Drawing on three recent KPMG surveys and inputs from Howden Specialty Luxembourg, this report highlights the consequences of foreign tax audit activity for Luxembourg funds, assesses the current market situation and explains how alternative investment managers can gain more tax risk certainty, including via the use of tax risk insurance.
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Market data, deal certainty and governance implications.
Tax audits remain a common feature of the European alternative investments landscape – they are stable but quite high in volume. In 2025, 43% of managers reported facing a direct foreign tax audit. The issue is not necessarily increasing audit volumes, but the growing consequences of those audits. Transfer pricing audits takes 1.3 years on average, and more than 9% involve criminal proceedings.
Tax authorities focus on beneficial ownership, substance, transfer pricing and withholding tax.
In transfer pricing and tax matters, documentation has become essential. But it is alone not sufficient as a shield from scrutiny: what matters is the consistency between what is documented and what is implemented.
Tax risk may now cost managers deal time, capital and management attention, and the platform operating model may amplify it with the typical platform now running an average of 114 entities.
A consolidated model with an in-house AIFM helps counter this: the AIFM performs regulated functions locally, adding a qualitative substance that headcount alone cannot convey, which is why such managers rate their own substance more highly.
As tax uncertainty is increasing across European jurisdictions, several entities, including alternative asset managers, are now turning to tax and contingent risk insurance policies to manage identified commercial, legal and tax risks and preserve deal certainty.
Tax insurance transfers the financial exposure of a tax authority challenge from the insured to the insurer. Therefore, providing certainty in situations where the technical position may be robust but is not risk-free. In Luxembourg, pricing for more common, non-contentious risks typically runs between 1% and 5% of the insured limit.
It should be viewed as a complementary tool in risk management: one that enhances deal certainty, supports risk management and strengthens the defensibility of a position when used in conjunction with high-quality advice.
Insurer underwriting has become rigorous: insurers now run detailed technical reviews of the tax position, often supported by external legal opinions, in a process that mirrors the scrutiny of the tax authorities.
Placing a policy can therefore serve as independent validation of a manager’s technical tax position.
The European tax risk landscape
Tax audits remain a common feature of the European alternative investments landscape – they are stable but quite high in volume. In 2025, 43% of managers reported facing a direct foreign tax audit. The issue is not necessarily increasing audit volumes, but the growing consequences of those audits. Transfer pricing audits takes 1.3 years on average, and more than 9% involve criminal proceedings.
Tax authorities focus on beneficial ownership, substance, transfer pricing and withholding tax.
Documentation as the primary response
In transfer pricing and tax matters, documentation has become essential. But it is alone not sufficient as a shield from scrutiny: what matters is the consistency between what is documented and what is implemented.
Practical implications for AIFMs
Tax risk may now cost managers deal time, capital and management attention, and the platform operating model may amplify it with the typical platform now running an average of 114 entities.
A consolidated model with an in-house AIFM helps counter this: the AIFM performs regulated functions locally, adding a qualitative substance that headcount alone cannot convey, which is why such managers rate their own substance more highly.
Tax insurance as a strategic risk-transfer tool
As tax uncertainty is increasing across European jurisdictions, several entities, including alternative asset managers, are now turning to tax and contingent risk insurance policies to manage identified commercial, legal and tax risks and preserve deal certainty.
Tax insurance transfers the financial exposure of a tax authority challenge from the insured to the insurer. Therefore, providing certainty in situations where the technical position may be robust but is not risk-free. In Luxembourg, pricing for more common, non-contentious risks typically runs between 1% and 5% of the insured limit.
It should be viewed as a complementary tool in risk management: one that enhances deal certainty, supports risk management and strengthens the defensibility of a position when used in conjunction with high-quality advice.
Underwriting for tax risk insurance
Insurer underwriting has become rigorous: insurers now run detailed technical reviews of the tax position, often supported by external legal opinions, in a process that mirrors the scrutiny of the tax authorities.
Placing a policy can therefore serve as independent validation of a manager’s technical tax position.
With cross-border tax authorities focusing on substance, beneficial ownership and transfer pricing in these circumstances, documentation is essential but is not enough on its own. What counts is that practice matches the paper trail.
Alternative asset managers should respond with rigorous analysis and demonstrable substance. Where a residual risk remains, tax risk insurance can be used to transfer the risk in a targeted way.
The full report sets out what the data means for your platform.
KPMG Luxembourg advises asset managers across the fund life cycle, from structuring, substance and transfer pricing through to audit defense.
