“The PE industry has continued to grow slowly but steadily, said Vincent Lebrun, partner, Private Equity Leader at PwC Luxembourg. In the first three quarters of 2013, the global M&A activity increased by 5.5% and the total PE buyout values were up 11.6% whereas exit activity (down 20.6%) and European cross-border activity (decrease of 24.6%) were modest.”

The PE industry has seen its fair share of changes brought about by the financial crisis and shifts in regulation. The near future will be no different, as PE players will have to deal with unprecedented regulatory requirements. One of the top challenges facing the industry is BEPS . Prompted by the perception that multinationals are abusing the current international tax environment, the OECD published the BEPS Action Plan, which includes 15 proposed initiatives. As the Action Plan focuses on aligning taxing rights with substance, transfer pricing and taxation should follow the substance and functional arrangements at all levels from funds to portfolio companies to investment managers.

“The risk areas highlighted by BEPS – in particular PE threshold and transfer pricing related to risks and capital – are current issues that need to be addressed now. Private equity houses should review their positions now, particularly in light of AIFMD and other fiscal and regulatory changes,” said Maarten Verjans, partner at PwC Luxembourg.

“As the BEPS agenda progresses there will be greater documentation and disclosure requirements including disclosures of tax rulings and advance pricing agreements, added Fiona Hauger, director at PwC London. All in all, a significant amount of the BEPS Action Plan approach is consistent with the current attitude of fiscal authorities and this will only serve to increase their confidence.”

The fiscal landscape of the Luxembourg PE industry is definitely undergoing change, with the regulatory focus shifting toward substance. Yet again, it seems to be all about the survival of the fittest.

The Luxembourg authorities have been highly committed to positioning Luxembourg as a PE "hub". The transposition of the European AIFMD  into Luxembourg law in July 2013 is a case in point. Legislative changes have also been passed this year to make Luxembourg a prime location for Private Equity, e.g. introduction of the new limited partnership and new tax regime for the taxation of carried interest.

“There is an increasing interest for the new limited partnership structure, especially from US funds and from European investors in search of an "onshore" investment vehicle, said Vincent Ball, partner at PwC Luxembourg. In addition, the marketplace has been very enthusiastic about the new regime on the taxation of carried interest. However, PE players expect the government to expand the carried interest regime and supplement it with new measures that will increase the attractiveness of Luxembourg to the PE industry.”

In its programme, the new Luxembourg government has committed itself to maintaining the SICAR regime and to taking appropriate actions to attract PE investors to Luxembourg. In addition, the corporate income tax rates and the subscription tax rates should remain stable.

Luxembourg will certainly have to renew its efforts to sustain the PE industry - and to adapt itself to a shifting landscape. But the right atmosphere has already been created for the industry and authorities to keep on working hand in hand.