Fund domiciliation has become increasingly important in the competitive landscape of investment funds as investors seek to maximize returns and minimize costs. The location of a fund has implications on market access, tax liabilities and product regulation, making a real difference amid the fine margins that asset managers face. Ireland and Luxembourg have emerged as the key European locations where funds chose to base themselves, dominating the market in place of their larger neighbors. Long-term strategic decisions by both countries paved the way to their allure. Nevertheless, seeking to replicate their success, new players like Dubai and Malta are placing a greater focus on attracting investment funds
Overview of Fund Domiciliation
Fund domiciliation refers to the legal base of an investment fund, determining the regulation, tax treatment and market access that apply to it. A well-chosen fund domicile ensures regulatory efficiency, low tax burdens and access to a high number of investors. Furthermore, developed investment ecosystems are desirable to provide an established setup for fund deployment. These include fund administrators, depositaries, transfer agents and lawyers.
With the ability to market products to investors being contingent on the jurisdiction of the fund domiciliation, it is clear to see its importance to asset managers. Accordingly, funds seek to place themselves in locations which grant them the greatest volume of potential investors and capital. This can be seen, especially post-Brexit, with US asset managers having chosen to use multiple entity structures to domicile themselves in both a US and European jurisdiction to take advantage of global demand.
Tax and regulation are also at the forefront of the choice of domiciliation, directly impacting costs and returns. Inevitably, low tax jurisdictions have proven to be desirable, and more nuanced tax laws, such as those on the treatment of carried interest or special cases of capital gains, can also prove to be advantageous. Alongside this, asset managers seek leniency, consistency and clarity in regulation.
Additionally, domiciliation affects the effectiveness of operations through the presence of the associated services (like lawyers and administrators) that are essential to funds. This is especially relevant in the face of the 2013 AIFMD regulation making a depositary a legal requirement for funds, providing large setups a distinct advantage through economies of scale.
The Rise of Luxembourg and Ireland in the Investment Fund Domicile Industry
The rise of Luxembourg and Ireland as dominant centers in the European investment fund (IF) domicile industry can largely be attributed to their quick adoption and implementation of the UCITS Directive (Undertakings for Collective Investment in Transferable Securities) of 1985. Before the Directive, cross-border asset management in Europe was a relatively small and fragmented industry, with a focus primarily on private wealth management. Key centers for this activity included London, Switzerland, and Luxembourg, but retail asset management was still largely a domestic affair. This meant that investment funds (IFs) and their related services, such as administration and custodianship, were usually located in the same country as the investors they served.
What UCITS did was create a unified regulatory framework that allowed investment funds to be marketed and sold across borders within the European Union (EU) with a single authorization from any EU member state. This transformed the industry by allowing fund managers to establish a fund in one country and then distribute it throughout the EU, significantly expanding the market for retail investment products.
Luxembourg was the first to implement the Directive in 1988, followed closely by Ireland in 1989. At this point, Luxembourg already had a well-established reputation as an Offshore Jurisdiction (OJ) and International Financial Centre (IFC). This meant that Luxembourg had already created a strong foundation in cross-border finance, with many international financial institutions having operations there. It was seen as a stable and well-regulated country with favorable tax policies, which attracted multinational financial firms. In contrast, Ireland lacked the experience and reputation in international finance that Luxembourg already had. While it had some foreign direct investment, it did not have the infrastructure or international standing in financial services that Luxembourg had developed over time. However, Ireland adopted the Directive with a flexible approach and did not add unnecessary gold plating (additional regulations not required by the EU law). By aligning its regulatory framework closely with the UCITS Directive, Ireland kept things simple and transparent, making itself an attractive domicile for funds.
The rise of Luxembourg and Ireland as dominant centers in the European investment fund (IF) domicile industry can largely be attributed to their quick adoption and implementation of the UCITS Directive (Undertakings for Collective Investment in Transferable Securities) of 1985. Before the Directive, cross-border asset management in Europe was a relatively small and fragmented industry, with a focus primarily on private wealth management. Key centers for this activity included London, Switzerland, and Luxembourg, but retail asset management was still largely a domestic affair. This meant that investment funds (IFs) and their related services, such as administration and custodianship, were usually located in the same country as the investors they served.
What UCITS did was create a unified regulatory framework that allowed investment funds to be marketed and sold across borders within the European Union (EU) with a single authorization from any EU member state. This transformed the industry by allowing fund managers to establish a fund in one country and then distribute it throughout the EU, significantly expanding the market for retail investment products.
Luxembourg was the first to implement the Directive in 1988, followed closely by Ireland in 1989. At this point, Luxembourg already had a well-established reputation as an Offshore Jurisdiction (OJ) and International Financial Centre (IFC). This meant that Luxembourg had already created a strong foundation in cross-border finance, with many international financial institutions having operations there. It was seen as a stable and well-regulated country with favorable tax policies, which attracted multinational financial firms. In contrast, Ireland lacked the experience and reputation in international finance that Luxembourg already had. While it had some foreign direct investment, it did not have the infrastructure or international standing in financial services that Luxembourg had developed over time. However, Ireland adopted the Directive with a flexible approach and did not add unnecessary gold plating (additional regulations not required by the EU law). By aligning its regulatory framework closely with the UCITS Directive, Ireland kept things simple and transparent, making itself an attractive domicile for funds.
Source 1: Rise of Ireland and Luxembourg over the Last Decade in $Tn (Source: Financial Times)
Distinct Yet Complementary Jurisdictions
Despite their similarities, Luxembourg and Ireland differ in some aspects that have shaped their growth as IF hubs. Luxembourg’s geographic advantages, multilingual workforce, and central location in Europe played a pivotal role in its development. Positioned near major markets such as Germany, France, and Italy, Luxembourg benefited from its proximity and the use of French, German, and English, making it particularly attractive to European clients.
On the other hand, Ireland’s dominant appeal to US and UK asset managers stemmed largely from the shared language, common law system, and cultural links between these countries. By 1985, Ireland had already emerged as a major destination for US foreign direct investment (FDI), thanks to its favorable tax environment, use of English, and well-established legal framework. Despite these advantages, Dublin in the mid-1980s was far from being considered an International Financial Centre (IFC). It wasn’t until Charles Haughey’s 1987 election manifesto, which focused on creating a financial services hub, that the groundwork for the International Financial Services Centre (IFSC) was laid. After Haughey’s election as Prime Minister, the IFSC was established in Dublin’s Docklands with a key attraction: a 10% corporate income tax (CIT) rate, which was substantially lower than the 40% rate elsewhere in Ireland and far below European averages. Additionally, Ireland offered various tax exemptions for IFs, which was a significant advantage over Luxembourg, which still applied a small 0.06% tax on fund assets.
Despite their similarities, Luxembourg and Ireland differ in some aspects that have shaped their growth as IF hubs. Luxembourg’s geographic advantages, multilingual workforce, and central location in Europe played a pivotal role in its development. Positioned near major markets such as Germany, France, and Italy, Luxembourg benefited from its proximity and the use of French, German, and English, making it particularly attractive to European clients.
On the other hand, Ireland’s dominant appeal to US and UK asset managers stemmed largely from the shared language, common law system, and cultural links between these countries. By 1985, Ireland had already emerged as a major destination for US foreign direct investment (FDI), thanks to its favorable tax environment, use of English, and well-established legal framework. Despite these advantages, Dublin in the mid-1980s was far from being considered an International Financial Centre (IFC). It wasn’t until Charles Haughey’s 1987 election manifesto, which focused on creating a financial services hub, that the groundwork for the International Financial Services Centre (IFSC) was laid. After Haughey’s election as Prime Minister, the IFSC was established in Dublin’s Docklands with a key attraction: a 10% corporate income tax (CIT) rate, which was substantially lower than the 40% rate elsewhere in Ireland and far below European averages. Additionally, Ireland offered various tax exemptions for IFs, which was a significant advantage over Luxembourg, which still applied a small 0.06% tax on fund assets.
The Growth of the IF Industry
Source 2: Net Flows in Billion Euros in European ETFs and ETCs (Source: Morningstar Direct)
By the early 2000s, the IF industry in both Luxembourg and Ireland grew rapidly, driven in part by the Eurozone's creation, which made the region more attractive for investments. The UCITS III Directive (2001), which expanded the range of financial instruments available to IFs, including derivatives, further fueled this growth. The UCITS IV Directive (2011), which introduced a management company passport, further accelerated the integration of both countries into the global IF ecosystem. Luxembourg and Ireland were positioned to capitalize on these regulatory changes, with both countries becoming leaders in the management, domiciliation, and administration of UCITS and AIFs (Alternative Investment Funds).
While UCITS became the dominant regulatory framework for retail investors, AIFs grew significantly as a structure for institutional and alternative investments. The introduction of the AIFMD (Alternative Investment Fund Managers Directive) in 2011, aimed at regulating and providing a clear framework for alternative investments across Europe, solidified Luxembourg and Ireland's roles as key domiciles for AIFs. By the end of 2023, Luxembourg and Ireland accounted for a significant portion (46%) of the total net assets in European funds, including both UCITS and AIFs.
While UCITS became the dominant regulatory framework for retail investors, AIFs grew significantly as a structure for institutional and alternative investments. The introduction of the AIFMD (Alternative Investment Fund Managers Directive) in 2011, aimed at regulating and providing a clear framework for alternative investments across Europe, solidified Luxembourg and Ireland's roles as key domiciles for AIFs. By the end of 2023, Luxembourg and Ireland accounted for a significant portion (46%) of the total net assets in European funds, including both UCITS and AIFs.
Source 3: Top country shares in UCITS and AIFs net assets in 2023
Despite facing challenges such as growing congestion, labor, and real estate costs, both countries have successfully navigated these issues. Luxembourg has increasingly relied on a workforce of commuters from neighboring Belgium, France, and Germany, while Ireland has managed these pressures through changes in tax rates and the relocation of some functions outside of Dublin.
Investment in Financial Education and Innovation
Both Luxembourg and Ireland have invested heavily in financial education and innovation, which has played a crucial role in their success. Luxembourg has been at the forefront of developing Sharia-compliant products, microfinance, sustainable finance, and Chinese market products, such as Dim Sum bonds. These initiatives have attracted a diverse range of investors and financial institutions. Ireland, meanwhile, has become a hub for securitization and exchange-traded funds (ETFs), securing a dominant 72.66% of the overall assets under management in the European ETF industry (as of September 2024). Ireland’s focus on hedge funds and aviation finance has also bolstered its standing in the global financial landscape, with the country becoming the world’s leading center for aviation finance.
Both Luxembourg and Ireland have invested heavily in financial education and innovation, which has played a crucial role in their success. Luxembourg has been at the forefront of developing Sharia-compliant products, microfinance, sustainable finance, and Chinese market products, such as Dim Sum bonds. These initiatives have attracted a diverse range of investors and financial institutions. Ireland, meanwhile, has become a hub for securitization and exchange-traded funds (ETFs), securing a dominant 72.66% of the overall assets under management in the European ETF industry (as of September 2024). Ireland’s focus on hedge funds and aviation finance has also bolstered its standing in the global financial landscape, with the country becoming the world’s leading center for aviation finance.
The 2008 Financial Crisis and Its Aftermath
The 2008 financial crisis had a relatively muted impact on the growth of the IF industry in Luxembourg and Ireland. In Luxembourg, although there were bank bailouts, there was little impact on IF-related revenues. In Ireland, the crisis led to a short-lived recession, but it also brought about a temporary reduction in labor and real estate costs, which provided some relief for the IF sector. In both cases, the crisis led to an increase in regulation, but much of this regulation focused on banks rather than asset management, with institutions such as the European Central Bank (ECB) playing a larger role in the recovery of the financial system.
The 2008 financial crisis had a relatively muted impact on the growth of the IF industry in Luxembourg and Ireland. In Luxembourg, although there were bank bailouts, there was little impact on IF-related revenues. In Ireland, the crisis led to a short-lived recession, but it also brought about a temporary reduction in labor and real estate costs, which provided some relief for the IF sector. In both cases, the crisis led to an increase in regulation, but much of this regulation focused on banks rather than asset management, with institutions such as the European Central Bank (ECB) playing a larger role in the recovery of the financial system.
Will Luxembourg and Ireland Continue to Dominate?
The success of Luxembourg and Ireland as dominant IF domiciles can be attributed to several key factors: the UCITS Directive, the strategic geographic and economic advantages both countries offered, and their ability to adapt to changes in the global financial landscape. Luxembourg had a head start as an established OJ and IFC, but Ireland leveraged its strengths, learning from Luxembourg’s example and promoting itself aggressively. Both countries have continued to build on these advantages, attracting major international financial institutions and successfully navigating challenges in labor, real estate, and market demands.
Whether Luxembourg and Ireland continue to dominate depends on several key factors. Firstly, both countries have been at the forefront of regulatory changes, remaining compliant with new directives such as the Alternative Investment Fund Managers Directive (AIFMD) and UCITS IV. Their willingness to innovate with new technologies like blockchain, AI, and tokenization will be crucial in maintaining their competitive edge. Luxembourg has been proactive in this area, becoming one of the first EU member states to pass laws recognizing blockchain transactions, thereby allowing the use of distributed ledger technology (DLT). In terms of fund servicing, Luxembourg is improving efficiency by leveraging new technologies to standardize fund flows and enhance anti-money laundering regulation. On the other hand, Ireland is also heavily invested in technological innovation. Irish Funds, the industry association, has launched workstreams focusing on the application of AI and tokenization. Ireland's FinTech ecosystem is well-developed, with leading technology companies contributing to the creation and application of new financial technologies. The ongoing development of both countries’ financial infrastructures will be essential for adapting to changing market conditions.
While Brexit has presented challenges, it has also created new opportunities for Luxembourg and Ireland, especially as firms relocate certain operations to maintain access to EU markets. However, both countries will need to continue capitalizing on these shifts while ensuring that their global distribution networks and international relationships remain strong, especially with hubs like New York and London. The ability to stay flexible in the face of changing political and financial landscapes will determine whether Luxembourg and Ireland continue to lead.
In conclusion, Luxembourg and Ireland's rise as dominant hubs in the European investment fund industry highlights the importance of regulatory frameworks like UCITS, favorable tax environments, geographic advantages, and targeted investments in education and innovation. However, their continued dominance will depend on their ability to navigate new market demands, sustain their competitive advantages, and stay ahead of global trends. With both countries investing in innovation and fostering technological advancements, they are well-positioned to remain central players in the global financial system for years to come.
Will Luxembourg and Ireland Continue to Dominate?
The success of Luxembourg and Ireland as dominant IF domiciles can be attributed to several key factors: the UCITS Directive, the strategic geographic and economic advantages both countries offered, and their ability to adapt to changes in the global financial landscape. Luxembourg had a head start as an established OJ and IFC, but Ireland leveraged its strengths, learning from Luxembourg’s example and promoting itself aggressively. Both countries have continued to build on these advantages, attracting major international financial institutions and successfully navigating challenges in labor, real estate, and market demands.
Whether Luxembourg and Ireland continue to dominate depends on several key factors. Firstly, both countries have been at the forefront of regulatory changes, remaining compliant with new directives such as the Alternative Investment Fund Managers Directive (AIFMD) and UCITS IV. Their willingness to innovate with new technologies like blockchain, AI, and tokenization will be crucial in maintaining their competitive edge. Luxembourg has been proactive in this area, becoming one of the first EU member states to pass laws recognizing blockchain transactions, thereby allowing the use of distributed ledger technology (DLT). In terms of fund servicing, Luxembourg is improving efficiency by leveraging new technologies to standardize fund flows and enhance anti-money laundering regulation. On the other hand, Ireland is also heavily invested in technological innovation. Irish Funds, the industry association, has launched workstreams focusing on the application of AI and tokenization. Ireland's FinTech ecosystem is well-developed, with leading technology companies contributing to the creation and application of new financial technologies. The ongoing development of both countries’ financial infrastructures will be essential for adapting to changing market conditions.
While Brexit has presented challenges, it has also created new opportunities for Luxembourg and Ireland, especially as firms relocate certain operations to maintain access to EU markets. However, both countries will need to continue capitalizing on these shifts while ensuring that their global distribution networks and international relationships remain strong, especially with hubs like New York and London. The ability to stay flexible in the face of changing political and financial landscapes will determine whether Luxembourg and Ireland continue to lead.
In conclusion, Luxembourg and Ireland's rise as dominant hubs in the European investment fund industry highlights the importance of regulatory frameworks like UCITS, favorable tax environments, geographic advantages, and targeted investments in education and innovation. However, their continued dominance will depend on their ability to navigate new market demands, sustain their competitive advantages, and stay ahead of global trends. With both countries investing in innovation and fostering technological advancements, they are well-positioned to remain central players in the global financial system for years to come.
Can Another Country Replicate Their Success?
Ireland and Luxembourg have created strong entry barriers for other countries. Their wide moats are based on their first-mover advantage, regulatory expertise and strong financial infrastructure. While these two countries remain the leaders in fund domiciliation others have also been trying to step up to the challenge.
Malta has emerged in recent years due to their strong domiciliation potential for alternative investment funds. What attracts funds to this country is their competitive tax incentives and their flexible regulatory framework. Malta’s tax framework changes depending on the funds’ classification, whether it is prescribed or non-prescribed. Prescribed funds invest at least 85% of the value of assets within Malta and they are subject to 15% withholding tax on investment income. Non-Prescribed funds on the other hand invest more than 15% of their asset value abroad and they are exempt from Maltese income tax. Furthermore, Collective Investment Schemes set up as SICAVs are liable for a more favorable income tax of 25%, rather than the standard 35% corporate tax rate. On the regulatory framework side, Malta aligns with all the major EU directives. These include but are not limited to Markets in Financial Instruments Directive (MiFID), the Undertakings for Collective Investment in Transferable Securities (UCITS) Directive and the Alternative Investment Fund Managers Directive (AIFMD). While, Malta has its attractive properties it also has weakness that are holding it back. Their two main ones are their inability to scale their domiciliation operations and their inability attract a skilled workforce. If they are able to improve on these two points, Malta might have a real chance to compete with Luxembourg and Ireland. If we also start looking outside of Europe, Dubai comes up as a viable option. With its low tax regime and emerging economy, it seems like a great alternative. The only problem relies on the fact that it does not align with European standards, limiting its appeal to European funds. This does not oppose the possibility of this location attracting funds that do not invest the majority of their assets value in the EU and USA.
The other larger European countries are not able to compete due to their higher taxation. For example, France and Germany have added additional requirements to UCITS regulation. These have increased compliance costs in a process called gold-plating. This leads to very few countries being able to replicate the same success that Luxembourg and Ireland have been able achieve.
What’s Next for Fund Domiciliation in Europe?
Luxembourg and Ireland have established themselves as the main fund domiciles in Europe due to their favorable regulatory regimes, lower tax structures and ability to attract highly skilled workers. Furthermore, with the early adaptation of UCITS and AIFMD frameworks, cross border funds have emerged with the ability to attract both European and US asset managers. Combined these factors have led to 50% of European funds being domiciled in these two countries.
We believe that in the short to medium term it is unlikely to see big shifts in fund domiciliation space. A wild card to the future of this industry could be the relationship between the EU and UK. Post Brexit, many of the top UK asset managers like Schroders and M&G moved their domiciliation to Luxembourg or Ireland. In the future, It is possible that some of the previous contracts between EU and UK could be reinstated, rebirthing fund domiciliation in the UK. The next most viable option could be an increase of fund domiciliation in Malta. While I do not believe that Malta can disrupt the industry it can some market share from Luxembourg and Ireland. Lastly, I don’t believe that non-Western domiciliation like Dubai is viable for European or American funds due to regulatory challenges even if tax structures are favorable.
We refrain to give an outlook about the long term, as in the world we are currently living its many moving pieces make it difficult to make a prediction.
By Ilse Katelyn Russell-Jones, Ettore Marku, Neil Pinto
SOURCES:
- EFAMA (European Fund and Asset Management Association)
- RBC (Royal Bank of Canada)
- Financial Times
- State Street
- Refinitiv
- PubMed Central
- Maples
- Thomson Reuters