The more mature EUFS often have the option to appoint their own authorised AIFM in their home jurisdiction, which is easier and more cost efficient than hiring a third-party AIFM. The AIFM is required by law to assume at least the AIF’s portfolio management and risk management functions. The portfolio management function, which boils down to buy and sell decisions, may be supported by a power of attorney (PoA) issued by the GP to the AIFM. With that PoA, the AIFM is not only able to decide on investments, but also to implement these decisions, including signing the deal documentation.

Other functions relevant to the AIF typically remain with the GP, such as making capital calls, distributions, and organising closings (GP Functions). However, some EUFS may be required, due to their home country’s regulatory framework, to assume certain of the GP functions. In such case the PoA referred to above may be broadened to cover the execution of the GP Functions by the AIFM.

Although the appointment of an EUFS’s own, in-house AIFM in its home jurisdiction is cost-efficient and gives the EUFS the preferred degree of control, it should be approached with great caution. Certain EU countries consider that carrying out portfolio management and/or other GP Functions may establish a taxable presence of the AIF in that other EU country. Such taxable presence may trigger a layer of tax and/or tax filing obligations, which understandably raises concerns with investors. Not all EU countries adopt this stance, but in some countries these risks are clear and necessitate an appropriate solution.

To mitigate the tax risk in those jurisdictions, it may be advisable to confer greater decision-making authority upon the GP. This could involve refraining from issuing a PoA for the implementation of the portfolio management decisions and, where permitted by the home country’s regulatory framework, retaining GP Functions with the GP. Such setup ensures that every investment decision made by the EU AIFM can only be implemented if supported by the GP and that GP Functions are decided upon in Luxembourg. A further measure that reinforces the independence of the GP is its “orphanisation”, which severs the AIFM’s ultimate control over the GP through the shareholder chain.  We will address orphanisation in a separate Snippet.

As a fallback, the EUFS can appoint a Luxembourg third-party AIFM that obtains investment advice from the EUFS’ in-house AIFM. This option obviously comes at a cost, and the advisory function would often trigger regulation in the EUFS’s home country. In this setup, the EUFS loses some control, as the third-party AIFM has discretion to disregard the investment advice.

When structuring a Luxembourg fund, EUFS located in a jurisdiction where the above-discussed tax risk is at play should carefully navigate the balancing act between efficiency and potential tax risks. 

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