Pooling International Pension Assets in Luxembourg

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 December 2008, promoters from 39 countries had domiciled over 3,370 investment funds (and 10,973 sub funds) in Luxembourg, holding assets in excess of EUR 1.5 trillion. Of these funds, 1,910 were FCP's managing EUR 567 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.