Pole Position for a New European Domicile?
May 19, 2003
Dublin and Luxembourg are currently the two leading domiciles for funds in Europe, much as Delaware is in the U.S. They offer incredibly favorable tax rates, prestige, experience, geographic location and a skilled, English-speaking labor force. But many believe cheaper labor costs and equally favorable taxation could allow another country to gain prominence in the field.
Luxembourg and Dublin are operating from clear positions of strength, most notably in terms of taxes. Sean Cook, managing director of Brown Brothers Harriman in Luxembourg, said the nation's corporate taxation has been as low as 8% in the past couple of years.
According to Sean Pairceir, managing director of Brown Brothers Harriman in Dublin, Dublin and Luxembourg's appeal extends beyond tax incentives. Having become the premier European domiciles over the past 20 years, the two locales have built up a tremendous level of expertise and reputation. "Call it branding," Pairceir said.
What makes Dublin and Luxembourg stand out so far in front of the pack, especially when cities like London offer some of the same geographical and language benefits? Taxes and regulation.
London, currently the third-biggest domicile in Europe, houses only 2% to 3% of funds in Europe, making it a very distant third, Cook said.
"The U.K. would have liked to have thought it [would become] an emerging European domicile when it created open-ended investment company legislation as far back as 1996 or 1997," Cook said. Part of the reason it has been held back is because other financial services industries, including insurance and banking, have vied more successfully than funds for favorable tax treatment, Cook said. On top of that, regulation and taxes have constantly been changing in the U.K.
Gavin Caldwell, head of the investment division for KBC Asset Management Ltd. of Dublin, says Dublin and Luxembourg have worked hard to establish themselves and are high up on a domicile "value chain" of sorts. By this he means a domicile's initial purpose and role can change with further development of the labor force and tax incentives.
Luxembourg found itself not being able to compete with the far lower operating costs of the "Celtic Tiger" in the 1990s, and subsequently lost some business. Dublin has since become quite competitive with Luxembourg, thanks to its well-educated, sizeable workforce, Caldwell said. In fact, he expects that as Dublin evolves in the value chain, more funds will not only be administered in Dublin but managed there, as well.
But do any of the emerging countries in central Europe have a chance to move on in? Caldwell, Cook and Pairceir agree that a country such as Poland, with an increasingly educated yet much cheaper labor force, could soon emerge as a center for outsourcing back-office work.
Building off the notion that Dublin and then Luxembourg are higher up on the value chain, yesterday's back office grunt labor hub could emerge as a hot spot for fund administration pending the forthcoming expansion of the European Union.
"It's going to take a bit of time to build confidence in the regulatory and legislative infrastructure in places like Poland and possibly Slovenia," Cook said. "I wouldn't see Warsaw as a threat in a five to 10-year horizon but potentially after the EU law takes route, then possibly greater opportunities will open up."
One person with a particularly unique perspective on Poland is Nigel Wilson, president and CEO of Global Investment Systems. His firm provides mutual fund portfolio accounting software, which Wilson asserts is a leading indicator of emerging locales for domiciles since it is one of the initial ingredients a company needs before offering a fund. Wilson says he has been getting a lot of inquiries from Poland, which is precisely what happened in Ireland in the 1980s before it established itself as a European domicile, he said.
"Ireland has lost a bit of its cost competitive edge over the last couple of years, and just as Luxembourg was very expensive when Dublin first got into the business, Dublin has now become more expensive," Wilson said. "Inevitably when that happens, people start to look around."
Wilson believes Poland has the necessary infrastructure due to its recent pension-reform legislation. This will only be augmented once Poland is brought into the EU in May 2004 and becomes part of the UCITS directive allowing funds to be sold across all European borders, he said.
But some question whether it is too soon for an Eastern European country such as Poland to emerge as a fund domicile due to its roots in Communism and economic turmoil as recently as seven years ago.
Wilson dismissed such drawbacks, saying, "The Poles have a very highly educated professional class who are very hard-working and entrepreneurial in their motivation. They have come a long way economically since the fall of the Eastern Bloc.
"There is no doubt in my mind that those who are involved in the fund administration business in Poland are very definitely looking beyond their borders after the EU membership to leverage their expertise in fund administration to attract more business."
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