Tax Framework of Investment Funds in the European Union: A Comparative Analysis of Portugal, Luxembourg, and Ireland

This study analyses the typology, legal framework and tax implications of investment funds in the European context, with particular emphasis on the distinction between Undertakings for Collective Investment in Transferable Securities (UCITS) and Alternative Investment Funds (AIFs). It examines the structural, regulatory and tax differences between these categories, as well as the challenges of tax neutrality and cross-border tax coordination arising from the fragmentation of national tax systems within the European Union. The research adopts a qualitative and interpretative approach based on legal-dogmatic analysis and a review of the relevant literature, with particular consideration of Directive 2009/65/EC (UCITS Directive), Directive 2011/61/EU (AIFMD), OECD principles and recent scholarship on international taxation. The analysis shows that the European investment fund regime is characterized by a high degree of prudential harmonization, in contrast to persistent fiscal fragmentation among Member States. By applying a common comparison matrix to Portugal, Luxembourg and Ireland, the study demonstrates that formal adherence to fund-level tax neutrality coexists with materially different vehicle-level tax mechanisms: Portugal applies a partial exclusion regime, Luxembourg operates a subscription tax, while Ireland provides a full fund-level exemption. These differences demonstrate that regulatory harmonization under UCITS and AIFMD has not been matched by equivalent convergence in the technical design of vehicle-level tax rules and may therefore produce different investor-level tax outcomes in cross-border contexts. The distinction between UCITS and AIFs remains central to the European regulatory architecture, reflecting different levels of investor protection, liquidity requirements and strategic flexibility, while AIFs are more heterogeneous and may involve greater exposure to illiquidity, leverage and management costs. The findings further indicate that differences in fund-level taxation, withholding mechanisms, treaty access and exit-tax or deemed-disposal rules continue to affect the location and structuring of investment funds, creating practical challenges for fund managers, tax authorities and institutional investors. Although the case law of the Court of Justice of the European Union and international initiatives such as the OECD’s BEPS project have contributed to reducing explicit discrimination and abusive tax practices, prudential harmonization has not eliminated the tax asymmetries that constrain full economic neutrality. The study concludes that the consolidation of a genuine internal market for investment funds requires not only continued prudential harmonization but also stronger tax coordination, particularly through more consistent cross-border tax reporting and financial disclosure requirements.