your bridge between europe and china: luxembourg -...
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Your bridge between Europe and China: Luxembourg
Association Luxembourgeoise des Fonds d’Investissement - Association of the Luxembourg Fund Industry
In association with
2 Your bridge between Europe and China: Luxembourg
Contents
I – Executive summary 1
II – QDII, QFII and RQFII 2
A.QualifiedDomesticInstitutionalInvestors(QDII) 2
B.QualifiedForeignInstitutionalInvestor(QFII)andRenminbi QualifiedForeignInstitutionalInvestor(RQFII) 3
III – Your bridge between the European and Chinese 4 markets: why Luxembourg? A.UCITS:theglobaldistributionproductforChineseassetmanagers 5
B.Alternativeinvestmentfunds:acompleterangeofproductsandsolutions 6
C.AhubforexpansionintoEuropeandbeyond 7
D.Aneffectivetaxregime 8
E.Luxembourg–HongKong,anaturalgatewayforChineseinvestors 11
F.TheEuropeanopen-endedfunddistributionmarketinnumbers-2015insight 12
Glossary 14
Connect with us 15
Your contacts in Luxembourg 17
Your bridge between Europe and China: Luxembourg 1
I. Executive summary
WelearnfromourongoingdialoguewithChineseassetmanagersthatexpandingoverseasisoneoftheirhighestshort-tomedium-termpriorities.ThispublicationaimstoprovidesomekeyinformationforChineseassetmanagerswhoareconsideringestablishingtheirinternationalpresenceviaLuxembourg.Itprovidesbriefbackgroundinformationonthemaincross-borderprograms,namelythequalifieddomesticinstitutionalinvestors(QDII),thequalifiedforeigninstitutionalinvestors(QFII),andtheRenminbiqualifiedforeigninstitutionalinvestors(RQFII)regimes.
ItsetsoutthereasonsforchoosingLuxembourgasthe“hub”fromwhichfundsmaybedistributedtoEuropeanandinternationalinvestors.InadditionitprovidessomeinformationonthedifferentfundstructuresavailableinLuxembourgforcreatingUCITS,coveringtraditionalequity,fixedincome,moneymarketandETFtypesofproductsandforcreatingalternativefundproductssuchasprivateequity,hedge,realestate,debtandinfrastructure.WehavealsoprovidedsomeexamplesoftypicalfundstructuresanddiscusstheuseofHongKongasthegatewaybetweenLuxembourg and Mainland China.
2 Your bridge between Europe and China: Luxembourg
ToallowChineseinvestorstomakeinvestmentsoutsideMainlandChinawhilealsoopeninguptheChinesesecuritiesmarkettoforeigninvestors,theChinesegovernmentintroducedthreeprograms,theQualifiedDomesticInstitutionalInvestors(QDII)programin2006,theQualifiedForeignInstitutionalInvestors(QFII)programin2002andtheRMBQualifiedForeignInstitutionalInvestors(RQFII)programin2011.LuxembourgandChinahavebeenabletomutuallybenefitfromtheseprograms.Givenitstraditionalstrengthasafunddomicileanddistributionhub,LuxembourgisanaturalgatewayforinvestmentflowsinandoutofChina.China’sQDIIprogramgivesinvestorsaccesstomarketsoutsidethecountry.Luxembourg’sMemorandumofUnderstanding(MoU)qualifiesLuxembourg-regulatedinvestmentfundsaseligibleinvestmentsforQDIIinvesting.TheQFIIprogramoffersforeigninvestorsaccesstosecuritiesmarketsinChina.InternationalassetmanagersgenerallyentertheChinesemarketthroughjointventureswithlocalChinesepartners.TheRQFIIprogramhasbeenwelcomedbyChina’sassetmanagementcompanies,whichaimtofurtherexpandtheirinternationalbusinessbyofferingoffshoreRenminbiproducts.ThisprogramhasbeenfurtherextendedtojurisdictionsotherthanHongKong,whichallowsinternationalassetmanagerstosetupRQFIIfundsoutsideofChina.
A. Qualified Domestic Institutional Investors (QDII)
SinceApril2006,China’sQDIIprogramhasgivenChineseinvestorsaccesstomarketsoutsidethecountry,openingnewopportunitiesforinvestmentfunds.
TheregulationrelatingtotheQDIIprogramwasoutlinedinabriefdocumentissuedbythePeople’sBankofChina(PBOC)inApril2006.Thissetsouttheframeworkforinvestmentsbycommercialbanks.
QDII for commercial banks
InMay2007,theChinaBankingRegulatoryCommission(CBRC)issuedaCircularonAdjustingtheScopeofOverseasInvestmentbyCommercialBanksforOverseasWealthManagementBusinessforClients,allowingonshorecommercialbankstoinvestinoffshoreequitywithincertainlimits.ThissignificantlyexpandedthescopeofinvestmentauthorizedforcommercialbankQDIIs.
QDII for fund managers and securities firms
InJune2007,theChinaSecuritiesRegulatoryCommission(CSRC)issuedtheInterimMeasuresforOverseasSecuritiesInvestmentbyQualifiedDomesticInstitutionalInvestorsanditsimplementationnotice,allowingqualifiedChinesefundmanagementcompaniesandsecuritiesfirmstoinvestinoffshorefinancialmarkets.
Thefundscreatedbyfundmanagersandsecuritiescompaniesmayinvestinawiderangeoffinancialproducts.IncontrasttotheQDIIregimeforcommercialbanks,CSRC’srulesprovidemoreflexibilityintermsofproductstructuring.
II. QDII, QFII and RQFII
II.QDII,QFIIandRQFII
Your bridge between Europe and China: Luxembourg 3
Future development
TheChinesegovernmentannounceditsintentiontoexpandtheQDIIprogramtoindividualstoinvestdirectlyoverseasinthenearfuture(commonlyknownastheQDII2program).DetailsoftheprogramwerenotissuedatthedateofissuanceofthispublicationbutitisexpectedthatQDII2willfirstbepilotedincertainselectedcitiesinChina.ThescopeofinvestmentunderQDII2isexpectedtobebroader.
Access to Luxembourg regulated products
ThesigningoftheMoUbetweenregulatorsinLuxembourgandChinain2008tooktheprocessonestepfurther,allowingChineseinstitutionalinvestorstoinvestinLuxembourg-regulatedinvestmentfundproducts.TheMoUwassignedbetweenLuxembourg’sCommissionfortheSupervisionoftheFinancialSector(CSSF)andtheCBRC.ItallowsQDIIstoinvestonbehalfoftheirclientsinfinancialproductsregulatedbytheCSSF.TheMoUmakesLuxembourgoneofthefewfinancialcenterstohavesuchan agreement1inplace.ThisagreementalsomakesitpossibletodistributeUndertakingsforCollectiveInvestmentinTransferableSecurities(UCITS)inmainlandChinathroughtheQDIIscheme.
QDIIproductsissuedbyChinesefundmanagersshowthattheytendtoallocateinvestmenttotheHongKongmarket,toChineserelatedsecuritiesortotopperformingforeignfunds.Mostbanks’QDIIproductstendtoreplicateanindexandinvestinasingleassetclass,orreplicateaninternationalinvestmentfund,generallyaUCITS.AsaleadingjurisdictionforUCITS,LuxembourgisthenaturalhomeforQDIIproductsinvestinginfunds.
Goingforward,LuxembourgisexpectedtoevolveintothedomicileofchoiceforaninternationallyrecognizedbrandofalternativeinvestmentfundproductsmeetingtherequirementsoftheAlternativeInvestmentFundManagers(AIFM)Directive,includingrealestate,privateequity,venturecapitalandhedgefunds.
B. Qualified Foreign Institutional Investor (QFII) and Renminbi Qualified Foreign Institutional Investor (RQFII)
TheQFIIschemeallowsforeigninvestorsaccesstosecuritiesmarketsinChina.TheQFIIschemeallowsforeigninstitutionstotradeChineseA-sharesandotherfinancialinstrumentsviaspecialaccountsopenedindesignatedcustodianbanks.Inthespiritof“lessercontrol,moreregulation,”inJuly2012,theCSRCreleasedsomemeasurestolowerQFIIeligibilityrequirements:simplifyapplicationprocedures,easerestrictionsontheestablishmentofsecuritiesaccountsbyQFIIs,broadentheQFIIinvestmentscopetoincludestockfuturesandwarrantsandincreasetheshareholdinglimitinasinglelistedcompanybyalloverseasinvestorsto30%.TheCSRCalsoclarifiedtaxpoliciesforparticipantsintheQFIIschemeinamovetoopenupthemainland’scapitalmarket.
Tofurtherliberalizethecapitalmarket,aswellastoencouragetheinternationalizationoftheRenminbicurrency,theRQFIIschemewaslaunchedinDecember2011.TheRQFIIprogramwasfirstintroducedinHongKongandhasthenbeenexpandedtootherjurisdictionsincludingLuxembourg.UndertheRQFIIprogram,offshoreinvestorsareallowedtoinvestoffshoreRMBintheChinesemainlandsecuritiesmarkets(includingtheinterbankbondmarketandtheexchange-tradedbondmarket).TheChineseauthoritiesalsoeasedtheinvestmentrestrictionsofRQFIIproductstoallowinstitutionstohavemoreflexibilitytodesignthetypesofproductsinaccordancewithmarketconditions.TheprogramalsoopensadoorforlocalChineseassetmanagerstofurtherexploretheirinternationalbusinessbyprovidinganewplayingfield.
On29April2015,thePeople’sBankofChinaannouncedthegrantingofa50billionRMBRQFIIquotatoLuxembourg.Infact,theRQFIIprogramisparticularlyusefulforfundmanagerswhouseLuxembourgasaplatformforcross-borderdistribution.Beforetheannouncement,majorinternationalandChinesefundinitiatorshadalreadysetupRQFIIfundsthroughLuxembourg-domiciledvehiclesusingotherjurisdictions’quotas.
II.QDII,QFIIandRQFII
1 At30June2015,theCSRC(www.csrc.gov.cn)listed59overseasauthorities,andtheCBRClisted63(www.cbrc.gov.cn),whichhadsignedanMOU;Luxembourgislistedonbothwebsites.Asaconsequence,Luxembourg-domiciledUCITSfundsareeligibleforQDIIportfoliospromotedbybanks,fundmanagersandsecuritiesfirmsinChina.
4 Your bridge between Europe and China: Luxembourg
III. Your bridge between the European and Chinese markets: why Luxembourg?
Luxembourg is a natural gateway for investment flows in and out of China.
• ►►Luxembourgisrecognizedastheglobalhubforcross-borderinvestmentfundsofferingChineseassetmanagersaplatformtolaunchaninvestmentfundproductandtodistributeitonacross-borderbasis−i.e.,notonlyinEuropebutbacktoAsiaandacrosstheglobe.
• ►TheMoUsignedbetweentheLuxembourgandChineseregulatorsmakesLuxembourgoneofthefewfinancialcenterstohavesuchanagreement,enablingQDIIstoinvestdirectlyinLuxembourg-regulatedfinancialproducts,includinginvestmentfundsdomiciledinLuxembourg.
• ►►LuxembourgisactivelybuildingrelationshipswithChinaandotherAsiancountriesandhasconcluded14doubletaxationtreatieswithvariousAsiancountriesorregions(includingthePeople’sRepublicofChina,India,Indonesia,Japan,Laos,Malaysia,Mongolia,
Thailand,SriLanka,Singapore,SouthKorea,Vietnam,TaiwanandtheHongKongSpecialAdministrativeRegion).
• Today,Luxembourgisthemostimportanthubforcross-borderRMBbusinessintheEurozone.LuxembourgranksfirstinEuropewhenitcomestoRMBdeposits(61.5billionRMB),loans(61.1billionRMB)andRMBininvestmentfunds(296.3billion).TheLuxembourgStockExchangeisalsotheexchangewithmostDimSumbondslistedinEurope(number:45).2 ThecombinationofthestrengthsofLuxembourgasaleadingglobalinvestmentfundhubandRMB-relatedbusinessdevelopmentcouldofferhugeopportunitiestofundmanagers.
2 Allfiguresasof2014H2.Source:http://www.luxembourgforfinance.com/latest-rmb-figures(accessedon31August2015)
III.YourbridgebetweentheEuropeanandChinesemarkets:whyLuxembourg?
Luxembourg offers investors:
• ►Astrongtraditionofinvestorprotection• ►Astabledemocracyandstrongeconomy:Luxembourg
isafoundingmemberoftheEuropeanUnion• ►Aknowledgeableandresponsiveregulator• ►Proactivelegislation:acloseworkingrelationship
betweenthebusinesscommunity,thegovernmentandlegislatorsthatunderpinsLuxembourg’sinnovativelegalframework
• ►Atraditionoffinancialexpertise
• ►►Auniqueconcentrationofinvestmentfundindustryprofessionalsinallaspectsofproductdevelopment,administrationanddistribution
• ►Extensiveexperienceintechnicalinvestmentfundsolutions,includingmultipleshareclassesandpooling
• Serviceproviderssuchasdepositories,custodians,fundadministrators,fundlawyers,auditfirmsandtaxadvisorsexperiencedincross-borderregistrationofbothUCITSandalternativefunds
61.5 61.1 296.3billion RMB deposits
billion RMB loans
billion RMB investment funds
2
Your bridge between Europe and China: Luxembourg 5
A. UCITS: the global distribution product for Chinese asset managersUndertakingsforCollectiveInvestmentinTransferableSecurities(UCITS)andotherregulatedinvestmentvehiclescontributetothedevelopmentofQDIIandRQFII.Thereasonissimple:investmentfundsareaneasywaytoinvestintheglobalmarket,tappingintoexperiencedassetmanagementspecialistsinworldwidemarketswithouthavingtosetupacomplexbackofficetohandleadministrativetasks.UCITSareopen-endedfundsinvestingintransferablesecurities,suchassharesandbondsthataresubjecttoaharmonizedEUregulatoryregime.Theregimeisdesignedtoofferhighlevelsofinvestorprotectionappropriateforretailinvestors.TheUCITSregimeregulatestheorganization,managementandoversightofsuchfunds,andlaysdownrulesondiversification,liquidityanduseofleverage.
UCITSmaybesetupinan“umbrella”structurewithvarioussubfundscreatedtopursuedifferentstrategiesandtooperateasdistinctentities.Accordingly,aUCITSmayhaveseveralsubfunds,eachofwhichmaypursuedifferentinvestmentpoliciesandattractdifferentinvestors.
UCITSareflexibleandmaytakeacontractual(FCP)oracorporate(SICAV)form.InvestmentfundsthatfulfilltherequirementsoftheUCITSDirectivebenefitfroma“passport”permittingthemtobefreelymarketedthroughouttheEuropean Union.
UCITShaveevolvedfromaEuropeaninvestmentfundproducttoatrulyinternationalproduct;today,the“UCITSbrand”isrenownedglobally.Asaresult,anincreasingnumberofassetmanagersareestablishingUCITSfundswithaclearlydefinedglobaldistributionstrategyinmind.
Luxembourghassuccessfullypositioneditselfasthegloballeaderforcross-borderdistributionofinvestmentfunds,withtheresultthattodayalmost75%ofUCITSfundsdistributedinternationallyaredomiciledinLuxembourg.
AgrowingnumberofcountriesinAsiarecognizetheUCITSasahighquality,wellregulatedandstableinvestmentproductwithsignificantlevelsofinvestorprotection.SuchcountriesthereforepermitthedistributionofUCITSproducts.
0%
10%
20%
30%
40%
50%
60%
70%
80%
73% of all UCITS registered in at least three countries (including home state) are Luxembourg funds
Luxembourg Ireland United Kingdom
France Belgium Germany Others
Source: EY Global Fund Distribution - ey.com/gfd
The main UCITS exporting countries in Europe as of 05/2015
III.YourbridgebetweentheEuropeanandChinesemarkets:whyLuxembourg?
6 Your bridge between Europe and China: Luxembourg
B. Alternative funds: a complete range of products and solutionsWhileUCITSaresavingsvehiclestargetingretailinvestorsanddesignedtoofferthehighestpossibleprotectionofinvestors,otherinvestmentschemesinvestinginassetclasses,suchasrealestate,privateequity,venturecapitalandhedgefunds,falloutsidethescopeoftheUCITSDirective.
FollowingtheUCITSDirectiveregime,theEuropeanUnionhasbeenimplementingaharmonizedregimeregulatingthemanagersofnon-UCITSinvestmentfunds,viatheAlternativeInvestmentFundManagersDirective(AIFMD),withaviewtoincreasinglevelsofinvestorprotection.Non-UCITSenteringintothescopeoftheAIFMDareclassifiedas“alternativeinvestmentfunds”(AIFs).
Currently,thedistributionofAIFsinEuropeverymuchdependsonthelocationoftheinvestmentfundanditsmanager.European-domiciledAIFswithEuropeanmanagersbenefitfromapanEuropeanmarketingpassportregime,whilenon-EuropeanAIFsorthosewithnon-EuropeanmanagersdependoneachtargetedEuropeancountry’sdistributionregulations.Thismay,however,changebefore2018withtheEuropeanUnionallowingnon-Europeanmanagersandinvestmentfunds,dependingontheirgoverningjurisdiction,tobenefitfromthismarketingpassport.
The“AlternativeInvestmentFundManagers”regimeisexpectedtocreateaglobalalternativeinvestmentfundbrandfornon-UCITSfundscomparabletothatcurrentlyexistingforUCITS.LuxembourgiswellpositionedtoreplicatetheLuxembourgUCITSsuccessstoryforthedistributionofalternativefunds,benefitingfromitsreputationandexpertiseasahubforUCITSproducts.
ThevehiclesusedinLuxembourgarethefollowing:• SpecializedInvestmentFund(SIF)• Investmentcompanyinriskcapital(SICAR)• ►Financialholdingcompanies(SOPARFI).These
unregulatedentitiesareusuallyusedfortheefficientstructuringofinvestmentsincombinationwithSIFsorSICARs
SIFsandSICARscantakevariousforms(e.g.,commonfund,InvestmentCompany,limitedliabilityorpubliclimitedcompany,partnership)andcanbeset-uptobetransparentoropaquestructuresfromataxperspective.Forfurtherinformation,seeEY’sInvestment Funds in Luxembourg – A Technical Guide.
III.YourbridgebetweentheEuropeanandChinesemarkets:whyLuxembourg?
Your bridge between Europe and China: Luxembourg 7
C. A hub for expansion into Europe and beyondLuxembourghasalong-standingreputationofbeingtheglobalcenterofcross-borderinvestmentfundmanagement.Therefore,ifaChineseassetmanagerplanstolaunchaninvestmentfundproductandtodistributethisonacross-borderbasis,i.e.,notonlyinEuropebutbacktoAsia,toLatinAmericaandtotheMiddleEast,Luxembourgofferstheidealplatformfortheirdistributionambitions.
Anumberofwell-establishedfactorsmakeLuxembourgtheleadingjurisdiction.TheseincludeLuxembourg’s“brandrecognition”and“trackrecord”inthecross-borderspace
withamarketshareofalmost75%,theexistenceofacenterofexcellenceforitsfundinfrastructureandexpertisetocreateproductscoveringallassetclassesandforanyinvestortype,deepservicingandproductstructuringknow-howinthecross-borderspace,multilingualcapabilitiesand,mostimportantly,averystableeconomic,politicalandregulatoryenvironment.
AnexampleofhowassetmanagersusingLuxembourgUCITSmayexpandtheirinvestorbase:
Chinese asset managers
Subsidiary in Hong Kong Management company(in Luxembourg)
UCITS Investors
Management company
UCITS
Subsidiary in Hong Kong
III.YourbridgebetweentheEuropeanandChinesemarkets:whyLuxembourg?
8 Your bridge between Europe and China: Luxembourg
D. An effective tax regimeAnumberofkeyfeaturesmakeLuxembourgataxefficientplacetoconductbusiness:
• Stableandconsistenttaxlegislation• Accesstoawidevarietyofover75doubletaxation
treaties;thesetypesofagreementsbetweencountriestendtoeliminatethetaxationofthesameincomeintwocountries(i.e.,eliminationofdoubletaxation)
• AccesstoalladvantagesresultingfromEUDirectives• Efficientpossibilitiesforcashrepatriationtoinvestors• Dividendsandcapitalgainsaretaxexemptaccording
totheparticipationexemptionregime• Nowithholdingtaxoninterest,licensefeesand
dividends(ifcertainconditionsaremet)
• Nocapitalduty/stampduty• Managementservicesandadministrationservices
providedbyaLuxembourgserviceprovidertoaLuxembourgfundareVATexemptoroutsidethescopeofVAT
• ►Specialtaxregimeforexpatriatehighlyskilledemployees(ifcertainconditionsaremet)
III.YourbridgebetweentheEuropeanandChinesemarkets:whyLuxembourg?
Your bridge between Europe and China: Luxembourg 9
Examplesofefficientfundstructures
1. Inbound: investing efficiently in China
Greatchoiceoftransparentandopaquefundvehiclesaccommodatingtheneedsofdifferenttypesofinvestors.
Chinese Investors
Equity
Financing(loans)
PropCo
LuxCo
Fund (Luxembourg)
Feedervehicle
Nowithholdingtaxondividendspaidtoinvestors.Nocapitalgainstaxation in Luxembourg upon disposalofsharesinthefund(withrestrictions).
Possibilityforfund-upstructuring(e.g.,viaafeedervehicle).
Structuringofcashrepatriationallowsbringingproceedsbacktothefundwithoutwithholdingtaxes.Nowithholdingtaxonliquidationproceeds.
European investors
Fund (Luxembourg)
LuxCo
China
ManCo
Greatchoiceoftransparentandopaquefundvehiclesaccommodatingtheneedsofdifferenttypes.
TheLuxembourgcompany(LuxCo)maybeinterposedtosegregatevariousinvestmentsandtoallowring-fencingforbanks.Varioustypesofentitiestobeconsideredforforeigninvestmentdependingonvariousfactors,includingnon-taxmotivatedconsiderations.Reducedwithholdingtaxondividends(generally5%underconditions)possibleifpaidto LuxCo.
TheLuxembourgcompany(LuxCo)maybeinterposedtosegregatevariousinvestmentsandtoallowring-fencingforbanks.Varioustypesofentitiestobeconsideredforforeigninvestmentdependingonvariousfactors,includingnon-taxmotivatedconsiderations.Reducedwithholdingtaxondividends(generally5%underconditions)possibleifpaidtoLuxCo.
Structuremaydependonthetypeoffund(e.g.,aninvestmentfundwith, or without a management company).The“management”ofthefundwouldbeexemptfromLuxembourgVAT(withrestrictions).
Feedervehicle
Principallyno,orverylimited,dividendwithholdingtaxationbetweenEUstates.NocapitalgainstaxationinLuxembourgupondisposalofsharesinthefund(withrestrictions).
Structuringofcashrepatriationallowsbringingproceedsbacktothefundwithoutwithholdingtaxes.Nowithholdingtaxonliquidationproceeds.
Possibilityforfund-upstructuring(e.g.,viaafeedervehicle).
2.Outbound:ChineseinvestorsinvestinginEuropeancompaniesusingalternativefundstructures
III.YourbridgebetweentheEuropeanandChinesemarkets:whyLuxembourg?
10 Your bridge between Europe and China: Luxembourg
A broad double taxation treaty network
Formanymanagersandinvestors,awide-reachingdoubletaxationtreaty(DTT)networkisimportantwhenselectinganoverseasjurisdictiontoperformforeigninvestments.TheaimofDTTsistoavoiddoubletaxationandtoencourageinternationaltrade,aswellasflowsofcapitalandlaborbetweenthecontractingjurisdictionsandalsotoprovidecertaintyintaxation;tocombattaxavoidance,taxfraudandtaxevasion;andtoeliminatepossiblediscriminatorytaxation.
ManagerscanthereforebenefitfromDTTstominimizetaxcostsonthereturnsoftheirinvestmentsinAsia,e.g.,withholdingtaxondividends,interestand,possibly,capitalgains.ADTTdoesnotcreateanyadditionaltaxationincomparisonwithdomestictaxlaw.Thus,eveniftheDTTsetsawithholdingtaxof10%maximumoninterestpaymentstoaChineseresidentinvestor,nowithholdingtaxappliesinLuxembourgoninterestpaymentsmadetoChineseresidentinvestorsunderLuxembourgdomestictaxlaw.DTTbenefitsarenotexclusivelyreservedtofullytaxablecompaniesinLuxembourg.
LuxembourgisactivelybuildingrelationshipswithMainlandChinaandotherAsiancountriesandhasconcludedDTTswithvariousAsiancountriesorregions.
LuxembourghasanextensiveDTTnetworkspanningtheworld’smajoreconomies,includingtheUnitedStates,Canada,Brazil,mostEuropeancountries,SouthAfrica,theUnitedArabEmiratesandRussia.
Chinacanalsoactasa“dooropener”forLuxembourgstructurestoothercountriesthathaveaDTTwithmainlandChinabutnotwithLuxembourg(e.g.,Philippines,Macao,Brunei).
III.YourbridgebetweentheEuropeanandChinesemarkets:whyLuxembourg?
Your bridge between Europe and China: Luxembourg 11
E. Luxembourg – Hong Kong, a natural gateway for Chinese investorsInpractice,ChineseassetmanagersgenerallydonotcomedirectlyfromChinatoinvestinEurope.Instead,theyusuallyadopta“stepping-stoneapproach”:ChineseassetmanagersusuallysetuptheirownsubsidiariesinHongKongtofamiliarizethemselveswiththeinternationalregulatoryandoperationalstandardsandbuilduptheirknow-howfromthere.TheythenuseHongKongandtheirlocallyregulatedentitiestolookoutwardsforfurtherdistributioninAsiaandEurope.
TheLuxembourg-HongKongDTTnegotiatedandconcludedbybothjurisdictionshighlightsthebridgebetweenHongKongandLuxembourgasapreferredchannelforChineseinvestmentsinEurope,combiningtwofavorabletaxregimes.HongKonghasalwaysplayedapredominantroleasawindowtotheChinesemarket.IthassubstantiallyincreasedthenumberofDTTssince2010,when5DTTswereinplace.Thisnumberwentupto32signedagreements,ofwhich28wereinforceattheendofJune2015.
IfHongKongcompaniesdobusinessormakeinvestmentsoverseas,theyarethuspotentiallysubjecttosignificanttaxcosts.Suchcostswouldtypicallytaketheformof,interalia,withholdingtaxoninterest,dividends,royalties,orcapitalgains.SinceHongKonghasadoptedafavorableterritorialtaxsystem,suchtaxescangenerallynotberecoveredinHongKong,whichmayleadtofinaltaxcostsforinvestors.
ItispossibletoreducesuchcostsbyusingLuxembourginvestmentvehicles,providingcertainconditionsaremet.TheDTTbetweenLuxembourgandHongKongallowsflexibleandtax-efficientreturnsonprofitsandcashtoHongKonginvestorsandremainsoneofthemostattractiveDTTsinplace.
Mutual recognition of funds between mainland China and Hong Kong
On22May2015,theSecuritiesandFuturesCommissionofHongKong(SFC)andtheChinaSecuritiesRegulatoryCommission(CSRC)signedtheMemorandumofRegulatoryCooperationonMainland-HongKongMutualRecognitionofFunds(MRF).ThismemorandumwillalloweligiblemainlandandHongKongfundstobedistributedineachother’smarketsthroughastreamlinedvettingprocess.Theschemehasbeenimplementedsince1July2015.TheMRFcouldpotentiallyintroducearound850mainlandfundsintotheHongKongmarketandaround100HongKongfundsintothemainlandmarket.
WiththesuccessfullaunchoftheShanghai-HongKongStockConnect(StockConnect)inNovember2014,andthepositivemarketresponse,theannouncementoftheMRFisseenasanotherbreakthroughintheliberalizationofthemainland’sfinancialmarket.ItoffersmoreinvestmentoptionsforboththemainlandandHongKonginvestorstoaccessunparalleledcapitalmarkets.ItalsoopensupapotentialnewchapterindevelopingafundregulatorystandardinAsiaastheMRFbetweenmainlandandHongKongisexpectedtobethefirstofmanyacrossAsia.
Aswithothermainlandfinancialliberalizationschemes(RQFIIandStockConnect),thereismarketexpectationthattheschemewillbeexpandedinthefutureoncetheMRFisproventobesuccessful.MRFisseenasthebeginningofHongKong’sjourneyinbecomingtheassetmanagementhubofAsia,sinceHongKongretailfundsmaybeabletorideonthewaveofexpansiontogetherwithmainlandretailfundstootherjurisdictionssuchasLuxembourg.
32 850 100DTT signed potential mainland
funds introduced into Hong Kong market
potential Hong Kong funds introduce into mainland market
III.YourbridgebetweentheEuropeanandChinesemarkets:whyLuxembourg?
12 Your bridge between Europe and China: Luxembourg
F. The European open-ended fund distribution market in numbers — 2015 insight
33%
32%
22%
4%6%
3%
37%
25%
10%
18%
4%
1% 5%
Market share per asset class in EuropeRetailvs.institutionalbasedonAuM06/2015
Retail share classes(outercircle)€5.91billion
Institutional share classes(innercircle)€1.95billion
EquityFixedincomeMoneymarketAllocation/balancedAlternativeGuaranteedOthers
Annual growth of local distribution markets
-9% -6% -3% 0 3% 12%6%-12% 9%
Bubble scaling for market insight (total net assets)About€500billionAbout€250billion<€50billion
GB
DE
FRCH
ITES
SE
LU
NLIE
AT
NO
BE
DK
FI
PL
PT GR
JE CZ
LI
GG
HU
Themapshowsthestatusand12-monthdevelopmentoftheEuropeanopen-endedfunddistributionmarketyoucanreachwithaLuxembourg-domiciledUCITSorauthorizedAIF.
Europeaninvestors,bothretailandinstitutional,keepmostoftheirassetsinequityandfixedincomeassetclasses.
EYGFDreferstoasetofinnovativeservicesdevelopedbyEYtohelpassetmanagerswiththecross-borderdistributionandregistrationoftheirUCITS,AIFsandothercollectiveinvestmentschemes.ItcoversallkeydistributionmarketsinEurope,Asia,LatinAmerica,AfricaandtheMiddleEast.
Formoreinformationvisit:ey.com/gfd
Source: EY Global Fund Distribution — ey.com/gfd
III.YourbridgebetweentheEuropeanandChinesemarkets:whyLuxembourg?
Your bridge between Europe and China: Luxembourg 13
-20
-10
0
10
20
30
40
50
DE FR GB IT CH ES SE LU NL IE AT NO DK BE FI PT
Net fund flows per country of distribution Allocationperfunddomicile07/2014—06/2015excludingmoneymarketfunds
OtherdomicilesIEdomiciledLUdomiciledDomesticfunds
€ bi
llion
s
-60
-40
-20
0
20
40
60
80
100
1 2 3 4 5 6 7
Net fund flows per SRRI class YtDandone-yearanalysis
€ bi
llion
s
SRRI classificationNetfundflows07/2014-06/2015(1-Yr)Netfundflows01/2015-06/2015(YtD)
-60
-40
-20
0
20
40
60
80
07/2014 08/2014 09/2014 10/2014 11/2014 12/2014 01/2015 02/2015 03/2015 04/2015 05/2015 06/2015
Monthly net fund flows per asset class in EuropeAllocationperassetclass07/2014—06/2015
€ bi
llion
s
EquityMoneymarketAlternativeOthers
FixedincomeAllocation/balancedGuaranteed
32% 31%
48%
24%
39%
23%
51%
25%
42%
32% 31%
41% 40%
27%
42%
26%
27%23%
20%
34%
35%
29%
22%
31%
29%
32% 37%
38% 44%
18%
37%
35%
14% 28%
12%
7%
7%
11%
6%
6%
13%
16%6%
13% 4%
3%
12%
12%
13%
10% 11%
27%
11%
23%
13%
24%
10%
7%
11%
5%7%
45%
5%
19%
14%9% 9% 7% 8%
13%7%
14%6%
12%16%
3% 5% 7%4%
8%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
DE FR GB IT CH ES SE LU NL IE AT NO DK BE FI PT
European market DNAMarketshareperassetclassbasedonAuM06/2015forselectedEuropeandistributionmarkets
EquityFixedincomeMoneymarketAllocation/balancedOthers
*Marketsharesmaynotsumto100%duetorounding
Theaverageinvestmentprofileisdifferentpercountryofdistribution,reflectingdifferencesintermsoftax,localpreferencesandriskappetite.
ThroughouttheEuropeanmarketsLuxembourg-domiciledfundsmanagedtoattractthehighestnetinflowsofinvestors’money.
Europeaninvestorskepttheirappetiteforfundswithallocation/balancedinvestmentstrategiesduringthe12-monthperiodleadinguptoJune2015.
EuropeaninvestorsfavorfundswithSRRI3and4riskcategories.Verylowandveryhighriskstrategieshavenotattractedasignificantamountofinvestment.
Source: EY Global Fund Distribution - ey.com/gfd
Due to their volatile nature, money market strategies were excluded from the data.
III.YourbridgebetweentheEuropeanandChinesemarkets:whyLuxembourg?
14 Your bridge between Europe and China: Luxembourg
Glossary
Ashares CompaniesincorporatedinmainlandChinaandtradedonthemainlandA-sharemarkets.AsharesarequotedinRenminbi,andcurrentlyonlymainlandersandselectedforeigninstitutionalinvestorsareallowedtotradethem
AIF AlternativeInvestmentFund
AIFM AlternativeInvestmentFundManagers
AuM AssetsunderManagement
CBRC ChinaBankingRegulatoryCommission
CSRC ChinaSecuritiesRegulatoryCommission
CSSF Commissionforthesupervisionofthefinancialsector,theLuxembourgsupervisoryauthorityforthefinancialsector
FCP Commonfund,anunincorporatedandtax-transparentco-ownershipofassets
DTT ADoubleTaxationTreaty(DTT)eliminatesdoubletaxationofincomeearnedinonecontractingstatebyaresidentoftheother
Institutionalinvestor
Undertakingsandorganizationsthatmanageasizeablenumberoffundsandassets.Thetermcoverscreditinstitutionsandotherfinancialsectorprofessionals,insuranceandre-insuranceundertakings,welfareinstitutionsandpensionfunds,industrialandfinancialgroups,andstructuresputinplacebytheseentitiestomanagesubstantialfundsandassets
MRF Mainland-HongKongMutualRecognitionofFunds
Professionalinvestor AprofessionalinvestorasdefinedwithinthemeaningoftheMarketsinFinancialInstrumentsDirective(MiFID)
QDII QualifiedDomesticInstitutionalInvestor
QFII QualifiedForeignInstitutionalInvestor
RMB Renminbi
RQFII RMBQualifiedForeignInstitutionalInvestor
SICAR Investmentcompanyinriskcapital
SICAV Investmentcompanywithvariablecapital
SIF Aspecialisedinvestmentfund
SOPARFI Financialholdingcompanies–companiesthathave,astheirmaincorporatepurpose,theholdingofparticipationsinothercompanies
StockConnect Shanghai-HongKongStockConnect
UCI Undertakingforcollectiveinvestment
UCITS Undertakingforcollectiveinvestmentintransferablesecurities
Glossary
Your bridge between Europe and China: Luxembourg 15
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Your bridge between Europe and China: Luxembourg 17
Your contacts in Luxembourg
Michael FergusonAsset Management Leader of EY LuxembourgEY EMEIA Regulated Investment Funds [email protected]
Dietmar Klos Financial Services Tax [email protected]
Amanda Yeung (杨咏仪) EMEIA China Business [email protected]
Rafael AguileraEMEIA Wealth & Asset Management Product Strategy and Distribution [email protected]
Your contacts in China
Joyce Xu (徐艳)Greater China Asset Management [email protected]
Gavin Tang (汤 骏)Asset [email protected]
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