Fund Management Services: Considerations from a (Luxembourg) Transfer Pricing Perspective

Luxembourg is the largest domicile for investment funds in Europe and the second largest fund centre worldwide (after the United States). Investment funds can be defined as collective investment vehicles which are created for the purpose of gathering investors’ capital and investing that capital in a portfolio of assets.

Investment funds may be divided into two broad categories:

  • Undertakings for collective investment in transferable securities (“UCITS”) which invest into financial instruments such as stocks, bonds and other securities; and
  • Alternative investment funds (“AIF”) which are created for different types of investments such as Private Equity, Venture Capital, Real Estate and Infrastructure investments.

All funds have in common that they are managed in one way or another by an investment manager. However, the organisation of fund management services may vary significantly from one case to another and involve two or more related parties (management companies, advisory companies, etc.).

When fund management services involve controlled transactions between related parties, it is crucial that the parties to these transactions are remunerated at arm’s length. Given that the overall amount of fees for fund management services typically ranges between 1% and 2% of the assets under management (or commitments as the case may be), fund management services are frequently material transactions. Therefore, it is not surprising that the transfer pricing of fund management services is increasingly more in the focus of the Luxembourg tax authorities.