Recent moves by the UK and Luxembourg authorities regarding investment funds should allow business to continue mostly as normal despite Brexit, says Patrick Mischo, newly appointed Senior Partner of the law firm Allen & Overy in Luxembourg.
As the end of the Brexit transition looms, Mr Mischo is optimistic that mechanisms have been developed to replicate the mutual market access arrangements between the EU and the UK. The UK government has issued a consultation setting out its proposal for a new process for allowing investment funds domiciled overseas to be sold into the UK after the end of Brexit transition. `This is significant as Luxembourg UCITS represent 73% of foreign funds sold into the UK and 16% of the overall UK market,` Mr Mischo said.
The details still have to be finalised, `but overall this seems to be pretty practical and pragmatic, and it has been welcomed by the industry so far, even if there are some technical issues that are quite contentious which need resolving,` Mr Mischo said. `This is good news in terms of allowing UCITS to keep access and allow UK investors to have a wider range of investment products.`
As for CSSF regulation N° 20-02 he is equally optimistic saying it `gives guidance and reassurance, which is good news for the fund industry,` he said. This regulation establishes a list of countries outside the EU for which the CSSF considers that the supervision and authorisation rules for investment firms are equivalent to those governed by Luxembourg law. Initially this will apply to Singapore, US, Canada, Switzerland, Japan, and Hong Kong, but if the UK maintains its current regulatory regime, it would appear to be an easy step to add the country to this list next year.
Also Circular 20/743 clarifies when an investment service provided by a third-country firm is deemed to be provided in Luxembourg. These rules will be in force pending a final decision to be taken by the Commission. However it should be noted that this only refers to services provided from these countries into Luxembourg. These changes do not grant a cross-border passport allowing firms to operate through the EU.
New momentum for digital services tax
Brexit worries, however, have of course been overshadowed by the onslaught of the coronavirus pandemic. Mischo does not believe governments will increase taxes to repair their deficits in the short run. ‘The Luxembourg government has even said this specifically.’
`So technically speaking, the Covid-19 crisis had no short-term impact on the tax position of corporates, other than in terms of whether this resulted in them making more or less profit,` said Mr Mischo. `It is probably unlikely that governments will increase taxes in the short run – and.`
However over the long term something will have to give, even if the current emergency debts are scheduled to be paid back over many decades. `Obviously it is hard to predict where the burden will fall most,` said Mr Mischo, although he sees the question of taxation of global internet businesses returning to the fore. `Often these firms have navigated the economic crisis pretty well, with many seeing increased activity as people were forced to shop from home. Covid-19 could be a triggering event to move forward quicker than expected on a digital services tax.` This could have implications for the many online businesses with their headquarters in Luxembourg.
This will be easier said than done, particularly since June when the US pulled out of international discussions on this topic, mainly because the firms concerned are US-based. `The European Council said last year that if agreement could not be found by the end of this year at OECD level, the Council might look again into taxation at the European Union level,` Mr Mischo noted. `Yet there is the risk inherent in this of provoking trade conflict with the US,` he added.
New orientation
Mr Mischo was made sole head of the Luxembourg office in early June, when previously this role had been shared. `This does not represent a dramatic change, but alignment with the way we manage most of our offices around the world,` he said. He says his ambition is to continue with the on-going trend of growth and an increased role for the Luxembourg office. `Where 10-15 years ago international transactions would routinely be handled out of London or New York, increasingly we are the lead counsel,` he said. He is also bullish about developments in the innovative technological tools the firm is developing to deal with more routine and standardised tasks. He also expects that being a full service international law firm will be significant as the implications of the coronavirus crisis unwind. Much of this will relate to how businesses restructure, but it might also include litigation as the legal ramifications of this unprecedented crisis play out.