US fund sponsors who raise capital in the EU will encounter that some EU investors prefer to commit to an EU fund vehicle rather than a non-EU vehicle. An EU fund vehicle is typically organized as a Luxembourg special limited partnership (SCSp), which comes with the need for a Luxembourg general partner entity (GP). A Luxembourg fund vehicle that wants to benefit from an EU marketing passport requires the services of a (host) EU-authorized Alternative Investment Fund Manager (AIFM).
The US sponsor, the host AIFM (if appointed) and the GP all need to be remunerated for their services. Who bears these fees and how are they structured?
The US sponsor fee (generally approx. 2% of committed or invested capital) is borne by all investors in the Luxembourg SCSp and is either paid directly by the SCSp to the US sponsor or is paid to the US sponsor on a back-to-back basis via the GP whereby the GP retains an arm’s length remuneration. Any preference for the latter alternative may be driven by the mitigation of any risk that the GP (and potentially also the SCSp) is viewed as a taxpayer in the sponsor jurisdiction. In the back-to-back alternative, it is key that the tax deductibility of the fee paid by the GP to the US sponsor is not curtailed by e.g. anti-hybrid rules.
The fee payable to the host AIFM (which is generally a percentage of AUM with a floor of approx. USD 50k annually) is usually borne by all investors in the SCSp and is paid directly by the SCSp to the host AIFM.
The GP often only provides administrative services to the SCSp. The annual arm’s length profit of the GP generally does not exceed USD 50k, which is subject to Luxembourg taxation at a rate of 24.94%. However, if the GP also conducts the marketing function, the remuneration should be higher. The GP fee is usually borne by the US sponsor and is paid (i) by the US sponsor to the GP out of its sponsor fee or (ii) by the SCSp to the GP, in which case the fee paid by the SCSp to the US sponsor is reduced by the GP fee. The dominant set-up is model (i). Model (ii) is often not preferred because it requires designating the GP fee mechanics in the LPA, which deviates from global fund standards. A third model applies in case the US sponsor fee flows via the GP as described above. Under model (iii), the GP receives its fee by retaining part of the US sponsor fee. The GP fee is not designated in the LPA under model (iii).
The above-discussed fees are all caught in the Luxembourg VAT net as they are deemed to take place in Luxembourg. However, no Luxembourg VAT should apply as fund management services are generally exempt from VAT. Other services, such as fund marketing, fund administration and investment advisory services can also benefit from a VAT exemption.
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