Master feeder structures have existed in the past in the US predominately for tax reasons. The most common scenario was for promoters to set up a Master Fund based in an offshore jurisdiction and to have feeder funds for US (US domiciled) and non US investors (non US domiciled). In this way the tax status of the US investors will not have an impact on the tax situations of the non US investors. Similarly feeders may be set up for targeted investors. Recently with the introduction of the SIF law in 2007, many SIF feeders have been set up in Luxembourg investing in other Luxembourg SIFs, Cayman or offshore funds.
Likewise, the introduction of master feeder structures in UCITS is precisely aimed at targeted investors. It is anticipated that promoters will set up feeders in different EU countries and set up masters in one jurisdiction such as Luxembourg and Dublin. In doing so, the asset managers will benefit from the economies of scale in managing one portfolio and circumvent the preference of investors to invest in local/national funds.
In accordance with the Law of 17 December 2010, fund managers may set up master feeder structures under certain conditions. Among others,
- An agreement should be in place between the master and the feeder so that the feeder may obtain the necessary information it requires per the law,
- The feeder must invest at least 85% of its assets into the master,
- The master cannot be a feeder,
- An exchange of information agreement between depositaries of the master and the feeder is in place, if different,
- An exchange of information agreement between auditors of the master and the feeder is in place, if different.
By the creation of feeders, the master fund will benefit from :
- Reduced trading costs – no need to trade in several portfolios;
- Reduced administrative burden of managing several portfolios;
- Better financing arrangements;
- Better access to certain markets as a result of ease of compliance with specific tax reporting requirements;
- Promoters and managers promoting their own brand by sitting up feeders investing in masters managed by specialist of a particular strategy.
Overall the benefit of setting up master feeder structures should outweigh the disadvantages, which are mainly the cost (double layers of certain costs), and sometimes the complexity involved.
According to a survey held jointly by KPMG and EFAMA in May/June 2010, 53% of managers intend to take advantage of the master feeder structures. The survey also highlighted that costs, operational issues, investor preference and tax issues will need to be addressed before turning this opportunity into reality.
What are the tax issues? The most obvious tax issues are at the redemption of the master shares by the feeders and withholding taxes if the feeders receive dividends. Access to double taxation treaties may partially mitigate the tax impact.
At the level of Luxembourg:
- Where the master is located in Luxembourg, no withholding tax would arise on payments made by the master fund to the feeder fund, regardless of the latter’s place of residence.
- No tax will be due in Luxembourg for gains realized by foreign feeder funds from the disposal of interests in the Luxembourg master fund.
We have seen interest from asset managers for various reasons already in master feeder structures and several promoters are currently analyzing the operational set up of these structures.
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