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Further enhancement of Luxembourg’s fund regime

28 Jul 2023

In short: On 21 July 2023, Luxembourg's Parliament voted in favour of a new fund law that implements a range of legal and tax measures aimed at enhancing the appeal of the Luxembourg financial centre and ensuring its continued prominence as a hub for alternative investment funds. The legislative changes affect five sectoral laws, namely the laws on SICARs, SIFs, RAIFs, UCIs, and AIFMs, and encompass a range of improvements and tax-related provisions (the Amendments). The law has entered into effect as of 28 July 2023 and is published in the Memorial A  n°442, page 1.

In detail: Amidst the ever-changing investment fund industry, and with other global fund centres continuing to progress to attract investors, the Luxembourg Government has introduced changes aimed at enhancing and modernising the country's investment fund offerings. The main purpose of this legislation is to uphold Luxembourg's dominant position as a financial centre and asset management hub. Additionally, the Amendments seek to implement necessary measures that acknowledge the crucial role investment funds play in fulfilling the long-term investment requirements of the European Union. Through these Amendments, the Luxembourg legislature acknowledges the growing interest among alternative investment fund managers in fund products overseen under part II of the law of 17 December 2010 relating to undertakings for collective investment, as amended (Part II of the UCI Law) in the context of the adoption of European Long Term Investment Funds (ELTIF).

In this regard, the Amendments makes modifications to five specific laws concerning investment funds and/or their managers, namely:

  • The law of 15 June 2004 relating to the investment companies in risk capital (SICAR), as amended (the SICAR Law)
  • The law of 13 February 2007 relating to the specialised investment fund, as amended (the SIF Law)
  • The law of 17 December 2010 relating to undertakings for collective investment, as amended (the UCI Law)
  • The law of 23 July 2016 relating to reserved alternative investment fund, as amended (the RAIF Law)
  • The law of 12 July 2013 relating to alternative investment fund managers, as amended (the AIFM Law)

As a result, the key changes to fund legislation are:

  1. Additional structuring options for UCI Part II Funds and other modernisations
  2. Amendment of the definition of a “well-informed investor”
  3. Extension of the deadlines to reach the respective minimum capital requirements
  4. Possibility for AIFMs to use tied agents
  5. Administrative simplifications
  6. Tax provisions

New structuring options and other modernisations

In addition to the form of a public limited company (société anonyme  – S.A.), the Amendments now allow SICAVs subject to Part II of the UCI Law to be formed as:

  • A private limited company (société à responsabilité limitée  – S.à r.l.)
  • A partnership limited by shares (société en commandite par actions  – S.C.A.)
  • A common limited partnership (société en commandite simple  – S.C.S.)
  • A special limited partnership (société en commandite spéciale  – SCSp)
  • A cooperative in the form of a public limited company (société coopérative organisée sous forme de société anonyme - S.A.-SCOP)

This welcomed change gives prospective funds access to a wider range of structuring options, allowing more flexibility in their tax and governance matters.

In addition to this, the UCI Law has been altered to permit Part II funds to value their assets using a methodology other than fair-value, subject to the condition that such an alternative approach is specified in the constitutive documents of the Part II funds.

At last, closed-ended Part II funds are now granted the option to issue shares at a price different from the net asset value, meaning they can opt for a fixed issue price or a price based on a listing price for listed funds in most cases.

Tax provisions

The Amendments introduce changes aimed at modernising the subscription tax regime (taxe d’abonnement) targeting three of its central pillars. Namely, the Amendments:

  1. Waive the requirement for a maximum 90-day weighted residual duration of the portfolio to qualify for the subscription tax exemption for money market funds. This condition has become obsolete due to the portfolio rules for short-term money market funds defined in Regulation (EU) 2017/1131, which already include criteria regarding the residual maturity of the portfolio
  2. Introduce a subscription tax exemption for ELTIFs in accordance with Regulation (EU) 2015/760
  3. Implement a subscription tax exemption for the savers of a pan-European personal pension products established in accordance with Regulation (EU) 2019/1238

These amendments aim to facilitate the emergence of new European fund products like ELTIFs and PEEPs.

Amendment to the definition of “well-informed investor”

The law revises the definition of "well-informed investor" in the SICAR, SIF, and RAIF Laws to establish uniformity among these and align the Luxembourg framework with the European standard. One significant change is the reduction of the existing investment threshold from €125,000 to €100,000 for non-professional. Additionally, the law specifies that the definition of "professional investors" corresponds to the one outlined in the MiFID II Directive.

Extension of the period for reaching the minimum capital

The law prolongs the duration within which funds governed by the SICAR, SIF, and RAIF Laws must attain the minimum capital from 12 to 24 months. Similarly, for Part II of the UCI Law, the term is extended from six to 12 months to align these laws with the demands of the market.

Appointment of tied agents for AIFMs and marketing of AIFs in Luxembourg

Additionally, the Amendments introduce a new provision that allows AIFMs (Alternative Investment Fund Managers) to appoint tied agents, bringing their legal framework in line with that of UCITS management companies.

Further amendments have been made to the AIFM Law to provide clarity regarding the relationship between the AIFM Law and other legal texts concerning the marketing of AIFs to retail investors based or residing in Luxembourg. The Amendments specify that ELTIFs, European Social Entrepreneurship Funds, and European Venture Capital Funds can only be marketed to retail investors in Luxembourg if they meet the conditions set forth in the regulations governing these products.

Moreover, the law clarifies that SICARs and SIFs may be marketed in Luxembourg to retail investors, but only if these investors qualify as well-informed investors. While a RAIF can also benefit from this provision, other Luxembourg AIFs that are not supervised by the CSSF are not eligible for such marketing to retail investors.

Administrative simplifications

The obligation for notarial confirmation of the establishment of a RAIF will be eliminated if the RAIF has already been set up using a notarial deed.

Any changes made to the information registered for a RAIF on the official list of RAIFs must now be communicated to the register of commerce and companies within 20 working days from the date when the modification takes effect.