Fundraising in Europe
Navigating the regulatory environment
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Success relies on mastering multi-layered regulation.
The regulation of alternative investment funds (AIF) is shaped by a multi-layered framework that spans global, regional, and local levels across Europe.
Global standards, set by organizations such as the International Organization of Securities Commissions (IOSCO) and the Financial Action Task Force (FATF), provide a foundation for governance, transparency, and anti-money laundering (AML) efforts across all markets.
Regional regulations, particularly within the EU, impose additional compliance requirements, such as the AIFMD and the Markets in Financial Instruments Directive II (MiFID II) frameworks.
International and regional regulatory standards are enforced at local and national levels, with appropriate regulatory bodies ensuring that fund structures, managers, and service providers operate in accordance with these standards at all levels.
This approach fosters a customized yet globally compliant regulatory environment.
Watch Vittoria Faraone, Counsel at A&O Shearman introduce the complexities of navigating the European regulatory environment.
How the three levels of regulation apply across Europe
Regulatory layer
Industry/ global level
Key examples
- Common Reporting Standard (CRS): Overseen by the Organization for Economic Co-operation and Development (OECD), CRS is a global standard for automatic exchange of financial information between tax authorities. U.S. fund managers with investors coming into EU vehicles must provide annual reporting on certain account holders and their tax residency status to ensure tax transparency.
- The Foreign Account Tax Compliance Act (FATCA): FATCA is a U.S. regulation that seeks to prevent tax avoidance by ensuring that the U.S. Internal Revenue Service has access to information on U.S. taxpayers with investments outside the U.S. Pursuant to FATCA, certain non-U.S. vehicles will need to provide the requisite information to their relevant domestic tax authorities or to the U.S. Internal Revenue Service directly. Failure to do so would result in a withholding tax of 30% on U.S. source income.
- Anti-Money Laundering/Counter-Terrorism Financing (AML/CFT): Overseen by FATF, stringent AML/CFT requirements ensuring fund managers implement due diligence procedures, monitoring, and reporting to prevent money laundering and terrorist financing.
- International Organization of Securities Commissions (IOSCO): IOSCO emphasizes strong investor protection measures, which are mirrored in European regulations. U.S. fund managers need to align their fund’s governance, reporting, and operational practices with these standards to ensure compliance and build investor trust.
- Pillar II: Part of the OECD’s global minimum tax framework, Pillar II could increase tax liabilities for U.S. fund managers by imposing a 15% minimum effective tax rate on multinational entities. Managers may need to reassess their fund structures and ensure compliance with local tax rules to avoid penalties or investor concerns. It also highlights the importance of aligning substance requirements with operational presence in the EU to maintain tax efficiency.
Regulatory layer
Regional level
(EU and Non-EU)
Key examples
- Alternative Investment Fund Managers Directive (AIFMD): Empowering the European Securities and Markets Authority (ESMA) and the national authorities to oversee the AIF sector, AIFMD is a significant regulation for U.S. fund managers managing or marketing AIFs in Europe. It governs the management and marketing of AIFs to professional investors in the EU as well as non-EU AIFMs that are managing or marketing AIFs in EU member states which have transposed the AIFMD into national law.
- Alternative Investment Fund Managers Directive II (AIFMD II): This revised version of AIFMD, which is expected to be fully applicable by 2026, caters for new standards such as the requirements for non-EU AIFMs marketing AIFs in the EU, and for AIFs being marketed in the EU to (i) not be domiciled in high risk jurisdictions under the AMLD and (ii) be domiciled in a country which has signed the OECD Model Tax Convention on Income and on Capital with the country where the AIF will be marketed and (iii) to not be included on the EU list of non-cooperative jurisdictions for tax purposes.
- Anti-Money Laundering Directive (AMLD): EU regulation and directives aimed at strengthening measures against money laundering and terrorist financing and aligning the standard across EU member states. The revised version of AMLD (version 6) will introduce harsher penalties, a clearer definition of offenses, and increased cooperation between EU member states, with a new European authority coordinating efforts at European Union level and performing supervision of the most significant financial institutions in the EU.
- Markets in Financial Instruments Directive II (MiFID II): Overseen by ESMA and the national authorities, MiFID II regulates, among many other aspects, the rules relevant to the distribution of financial instruments, including investment funds, across the EU. U.S. fund managers must comply with its rules on investor protection, transparency, and business conduct.
- General Data Protection Regulation (GDPR): EU regulation aimed at protecting the personal data and privacy of individuals within the EU. It provides natural persons with greater control over their personal data by establishing a clear legal framework on how organizations should collect, store, process, and transfer personal data outside of the European Economic Area (EEA). The transfer of personal data to the U.S., therefore, requires appropriate safeguards (such as standard contractual clauses approved by the European Commission). GDPR applies where data of EU individuals are monitored or when a non-EU entity offers (i.e. directs) its products or services to EU-based individuals.
- The Sustainable Finance Disclosure Regulation (SFDR) and the Taxonomy Regulation: Overseen by the European Securities & Markets Authority (ESMA) and the national authorities, this framework of regulations impose requirements on fund managers regarding sustainability-related disclosures (including non-EU AIFMs for AIFs marketed in the EU). This includes harmonized rules for financial market participants regarding transparency in relation to: (i) integration of sustainability risks, (ii) consideration of adverse impacts on sustainability factors in their processes, (iii) sustainability-related information regarding financial products.
- Tax Avoidance Directive 3 (ATAD 3): Inspired by the OECD’s Base Erosion and Profit Shifting (BEPS) Action 2, the objective of this European Directive is to combat hybrid mismatches that may arise as a result of differences in the characterization of an instrument or an entity. Any such mismatches could result in tax leakage at both the level of the EU fund vehicle and in the downstream holding/target structure and as a result, could impact returns to investors.
- Directive on Administrative Cooperation 6 (DAC 6): Overseen by the European Commission, DAC 6 imposes mandatory reporting obligations on certain intermediaries (such as lawyers, accountants, and tax advisers) and, in some cases, taxpayers. It requires disclosure of cross-border tax arrangements that meet specific hallmarks indicative of potential tax avoidance or abuse. U.S. fund managers operating in the EU should assess their transactions to determine whether they trigger DAC 6 reporting requirements, as failure to comply may result in significant penalties.
Regulatory layer
Country level
Key examples
U.S. fund managers must comply with specific regulations in each European country where they operate or market their funds.
These include:
- Local laws implementing EU-level directives and regulations with Luxembourg typically having a very low level of "gold-plating" (adding additional rules or stricter standards when implementing EU directives). This approach often anticipates upcoming regulatory changes, such as those in the AML field.
- Local tax laws
- Registration and licensing requirements
- Specific fund structures allowed in jurisdictions like Luxembourg (e.g., SICAV, RAIF) or Ireland (e.g., ICAV, QIAIF)
- Complying with substance requirements in each jurisdiction to demonstrate appropriate management and control in the jurisdictions in which the entities are domiciled.
Effective fund management requires navigating complex regulation at a global, regional, and country level.
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