Capital in motion: funds, private equity and tax efficiency

A report on a session at the 15th IBA Annual London Finance and Capital Markets Tax Conference held on 26 and 27 January 2026

Chair

Raul-Angelo Papotti, Chiomenti Studio Legale, Milan

Panellists

Reinout de Boer, Stibbe, Amsterdam

Andrew Howard, Ropes & Gray, London

Annette Keller, McDermott, Will & Schulte, Munich

Ron G Nardini, Vinson & Elkins, New York

Jan Neugebauer, Arendt & Medernach, Luxembourg City

Reporter

Mathieu Lizotte, PwC Canada, Montréal

This report summarises a panel discussion on current issues in private equity investment structuring. The panel was divided into two parts. The first part addressed entity classification and cross-border mismatches. The second part focused on operational and structural challenges, including carried interest, substance and new fund structures.

Entity classification and cross-border mismatches

Issue: Different jurisdictions have varying rules for entity classification, leading to tax mismatches, such as reverse hybrids.

The Netherlands

As of 1 January 2025, the Netherlands adopted a ‘mutual recognition regime’ for limited partnerships, aiming to align with the international consensus on tax transparency and reduce mismatches. This new approach is expected to mitigate issues related to reverse hybrids under the Anti-Tax Avoidance Directive (Council Directive (EU) 2016/1164), known as ATAD 2, and withholding taxes.

A remaining complexity is the ‘fund for joint account’, which has its own set of rules that can lead to ‘surprise opacity’.

Luxembourg

The reverse hybrid rules under ATAD 2 were discussed, where a partnership treated as transparent in its jurisdiction but opaque by a majority investor can be taxed in the partnership’s jurisdiction.

The ‘collective investment vehicle’ (CIV) exemption was highlighted, which requires a fund to be widely held, to hold a diversified portfolio of securities and be regulated.

A recent circular issued by the Luxembourg tax administration provides helpful guidance, including a broad definition of ‘securities’ that includes ‘all other receivables’ (beneficial for debt funds) and clarifications on master-feeder structures and ramp-up phases. Real estate funds, however, do not benefit from this exemption.

United States

A US tax adviser’s practical approach is to use a hybrid feeder for non-US investors (by ‘checking the box’) and to place a corporation underneath a feeder for US investors when corporate status is needed. This adds another entity to the structure.

Operational and structural challenges in private equity investment structuring

Carried interest

Issue: While many jurisdictions offer preferential tax rates for carried interest, the conditions to access these rates vary significantly, creating complexity for international fund managers.

United Kingdom

New rules treat carried interest as trading income. A lower tax rate is available if the fund’s average holding period is 40 months or more.

For internationally mobile recipients, the UK taxes the carry based on the proportion of time the individual worked in the UK for the fund. This creates a significant compliance burden for individuals, who must self-assess and may face double taxation issues.

Luxembourg

A new law, effective as of the week the panel took place, creates an attractive tax regime for carried interest to attract talent to Luxembourg.

It distinguishes between ‘contractual/synthetic carry’ (taxed at around 11.5 per cent) and ‘investment carry’ (where the individual co-invests), which can be structured to achieve zero per cent tax on capital gains. This requires the individual to be a Luxembourg resident.

US (California)

California has taken the position that it can tax a fund manager’s fees if the fund has California investors, regardless of where the manager is located or invests. This applies if the carry is structured as an incentive fee.

Italy

A preferential rate of 26 per cent is available for managers of EU funds, but under strict conditions: a minimum one per cent investment, a European waterfall (investors get money back plus a hurdle before carry is paid) and a five-year holding period. If these requirements are not met, the rate is likely to be 43 per cent.

Germany

If a manager moves to Germany, the carry received is treated as business income from self-employment.

There is a pending court case on whether this income is considered ‘business income’ under tax treaties. A first instance court suggested it is not, which could lead to qualification conflicts with jurisdictions like the UK.

Substance and effective place of management

Issue: Tax authorities are increasingly scrutinising the substance of entities in private equity structures to combat abuse.

EU

Court of Justice of the European Union case law (eg, the Danish cases) has established a set of anti-abuse rules, particularly concerning holding companies. Artificiality alone is not sufficient. The object and purpose of the relevant directive must be considered.

The concept of abuse is dynamic, and a holistic approach should be taken, looking at the overall tax benefit.

Germany

The German tax authorities (particularly in Munich) are critically reviewing fund structures, questioning the ‘effective place of management’ of foreign feeder and blocker entities.

If management and control are found to be in Germany, these foreign entities could be deemed German tax residents, leading to German withholding tax on all payments and potential corporate and trade tax liabilities in Germany. This will create long and complex tax disputes.

UK

The UK takes a more ‘benign’ approach and has not been aggressive in asserting that fund managers’ activities in the UK create a permanent establishment for the funds themselves.

The UK’s safe harbour investment management exemption is being relaxed, making it more user-friendly. Private equity funds are also generally not considered to be ‘trading’ under UK principles.

Current trends in fund structuring

Issue: The private equity market is evolving, with new structures emerging to meet the demands of both general partners (GPs) and limited partners (LPs).

EU

There’s a move from traditional closed-end funds towards more ‘evergreen’ or permanent capital structures.

GP-led transactions, such as continuation funds and net asset value (NAV) loans, are becoming more common to provide liquidity and extend the life of assets.

There is a ‘retailisation’ of alternatives, with hybrid structures like the European Long-Term Investment Fund (ELTIF) allowing retail investors to access private equity. These are also regulated products requiring liquidity measures.

US

Similar trends are also being observed in the US, with a strong focus on:

• evergreen funds: described as the ‘holy grail’, they are attractive to both managers and investors but create significant tax structuring challenges due to changing investor compositions and ongoing investments;
• secondary funds: the main challenge is ensuring a ‘step-up’ in basis for the buyer and avoiding the inheritance of prior tax liabilities;
• infrastructure funds: a growing and attractive asset class, but often involves real estate, which has specific and complex US tax implications for foreign investors (under the Foreign Investment in Real Property Tax Act 1980 (FIRPTA)); and
• loan origination: this continues to be a major trend.