Luxembourg is the leading global location for investment funds. Its success in attracting investment funds and becoming a major financial center may be attributed to a number of factors such as:
• reputation of the Luxembourg brand in the investment
• attractive range of investment fund solutions;
• regulatory environment including accessibility,
knowledge and responsiveness of the regulator as well as local practice in areas such as outsourcing;
• political, economic and social environment’s stability as well as stable legal environment and taxation regime;
• ability to achieve tax neutrality for products by considering direct and indirect taxation implications at fund and
• operational factors such as relocation costs, local infrastructure and the qualifications and knowledge of
• central location, language and cultural alignment;
• attractive jurisdiction for institutional investors.
The first Luxembourg fund was established in 1959 and there are now nearly 4,000 funds (referred to as Undertakings for Collective Investments, or UCIs) registered in the jurisdiction. Luxembourg investment funds (except for Reserved Alternative Investment Funds RAIF) are authorized and supervised by the Commission for the Supervision of the Financial Sector (Commission de Surveillance du Secteur Financier, or CSSF).
The Luxembourg fund industry has, since 1988, been successfully represented and promoted by the Association of the Luxembourg Fund Industry (ALFI).
Regulated Luxembourg open-ended investment funds can be established under either of the following regimes:
• Undertakings for Collective Investment in Transferable Securities (UCITS); and
• Alternative Investment Funds (AIFs).
Many Luxembourg investment funds –UCITS and AIFs- benefit from a product passport, enabling them to be marketed to investors in the European Union (EU) and European Economic Area (EEA), following a notification procedure. Marketing of funds, which do not benefit from a product passport is subject to the national regimes of the country where the marketing takes place.
The vast majority of Luxemburg investment funds are retail funds, regulated as UCITS.
The AIFMD regulates the managers of alternative investment funds and its objectives include enhancing investor protection, increasing transparency for investors and regulators, and better managing systemic risks. The directive lays down requirements that must be met, relating to authorization and registration, minimum capital, marketing, organization, remuneration, conduct of business, conflict of interest, functions, service providers and transparency.
All funds that are in scope of the AIFMD will have to ensure that an authorized AIFM is appointed and identified, or comply with the requirements of the AIFMD as an internally managed AIF.
The Directive imposes additional requirements on AIFs relating for example to the depositary, the valuation function, portfolio and risk management, reporting and disclosure to investors, as well as reporting to the regulators.
AIFs are generally set up as Specialized Investment Funds (SIFs) or created under Part II of the Law of December 17, 2010 on undertakings for collective investment (Part II funds).
RAIFs are supervised indirectly under the AIFMD but are not subject to direct approval or supervision by the CSSF. A RAIF must be managed by an authorized AIFM. As such, a RAIF is indirectly supervised through the prudential supervision carried out by the competent authority of its AIFM.
Specialized Investment Funds
The SIF is a regulated, operationally flexible and fiscally efficient investment fund for a well-informed investor base.
The SIF Law of February 13, 2007 was amended by the AIFM Law of 12 July 2013 and is now divided into two parts: (i) general provisions applicable to all SIFs and (ii) specific provisions applicable to SIFs which qualify as AIFs and which are required to be managed by an authorised AIFM. Due to the broad definition of AIFs, most SIFs will qualify as SIF AIFs.
The setting up and launching of a SIF requires the approval of the CSSF and its articles of association, the choice of depositary and information regarding the directors and officers must be submitted to the CSSF prior to the formation of the vehicle.
The SIF is required to constitute an issuing document which must include the information necessary for investors to be able to make an informed judgement. Approval by the CSSF is required for any material change in a SIF’s offering documents.
A SIF is required to produce an annual report following a reporting template, providing for a minimum level of disclosure. This annual report has to be provided to the fund’s investors and to the CSSF within six months of the end of the financial year it relates to.
Investment in a SIF is reserved for “well-informed” investors, comprising institutional investors, professional investors and investors who confirm in writing that they are a “well-informed” investor and who either (i) invest a minimum of EUR 125,000 or have (ii) been assessed by a credit institution, investment firm or management company which certifies the investor’s ability to understand the associated risks of investing in the SIF.
There are currently no restrictions as to the eligible assets of a SIF, but SIFs are subject to the principle of risk-spreading. Risk diversification requirements are defined by CSSF Circular n° 07/309 and are less stringent than the ones in application for Part I (UCITS) and Part II funds. SIFs are not subject to detailed investment or borrowing rules.
A SIF may be set up as a single fund or as an umbrella fund consisting of multiple compartments, each with a different portfolio of assets and liabilities. Under certain conditions, a compartment of an umbrella SIF may invest in one or more other compartments of the same SIF. The fund and compartments respectively may have an unlimited number of share classes, depending on the needs of the investors to whom the fund is distributed. The structures may be open-ended or closed-ended.
The net assets of a SIF may not be less than EUR 1,250,000. This minimum must be reached within a period of twelve months following its authorization. Unless otherwise provided for, the assets of a SIF must be valued at fair value.
SIFs must have appropriate risk management systems in place to identify measure, manage and monitor the risks associated with the positions and their contribution to the overall risk profile of the portfolio. Moreover, SIFs are required to establish a conflict of interest policy. Further details are provided by CSSF Regulation N° 12-01.
Reserved Alternative Investment Funds
The RAIF is regulated under the AIFMD, but its creation, launch, offering documentation and activities will not be supervised by the CSSF, making it an attractive vehicle from a cost and time-to-market perspective.
The RAIF will be considered as an AIF, and, as such, will have to be managed by an authorised AIFM within the meaning of the AIFMD. The AIFM may be established in Luxembourg or in another EEA state. A RAIF may not be managed by a registered AIFM.
The RAIF may invest in all asset classes, subject only to the principle of risk-spreading and its shares, units or partnership interests are reserved for well-informed investors (as described above). Assets of the RAIF must be entrusted to a depositary for safe-keeping in Luxembourg. Depositaries of RAIFs must comply with the regime as provided for by the AIFM law. A prime broker which acts as counterparty to a RAIF is only allowed to act as a depositary for that RAIF if it has functionally and hierarchically separated its functions. Finally, an auditor and administrator must be appointed in Luxembourg.
The constitutive documents must expressly provide that the investment vehicle is subject to the RAIF Law.
It is worth mentioning that a phased approach can be chosen, whereby a RAIF can be converted into a SIF later on. In such way, there can be a fast first closing as a RAIF with investors not requiring a product subject to direct supervision and a conversion into a SIF once CSSF approval is obtained.
The RAIF Law specifically refers to the FCP and the SICAV,
but does not limit the legal forms a RAIF may take.
The decision as to create an investment fund in contractual form or in corporate form is primarily based on tax, operational and marketing considerations.
An FCP is a co-proprietorship of asset and which has no legal personality and is governed by a contractual arrangement. The investors’ liability is limited to the amount they have contributed and their rights are represented by units.
It must be managed by a Luxembourg management company on behalf of the joint owners and is deemed in most cases to be tax transparent. The co-ownership is established under Luxembourg law by its constitutional document, the management regulations.
Investment Company (SICAV or SICAF)
A SICAV is a company whose capital is at any time equal to its net assets: its capital increases and decreases automatically as a result of subscriptions or redemptions, and variations in its net asset value, i.e. no formalities are required for increases and decreases in capital. A SICAF is a company subject to formalities (notarization and publication) when changes are made to its capital. In light of this, most funds are set up in the form of a SICAV, rather than a SICAF.
Subject to some restrictions for UCITS and Part II Funds, investment companies can take the form of a:
i. public limited company (Société anonyme – S.A.) or a European company (S.E.);
ii. private limited company (Société à reponsabilité limitée – S.à r.l.);
iii. partnership limited by shares (Société en commandite par actions – S.C.A.);
iv. limited partnership (Société en commandite simple – S.C.S.);
v. special limited partnership (Société en commandite spéciale – S.C.Sp.); or
vi. cooperative company in the form of a public limited company (Société cooperative organisée sous forme de société anonyme).
A SICAV set up as a public limited company or a private limited liability company may be created for a single shareholder, enabling SICAVs to be incorporated by a single entity/person and permitting their creation for a single investor.
A 2010 Law Part II SICAF, a SIF SICAF or a RAIF SICAF may take any commercial company form (see above) or, in addition, the form of an unlimited company (Société en nom collectif).
An investment company must either designate itself as a self-managed investment company or appoint a Luxembourg management company. An investment company is not tax transparent (with limited exceptions).
A SIF (and a RAIF which does not elect to be treated as a SICAR) are tax exempt in Luxembourg with the exception of the registration duty, which is fixed and does not vary with the number of compartments, and an annual subscription tax. There is no stamp duty in Luxembourg on the issuance or transfer of shares or units. Taxation in relation to SIFs and RAIFs (except RAIFs investing exclusively in risk capital) can be summarized as follows:
• Annual subscription tax of 0.01% on the net asset value;
• No capital gains or income tax;
• No wealth tax;
• No capital gains tax for non-resident investors;
• VAT exemption on management fees;
• Access to Luxembourg’s double taxation treaties in some cases; and
• Choice between tax transparent (for FCP, common or special limited partnerships) or non-tax transparent regimes (for other investment companies).
A RAIF (other than an FCP) investing in risk capital will be entitled to opt for a special tax regime, which will be identical to that applicable to the SICAR, and would therefore not be subject to the subscription tax.
The registered office of a UCI (or its management company in case of an FCP) must be in Luxembourg.
An investment company must appoint an approved management company in Luxembourg or designate itself as being self managed. An FCP must be managed by a Luxembourg management company since it has no legal personality.
The AIFM must be authorized if the AIF assets it manages are above the AIFM Law minimum thresholds. In absence of an own AIFM authorization, the management company must designate another management entity as AIFM. This AIFM can be based in Luxembourg or in another EU/EEA member state. The AIFM (whether appointed directly or by the management company) must perform at least the portfolio management and the risk management functions of the AIF.
It is necessary to distinguish between authorized AIFMs, which are required to comply fully with the AIFM Law, and registered AIFMs, which are only required to comply with limited provisions of the AIFM Law.
A depositary must be appointed for each Luxembourg UCI. The appointment and any replacement of the depositary must be approved by the CSSF. Depositary contracts of full AIFM regime AIFs must meet minimum content requirements.
Eligible for appointment as depositary of an AIF, are, in general, bank or other credit institutions with their registered office in Luxembourg. For AIFs holding assets other than financial instruments (i.e. mainly private equity and real estate funds), a specialized professional of the financial sector (PSF) may also act as depositary.
In general, the depositary should perform the following duties:
• Safekeeping of financial instruments and other assets belonging to the investment fund;
• Cash flow monitoring; and
• Carrying out monitoring and oversight duties.
As a general rule, the depositary is liable to an AIF, or its investors, for the loss of financial instruments held in custody, irrespective of whether custody of assets has been delegated to a third party.
Administration is one of the management company’s or AIFM’s functions, but in practice is generally delegated to a third party administrator. The administrator must be located in Luxembourg and will be appointed to carry out the activities of:
• Fund administration (covering, for example, accounting services and calculating Net Asset Values);
• Registrar and transfer agent (covering, amongst others, the maintenance of the shareholder or unitholder register, processing of subscriptions and redemptions and carrying out anti-money laundering procedures); and
• Domiciliation agent.
The financial statements of a UCI must be audited by an independent auditor. The auditor of the fund must be based in Luxembourg.
Directors means, in the case of public limited companies and in the case of cooperatives in the form of a public limited company, the members of the Board of Directors, in the case of partnerships, the managers or General Partner, in the case of private limited liabilities companies, the manager(s) and in the case of common funds, the member of the Board of Directors or the managers of the management company.
The SIF Law requires that directors of a SICAV or SICAF are of good reputation and are sufficiently experienced in relation to the type of business carried out by the SIF. The directors are not subject to any residency requirements. In practice, the appraisal of the CSSF will consider the qualifications and experience of the management team in its entirety. The board of directors controls the day-to-day affairs of the investment company and is responsible for the investments and the appointment and supervision of its service providers.
A RAIF must be managed by an authorized AIFM. Unlike a SIF, a RAIF cannot be a non-AIF, nor can it be managed by a simplified registration regime AIFM. The AIFM may be established in Luxembourg, in another member state of the EU, or located in a third country, once the AIFMD passport is available in that third country.