Your bridge between Europe and China: Luxembourg -...

Your bridge between Europe and China: Luxembourg

Association Luxembourgeoise des Fonds d’Investissement - Association of the Luxembourg Fund Industry

In association with

2 Your bridge between Europe and China: Luxembourg

Contents

I – Executive summary 1

II – QDII, QFII and RQFII 2

A.QualifiedDomesticInstitutionalInvestors(QDII) 2

B.QualifiedForeignInstitutionalInvestor(QFII)andRenminbi QualifiedForeignInstitutionalInvestor(RQFII) 3

III – Your bridge between the European and Chinese 4 markets: why Luxembourg? A.UCITS:theglobaldistributionproductforChineseassetmanagers 5

B.Alternativeinvestmentfunds:acompleterangeofproductsandsolutions 6

C.AhubforexpansionintoEuropeandbeyond 7

D.Aneffectivetaxregime 8

E.Luxembourg–HongKong,anaturalgatewayforChineseinvestors 11

F.TheEuropeanopen-endedfunddistributionmarketinnumbers-2015insight 12

Glossary 14

Connect with us 15

Your contacts in Luxembourg 17

Your bridge between Europe and China: Luxembourg 1

I. Executive summary

WelearnfromourongoingdialoguewithChineseassetmanagersthatexpandingoverseasisoneoftheirhighestshort-tomedium-termpriorities.ThispublicationaimstoprovidesomekeyinformationforChineseassetmanagerswhoareconsideringestablishingtheirinternationalpresenceviaLuxembourg.Itprovidesbriefbackgroundinformationonthemaincross-borderprograms,namelythequalifieddomesticinstitutionalinvestors(QDII),thequalifiedforeigninstitutionalinvestors(QFII),andtheRenminbiqualifiedforeigninstitutionalinvestors(RQFII)regimes.

ItsetsoutthereasonsforchoosingLuxembourgasthe“hub”fromwhichfundsmaybedistributedtoEuropeanandinternationalinvestors.InadditionitprovidessomeinformationonthedifferentfundstructuresavailableinLuxembourgforcreatingUCITS,coveringtraditionalequity,fixedincome,moneymarketandETFtypesofproductsandforcreatingalternativefundproductssuchasprivateequity,hedge,realestate,debtandinfrastructure.WehavealsoprovidedsomeexamplesoftypicalfundstructuresanddiscusstheuseofHongKongasthegatewaybetweenLuxembourg and Mainland China.


ToallowChineseinvestorstomakeinvestmentsoutsideMainlandChinawhilealsoopeninguptheChinesesecuritiesmarkettoforeigninvestors,theChinesegovernmentintroducedthreeprograms,theQualifiedDomesticInstitutionalInvestors(QDII)programin2006,theQualifiedForeignInstitutionalInvestors(QFII)programin2002andtheRMBQualifiedForeignInstitutionalInvestors(RQFII)programin2011.LuxembourgandChinahavebeenabletomutuallybenefitfromtheseprograms.Givenitstraditionalstrengthasafunddomicileanddistributionhub,LuxembourgisanaturalgatewayforinvestmentflowsinandoutofChina.China’sQDIIprogramgivesinvestorsaccesstomarketsoutsidethecountry.Luxembourg’sMemorandumofUnderstanding(MoU)qualifiesLuxembourg-regulatedinvestmentfundsaseligibleinvestmentsforQDIIinvesting.TheQFIIprogramoffersforeigninvestorsaccesstosecuritiesmarketsinChina.InternationalassetmanagersgenerallyentertheChinesemarketthroughjointventureswithlocalChinesepartners.TheRQFIIprogramhasbeenwelcomedbyChina’sassetmanagementcompanies,whichaimtofurtherexpandtheirinternationalbusinessbyofferingoffshoreRenminbiproducts.ThisprogramhasbeenfurtherextendedtojurisdictionsotherthanHongKong,whichallowsinternationalassetmanagerstosetupRQFIIfundsoutsideofChina.

A. Qualified Domestic Institutional Investors (QDII)

SinceApril2006,China’sQDIIprogramhasgivenChineseinvestorsaccesstomarketsoutsidethecountry,openingnewopportunitiesforinvestmentfunds.

TheregulationrelatingtotheQDIIprogramwasoutlinedinabriefdocumentissuedbythePeople’sBankofChina(PBOC)inApril2006.Thissetsouttheframeworkforinvestmentsbycommercialbanks.

QDII for commercial banks

InMay2007,theChinaBankingRegulatoryCommission(CBRC)issuedaCircularonAdjustingtheScopeofOverseasInvestmentbyCommercialBanksforOverseasWealthManagementBusinessforClients,allowingonshorecommercialbankstoinvestinoffshoreequitywithincertainlimits.ThissignificantlyexpandedthescopeofinvestmentauthorizedforcommercialbankQDIIs.

QDII for fund managers and securities firms

InJune2007,theChinaSecuritiesRegulatoryCommission(CSRC)issuedtheInterimMeasuresforOverseasSecuritiesInvestmentbyQualifiedDomesticInstitutionalInvestorsanditsimplementationnotice,allowingqualifiedChinesefundmanagementcompaniesandsecuritiesfirmstoinvestinoffshorefinancialmarkets.

Thefundscreatedbyfundmanagersandsecuritiescompaniesmayinvestinawiderangeoffinancialproducts.IncontrasttotheQDIIregimeforcommercialbanks,CSRC’srulesprovidemoreflexibilityintermsofproductstructuring.

II. QDII, QFII and RQFII

II.QDII,QFIIandRQFII


Future development

TheChinesegovernmentannounceditsintentiontoexpandtheQDIIprogramtoindividualstoinvestdirectlyoverseasinthenearfuture(commonlyknownastheQDII2program).DetailsoftheprogramwerenotissuedatthedateofissuanceofthispublicationbutitisexpectedthatQDII2willfirstbepilotedincertainselectedcitiesinChina.ThescopeofinvestmentunderQDII2isexpectedtobebroader.

Access to Luxembourg regulated products

ThesigningoftheMoUbetweenregulatorsinLuxembourgandChinain2008tooktheprocessonestepfurther,allowingChineseinstitutionalinvestorstoinvestinLuxembourg-regulatedinvestmentfundproducts.TheMoUwassignedbetweenLuxembourg’sCommissionfortheSupervisionoftheFinancialSector(CSSF)andtheCBRC.ItallowsQDIIstoinvestonbehalfoftheirclientsinfinancialproductsregulatedbytheCSSF.TheMoUmakesLuxembourgoneofthefewfinancialcenterstohavesuchan agreement1inplace.ThisagreementalsomakesitpossibletodistributeUndertakingsforCollectiveInvestmentinTransferableSecurities(UCITS)inmainlandChinathroughtheQDIIscheme.

QDIIproductsissuedbyChinesefundmanagersshowthattheytendtoallocateinvestmenttotheHongKongmarket,toChineserelatedsecuritiesortotopperformingforeignfunds.Mostbanks’QDIIproductstendtoreplicateanindexandinvestinasingleassetclass,orreplicateaninternationalinvestmentfund,generallyaUCITS.AsaleadingjurisdictionforUCITS,LuxembourgisthenaturalhomeforQDIIproductsinvestinginfunds.

Goingforward,LuxembourgisexpectedtoevolveintothedomicileofchoiceforaninternationallyrecognizedbrandofalternativeinvestmentfundproductsmeetingtherequirementsoftheAlternativeInvestmentFundManagers(AIFM)Directive,includingrealestate,privateequity,venturecapitalandhedgefunds.

B. Qualified Foreign Institutional Investor (QFII) and Renminbi Qualified Foreign Institutional Investor (RQFII)

TheQFIIschemeallowsforeigninvestorsaccesstosecuritiesmarketsinChina.TheQFIIschemeallowsforeigninstitutionstotradeChineseA-sharesandotherfinancialinstrumentsviaspecialaccountsopenedindesignatedcustodianbanks.Inthespiritof“lessercontrol,moreregulation,”inJuly2012,theCSRCreleasedsomemeasurestolowerQFIIeligibilityrequirements:simplifyapplicationprocedures,easerestrictionsontheestablishmentofsecuritiesaccountsbyQFIIs,broadentheQFIIinvestmentscopetoincludestockfuturesandwarrantsandincreasetheshareholdinglimitinasinglelistedcompanybyalloverseasinvestorsto30%.TheCSRCalsoclarifiedtaxpoliciesforparticipantsintheQFIIschemeinamovetoopenupthemainland’scapitalmarket.

Tofurtherliberalizethecapitalmarket,aswellastoencouragetheinternationalizationoftheRenminbicurrency,theRQFIIschemewaslaunchedinDecember2011.TheRQFIIprogramwasfirstintroducedinHongKongandhasthenbeenexpandedtootherjurisdictionsincludingLuxembourg.UndertheRQFIIprogram,offshoreinvestorsareallowedtoinvestoffshoreRMBintheChinesemainlandsecuritiesmarkets(includingtheinterbankbondmarketandtheexchange-tradedbondmarket).TheChineseauthoritiesalsoeasedtheinvestmentrestrictionsofRQFIIproductstoallowinstitutionstohavemoreflexibilitytodesignthetypesofproductsinaccordancewithmarketconditions.TheprogramalsoopensadoorforlocalChineseassetmanagerstofurtherexploretheirinternationalbusinessbyprovidinganewplayingfield.

On29April2015,thePeople’sBankofChinaannouncedthegrantingofa50billionRMBRQFIIquotatoLuxembourg.Infact,theRQFIIprogramisparticularlyusefulforfundmanagerswhouseLuxembourgasaplatformforcross-borderdistribution.Beforetheannouncement,majorinternationalandChinesefundinitiatorshadalreadysetupRQFIIfundsthroughLuxembourg-domiciledvehiclesusingotherjurisdictions’quotas.

II.QDII,QFIIandRQFII

1 At30June2015,theCSRC(www.csrc.gov.cn)listed59overseasauthorities,andtheCBRClisted63(www.cbrc.gov.cn),whichhadsignedanMOU;Luxembourgislistedonbothwebsites.Asaconsequence,Luxembourg-domiciledUCITSfundsareeligibleforQDIIportfoliospromotedbybanks,fundmanagersandsecuritiesfirmsinChina.


III. Your bridge between the European and Chinese markets: why Luxembourg?

Luxembourg is a natural gateway for investment flows in and out of China.

• ►►Luxembourgisrecognizedastheglobalhubforcross-borderinvestmentfundsofferingChineseassetmanagersaplatformtolaunchaninvestmentfundproductandtodistributeitonacross-borderbasis−i.e.,notonlyinEuropebutbacktoAsiaandacrosstheglobe.

• ►TheMoUsignedbetweentheLuxembourgandChineseregulatorsmakesLuxembourgoneofthefewfinancialcenterstohavesuchanagreement,enablingQDIIstoinvestdirectlyinLuxembourg-regulatedfinancialproducts,includinginvestmentfundsdomiciledinLuxembourg.

• ►►LuxembourgisactivelybuildingrelationshipswithChinaandotherAsiancountriesandhasconcluded14doubletaxationtreatieswithvariousAsiancountriesorregions(includingthePeople’sRepublicofChina,India,Indonesia,Japan,Laos,Malaysia,Mongolia,

Thailand,SriLanka,Singapore,SouthKorea,Vietnam,TaiwanandtheHongKongSpecialAdministrativeRegion).

• Today,Luxembourgisthemostimportanthubforcross-borderRMBbusinessintheEurozone.LuxembourgranksfirstinEuropewhenitcomestoRMBdeposits(61.5billionRMB),loans(61.1billionRMB)andRMBininvestmentfunds(296.3billion).TheLuxembourgStockExchangeisalsotheexchangewithmostDimSumbondslistedinEurope(number:45).2 ThecombinationofthestrengthsofLuxembourgasaleadingglobalinvestmentfundhubandRMB-relatedbusinessdevelopmentcouldofferhugeopportunitiestofundmanagers.

2 Allfiguresasof2014H2.Source:http://www.luxembourgforfinance.com/latest-rmb-figures(accessedon31August2015)

III.YourbridgebetweentheEuropeanandChinesemarkets:whyLuxembourg?

Luxembourg offers investors:

• ►Astrongtraditionofinvestorprotection• ►Astabledemocracyandstrongeconomy:Luxembourg

isafoundingmemberoftheEuropeanUnion• ►Aknowledgeableandresponsiveregulator• ►Proactivelegislation:acloseworkingrelationship

betweenthebusinesscommunity,thegovernmentandlegislatorsthatunderpinsLuxembourg’sinnovativelegalframework

• ►Atraditionoffinancialexpertise

• ►►Auniqueconcentrationofinvestmentfundindustryprofessionalsinallaspectsofproductdevelopment,administrationanddistribution

• ►Extensiveexperienceintechnicalinvestmentfundsolutions,includingmultipleshareclassesandpooling

• Serviceproviderssuchasdepositories,custodians,fundadministrators,fundlawyers,auditfirmsandtaxadvisorsexperiencedincross-borderregistrationofbothUCITSandalternativefunds

61.5 61.1 296.3billion RMB deposits

billion RMB loans

billion RMB investment funds

2


A. UCITS: the global distribution product for Chinese asset managersUndertakingsforCollectiveInvestmentinTransferableSecurities(UCITS)andotherregulatedinvestmentvehiclescontributetothedevelopmentofQDIIandRQFII.Thereasonissimple:investmentfundsareaneasywaytoinvestintheglobalmarket,tappingintoexperiencedassetmanagementspecialistsinworldwidemarketswithouthavingtosetupacomplexbackofficetohandleadministrativetasks.UCITSareopen-endedfundsinvestingintransferablesecurities,suchassharesandbondsthataresubjecttoaharmonizedEUregulatoryregime.Theregimeisdesignedtoofferhighlevelsofinvestorprotectionappropriateforretailinvestors.TheUCITSregimeregulatestheorganization,managementandoversightofsuchfunds,andlaysdownrulesondiversification,liquidityanduseofleverage.

UCITSmaybesetupinan“umbrella”structurewithvarioussubfundscreatedtopursuedifferentstrategiesandtooperateasdistinctentities.Accordingly,aUCITSmayhaveseveralsubfunds,eachofwhichmaypursuedifferentinvestmentpoliciesandattractdifferentinvestors.

UCITSareflexibleandmaytakeacontractual(FCP)oracorporate(SICAV)form.InvestmentfundsthatfulfilltherequirementsoftheUCITSDirectivebenefitfroma“passport”permittingthemtobefreelymarketedthroughouttheEuropean Union.

UCITShaveevolvedfromaEuropeaninvestmentfundproducttoatrulyinternationalproduct;today,the“UCITSbrand”isrenownedglobally.Asaresult,anincreasingnumberofassetmanagersareestablishingUCITSfundswithaclearlydefinedglobaldistributionstrategyinmind.

Luxembourghassuccessfullypositioneditselfasthegloballeaderforcross-borderdistributionofinvestmentfunds,withtheresultthattodayalmost75%ofUCITSfundsdistributedinternationallyaredomiciledinLuxembourg.

AgrowingnumberofcountriesinAsiarecognizetheUCITSasahighquality,wellregulatedandstableinvestmentproductwithsignificantlevelsofinvestorprotection.SuchcountriesthereforepermitthedistributionofUCITSproducts.

0%

10%

20%

30%

40%

50%

60%

70%

80%

73% of all UCITS registered in at least three countries (including home state) are Luxembourg funds

Luxembourg Ireland United Kingdom

France Belgium Germany Others

Source: EY Global Fund Distribution - ey.com/gfd

The main UCITS exporting countries in Europe as of 05/2015



B. Alternative funds: a complete range of products and solutionsWhileUCITSaresavingsvehiclestargetingretailinvestorsanddesignedtoofferthehighestpossibleprotectionofinvestors,otherinvestmentschemesinvestinginassetclasses,suchasrealestate,privateequity,venturecapitalandhedgefunds,falloutsidethescopeoftheUCITSDirective.

FollowingtheUCITSDirectiveregime,theEuropeanUnionhasbeenimplementingaharmonizedregimeregulatingthemanagersofnon-UCITSinvestmentfunds,viatheAlternativeInvestmentFundManagersDirective(AIFMD),withaviewtoincreasinglevelsofinvestorprotection.Non-UCITSenteringintothescopeoftheAIFMDareclassifiedas“alternativeinvestmentfunds”(AIFs).

Currently,thedistributionofAIFsinEuropeverymuchdependsonthelocationoftheinvestmentfundanditsmanager.European-domiciledAIFswithEuropeanmanagersbenefitfromapanEuropeanmarketingpassportregime,whilenon-EuropeanAIFsorthosewithnon-EuropeanmanagersdependoneachtargetedEuropeancountry’sdistributionregulations.Thismay,however,changebefore2018withtheEuropeanUnionallowingnon-Europeanmanagersandinvestmentfunds,dependingontheirgoverningjurisdiction,tobenefitfromthismarketingpassport.

The“AlternativeInvestmentFundManagers”regimeisexpectedtocreateaglobalalternativeinvestmentfundbrandfornon-UCITSfundscomparabletothatcurrentlyexistingforUCITS.LuxembourgiswellpositionedtoreplicatetheLuxembourgUCITSsuccessstoryforthedistributionofalternativefunds,benefitingfromitsreputationandexpertiseasahubforUCITSproducts.

ThevehiclesusedinLuxembourgarethefollowing:• SpecializedInvestmentFund(SIF)• Investmentcompanyinriskcapital(SICAR)• ►Financialholdingcompanies(SOPARFI).These

unregulatedentitiesareusuallyusedfortheefficientstructuringofinvestmentsincombinationwithSIFsorSICARs

SIFsandSICARscantakevariousforms(e.g.,commonfund,InvestmentCompany,limitedliabilityorpubliclimitedcompany,partnership)andcanbeset-uptobetransparentoropaquestructuresfromataxperspective.Forfurtherinformation,seeEY’sInvestment Funds in Luxembourg – A Technical Guide.



C. A hub for expansion into Europe and beyondLuxembourghasalong-standingreputationofbeingtheglobalcenterofcross-borderinvestmentfundmanagement.Therefore,ifaChineseassetmanagerplanstolaunchaninvestmentfundproductandtodistributethisonacross-borderbasis,i.e.,notonlyinEuropebutbacktoAsia,toLatinAmericaandtotheMiddleEast,Luxembourgofferstheidealplatformfortheirdistributionambitions.

Anumberofwell-establishedfactorsmakeLuxembourgtheleadingjurisdiction.TheseincludeLuxembourg’s“brandrecognition”and“trackrecord”inthecross-borderspace

withamarketshareofalmost75%,theexistenceofacenterofexcellenceforitsfundinfrastructureandexpertisetocreateproductscoveringallassetclassesandforanyinvestortype,deepservicingandproductstructuringknow-howinthecross-borderspace,multilingualcapabilitiesand,mostimportantly,averystableeconomic,politicalandregulatoryenvironment.

AnexampleofhowassetmanagersusingLuxembourgUCITSmayexpandtheirinvestorbase:

Chinese asset managers

Subsidiary in Hong Kong Management company(in Luxembourg)

UCITS Investors

Management company

UCITS

Subsidiary in Hong Kong



D. An effective tax regimeAnumberofkeyfeaturesmakeLuxembourgataxefficientplacetoconductbusiness:

• Stableandconsistenttaxlegislation• Accesstoawidevarietyofover75doubletaxation

treaties;thesetypesofagreementsbetweencountriestendtoeliminatethetaxationofthesameincomeintwocountries(i.e.,eliminationofdoubletaxation)

• AccesstoalladvantagesresultingfromEUDirectives• Efficientpossibilitiesforcashrepatriationtoinvestors• Dividendsandcapitalgainsaretaxexemptaccording

totheparticipationexemptionregime• Nowithholdingtaxoninterest,licensefeesand

dividends(ifcertainconditionsaremet)

• Nocapitalduty/stampduty• Managementservicesandadministrationservices

providedbyaLuxembourgserviceprovidertoaLuxembourgfundareVATexemptoroutsidethescopeofVAT

• ►Specialtaxregimeforexpatriatehighlyskilledemployees(ifcertainconditionsaremet)



Examplesofefficientfundstructures

1. Inbound: investing efficiently in China

Greatchoiceoftransparentandopaquefundvehiclesaccommodatingtheneedsofdifferenttypesofinvestors.

Chinese Investors

Equity

Financing(loans)

PropCo

LuxCo

Fund (Luxembourg)

Feedervehicle

Nowithholdingtaxondividendspaidtoinvestors.Nocapitalgainstaxation in Luxembourg upon disposalofsharesinthefund(withrestrictions).

Possibilityforfund-upstructuring(e.g.,viaafeedervehicle).

Structuringofcashrepatriationallowsbringingproceedsbacktothefundwithoutwithholdingtaxes.Nowithholdingtaxonliquidationproceeds.

European investors

Fund (Luxembourg)

LuxCo

China

ManCo

Greatchoiceoftransparentandopaquefundvehiclesaccommodatingtheneedsofdifferenttypes.

TheLuxembourgcompany(LuxCo)maybeinterposedtosegregatevariousinvestmentsandtoallowring-fencingforbanks.Varioustypesofentitiestobeconsideredforforeigninvestmentdependingonvariousfactors,includingnon-taxmotivatedconsiderations.Reducedwithholdingtaxondividends(generally5%underconditions)possibleifpaidto LuxCo.

TheLuxembourgcompany(LuxCo)maybeinterposedtosegregatevariousinvestmentsandtoallowring-fencingforbanks.Varioustypesofentitiestobeconsideredforforeigninvestmentdependingonvariousfactors,includingnon-taxmotivatedconsiderations.Reducedwithholdingtaxondividends(generally5%underconditions)possibleifpaidtoLuxCo.

Structuremaydependonthetypeoffund(e.g.,aninvestmentfundwith, or without a management company).The“management”ofthefundwouldbeexemptfromLuxembourgVAT(withrestrictions).

Feedervehicle

Principallyno,orverylimited,dividendwithholdingtaxationbetweenEUstates.NocapitalgainstaxationinLuxembourgupondisposalofsharesinthefund(withrestrictions).

Structuringofcashrepatriationallowsbringingproceedsbacktothefundwithoutwithholdingtaxes.Nowithholdingtaxonliquidationproceeds.

Possibilityforfund-upstructuring(e.g.,viaafeedervehicle).

2.Outbound:ChineseinvestorsinvestinginEuropeancompaniesusingalternativefundstructures



A broad double taxation treaty network

Formanymanagersandinvestors,awide-reachingdoubletaxationtreaty(DTT)networkisimportantwhenselectinganoverseasjurisdictiontoperformforeigninvestments.TheaimofDTTsistoavoiddoubletaxationandtoencourageinternationaltrade,aswellasflowsofcapitalandlaborbetweenthecontractingjurisdictionsandalsotoprovidecertaintyintaxation;tocombattaxavoidance,taxfraudandtaxevasion;andtoeliminatepossiblediscriminatorytaxation.

ManagerscanthereforebenefitfromDTTstominimizetaxcostsonthereturnsoftheirinvestmentsinAsia,e.g.,withholdingtaxondividends,interestand,possibly,capitalgains.ADTTdoesnotcreateanyadditionaltaxationincomparisonwithdomestictaxlaw.Thus,eveniftheDTTsetsawithholdingtaxof10%maximumoninterestpaymentstoaChineseresidentinvestor,nowithholdingtaxappliesinLuxembourgoninterestpaymentsmadetoChineseresidentinvestorsunderLuxembourgdomestictaxlaw.DTTbenefitsarenotexclusivelyreservedtofullytaxablecompaniesinLuxembourg.

LuxembourgisactivelybuildingrelationshipswithMainlandChinaandotherAsiancountriesandhasconcludedDTTswithvariousAsiancountriesorregions.

LuxembourghasanextensiveDTTnetworkspanningtheworld’smajoreconomies,includingtheUnitedStates,Canada,Brazil,mostEuropeancountries,SouthAfrica,theUnitedArabEmiratesandRussia.

Chinacanalsoactasa“dooropener”forLuxembourgstructurestoothercountriesthathaveaDTTwithmainlandChinabutnotwithLuxembourg(e.g.,Philippines,Macao,Brunei).



E. Luxembourg – Hong Kong, a natural gateway for Chinese investorsInpractice,ChineseassetmanagersgenerallydonotcomedirectlyfromChinatoinvestinEurope.Instead,theyusuallyadopta“stepping-stoneapproach”:ChineseassetmanagersusuallysetuptheirownsubsidiariesinHongKongtofamiliarizethemselveswiththeinternationalregulatoryandoperationalstandardsandbuilduptheirknow-howfromthere.TheythenuseHongKongandtheirlocallyregulatedentitiestolookoutwardsforfurtherdistributioninAsiaandEurope.

TheLuxembourg-HongKongDTTnegotiatedandconcludedbybothjurisdictionshighlightsthebridgebetweenHongKongandLuxembourgasapreferredchannelforChineseinvestmentsinEurope,combiningtwofavorabletaxregimes.HongKonghasalwaysplayedapredominantroleasawindowtotheChinesemarket.IthassubstantiallyincreasedthenumberofDTTssince2010,when5DTTswereinplace.Thisnumberwentupto32signedagreements,ofwhich28wereinforceattheendofJune2015.

IfHongKongcompaniesdobusinessormakeinvestmentsoverseas,theyarethuspotentiallysubjecttosignificanttaxcosts.Suchcostswouldtypicallytaketheformof,interalia,withholdingtaxoninterest,dividends,royalties,orcapitalgains.SinceHongKonghasadoptedafavorableterritorialtaxsystem,suchtaxescangenerallynotberecoveredinHongKong,whichmayleadtofinaltaxcostsforinvestors.

ItispossibletoreducesuchcostsbyusingLuxembourginvestmentvehicles,providingcertainconditionsaremet.TheDTTbetweenLuxembourgandHongKongallowsflexibleandtax-efficientreturnsonprofitsandcashtoHongKonginvestorsandremainsoneofthemostattractiveDTTsinplace.

Mutual recognition of funds between mainland China and Hong Kong

On22May2015,theSecuritiesandFuturesCommissionofHongKong(SFC)andtheChinaSecuritiesRegulatoryCommission(CSRC)signedtheMemorandumofRegulatoryCooperationonMainland-HongKongMutualRecognitionofFunds(MRF).ThismemorandumwillalloweligiblemainlandandHongKongfundstobedistributedineachother’smarketsthroughastreamlinedvettingprocess.Theschemehasbeenimplementedsince1July2015.TheMRFcouldpotentiallyintroducearound850mainlandfundsintotheHongKongmarketandaround100HongKongfundsintothemainlandmarket.

WiththesuccessfullaunchoftheShanghai-HongKongStockConnect(StockConnect)inNovember2014,andthepositivemarketresponse,theannouncementoftheMRFisseenasanotherbreakthroughintheliberalizationofthemainland’sfinancialmarket.ItoffersmoreinvestmentoptionsforboththemainlandandHongKonginvestorstoaccessunparalleledcapitalmarkets.ItalsoopensupapotentialnewchapterindevelopingafundregulatorystandardinAsiaastheMRFbetweenmainlandandHongKongisexpectedtobethefirstofmanyacrossAsia.

Aswithothermainlandfinancialliberalizationschemes(RQFIIandStockConnect),thereismarketexpectationthattheschemewillbeexpandedinthefutureoncetheMRFisproventobesuccessful.MRFisseenasthebeginningofHongKong’sjourneyinbecomingtheassetmanagementhubofAsia,sinceHongKongretailfundsmaybeabletorideonthewaveofexpansiontogetherwithmainlandretailfundstootherjurisdictionssuchasLuxembourg.

32 850 100DTT signed potential mainland

funds introduced into Hong Kong market

potential Hong Kong funds introduce into mainland market



F. The European open-ended fund distribution market in numbers — 2015 insight

33%

32%

22%

4%6%

3%

37%

25%

10%

18%

4%

1% 5%

Market share per asset class in EuropeRetailvs.institutionalbasedonAuM06/2015

Retail share classes(outercircle)€5.91billion

Institutional share classes(innercircle)€1.95billion

EquityFixedincomeMoneymarketAllocation/balancedAlternativeGuaranteedOthers

Annual growth of local distribution markets

-9% -6% -3% 0 3% 12%6%-12% 9%

Bubble scaling for market insight (total net assets)About€500billionAbout€250billion<€50billion

GB

DE

FRCH

ITES

SE

LU

NLIE

AT

NO

BE

DK

FI

PL

PT GR

JE CZ

LI

GG

HU

Themapshowsthestatusand12-monthdevelopmentoftheEuropeanopen-endedfunddistributionmarketyoucanreachwithaLuxembourg-domiciledUCITSorauthorizedAIF.

Europeaninvestors,bothretailandinstitutional,keepmostoftheirassetsinequityandfixedincomeassetclasses.

EYGFDreferstoasetofinnovativeservicesdevelopedbyEYtohelpassetmanagerswiththecross-borderdistributionandregistrationoftheirUCITS,AIFsandothercollectiveinvestmentschemes.ItcoversallkeydistributionmarketsinEurope,Asia,LatinAmerica,AfricaandtheMiddleEast.

Formoreinformationvisit:ey.com/gfd

Source: EY Global Fund Distribution — ey.com/gfd



-20

-10

0

10

20

30

40

50

DE FR GB IT CH ES SE LU NL IE AT NO DK BE FI PT

Net fund flows per country of distribution Allocationperfunddomicile07/2014—06/2015excludingmoneymarketfunds

OtherdomicilesIEdomiciledLUdomiciledDomesticfunds

€ bi

llion

s

-60

-40

-20

0

20

40

60

80

100

1 2 3 4 5 6 7

Net fund flows per SRRI class YtDandone-yearanalysis

€ bi

llion

s

SRRI classificationNetfundflows07/2014-06/2015(1-Yr)Netfundflows01/2015-06/2015(YtD)

-60

-40

-20

0

20

40

60

80

07/2014 08/2014 09/2014 10/2014 11/2014 12/2014 01/2015 02/2015 03/2015 04/2015 05/2015 06/2015

Monthly net fund flows per asset class in EuropeAllocationperassetclass07/2014—06/2015

€ bi

llion

s

EquityMoneymarketAlternativeOthers

FixedincomeAllocation/balancedGuaranteed

32% 31%

48%

24%

39%

23%

51%

25%

42%

32% 31%

41% 40%

27%

42%

26%

27%23%

20%

34%

35%

29%

22%

31%

29%

32% 37%

38% 44%

18%

37%

35%

14% 28%

12%

7%

7%

11%

6%

6%

13%

16%6%

13% 4%

3%

12%

12%

13%

10% 11%

27%

11%

23%

13%

24%

10%

7%

11%

5%7%

45%

5%

19%

14%9% 9% 7% 8%

13%7%

14%6%

12%16%

3% 5% 7%4%

8%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

DE FR GB IT CH ES SE LU NL IE AT NO DK BE FI PT

European market DNAMarketshareperassetclassbasedonAuM06/2015forselectedEuropeandistributionmarkets

EquityFixedincomeMoneymarketAllocation/balancedOthers

*Marketsharesmaynotsumto100%duetorounding

Theaverageinvestmentprofileisdifferentpercountryofdistribution,reflectingdifferencesintermsoftax,localpreferencesandriskappetite.

ThroughouttheEuropeanmarketsLuxembourg-domiciledfundsmanagedtoattractthehighestnetinflowsofinvestors’money.

Europeaninvestorskepttheirappetiteforfundswithallocation/balancedinvestmentstrategiesduringthe12-monthperiodleadinguptoJune2015.

EuropeaninvestorsfavorfundswithSRRI3and4riskcategories.Verylowandveryhighriskstrategieshavenotattractedasignificantamountofinvestment.

Source: EY Global Fund Distribution - ey.com/gfd

Due to their volatile nature, money market strategies were excluded from the data.



Glossary

Ashares CompaniesincorporatedinmainlandChinaandtradedonthemainlandA-sharemarkets.AsharesarequotedinRenminbi,andcurrentlyonlymainlandersandselectedforeigninstitutionalinvestorsareallowedtotradethem

AIF AlternativeInvestmentFund

AIFM AlternativeInvestmentFundManagers

AuM AssetsunderManagement

CBRC ChinaBankingRegulatoryCommission

CSRC ChinaSecuritiesRegulatoryCommission

CSSF Commissionforthesupervisionofthefinancialsector,theLuxembourgsupervisoryauthorityforthefinancialsector

FCP Commonfund,anunincorporatedandtax-transparentco-ownershipofassets

DTT ADoubleTaxationTreaty(DTT)eliminatesdoubletaxationofincomeearnedinonecontractingstatebyaresidentoftheother

Institutionalinvestor

Undertakingsandorganizationsthatmanageasizeablenumberoffundsandassets.Thetermcoverscreditinstitutionsandotherfinancialsectorprofessionals,insuranceandre-insuranceundertakings,welfareinstitutionsandpensionfunds,industrialandfinancialgroups,andstructuresputinplacebytheseentitiestomanagesubstantialfundsandassets

MRF Mainland-HongKongMutualRecognitionofFunds

Professionalinvestor AprofessionalinvestorasdefinedwithinthemeaningoftheMarketsinFinancialInstrumentsDirective(MiFID)

QDII QualifiedDomesticInstitutionalInvestor

QFII QualifiedForeignInstitutionalInvestor

RMB Renminbi

RQFII RMBQualifiedForeignInstitutionalInvestor

SICAR Investmentcompanyinriskcapital

SICAV Investmentcompanywithvariablecapital

SIF Aspecialisedinvestmentfund

SOPARFI Financialholdingcompanies–companiesthathave,astheirmaincorporatepurpose,theholdingofparticipationsinothercompanies

StockConnect Shanghai-HongKongStockConnect

UCI Undertakingforcollectiveinvestment

UCITS Undertakingforcollectiveinvestmentintransferablesecurities

Glossary


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