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.

Three key developments are driving the change

1. Tax treaties are being denied under BEPS Action 6

  • BEPS Action 6 and the multilateral instrument (“MLI”) modifies tax treaties to permit a source country to deny treaty benefits unless a Principal Purpose Test (“PPT”) is met or certain Limitation on Benefits (“LOB”) provisions are satisfied.  Many countries and territories have adopted the PPT and can deny treaty benefits if they determine that obtaining the treaty benefit was one of the principal purposes of a structure or transaction. For Asset Managers, this may limit the ability to rely on vehicles established in certain jurisdictions where treaty benefits were an important component of the overall structure.

2. Tax transparency initiatives are transforming reporting

  • Tax transparency initiatives, for example, Country by Country Reporting and EU DAC 6 (Directive 2011/16/EU, as amended by Council Directive (EU) 2018/822 of 25 May 2018, commonly referred to as Mandatory Disclosure Reporting “MDR”), require detailed disclosures to tax authorities.  Countries are using this information to try to determine whether someone has used entities in foreign jurisdictions to avoid tax. As a result, in addition to the burdens of complying with these initiatives, there is increased risk of tax controversy or limitations on otherwise applicable deductions or exemptions, if tax authorities increase audit activity.

3. Substance rules are changing rapidly

  • Economic Substance Requirements (“ESR”) – In response to OECD Base Erosion and Profit Shifting (“BEPS”) Actions and EU tax policies, many countries labelled as “Tax Havens”[1] have implemented rules requiring a resident entity to report and maintain minimum levels of local “substance” (e.g., people, functions, premises and costs) consistent with that entity’s stated activity. These rules are designed to demonstrate meaningful economic substance, which is intended to reduce the likelihood of being “blacklisted”[2] by countries, political unions, or Non-Governmental Organizations (“NGOs”).  The effect of being blacklisted can include reputational implications, reduced deductions or increased withholding taxes on cross-border transactions, and increased reporting or audit requirements.  KPMG member firms have been working with many investors and asset managers to review historical structures for compliance with ESR.

Two themes emerging in light of COVID-19

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

  • Investors and asset managers are asking whether the potential benefits of these legacy structures continue to outweigh the new or additional costs.  Some of these costs may be direct financial carrying costs―for example, the cost of adding the requisite amount of people or infrastructure under ESR, or the compliance cost of tax reporting.  However, some of the costs may be more nuanced―such as the potential cost of future restructurings because of shifting tax, regulatory or reputational goal posts, which may have knock-on effects on investor and stakeholder requirements. 

2. Reduction in offshore structuring

  • Secondly, many jurisdictions have been working to transform their legal, tax and regulatory landscape to better service the needs of their local investor and asset manager capital, and reduce the need for offshore investment structuring. Reducing offshore structuring may help keep capital and related services onshore, helping to develop the economy and facilitate local business development. We expect this will likely be especially important for many jurisdictions during the pandemic recovery period.

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.

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