Regulatory obstacles #2: Legal challenges of international GP teams

While we should focus on how to attract more capital to the European private equity and venture ecosystem, we have created a regulatory jungle for many fund managers. Regulations have become more extensive, increasingly complex and to a large extent working against the (good) intentions.

And unfortunately, it seems that things keep moving in the wrong direction. In this article, I’ll share my insights and highlight some of the regulatory obstacles for fund managers when raising funds.

Legal challenges of international GP teams

We see an increased number of managers with international teams, having GPs and employees in different jurisdictions.

From a commercial perspective, this makes good sense in order to get the best competencies, cover more geographies, ensuring access to best deals, having the best GPs, ensuring access to capital etc.

From a legal/tax perspective, having an international GP team creates a lot of complexity and managers would need to consider, e.g.:

• • how to avoid that the fund obtains permanent establishment in order country than its home jurisdiction,
  • manager’s local compliance with AIFM,
  • the structure for managers’ local presence (e.g. subsidiary or branch),
  • compliance with local tax and social contribution rules regarding employees,
  • VAT structure for the manager set up,
  • and lastly, the carried interest taxation rules which vary significantly between different jurisdictions and may influence the structure for the main fund.

While international teams should benefit the entire European ecosystem, the different legal and tax regimes offer little to accommodate this commercial no brainer.

Good news is that these obstacles can, one way or the other, be overcome. Bad news is that it comes with complexity, costs and a lot of questions from the tax advisors of the LPs.