Over the past few years, multi-national corporations
(MNC) have realised the growing importance of controlling
and monitoring financial risks together with the performance
of their pension schemes. While this new mindset has
been engraved in new accounting and corporate governance
principles, MNC's are now focussing on local pension
arrangements.
The Luxembourg investment industry, which has long
been recognised for developing and marketing asset
globalisation techniques, is now addressing the demands
of the MNC's. Luxembourg offers MNC's the ability
to establish a pension pooling strategy that can optimise
the cost and returns of their local pension schemes.
Why the need for Pension Pooling vehicles?
A single pension fund (which is accessible in a tax
efficient manner to persons in different countries)
allows companies to achieve investment management,
administration and custody efficiencies by pooling
the investments of their different pension funds into
a single fund. The pension funds may pool all their
investments into one fund vehicle or pool or their
investments in a particular country or region into
one vehicle.
Popular as collective investment vehicles, FCPs
offer a proven solution
At the end of 2003, promoters from 43 countries
had domiciled over 1,900 investment funds (and 7,500
sub funds) in Luxembourg, holding assets in excess
of EUR 953 billion. Of these funds, 960 were FCP's
managing EUR 466 billion of assets. Moreover, MNC's
have already established Luxembourg FCPs for the specific
purpose of pension pooling.
Cost-Benefit analysis
Implementing a pension pooling structure must be
the result of a detailed cost/benefit analysis. This
requires a clear understanding of the mechanism. The
pooling technique uses the hub-and-spoke approach,
under which local pension providers (which may include
a cross border pension fund) are the spokes feeding
their assets into the FCP being the hub. Each local
pension fund holds units in the FCP rather than the
underlying investments themselves. In order for such
pooling structures to be viable, the benefits (both
tangible and intangible), must outweigh the set-up
and ongoing operating costs.
The benefits of pension pooling include:
Tangibles
- Reduced total operating fees related to management,
custody
and administration of assets due to economies of
scale;
- Critical mass allows more efficient asset allocation
and
access to more diversified multi-manager strategies;
- As in/out flows are netted within the FCP, the
volume of
trades declines, thus reducing costs of asset managers,
custodians and administrative agents.
Multi-National Corporations
Local pension funds or insurance companies
Fonds Communs de Placements
Management Company Custodian Bank
Intangibles
- Corporate governance is improved as the oversight
by the trustees of asset management processes
is centralised at the level of FCP;
- Full consistency of the asset management performance
between the local pension funds;
- The global culture of MNC is reinforced.
Costs include establishing the FCP as well as
its annual operation. Furthermore, operating the
tax transparency of the FCP must be carefully
translated in adequate information reporting systems
which must be included in any determination of
the establishment costs.
What should the attributes of a Pension
Pooling vehicle be?
Essentially, the vehicle and its pension fund investors
must be exempt from local taxes in the jurisdiction
where the pooling vehicle is domiciled. Aside from
being considered tax transparent from a local perspective,
care should be given to the acknowledgement of the
tax transparency of the FCP by respectively:
- The tax authorities of the pension fund's home
jurisdiction;
- The tax authorities of investment countries,
which may levy withholding taxes on income and/or
gains arising on investments held by the vehicle.
Indeed, the pension fund investors should be no worse
off as a result of pooling their investments than
if they had invested directly in the relevant investments
held by the vehicle on their behalf. This can be achieved
by the tax authorities of the pension fund investor's
domicile and the tax authorities where investments
are located agreeing to apply treaty benefits as if
the pension pooling vehicle did not exist i.e. considering
it as tax transparent.
Moreover, a pension pooling vehicle must permit
asset class pooling and each pool of assets should
be separately managed.
Do Luxembourg FCPs meet these criteria?
An FCP contains all the necessary features for a
multinational pension pooling vehicle.
Tax transparency
A Luxembourg FCP is defined as an undivided aggregation
of assets under the joint ownership of unit holders
and managed on their behalf by a management company
and is tax transparent.
Tax attributes
A pension pooling FCP is exempt from all taxes in
Luxembourg. It is not subject to income tax nor stamp
duty. Previously, a Luxembourg FCP was subject to
a subscription tax at the rate of 0.05/0.01% of the
Net Asset Value of the fund, depending on fund/asset
type. From June 2004, an FCP (as well as a SICAV)
is exempt from the annual subscription tax if its
units are "reserved" for pension providers
for paying retirements benefits to the employees belonging
to the same multinational group.
An FCP is only subject to a one-off capital duty
of EUR 1,200 upon creation.
No withholding tax exposure at fund level
No withholding tax is due in Luxembourg, either
on the income distributed by the FCP or on any capital
gain realised by the unit holder upon sale of the
units.
An FCP is a flexible vehicle
The FCP may segregate its assets into separate pools
or sub-funds. Each sub-fund's liability is "ring
fenced". Moreover, the FCP can be established
as a non-UCITS fund with reduced assets restrictions
and relaxed regulation.
VAT advantages
A Luxembourg FCP is considered as a non-VATable person
when investing in shares or securities. However, due
to the BBL case ruled by the European Court of Justice,
FCPs may in the future be considered as VATable persons.
Services rendered directly to an FCP are currently
exempted from VAT if they qualify as "management
services of investments funds". Services covered
by this definition are administrative
services (accounting services, computation of the
NAV, transfer agent fees etc.) and investment advice
services.
It is worthwhile noting that this exemption also
applies to services indirectly rendered up to an FCP
through a Luxembourg taxable entity, such as a financial
institution.
The combination of both the above Luxembourg VAT
exemption framework and the lowest VAT rates in the
EU contributes to Luxembourg FCPs being a cost efficient
pooling vehicle pool.
Luxembourg contains numerous fund administrators
that can support an FCP Pension Pooling strategy
Luxembourg offers the investment fund industry a
modern legal and tax environment. The continuing development
of Luxembourg as a center of financial and investment
fund services has led to a unique concentration of
specialist services providers (including custodian
banks, assets managers, fund accountants and administrators,
transfer agents and registrars, distributors, legal
and tax advisors). Moreover, Luxembourg has an established
reputation for its well-educated, multilingual and
multinational workforce with the fund industry directly
employing over 7,000 people.
Practical issues
An FCP is considered as being a tax transparent entity
in Luxembourg. However, as part of implementing a
pooling strategy, one needs to ensure that the FCP
is also considered as a transparent entity by foreign
authorities. Tax treaty benefits on a look through
basis (i.e. application of a treaty in place between
the country of residence of the FCP's unit holder
and the country of investment) should be considered
on a case-by-case basis. Once feasibility is cleared
with each foreign tax authorities, the particular
requirements of these authorities must be reflected
in the information reporting systems to support the
tax reclaim filings.
