit The actual potential results of this are extremely hard to conjecture However itseems probable that the UK is in a strong enough position to protect the financial ser-vices industry although immigration may be a more difficult area to address

In the true Darwinian sense private equity adapts to its environment and is a survivorWhen the 2008 credit crunch hit and the banks restricted lending many private lsquoequityrsquofirms reinvented themselves as private lsquodebtrsquo Private equity continues to see theopportunity in adversity and is pragmatic enough to see that the chance of the totalcollapse of the EU or the UKrsquos relationship with it is highly unlikely Even if thisoccurred private equity is by nature an opportunistic industry In Gone With The WindRhett Butler states ldquoWhat most people donrsquot seem to realise is that there is just asmuch money to be made out of the wreckage of a civilisation as from the upbuildingof onerdquo

Private equity would realise this

Jenny WheaterJune 2016

Terms of exitare vital

Impact onprivate equity

A note on Brexit

xxii


BUY NOW

Published in August 2016 byPEI6th Floor140 London WallLondon EC2Y 5DNUnited Kingdom

Telephone +44 (0)20 7566 5444wwwprivateequityinternationalcombookstore

copy 2016 PEI

ISBN 978-1-911316-02-2

This publication is not included in the CLA Licence so you must not copy any portionof it without the permission of the publisher

All rights reserved No parts of this publication may be reproduced stored in a retrievalsystem or transmitted in any form or by any means including electronic mechanical pho-tocopy recording or otherwise without written permission of the publisher

Disclaimer This publication contains general information only and the contributors arenot by means of this publication rendering accounting business financial investmentlegal tax or other professional advice or services This publication is not a substitute forsuch professional advice or services nor should it be used as a basis for any decision oraction that may affect your business Before making any decision or taking any action thatmay affect your business you should consult a qualified professional adviser Neither thecontributors their firms its affiliates nor related entities shall be responsible for any losssustained by any person who relies on this publication

The views and opinions expressed in the book are solely those of the authors and neednot reflect those of their employing institutions

Although every reasonable effort has been made to ensure the accuracy of this publi-cation the publisher accepts no responsibility for any errors or omissions within thispublication or for any expense or other loss alleged to have arisen in any way in con-nection with a readerrsquos use of this publication

PEI editor Wanching LeongProduction editor Julie Foster

Printed in the UK by Hobbs the Printers (wwwhobbsukcom)


Contents







A haven from CRS 16






iii














iv

Contents












Contents

v










Contents

vi









Contents

vii











Contents

viii




CONCLUSION 217


About PEI 222

Contents

ix


About the editor



xi


Author biographies






xiii








Author biographies

xiv








Author biographies

xv








Author biographies

xvi


Introduction






xvii


Introduction





xviii





Introduction

xix

A note on Brexit






Will it evenhappen

xxi










A note on Brexit

xxii


BUY NOW

Contents







A haven from CRS 16






iii














iv

Contents












Contents

v










Contents

vi









Contents

vii











Contents

viii




CONCLUSION 217


About PEI 222

Contents

ix


About the editor



xi


Author biographies






xiii








Author biographies

xiv








Author biographies

xv








Author biographies

xvi


Introduction






xvii


Introduction





xviii





Introduction

xix

A note on Brexit






Will it evenhappen

xxi










A note on Brexit

xxii


BUY NOW













iv

Contents












Contents

v










Contents

vi









Contents

vii











Contents

viii




CONCLUSION 217


About PEI 222

Contents

ix


About the editor



xi


Author biographies






xiii








Author biographies

xiv








Author biographies

xv








Author biographies

xvi


Introduction






xvii


Introduction





xviii





Introduction

xix

A note on Brexit






Will it evenhappen

xxi










A note on Brexit

xxii


BUY NOW











Contents

v










Contents

vi









Contents

vii











Contents

viii




CONCLUSION 217


About PEI 222

Contents

ix


About the editor



xi


Author biographies






xiii








Author biographies

xiv








Author biographies

xv








Author biographies

xvi


Introduction






xvii


Introduction





xviii





Introduction

xix

A note on Brexit






Will it evenhappen

xxi










A note on Brexit

xxii


BUY NOW









Contents

vi









Contents

vii











Contents

viii




CONCLUSION 217


About PEI 222

Contents

ix


About the editor



xi


Author biographies






xiii








Author biographies

xiv








Author biographies

xv








Author biographies

xvi


Introduction






xvii


Introduction





xviii





Introduction

xix

A note on Brexit






Will it evenhappen

xxi










A note on Brexit

xxii


BUY NOW








Contents

vii











Contents

viii




CONCLUSION 217


About PEI 222

Contents

ix


About the editor



xi


Author biographies






xiii








Author biographies

xiv








Author biographies

xv








Author biographies

xvi


Introduction






xvii


Introduction





xviii





Introduction

xix

A note on Brexit






Will it evenhappen

xxi










A note on Brexit

xxii


BUY NOW










Contents

viii




CONCLUSION 217


About PEI 222

Contents

ix


About the editor



xi


Author biographies






xiii








Author biographies

xiv








Author biographies

xv








Author biographies

xvi


Introduction






xvii


Introduction





xviii





Introduction

xix

A note on Brexit






Will it evenhappen

xxi










A note on Brexit

xxii


BUY NOW



CONCLUSION 217


About PEI 222

Contents

ix


About the editor



xi


Author biographies






xiii








Author biographies

xiv








Author biographies

xv








Author biographies

xvi


Introduction






xvii


Introduction





xviii





Introduction

xix

A note on Brexit






Will it evenhappen

xxi










A note on Brexit

xxii


BUY NOW

About the editor



xi


Author biographies






xiii








Author biographies

xiv








Author biographies

xv








Author biographies

xvi


Introduction






xvii


Introduction





xviii





Introduction

xix

A note on Brexit






Will it evenhappen

xxi










A note on Brexit

xxii


BUY NOW

Author biographies






xiii








Author biographies

xiv








Author biographies

xv








Author biographies

xvi


Introduction






xvii


Introduction





xviii





Introduction

xix

A note on Brexit






Will it evenhappen

xxi










A note on Brexit

xxii


BUY NOW







Author biographies

xiv








Author biographies

xv








Author biographies

xvi


Introduction






xvii


Introduction





xviii





Introduction

xix

A note on Brexit






Will it evenhappen

xxi










A note on Brexit

xxii


BUY NOW







Author biographies

xv








Author biographies

xvi


Introduction






xvii


Introduction





xviii





Introduction

xix

A note on Brexit






Will it evenhappen

xxi










A note on Brexit

xxii


BUY NOW







Author biographies

xvi


Introduction






xvii


Introduction





xviii





Introduction

xix

A note on Brexit






Will it evenhappen

xxi










A note on Brexit

xxii


BUY NOW

Introduction






xvii


Introduction





xviii





Introduction

xix

A note on Brexit






Will it evenhappen

xxi










A note on Brexit

xxii


BUY NOW

Introduction





xviii





Introduction

xix

A note on Brexit






Will it evenhappen

xxi










A note on Brexit

xxii


BUY NOW




Introduction

xix

A note on Brexit






Will it evenhappen

xxi










A note on Brexit

xxii


BUY NOW

A note on Brexit






Will it evenhappen

xxi










A note on Brexit

xxii


BUY NOW









A note on Brexit

xxii


BUY NOW

Documents

GLOBAL TAX CONSIDERATIONS IN PRIVATE FUND FORMATION · Edited by Jenny Wheater GLOBAL TAX CONSIDERATIONS IN PRIVATE FUND FORMATION Assessing the new tax landscape for private equity