Following up on our Domicile Report, here is a quick update on the most popular domiciles around the world.
The following information is provided for illustrative purposes only and is based on publicly available information as of September 2021. The complexity and evolving nature of securities regulations and global tax law may change the analysis below. There may be other factors to consider when choosing where to domicile your Venture Capital fund, so you should consult legal counsel or a tax advisor when determining where and how to structure your fund.
Since releasing our Domicile Report, jurisdictions in the Americas have not seen much radical change. Delaware continues to be the most popular domicile in the Americas and the world, thanks to its superior speed, efficiency and cost.
Delaware is the clear winner out of all the VC domiciles globally. Forming an Alternative Investment Fund is relatively quick, cheap and easy. There are many affordable advisory, tax and legal services available to fund managers.
- Tax uncertainties in the US due to potential changes in legislation
Conclusion: Delaware continues to be a popular domicile for venture capital funds. It has a great set of legal precedents and US Limited Partners will typically expect you to domicile here. Since most LPs within Venture Capital are US citizens there is a high likelihood of this happening. Delaware is also starting to gain traction from fund managers across the globe due to increased KYC and AML measures in other fund domiciles.
The Cayman Islands was “blacklisted” by the EU Council in early 2020. The Cayman Islands has since enacted the Private Funds Law 2020 and implemented new reforms to its framework on Collective Investment Funds in an attempt to shed its “tax haven” moniker, as mentioned in our domicile report. Doing so has meant that the EU Council removed the Cayman Islands from its blacklist. However, this development has resulted in stricter and more onerous compliance measures for fund managers and LPs who are domiciled there.
- Fund managers are required to register with the CIMA and face ongoing operations obligations which adds administrative costs for the fund
- Yearly audits of the fund’s financial statement
- Implement a compliance regime
- Annual fees to CIMA
- Increased KYC & AML regulations
Conclusion: The Caymans, since being blacklisted by Europe and subsequently removed from the blacklist, have lost their appeal to some LPs. Also, the increased costs and onerous compliance procedures make it unviable for funds smaller than $15m.
Notable developments in Asia are coming from Hong Kong which is developing new and streamlining existing regulations. In Singapore, the Monetary Authority of Singapore is also working to streamline the VCFM licensing processes.
After the creation of the Limited Partnership Fund in 2020, Hong Kong is now working to capture formation opportunities after putting into effect new regulations. Fund managers looking to domicile in Hong Kong should note the costs and time associated with the application process.
- GPs need to set up :
- Time to set up a fund is from 3-4 weeks, and an additional 3-4 weeks to set up a bank account
- GPs have unlimited liability under this structure
- Only one LP needs to be listed on the LPF
- Subsequent LPs are anonymous in government filings
- These LPs only have an investment agreement with the LPF
Conclusion: Hong Kong’s time to market is relatively quick for the region, which is seeing an increase in licensing procedures.
Fund managers considering domiciling in Singapore should take note of recent developments and key requirements of the Venture Capital Fund Manager (VCFM) license application process. The Monetary Authority of Singapore (MAS) is actively working to educate emerging fund managers about their requirements and streamline the process.
- VCFM license application process nowadays takes 2-3 months in most cases
- Longer when applicants fail to comply with Monetary Authority of Singapore rules and/or are less responsive to regulators
- To domicile in Singapore, the management company must have at least 2 full-time resident professionals or representatives
- A fund’s director could serve as representative (there is a minimum requirement of 2 directors, at least 1 of whom must reside in Singapore)
- Monetary Authority of Singapore requires GPs to:
- Have a physical office in Singapore
- Fulfill AML/KYC requirements
- Preferably have backgrounds in investing/financial services
Conclusion: Historically, Singapore has been the most popular domicile in Asia. Currently, It is suboptimal for a fund under $15m to domicile in Singapore as the fund formation and operating costs are relatively high. However, MAS is trying to streamline the process for venture funds to set up in Singapore.
The EU Council has gone on to label and blacklist domiciles that have not met guidelines regarding tax evasion, fraud and avoidance as well as money laundering. As a consequence of this crackdown, we are seeing increased KYC and AML procedures across the world. This is substantially increasing the time to market for new funds, making jurisdictions less desirable for both LPs and GPs.
The Netherlands’ “Small Managers Regime” is attractive for new funds with AUM less than €100m. Both the costs of setting up and advisory services are relatively affordable for Europe. However, the speed to market has continued to be an issue across Europe, including in the Netherlands.
- New KYC and AML regulations increasing an already complex process
- It takes around two months to obtain a license under the Small Managers Regime
- Can be extended if additional documentation is required
Conclusion: The Netherlands offers a cost effective domicile for new fund managers in Europe operating under the Small Managers Regime. Advisory and legal services are ample and relatively affordable. However, the regulatory process is complicated and arduous. Nevertheless, with the regulatory climate in the EU, the Netherlands may be the best option for new fund managers.
Though Luxembourg has been one the most reputable domiciles in Europe and has flexible fund vehicles, recently both the cost and time to market have been increasing. Establishing a fund in Luxembourg is two to three times more expensive than Delaware and is mostly viable for large established funds.
- Labeled by the EU alongside the Cayman Islands and Estonia
- Increased KYC regulations by the CSSF, similar to the rest of Europe
- Even with quick and unregulated vehicles such as the RAIF, time to market has gone up considerably
- If a single LP holds more than 10% of the fund, further time-consuming KYC requirements are triggered
- Currently takes a couple of months to set up a fund
- Regulated funds should conduct independent yearly audits and submit accounts and NAV data to the CSSF
Conclusion: Luxembourg’s long-standing reputation was somewhat tarnished due to the EU Council labeling. Additionally, new KYC / AML procedures have significantly increased what was an already expensive licensing process.
Though Estonia has been emerging as a fast and cheap alternative domicile in Europe, there have been some notable developments. In particular, the EU Council and other regulatory entities have put restrictions on Estonia due to reports / allegations of questionable activities. Consequently, fund managers should be warned that the time to set up a fund has increased considerably.
- Labeled the same way as Luxembourg and the Cayman Islands
- In response, EFSA has increased KYC measures and licensing approval process
- Now application process may take longer than 120 days, whereas before it was as quick as a week
- GPs must also gain approval from the FIU
- Funds must have a compliance officer on their payroll
Conclusion: Currently, it is really hard to get a license from EFSA and FIU, as the domicile is cleaning up and conducting reviews of the funds there. The process which was previously seamless has become considerably complicated, long and expensive.
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