The development of the private equity industry in Luxembourg over the four years since the introduction of the Sicar vehicle for risk capital investment has opened up a wide range of opportunities for service providers in the grand duchy, not least multidisciplinary professional services firms such as Ernst & Young that can bring international experience and local skills to focus on the sector's needs.

Ernst & Young has adopted a different approach from the traditional Big Four structure of audit, tax and consulting services in separate silos. Instead it has assembled a private equity group of around 80 people including auditors, tax advisers, transaction specialists and consultants who work together in one practice, focusing fully on the specific requirements of the industry.

In addition to the structuring of private equity funds domiciled in Luxembourg, using Sicars, SIFs and other vehicles and regulatory structures, an important area of activity is the creation of intermediary vehicles for specific transactions. For example, where a US-based fund is looking to buy a target company in Germany, there is a strong likelihood that this transaction will not be carried out directly but through a Luxembourg holding company.

Luxembourg structures are particularly popular for this role because of the country's very dense network of more than 50 double taxation treaties. These allow the private equity firm to channel revenues, principally capital gains, from the portfolio company back to the fund via Luxembourg, using the treaty network to avoid tax leakage.

Advisory work to the country's burgeoning private equity administration sector is also a growing area of business. With the growth in the number of funds established in Luxembourg, demand is growing for accountancy and administration services, which in other centres such as Jersey and Guernsey tend to be provided by specialised firms.

In Luxembourg the banks and other service providers that traditionally have offered administration services have extensive experience with long-only mutual funds, and to some extent real estate vehicles, but started out with less expertise in the private equity business. These providers are continuing to invest heavily in the establishment of private equity accounting and administration capabilities and Ernst & Young is assisting in areas such as selecting software, recruitment of skilled staff and ongoing training.

Up to four years ago, Luxembourg was only known for tax structuring of international acquisitions using Soparfi holding companies that benefit from the tax treaties, but the Sicar legislation in 2004 has seen private equity funds established in the country for the first time. The next step has been administration to be carried out here and for promoters to set up offices carrying out substantive activities, and the result is a cluster of private equity competences emerging.

With private equity firms from all over the world now opting for Luxembourg, the industry is set to grow tremendously, encouraged by the trend toward better corporate governance and increased transparency. The country is a prime beneficiary as an onshore jurisdiction offering regulated vehicles, a well-established fund industry and a European location. But our clients say one of its biggest advantages is the ease of contact with and reactivity of the regulator and the tax administration. The latter no longer talks about taxpayers, but about clients - reflecting a mindset that will serve the country well in the years to come.

Alain Kinsch is a partner and head of private equity with Ernst & Young in Luxembourg