US fund sponsors raising capital in the EU via a Luxembourg special limited partnership (‘SCSp’) require the services of an EU-authorized AIFM to benefit from an EU marketing passport. AIFM services cover at least portfolio management and risk management (with the possibility to delegate one of the two and keep only oversight) and may include ancillary services such as valuation, marketing and fund administration.

In Luxembourg, US sponsors have the choice between hiring a third-party AIFM that already has an AIFM license or setting up their own licensed AIFM.

Under Luxembourg and OECD TP principles, affiliated parties must transact with each other on terms that would have been agreed by third parties in similar circumstances. Hence, it should be ensured that an in-house AIFM is remunerated on arm’s length terms.

Whether a US sponsor uses a third-party or in-house AIFM, the operating model is generally similar in practice: the AIFM retains only risk management (and sometimes valuation services and fund administration) while the portfolio management is delegated to a portfolio manager that is located in the US or Europe where the deal team is based and is affiliated with the US sponsor.

In such scenario, the functional profile of the in-house AIFM is very similar to a third-party AIFMs. The comparable uncontrolled price (‘CUP’) method should be appropriate to substantiate the in-house AIFM’s remuneration. The CUP method compares the price charged in a comparable transaction between third parties (i.e., a third party AIFM in the case at hand) in comparable circumstances. The CUP method may rely on similar transactions entered into by other fund entities of the US sponsor that have appointed a third-party AIFM (internal CUP) or by unrelated parties in the market (external CUP).

If the in-house AIFM takes on additional value-adding functions (portfolio management, investor relations etc.), the CUP method may no longer be suitable and the profit-split method may be more fitting. The latter method is often more complex to apply and to maintain over time.

TP is under scrutiny by the Luxembourg tax authorities, which may challenge TP policies years after a transaction took place. In the current international tax environment, proper TP documentation is indispensable and is more than a compliance matter. Indeed, TP is yet another tool to align fee allocation and economic substance within the structure and to ensure proper risk control, financial capacity and transparency.

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