Investors and asset managers are rethinking traditional approaches to cross-border investment, especially in light of the evolving tax environment in which governments are considering how to address budgetary shortfalls resulting from the COVID-19 situation. Traditionally, investors and asset managers often establish entities that offer legal attributes to facilitate cross-border investing arrangements of pooled capital, while also maintaining tax neutrality. Sometimes, these structures will also have certain tax attributes (e.g., transparent or opaque) which can mitigate unintended adverse tax issues.
While some countries’ corporate law, tax and regulatory environments have proven popular for such structures, this is now changing as recent tax treaty, disclosure and substance developments are causing investors and asset managers to reconsider historically popular jurisdictions in favor of new jurisdictions that may offer similar advantages at the same cost. In recent conversations, asset managers and investors have shared that they are especially focused on structures that are resilient and sustainable despite ever shifting fiscal sands.
In this blog series, which will run over the next few months, we will consider some of the new jurisdictions or regimes that are increasingly considered by asset managers in today’s environment, and highlight the reasons why they are garnering attention. Before we do that, however, it is worth reflecting on why change is happening in the first place.
1. Tax treaties are being denied under BEPS Action 6
2. Tax transparency initiatives are transforming reporting
3. Substance rules are changing rapidly
We expect the impact of these developments to be heightened in light of government revenue shortfalls resulting from reduced tax collections and increased expenditures as a consequence of the COVID-19 pandemic, and in response, we see two themes emerging.
1. Cost benefit analysis
2. Reduction in offshore structuring
Accordingly, investors and asset managers are revisiting their legal entity structures and rationalizing legal entities and jurisdictions. Many are concluding that a simplified structure helps manage cost and complexity. Sustainable structures are a paramount consideration. As investors and asset managers work through this rationalization, we are seeing several alternative jurisdictions frequently considered.
Click here to read the next blog post in this series, which will look at new jurisdictions being considered by asset managers, starting with the Abu Dhabi Global Market.
1. Countries with no or only nominal levels of corporate tax
2. “Blacklisting” can be very detrimental to a country, and can lead to punitive withholding taxes applied on payments to a company organized in a blacklist country, or limitations on local country deductions related to payments to a company organized in a blacklist country. Recently, Netherlands announced that it intended to implement withholding tax on dividend flows to blacklist jurisdictions.
Abu Dhabi is a top jurisdiction for investment as organizations transform for the new reality ahead.
Abu Dhabi is a top jurisdiction for investment as organizations transform for the new real
As a jurisdiction, Ireland has a reputation for product and market innovations coupled with strong investor protection measures.
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