The EU’s Anti-Tax Avoidance Directive 3 (Atad 3) is dominating tax talk in the private market fund sector this year, according to Giuliano Bidoli.

Bidoli is tax director at BC Partners--which is active in the private equity, private credit and real estate spaces and has roughly $40bn in assets under management globally--and a member of the executive committee and board of directors at the Luxembourg Private Equity and Venture Capital Association (LPEA).

The aim of Atad 3 is to crack down on the use of shell vehicles or letterbox companies for dubious tax purposes and to harmonise the rules on substance--meaning that real decision-making and operations are truly taking place in a jurisdiction--across the single market. The European Commission is expected to finalise the rulebook in the coming months, with Atad taking effect on 1 January 2024.

“It concerns all the EU member states, especially the EU member states which are known as a holding location,” said Bidoli. Under Atad 3, an EU jurisdiction could find that a particular entity does not have sufficient substance in a specific country. That means it would be “considered as a shell company” and blocked from using double-taxation treaties, which reduce--often to 0%--tax rates on dividends in the jurisdiction where investors are located, since they are paid where the entity is based.

“And that’s really the discussion today.” The European Commission is still refining the exact rules on substance and corporate governance. Organisations like the LPEA, and its counterparts across Europe, are currently making the case to Brussels for “a similar carve-out that’s already included in pillar two [under Atad 2], which take out all the [special purpose vehicles] and all the companies below the investment fund” from the scope of the directive. In other words, asset managers would not have to report down into portfolio companies. That is the “specific carve-out that we want.”

Toolbox working

Atad 1 and Atad 2 have already “really changed how fund structuring is done,” although Luxembourg fund firms have pretty much fully adapted to its requirements. The main consequence is that asset managers have to be sure they set up the right type of investment vehicles before they go to market.

For example, Luxembourg investment vehicles are often structured so “the partnership itself is tax transparent,” Bidoli said. But “some jurisdictions don’t have the concept of tax transparent partnerships; they assimilate that [Luxembourg entity] as tax opaque... it’s called the reverse hybrid issue, because there’s two ways to look at that. It can impact the taxation of the fund,” possibly including the fund becoming taxable in both Luxembourg and the other jurisdiction.

Does that mean that funds avoid taking investors from certain jurisdictions or avoid making investments in certain places? “No, no, no,” Bidoli replied. “In Luxembourg, we have a huge toolbox [of different] vehicles. So you can use a different vehicle which suits all the needs of the investor, as well as respecting the anti-tax avoidance directive, so that you avoid the negative tax impact. That’s one, I would say, of the advantages of Luxembourg: huge number of different vehicles which can be set up.” Given the Luxembourg toolbox, “no one will say, ‘we don’t accept this investor from that specific jurisdiction.’”