Selecting fund domiciles for Private Debt funds

Luxembourg

Luxembourg has established clear dominance for European-focused strategies, particularly through its Reserved Alternative Investment Fund (RAIF) regime. This unregulated vehicle, supervised at the manager rather than fund level, provides great operational flexibility while maintaining access to the EU marketing passport. The RAIF combines:

• Direct loan origination capabilities across EU markets
• Streamlined establishment procedures (45-60 days)
• No regulatory pre-approval requirements
• Compatibility with various legal forms (SCSp, SCS, SCA, SARL)

Luxembourg’s traditional regulated vehicles (SIFs and SICARs) have largely been supplanted by the RAIF, though they maintain relevance for certain investor segments requiring additional regulatory oversight. Luxembourg’s key strength is its sophisticated service provider ecosystem specialising in debt administration, with expertise in complex loan documentation and covenant monitoring.

Ireland

Ireland offers distinct advantages for specific lending strategies:

• The Irish Collective Asset-management Vehicle (ICAV) provides tax efficiency through EU treaty access while avoiding “check-the-box” complexities for US investors
• Section 110 companies offer effective securitisation platforms for portfolio acquisitions
• Special expertise in aviation finance and specialised lending markets
• Competitive establishment and operational costs compared to Luxembourg

Ireland has actively pursued specialised market segments, developing particular expertise in CLO structures, trade finance vehicles, and aviation leasing. The recent amendments to the Limited Partnership Act has enhanced structural flexibility, though the jurisdiction has yet to gain significant traction for mainstream direct lending.

Cayman Islands

For managers targeting non-EU investors or deploying capital primarily outside Europe, the Cayman Islands offers compelling advantages:

• Exempted Limited Partnership (ELP) structure familiar to US and Middle Eastern investors
• Tax-neutral environment without entity-level taxation
• Streamlined regulatory framework with reduced compliance burden
• Cost-effective establishment and operational framework
• Sophisticated service provider ecosystem

Cayman Island’s limited regulatory requirements make it particularly suitable for strategies requiring maximum flexibility, though recent economic substance requirements have added compliance considerations. Cayman vehicles face significant limitations for EU marketing and direct lending activities within Europe, requiring parallel structures for comprehensive deployment capabilities.

United Kingdom

The UK (particularly English and Scottish Limited Partnerships) whilst relevant for certain strategies, post-Brexit has a different standing:

• Loss of AIFMD passport, which severely limits marketing across the EU.
• Established legal framework with unparalleled jurisprudential certainty
• Good service provider ecosystem with specialist credit expertise
• Helpful for strategies targeting UK borrowers

However, the introduction of the Qualifying Asset Holding Company (QAHC) regime represents the UK’s most significant innovation, creating tax-efficient holding structures specifically designed for alternative investments, including private debt portfolios. Investors are taxed as if they were holding assets directly, eliminating double taxation. There is no corporation tax on qualifying share disposals and no UK withholding tax on interest or dividend payments, streamlining cross-border investments. Interest on profit-participating and convertible debt are deductible on accruals basis. Taxable profits are typically restricted to 10-25 basis point arm’s-length margin. Furthermore, debt instruments do not need to be listed on recognised exchanges. The QAHC regime offers a compelling option over Luxembourg or Irish vehicles particularly for loan origination strategies.

Tax optimisation

Effective tax structuring for private debt requires sophisticated approaches that can address multiple dimensions:

Intermediate holding structures

Direct investment from limited partnership fund vehicles typically creates adverse withholding tax treatment on interest payments from borrowers. Leading managers usually use intermediate holding companies to access treaty benefits or domestic exemptions:

• Luxembourg SOPARFIs accessing 85 + double tax treaties
• Irish Section 110 companies utilising 74 + treaty relationships
• UK holding companies leveraging extensive treaty networks.

The OECD Base Erosion and Profit Shifting (BEPS) initiative has substantially impacted these structures, requiring enhanced substance and genuine business purpose. Managers must now demonstrate significant operational presence rather than merely establishing “letterbox” entities.

Investor-level considerations

Jurisdictional selection significantly impacts tax outcomes for various investor types:

• US tax-exempt investors (particularly sensitive to Unrelated Business Taxable Income)
• European insurance companies (Solvency II efficiency)
• Sovereign entities (immunity protections)
• Retail structures (tax reporting requirements)

Sophisticated structures frequently incorporate parallel vehicles in multiple jurisdictions to accommodate diverse investor requirements while maintaining operational efficiency.

ECI mitigation strategies

For funds investing in US loan origination, addressing Effectively Connected Income (ECI) exposure requires specific structural approaches. Three common methodologies include:

1. Corporate blocker structures isolating non-US investors from direct ECI exposure
2. “Season-and-sell” approaches involving short holding periods prior to transfer
3. Treaty-based solutions leveraging specific provisions (particularly US-Ireland)