1 Legislative and regulatory framework
1.1 In broad terms, which legislative and regulatory provisions govern alternative investment funds in your jurisdiction?
Alternative investment funds (AIFs) may be governed by one of the following ‘product laws', depending on the structuring options and regime to which they are subject:
- Part II of the Law of 17 December 2010 relating to undertakings for collective investments (UCIs), as amended (‘UCI Law');
- the Law of 15 June 2004 on investment companies in risk capital (société d'investissement en capital à risque), as amended (‘SICAR Law');
- the Law of 13 February 2007 on specialised investment funds (fonds d'investissement spécialisé), as amended (‘SIF Law'); and
- the law of 23 July 2016 on reserved alternative investment funds (fonds d'investissement alternative réservé), as amended (‘RAIF Law').
AIFs structured in a corporate form or a partnership are also subject to the Law of 10 August 1915 on commercial companies, as amended (‘Companies Law').
AIFs can also be set up in the form of common or special limited partnerships without being subject to any product laws.
The Law of 12 July 2013 on alternative investment fund managers (‘AIFM Law'), which transposed Directive 2011/61/EU of the European Parliament and of the Council of 8 June 2011 on alternative investment fund managers (AIFMD) into Luxembourg law, is a cornerstone statute for the AIF industry, even though it does not directly regulate AIFs themselves, but only their managers.
Circulars and regulations issued by the Commission de Surveillance du Secteur Financier (CSSF), the Luxembourg supervisory authority, may also apply to AIFs which are subject to the prior and ongoing supervision of the CSSF.
1.2 Do any special regimes or provisions apply to specific types of alternative investment funds?
The following special regimes are available in Luxembourg, depending on the structuring requirements of the AIF (eg, types of assets, types of investors, investment restrictions or no limitations, regulated or non-regulated):
- Part II of the UCI Law;
- the SICAR Law - suitable for AIFs with a private equity and venture capital investment strategy. SICARs must invest in assets that qualify as ‘risk capital' and are subject to the prior authorisation and ongoing supervision of the CSSF;
- the SIF Law - suitable for all types of asset classes (including private equity and venture capital). SIFs are subject to risk-spreading requirements and the prior and ongoing supervision of the CSSF; and
- the RAIF Law - this combines the advantages of the SICAR Law and the SIF Law without submitting the AIF to the prior authorisation and ongoing supervision of the CSSF. However, it is reserved to AIFs that have designated a fully authorised AIFM.
Other pan-EU special regimes may be available to some AIFs (and their managers), subject to the fulfilment of specific requirements as to their investment policy, portfolio composition, diversification and type of assets:
- EU Regulation 345/2013 of 17 April 2013 on European venture capital funds, as amended (‘EuVECA Regulation');
- EU Regulation 346/2013 of 17 April 2013 on European social entrepreneurship funds, as amended (‘EuSEF Regulation'); and
- EU Regulation 2015/760 of 29 April 2015 on European long-term investment funds (‘ELTIF Regulation').
1.3 Do the legislative and regulatory provisions governing alternative investment funds have extra-territorial reach?
The purpose of the AIFM Law is to ensure that AIFs can be managed and marketed by AIFMs on a cross-border basis, while ensuring that there is always a nexus with the territory of Luxembourg.
The AIFM Law applies to:
- Luxembourg AIFMs which manage AIFs, irrespective of whether these AIFs are Luxembourg AIFs, EU AIFs or non-EU AIFs; and
- non-EU AIFMs which manage and/or market one or more AIFs established in the European Union or in a third country, where Luxembourg is defined as the member state of reference of the AIFM.
1.4 Are any bilateral, multilateral or supranational instruments in effect in your jurisdiction of relevance to alternative investment funds?
The AIFMD has established a comprehensive legal framework for the authorisation, supervision and oversight of managers of AIFs. Although the AIFMD regulates AIFMs and not AIFs, its provisions are of relevance to the structuring of AIFs.
The AIFMD framework has been complemented by EU Commission Delegated Regulation 231/2013 of 19 December 2012 supplementing the AIFMD with regard to exemptions, general operating conditions, depositaries, leverage, transparency and supervision (‘AIFMD Level 2 Regulation'). Additional AIFMD Level 2 measures have also been adopted - in particular, EU Commission Regulation 447/2013, EU Commission Regulation 448/2013 and EU Commission Regulation (694/2014.
The following pan-European special regimes are directly applicable across all EU member states, including Luxembourg:
- the EuVECA Regulation, which provides a voluntary EU-wide passport for qualifying venture capital funds and their managers;
- the EuSEF Regulation, which provides a voluntary framework and label for social entrepreneurship funds at EU level; and
- the ELTIF Regulation, introducing a pan-European passport to managers of ELTIF funds allowing to market them to professional and retail investors.
1.5 Which bodies are responsible for regulating alternative investment funds in your jurisdiction? What powers do they have?
The CSSF is the Luxembourg supervisory authority of the financial sector, operating under the authority of the minister responsible for the financial sector.
As part of its mission with respect to AIFs, the CSSF is responsible for the authorisation and ongoing prudential supervision of regulated AIFs (ie, SICARs, SIFs and funds subject to Part II of the UCI Law), as well as AIFMs established in Luxembourg and authorised under the AIFM Law, irrespective of whether such AIFM manages and/or markets AIFs in another member state.
The CSSF has the power to make regulations and has supervisory and investigatory powers for the exercise of its functions. The CSSF may impose certain sanctions or administrative measures with respect to AIFMs and AIFs which are subject to its supervision, such as the following:
- to access documents and request additional information (including existing data records and telephone conversations);
- to carry out on-site inspections and investigations;
- to request the cessation of any illegal practice;
- to request the freezing or sequestration of assets;
- to temporarily prohibit the exercise of professional activities with respect to persons subject to its prudential supervision;
- to withdraw the authorisation granted to AIFMs and AIFs subject to its supervision; and
- to transmit information to the state prosecutor for criminal prosecution.
The CSSF may also impose on AIFMs:
- administrative fines of between €250 and €250,000; and
- a temporary or definitive prohibition on carrying out operations or activities.
It may further disclose such penalties to the public.
1.6 To what extent do the regulators cooperate with their counterparts in other jurisdictions?
The CSSF must cooperate with the competent authorities of other member states, as well with the European Securities and Markets Authority (ESMA) and the European Systemic Risk Board, in view of the accomplishment of their respective duties and powers under the AIFMD and AIFM Law, as applicable.
The CSSF shall provide the competent authorities of other member states and ESMA with the information required for the purpose of carrying out their respective duties under the AIFMD.
The CSSF is further authorised to transfer and retain personal data and exchange information with competent authorities of other member states when such information is relevant for them in monitoring the activities of AIFMs within the territory of the European Union.
The CSSF may also be required to cooperate with other competent authorities of member states in the conduct of their supervisory mission, or for an on-the-spot verification or an investigation in Luxembourg.
2 Form and structure
2.1 What types of alternative investment funds are typically found in your jurisdiction?
The main types of alternative investment funds (AIFs) in Luxembourg are as follows:
- hedge funds;
- private equity funds;
- real estate funds;
- infrastructure funds;
- debt funds;
- commodity funds;
- funds of funds;
- master-feeder funds; and
- European long-term investment funds.
2.2 How are these alternative investment funds typically structured?
AIFs in Luxembourg can be structured as regulated funds (ie subject to the prior authorisation and on-going supervision of the Commission de Surveillance du Secteur Financier (CSSF)) or non-regulated funds.
The regulated alternative investment funds include the following:
- société d'investissement en capital à risque (SICAR) – investment company in risk capital;
- fonds d'investissement spécialisé – specialised investment fund (SIF); and
- organisme de placement collectif – undertaking for collective investments (UCI) subject to Part II of the UCI Law.
Non-regulated funds can be structured as:
- société de participation financière, organised in the form of ordinary commercial companies whose corporate purpose is the holding of participations and related activities;
- limited partnerships (which are not subject to the SICAR Law, the SIF Law or Part II of UCI Law) – either as a common limited partnership (société en commandite simple (SCS)) with legal personality or as a special limited partnership (société en commandite spéciale (SCSp)) without a legal personality; or
- fonds d'investissement alternatif réservé – reserved alternative investment fund (RAIF).
2.3 What are the advantages and disadvantages of these different types of structures?
A SIF can invest in all types of assets, whereas a SICAR can only invest in securities representing risk capital.
A SIF is subject to risk-spreading requirements: it cannot invest more than 30% of its assets or commitments in securities of the same type issued by the same issuer. This diversification requirement does not apply to SICARs. Both the SIF and SICAR are reserved to investors that qualify as well-informed investors (as defined in the SIF and SICAR Laws).
The main drawback of SIFs and SICARs is that they are subject to the prior authorisation and ongoing supervision of the CSSF.
The RAIF combines the advantages of the SIF or SICAR legal and tax regime without being itself regulated by the CSSF. The RAIF must appoint an authorised AIF manager (AIFM), which will enable it to use the EU marketing passport. The RAIF is thus quick to set up and to market.
Non-regulated AIFs structured as limited partnerships (eg, the SCS and SCSp not qualifying as a SIF, SICAR or RAIF) can invest in all types of assets. There is no prior authorisation and no ongoing supervision of the CSSF. There are no restrictions as to eligible investors. However, they can be marketed only to professional investors. As long as the assets under management do not exceed the threshold set out in Article 3(2) of the AIFM Law, only a registered AIFM need be appointed and no depositary is required.
2.4 What are the most widely used alternative investment funds structures used in your jurisdiction?
According to the Association of the Luxembourg Fund Industry Private Equity and Venture Capital Investment Fund Survey 2019, there has been a significant increase in the number of unregulated AIFs, such as RAIFs, SCSps and SCSs, which now represent 51% of all Luxembourg private equity funds.
SIFs and SICARs continue to be widely used in the AIF industry for regulated structures. Based on the statistics published by the CSSF, as of 30 November 2019, there were 1,469 SIFs and 252 SICARs.
2.5 Is there a preferred alternative fund structure for particular investment strategies (ie, hedge fund/private credit/private equity)?
AIFs with a hedge fund strategy are commonly structured as SIFs subject to the SIF Law and UCIs under Part II of the UCI Law.
The SICAR and SIF regimes are particularly well suited for private equity and venture capital investments. However, unregulated vehicles structured as a RAIF or a limited partnership (SCSp or SCS) offer a great level of structuring flexibility for AIFs with a private equity strategy.
Loan funds can also be structured as regulated and unregulated. The SIF is the most commonly used regime for loan funds, followed by RAIFs and Part II funds.
2.6 Are alternative investment funds required to have a local administrator appointed?
From a regulatory perspective, all Luxembourg product laws expressly require that the central administration of a Luxembourg AIF be located in the Grand Duchy of Luxembourg. This requirement applies to both regulated funds (SIFs, SICARs, UCIs) and unregulated funds (eg, RAIFs).
Within this scope, the notion of central administration comprises accounting and administrative functions as clarified in Institut Monétaire Luxembourgeois Circular 91/75. In practice, such functions can be performed, as applicable, either internally by the AIF itself, by a third-party service provider or by the AIFM, which can in turn delegate partially or entirely such functions to a third-party service provider. The CSSF may allow, on a case-by-case basis, the outsourcing of certain tasks linked to the function of the central administration located in Luxembourg to an entity located abroad, subject to certain requirements and under the responsibility of the Luxembourg administrator.
The AIFM or third-party service provider acting on its behalf is subject to the AIFM's home member state requirements regarding the administration function, including in the relevant national AIF product rules.
From a corporate law perspective, the concept of central administration - which differs from the above regulatory definition - is also used to determine the nationality of commercial companies (including AIFs). In accordance with the Companies Law, an AIF will be of Luxembourg nationality and subject to Luxembourg law if its domicile is located in Luxembourg, which is deemed to correspond to the seat of its central administration.
2.7 Are alternative investment funds required to appoint a local custodian to hold assets? If yes, what legal protections are in place to protect the alternative investment fund's assets?
An AIF that has appointed a fully authorised AIFM must appoint a single depositary (as opposed to sub-threshold/registered AIFMs, which are not required to appoint a depositary).
For AIFs established in Luxembourg, the depositary must either have its registered office in Luxembourg or have a branch there if its registered office is in another member state. For EU AIFs, the depositary must be established in the home member state of the AIF. For non-EU AIFs, it shall be established in the third country where the AIF is located or in the home member state or the member state of reference of the AIFM.
The AIFM Law includes certain safeguarding provisions aimed at protecting the assets of AIFs, as follows:
- AIFMs cannot act as depositaries;
- The depositary must act honestly, fairly, professionally, independently and in the interests of the AIF and its investors;
- Provisions to avoid conflict of interests between the depositary, the AIF, its investors and the AIFM apply;
- The delegation of the depositary functions is strictly supervised; and
- A two-pronged liability regime applies:
- strict liability of the depositary to the AIF and its investors for loss of financial instruments held in custody; and
- liability for fault - the depositary is liable for all losses suffered by the AIF/investors as a result of the depositary's negligent or intentional failure to properly fulfil its obligations.
2.8 Is it possible for an alternative investment fund to redomicile to your jurisdiction? If yes, what considerations are required and what are the steps involved?
Luxembourg offers straightforward processes for the redomiciliation of foreign companies and funds.
Transfer of registered office to Luxembourg: An AIF may be redomiciled to Luxembourg if it transfers its central administration/registered office to Luxembourg. As a result of such transfer, the entity will be of Luxembourg nationality and subject to Luxembourg laws. Provided that the law of the state of origin so permits, such transfer may be performed without interrupting the legal personality of the entity.
Cross-border merger: The foreign fund is merged into a Luxembourg company against the issuance of shares to the shareholders of the foreign fund. The merger entails, under certain conditions, the universal transfer of assets and liabilities to the Luxembourg entity. The foreign entity will then be dissolved without liquidation.
In both cases, the relevant corporate approvals by the board and the shareholders are needed both in the home country and in Luxembourg.
Additional requirements may apply, depending on the legal form into which the AIF is converted (eg, intervention of a Luxembourg notary, issuance of an interim balance sheet and auditor's report).
The fund documentation of the AIF (ie, offering memorandum, articles of association or limited partnership agreement) will need to be amended in order to reflect the provisions of the applicable Luxembourg laws (including product laws, if applicable).
If it is intended to transform the foreign entity into a Luxembourg regulated AIF, the prior approval of the CSSF will be required.
3.1 Must alternative investment funds be authorised or licensed in your jurisdiction?
Luxembourg alternative investment funds (AIFs) may choose:
- to be governed by a particular legal regime (eg, specialised investment fund (SIF) or société d'investissement en capital à risque (SICAR)) (‘regulated AIFs'); or
- to operate as an unregulated fund (‘unregulated AIFs'):
- with no particular legal regime applicable and governed by Luxembourg corporate law (eg, société en commandite par actions, société en commandite spéciale or société en commandite simple); or
- subject to a particular regime, such as reserved alternative investment funds (RAIFs) subject to the RAIF Law.
Regulated AIFs are subject to the prior authorisation and ongoing prudential supervision of the Luxembourg supervisory authority of the financial sector, the Commission de Surveillance du Secteur Financier (CSSF). Unregulated AIFs do not require the prior authorisation of the CSSF for their set-up and are not subject to the CSSF's ongoing supervision. However, both unregulated and regulated AIFs will fall within the scope of the AIF Manager (AIFM) Law and will be indirectly affected via the regulation of their AIFM.
This entails that, in case of a regulated AIF, there will be two layers of regulation:
- at the level of the AIF itself (via the product); and
- at the level of the AIFM (via the manager).
By contrast, unregulated AIFs are regulated only indirectly via their AIFM. There is no regulation at the level of the AIF (product) itself.
3.2 If so, what criteria must be satisfied to obtain authorisation? Do any restrictions apply in this regard?
Authorisation will be issued once the CSSF has verified that all fund documentation, as well as the application form, documents and information submitted to it, complies with the relevant legal regime (ie, the SICAR or SIF Law) and the relevant CSSF circulars, as applicable.
The requirements will depend on the applicable legal regime under the relevant product law (Part II of the Undertakings for Collective Investment Law, the SIF Law or the SICAR Law).
Please see questions 2.3 and 3.2 below for more details.
3.3 What is the process for obtaining authorisation of alternative investment funds and how long does this usually take?
For regulated AIFs, an application file must be submitted to the CSSF together with all required supporting documents through the CSSF eDesk portal.
The application must contain the following documents and authorisation will be granted only if the CSSF has approved them:
- the draft offering memorandum/prospectus;
- the draft articles of association, limited partnership agreement or management regulations of the AIF and of its general partner (if applicable);
- the agreements with service providers (AIFM, depositary, administrator, investment adviser, investment manager, auditor);
- a description of the risk management process and the conflict of interest policy;
- the business plan and the initiator's structure chart;
- the CSSF anti-money laundering/counter-terrorist financing investment fund market entry form; and
- the completed CSSF questionnaire to set up the AIF (including the form regarding the sub-fund, if applicable).
The members of the board must be of sufficiently good repute and have sufficient experience to perform their duties. To this end, the CSSF will require the following documents from each board member:
- a dated and signed CV;
- a certified copy of his or her ID or passport;
- a declaration of honour form;
- an excerpt from the criminal record(s); and
- a time allocation assessment form.
Additional information and documents may be requested by the CSSF.
The CSSF approval process may vary on a case-by-case basis, but it is generally recommended to count for between six and nine months (more likely 12 and 18 months for a SICAR) as from the date on which the complete CSSF file is submitted.
4 Management and advisory relationships
4.1 How are alternative investment fund managers and advisers typically structured in your jurisdiction?
There are no restrictions as to the legal form to be adopted by an alternative investment fund manager (AIFM) or investment adviser in Luxembourg.
Any legal person whose regular business is managing one or more AIFs can apply to act as an AIFM (authorised or registered).
An AIFM may either be an ‘external AIFM' or an ‘internal AIFM', depending on the legal form of the AIF. Where the legal form of the AIF permits an internal management and the AIF's governing body has chosen not to appoint an external AIFM, the AIF will be ‘internally managed'. The ‘external AIFM' is the legal person appointed by the AIF which will be responsible for managing the AIF. AIFs structured as a common fund (fonds commun de placement) or société en commandite spéciale cannot act as an internal AIFM and must appoint an external AIFM.
The following structures may be used by Luxembourg AIFMs:
- Chapter 16 management companies under the Undertakings for Collective Investment (UCI) Law;
- internally managed UCIs under Part II of the UCI Law;
- internally managed specialised investment funds (SIFs) under the SIF Law;
- internally managed sociétés d'investissement en capital à risque (SICARs) under the SICAR Law;
- any internally managed Luxembourg AIF which is not regulated under any of the product laws; and
- any Luxembourg entity adopting the status of AIFM and appointed in such capacity by an AIF.
In practice, most Luxembourg AIFMs are external AIFMs and are generally set up in the form of a Luxembourg private limited liability company (société à responsabilité limitée (S.àr.l.)) or a public limited liability company (société anonyme (SA)).
4.2 What are the advantages and disadvantages of these different types of structures?
In case of an internal AIFM, the AIF itself will be directly subject to the provisions and requirements of the AIFM Law. The AIF itself will then have to seek authorisation as an AIFM, unless the assets under management do not exceed the threshold set out in Article 3(2) of the AIFM Law.
Internally managed AIFs cannot engage in any activities other than the activities of internal management of the AIF as referred to in Annex I of the AIFM Law.
External AIFMs may engage in the activities listed in Annex I of the AIFM Law (ie, portfolio and risk management, administration and marketing of AIFs and activities relating to the assets of the AIF). They may also, by derogation and under certain conditions, provide the following additional services:
- management of portfolio of investments, including those owned by pension funds and institutions for provision of occupational retirement in accordance with mandates given by investors on a discretionary, client-by-client basis; and
- non-core services (ie, investment advice, safekeeping and administration regarding shares of UCIs, receipt and transmission of orders in relation to financial instruments, only if the investment management functions are provided).
An AIFM which is an internally managed AIF must have an initial capital of at least €300,000; whereas an external AIFM must have an initial capital of at least €125,000, subject to such additional own funds requirements as may be applicable pursuant to the AIFM Law.
4.3 Must alternative investment fund managers be authorised or licensed in your jurisdiction?
An AIFM must either be authorised or registered, based on the following criteria.
An AIFM must be ‘registered' if it manages, directly or indirectly, portfolios of AIFs whose aggregate assets under management do not exceed the following thresholds:
- €100 million, including assets acquired through the use of leverage; or
- €500 million, if the AIFs are not leveraged and have no redemption rights during a period of five years from the date of initial investment in each AIF.
Registered AIFMs are required only to comply with the ‘de minimis' obligations as set out in paragraphs 3 and 4 of Article 3 of the AIFM Law, as follows:
- Register with the Commission de Surveillance du Secteur Financier (CSSF) and identify the AIFs that they manage to the CSSF;
- Comply with minimum reporting obligations (ie, provide the CSSF with regular information on the main trading instruments, the principal exposures and concentrations of the AIFs); and
- If they no longer satisfy the first two conditions set out above, inform the CSSF and apply for authorisation within 30 calendar days.
Registered AIFMs may not benefit from the marketing passport or any other rights granted under the AIFM Law, unless they opt in.
Should any of the above thresholds be exceeded or should the AIFM intend to benefit from all rights under the AIFM Law, it shall apply to the CSSF for an authorisation to act as an ‘authorised AIFM'.
4.4 If so, what criteria must be satisfied to obtain authorisation? Do any restrictions apply in this regard?
Conducting the activities of an AIFM in Luxembourg is subject to the prior authorisation of the CSSF.
The requirements for authorisation as an AIFM include the following:
- shareholding structure (source of financing, qualified holdings): the holder of a qualifying holding shall be of good repute and suitable to exercise its powers;
- governing bodies and senior management:
- the persons who effectively conduct the business of the AIFM shall be of sufficiently good repute and experienced in relation to the investment strategies of the AIF managed by the AIFM;
- their names (and successors) shall be communicated beforehand to the CSSF; and
- other requirements regarding the minimum number, location, qualification, task allocation and incompatibilities must be fulfilled;
- capital requirements (initial share capital, own funds and additional own funds requirements);
- internal governance and internal control (operational functions, risk management, compliance functions and internal audit function);
- location of the head office and registered office in Luxembourg;
- infrastructure (own premises, IT systems, cloud computing, outsourcing and delegation);
- financial and business forecast;
- performance of core functions by the AIFM (portfolio and risk management);
- adequate systems, procedures and policies for conflict of interest management risk management and liquidity management;
- valuation of assets: a proper and independent valuation must be conducted at least once a year by an independent external valuer or the AIFM itself; and
- remuneration policies which are in line with the risk profile of the AIFs that the AIFM manages.
4.5 What is the process for obtaining authorisation and how long does this usually take?
An AIFM seeking authorisation from the CSSF must submit an application to the CSSF that includes the following information:
- the persons effectively conducting the business of the AIFM;
- the identities of the shareholders/members of the AIFM - whether direct or indirect, and whether natural or legal persons - that have qualifying holdings, and the amounts of those holdings;
- a programme of activity setting out the organisational structure of the AIFM, including information on how it intends to comply with its obligations regarding authorisation, operating conditions, organisational requirements, transparency requirements and, where applicable, requirements regarding the use of leverage, acquisition of control of non-listed companies and issuers, marketing conditions, third-country rules and requirements for marketing to retail investors;
- remuneration policies and practices;
- arrangements made for the delegation and sub-delegation of functions to third parties;
- investment strategies;
- location of the master AIF, if the AIF is a feeder AIF;
- management regulation or incorporation documents of each AIF that the AIFM intends to manage; and
- additional information regarding disclosure to investors, as per Article 21 of AIFM Law.
The authorisation process may vary on a case-by-case basis, but it generally takes between 12 and 18 months to obtain authorisation.
Authorisation granted to an AIFM by the CSSF is valid for all EU member states.
Authorised AIFMs are entered on a list by the CSSF. This entry is tantamount to authorisation and the AIFM concerned is notified by the CSSF.
4.6 What other requirements or restrictions apply to alternative investment fund managers and advisers in your jurisdiction?
An authorised AIFM cannot act as depositary and cannot be a credit institution or an investment firm under the Luxembourg Law of 5 April 1993 on the financial sector. However, a registered AIFM can combine the status of credit institution or investment firm under the 1993 law.
An AIFM must, at least, perform portfolio management and risk management functions when managing an AIF.
An AIFM may additionally perform certain ancillary functions set out in Annex I (2) of the AIFM Law (eg, administration, marketing and other activities), but cannot provide solely ancillary services.
Moreover, an external AIFM may additionally provide:
- discretionary portfolio management services on a client-by-client basis; and
- non-core services (eg, investment advice) as set out in Article 5(4) of the AIFM Law.
However, it cannot exclusively provide such additional services; and it cannot provide the non-core services under the second bullet above without providing the services under the first bullet above.
Although AIFMs do not fall within the scope of Directive 2014/65/EU on Markets in Financial Instruments (MiFID II), they may be subject to certain requirements under MiFID II (eg, inducement rules) when they render such additional services.
Investment advisers may also be subject to the MiFID II provisions in addition to Article 24 of the 1993 law (eg, capital base requirements), and must be authorised as professionals of the financial sector in order to provide personal recommendations to clients.
4.7 Can an alternative investment fund manager impose restrictions on the issue, redemption or transfer of interests in the funds under management?
The right to impose any restrictions on the issue, redemption or transfer of interests in AIFs is generally vested in the managing general partner of the AIF or the board of managers/directors of the AIF (in case of an SA or S.à r.l.), and not the AIFM itself.
However, if the AIFM is also the managing general partner or the statutory manager, it can impose restrictions on the issue, redemption or transfer of interests in the AIFs for which it acts in its capacity as managing general partner or statutory manager.
4.8 Are there any requirements regarding the ownership of alternative investment fund managers? If so, please provide details.
The CSSF will grant authorisation to an AIFM if it has received sufficient information in the application for authorisation on the identities of the AIFM's shareholders or members - whether direct or indirect, and whether natural or legal persons - that have qualifying holdings, and on the amounts of those holdings. The final beneficial owner and the possible holdings, subsidiaries and branches of the AIFM, and generally all entities forming part of the group, must also be clearly identified.
The CSSF must be satisfied that the holder of a qualifying holding is of good repute and suitable to exercise its powers in order to ensure the sound and prudent management of the AIFM, assessed in light of the good repute, financial soundness and absence of suspicion of money laundering or terrorist financing of the proposed acquirer, the reputation and professional experience of those who will direct the business of the AIFM and compliance with prudential requirements by the AIFM.
The shareholders must finance the incorporation of the AIFM with their own funds and on their own behalf. Direct shareholders which are legal persons must have own funds at least equivalent to the amount they intend to invest in the AIFM (at cost after deduction of their other holdings). The financing arrangement of the holdings in the AIFM (eg, cash transfer mechanisms at group level) must be described.
The structure chosen for the establishment of a Luxembourg AIFM must be adequately justified and cannot bypass the legal and regulatory anti-money laundering/counter-terrorist financing requirements.
4.9 Can alternative investment fund managers delegate to third-party investment managers or investment advisers? If yes, please provide details of any specific requirements.
An AIFM may, subject to the prior authorisation of the CSSF, delegate the exercise of one or more functions to third parties on its own behalf. The delegation must not result in the AIFM becoming a letterbox entity, and the AIFM must justify the entire delegation structure with objective reasons and effectively monitor the delegated activities on an ongoing basis. The delegate must be qualified and have sufficient resources to perform the tasks, and the persons effectively conducting the business of the delegate must be of good repute and sufficiently experienced.
The two core functions - that is, portfolio management and risk management - can be delegated only to undertakings which are authorised or registered for the purpose of asset management and subject to supervision by or the prior approval of the CSSF. Both functions cannot be delegated in full at the same time. In case of delegation to a third-country undertaking, cooperation between the CSSF and the supervisory authority of this third-country undertaking must be ensured, in addition to the above requirements. No delegation (or sub-delegation) can be made to the depositary or a delegate of the depositary, or to any entity which may give rise to conflict of interest, unless:
- the entity has functionally and hierarchically separated the performance of its portfolio or risk management tasks from other potentially conflicting tasks; and
- the potential conflicts of interest are identified, managed, monitored and disclosed to investors of the AIF.
4.10 Can alternative investment fund manager provide investment management services to clients other than alternative investment funds? If yes, do any additional requirements apply?
As a general rule, an external AIFM shall not engage in activities other than:
- investment management functions; and
- other additional functions performed with respect to AIFs as set out in Annex 1 of the AIFM Law.
However, an external AIFM can perform additional management of undertakings for collective investments in transferable securities, subject to authorisation under Directive 2009/65/EC.
By derogation, an external AIFM may additionally provide management services of investment portfolios, including those owned by pension funds and institutions for occupational retirement provision pursuant to Article 19(1) of Directive 2003/41/EC, in accordance with mandates given by investors on a discretionary, client-by-client basis in compliance with applicable provisions of the law of 30 May 2018 on markets in financial instruments and EU Regulation 600/2014 on markets in financial instruments.
5.1 Is the marketing of alternative investment funds subject to authorisation in your jurisdiction?
The requirements applicable to the marketing of alternative investment funds (AIFs) in Luxembourg depend on:
- the country of origin of the AIF member (AIFM) (EU or non-EU);
- whether the AIFM is authorised or registered;
- the country of origin of the AIF (EU or non-EU); and
- the types of investors targeted.
The EU marketing passport is available only to authorised EU AIFMs, subject to a simple notification procedure between the home country regulator of the AIFM and the regulator of the EU member state in which the AIF is to be marketed.
Registered EU AIFMs do not benefit from the marketing passport unless they opt in and subject themselves to the requirements of the full regime of the AIFM Law. They must comply with the local requirements applicable in the country of distribution. In Luxembourg, private placement is available for registered EU AIFMs.
Non-EU AIFMs intending to market EU AIFs within the European Union must obtain prior authorisation from the Commission de Surveillance du Secteur Financier (CSSF) where Luxembourg is the member state of reference of the AIFM pursuant to the AIFM Law.
5.2 If so, what criteria must be satisfied to obtain authorisation? Do any restrictions apply in this regard?
Currently, the EU marketing passport is not available to non-EU AIFMs.
Non-EU AIFMs wishing to market AIFs in the European Union must obtain prior authorisation from the CSSF where Luxembourg is the member state of reference of the AIFM.
A non-EU AIFM must comply with the provisions of the AIFM Law, including the transparency, disclosure and reporting requirements, and must appoint a legal representative established in Luxembourg.
In addition, appropriate cooperation arrangements must be in place between the CSSF, the competent authorities of the home member state of the EU AIF and the supervisory authorities of the third country in which the non-EU AIFM is established.
The third country in which the non-EU AIFM is established must not be listed as a non-cooperative country or territory by the Financial Action Task Force; and cooperation arrangements for the effective exchange of information on tax matters, including multilateral tax agreements, must be in place between such third country and the member state of reference.
Effective supervision must not be prevented by the national laws and of the third country governing the non-EU AIFM.
5.3 What is the process for obtaining authorisation and how long does this usually take?
A non-EU AIFM intending to market AIFs in the European Union must submit a request for authorisation to the CSSF where Luxembourg is the member state of reference of the non-EU AIFM.
Upon receipt of the application, the CSSF will assess whether the determination by the non-EU AIFM of Luxembourg as the member state of reference complies with the AIFM Law. If the CSSF considers that this is not the case, it will indicate the reasons for its refusal. If the CSSF agrees with the determination, it will notify the European Securities and Markets Authority (ESMA) and request advice on such assessment. Within one month of receipt of the notification, ESMA shall advise the CSSF on its assessment regarding the determination of the member state of reference.
Where the EU marketing passport is available, there is no authorisation process, but merely a simple notification process. Upon receipt of the notification file with the documents and information set out in Appendix III of the AIFM Law, the CSSF will inform the AIFM within 20 working days as to whether it may start marketing the AIF in Luxembourg. The AIFM may start marketing the AIF in Luxembourg from the date of notification of the decision of the CSSF. If the AIF is established in an EU member state (other than Luxembourg), the CSSF must inform the competent authorities of the AIF that the AIFM may start marketing in Luxembourg.
5.4 To whom can alternative investment funds be marketed?
Shares and units of AIFs can be marketed only to professional investors - that is, professional clients or clients who have requested to be treated as professional clients within the meaning of Annex II of Directive 2014/65/EU.
However, for the purpose of subscription of shares, interests in a specialised investment fund (SIF), société d'investissement en capital à risque (SICAR) or reserved alternative investment fund, the investors must additionally qualify as well-informed investors within the meaning of such product laws.
5.5 What are the content criteria that marketing materials for alternative investment funds must satisfy?
There is no harmonisation at EU level with respect to the requirements for marketing materials in general.
In case of marketing in Luxembourg, the following documentation and information shall be provided to the CSSF in accordance with Annex III of the AIFM Law:
- a notification letter, including a programme of operations identifying the AIFs that the AIFM intends to market and information on where the AIFs are established;
- the AIFs' management regulation or instruments of incorporation;
- the identity of the depositary of the AIFs;
- a description of, or any information on, the AIFs available to investors;
- information on where the master AIF is established, if the AIF is a feeder AIF;
- any additional information referred to in Article 21, paragraph 1 of the AIFM for each AIF that the AIFM intends to market; and
- information on arrangements established to prevent units or shares of the AIFs from being marketed to retail investors (where relevant).
In case of marketing in a member state other than Luxembourg, the notification file for marketing must, in addition to the criteria set out above, include an indication of the member state in which the AIFM intends to market the units or shares of the AIF to professional investors (Annex IV of the AIFM Law).
5.6 What other requirements or restrictions apply to marketing materials for alternative investment funds?
There are no other specific requirements applicable to the marketing materials for AIFs as such.
However, the product regimes, such as the SIF Law and the SICAR Law, require that the offering document/prospectus of the AIF include information necessary for investors to be able to make an informed judgement of the investment proposed to them and, in particular, of the risks attached thereto.
In addition, certain disclosure requirements apply to all AIFs (regulated or unregulated) in accordance with Article 21 of the AIFM Law.
5.7 Can alternative fund managers from other jurisdictions market alternative investment funds in your jurisdiction without authorisation?
Authorised EU AIFMs can market shares/units of EU AIFs to professional investors in Luxembourg with the EU marketing passport, subject to a simple prior notification procedure with the competent authorities of the EU AIFM's home member state. No prior authorisation is required. In case of a Luxembourg AIFM, the CSSF will prevent the marketing only if the AIFM's management of the AIF or the AIFM itself does not or will not comply with the AIFM Law.
Luxembourg-regulated AIFs (eg, SIFs, SICARs) managed by Luxembourg AIFMs are automatically authorised to market in Luxembourg to investors without any prior notification procedure.
EU AIFMs can market shares/units of non-EU AIFs in the European Union to professional investors if they comply with the national private placement regime. The AIFM must meet all requirements of the AIFM regime (with exceptions regarding the depositary regime) and comply with specific local requirements of the regulator. An EU or Luxembourg AIFM may market a non-EU AIF to professional investors in Luxembourg subject to a prior notification procedure to the CSSF in accordance with Article 37 of the AIFM Law.
Non-EU AIFMs wishing to market AIFs in the European Union must obtain prior authorisation from the CSSF where Luxembourg is the member state of reference of the AIFM. Non-EU AIFMs wishing to market AIFs to professional investors in the territory of Luxembourg must submit to the CSSF an information form prior to any marketing and comply with the minimum conditions under Article 45 of the AIFM Law.
5.8 Is the appointment of local marketing entities required in your jurisdiction?
A non-EU AIFM intending to market AIFs in the European Union shall appoint a legal representative established in the member state of reference. The local representative will act as the contact point of the non-EU AIFM in the European Union and shall perform the compliance functions in relation to the management and marketing activities performed by the AIFM together with the AIFM.
5.9 Is it possible to market alternative investment funds to retail investors in your jurisdiction? If so, are there specific requirements?
The marketing of AIFs by AIFMs to retail investors in Luxembourg must comply with the requirements of Article 46 of the AIFM Law, as follows:
- The AIF must be subject to permanent supervision by a supervisory authority in its home member state in order to ensure the protection of investors. In Luxembourg, this condition will be deemed fulfilled with respect to undertakings for collective investment (UCIs) subject to Part II of the UCI Law.
- AIFs must be subject in their home state to:
- regulation providing investors guarantees of protection; and
- supervision at least equivalent to that provided by Luxembourg laws governing AIFs authorised to be marketed to retail investors in Luxembourg; and
- There must be cooperation between the CSSF and the supervisory authority of the AIF.
In practice, the marketing of Luxembourg AIFs to retail investors in Luxembourg will be limited, since generally AIFs in Luxembourg can be marketed only to professional investors, with the exception of UCIs that are subject to Part II of the UCI Law.
6 Investment process
6.1 Do any investment or borrowing restrictions apply to the portfolios of alternative investment funds?
Certain investment restrictions stem from the applicable product laws, such as the Société d'Investissement en Capital à Risque (SICAR) Law, the Specialised Investment Funds (SIF) Law and the Reserved Alternative Investment Fund (RAIF) Law. However, the AIFs may provide for additional investment restrictions in their constitutive documents.
Borrowing restrictions may apply in light of the leverage requirements under the Alternative Investment Fund Managers (AIFM) Law. AIFMs must set a maximum level of leverage, which shall be calculated pursuant to the gross method and the commitment method. Indeed, the definition of ‘leverage' under the AIFM Directive includes borrowing, since ‘leverage' is defined as "any method by which the AIFM increases the exposure of an AIF it manages whether through borrowing of cash or securities, or leverage embedded in derivative positions or by any other means".
6.2 Are there any specific legal or regulatory requirements regarding investments in particular assets?
The SICAR Law provides that a SICAR must invest its funds in assets representing risk capital. ‘Investment in risk capital' is defined as the direct or indirect contribution of assets to entities in view of their launch, development or listing on the stock exchange.
A SIF may invest in any asset class, but is subject to a risk-spreading requirement pursuant to which it may not invest more than 30% of its assets or commitments in securities of the same type issued by the same issuer.
A RAIF may invest in any types of assets, subject to compliance with the risk-spreading requirement, unless by way of derogation it elects to invest exclusively in risk capital.
7 Reporting, governance and risk management
7.1 What key disclosure requirements apply to alternative investment funds in your jurisdiction?
The Alternative Investment Fund Managers (AIFM) Law sets out disclosure requirements towards both investors and the Commission de Surveillance du Secteur Financier (CSSF).
Article 21 of the AIFM Law requires that for each EU AIF managed and for each AIF marketed in the European Union, the AIFM make available certain information to investors before they invest in the AIF. This must include, among other things, information on:
- the investment strategy and policy of the AIF;
- the types of assets in which the AIF may invest;
- the techniques it may employ;
- the use of leverage;
- information on the identity of the service providers and the AIFM;
- investors' rights;
- a description of the delegation by the AIFM and the depositary;
- the valuation procedure;
- liquidity risk management;
- fees and expenses;
- information on the issue and sale of interests;
- the net asset value of the AIF; and
- its performance.
Any preferential treatment of investors must also be disclosed in the constitutive documents of the AIF. AIFMs having recourse to leverage for investment purposes are subject to additional disclosure requirements.
Disclosure obligations also apply when an AIF acquires or disposes of, individually or jointly, control of a non-listed company, other than a small or medium-sized entity or a real estate special purpose vehicle. The AIFM must notify the acquisition of control by the AIF:
- to the non-listed company;
- to the shareholders; and
- to the CSSF, together with information regarding the consequences on the voting rights, the conditions subject to which the control was acquired and the date on which control was acquired.
7.2 What key reporting requirements apply to alternative investment funds in your jurisdiction?
Registered AIFMs are subject only to the light reporting requirements as set out in Article 3(3) of the AIFM Law. Among other things, the information required includes details of the main trading instruments, the principal exposures and the most important concentrations of the AIFs they manage.
Authorised AIFMs must ensure that for each EU AIF managed and each AIF marketed in the European Union, an annual report is made available for each financial year no later than six months from the end of the financial year. This must be provided to investors upon request and be made available to the CSSF and the home member state of the AIF. It must contain at least the information set out in Article 20(2) of the AIFM Law (ie, balance sheet, income and expenditure account, report on activities, any material changes in the information listed in Article 21 of the AIFM Law, total amount of remuneration paid by the AIF to its staff, carried interest paid by the AIF and remuneration broken down by senior management).
Authorised AIFMs must regularly report to the CSSF on:
- the principal instruments and markets in which they trade;
- the principal exposures and most important concentrations;
- the main categories of assets (including percentages subject to special arrangements due to their illiquid nature); and
- the risk profile and risk management systems employed.
7.3 What key governance requirements apply to alternative investment funds in your jurisdiction?
Governance requirements apply to internally managed AIFs and AIFMs authorised under Chapter 2 of the AIFM Law.
The governing body of an AIFM or internally managed AIF must be composed of at least three members, who must possess sufficient skills and professional experience, and be of good repute. The number of hours dedicated to professional engagements cannot exceed 1,920 hours per year for each member of the governing body; and the number of mandates in regulated entities and in operating companies cannot exceed 20 mandates. The governing body must meet at least once every quarter and its work must be documented in writing.
Additional requirements apply to the senior management of the AIFM. Each AIFM must have at least two conducting officers, permanently located in Luxembourg, bound by a full-time employment contract. Certain derogations may be granted, depending on the size of the assets under management of the AIFM. The conducting officers must possess sufficient skills and professional experience in light of the type and investment strategies of the AIFs, and demonstrate their good repute. Conducting officers must be members of the executive committee of the AIFM.
There are certain incompatibilities in the exercise of the functions in order to ensure the independence of the management body of the AIFM.
7.4 What key risk management requirements apply to alternative investment funds in your jurisdiction?
Risk management requirements apply to AIFMs. There must be a functional and hierarchical separation of the risk management function from the operating units and from the portfolio management functions.
AIFMs must also implement adequate risk management systems in order to identify, measure, manage and monitor risks. Such risk management systems must be reviewed and least once a year and be adapted when necessary.
AIFMs must comply with the following minimum requirements:
- Conduct due diligence when investing on behalf of the AIF in accordance with the investment strategy, objectives and risk profile of the AIF;
- Ensure identification, measure and monitoring on an ongoing basis (including through use of stress testing procedures) of the risks associated with each investment position of the AIF and the overall effect on the AIF's portfolio; and
- Ensure that the risk profile of the AIF corresponds to the size, portfolio, structure and investment strategies and objectives of the AIF, as set out in the constitutive documents of the AIF.
Finally, AIFMs must set a maximum level of leverage which they may employ on behalf of the AIF and limit on the reuse collateral or guarantee granted under a leveraging arrangement.
8.1 How are alternative investment funds treated for tax purposes in your jurisdiction?
Alternative investment funds (AIFs) set up under the legal form of a limited partnership or a special limited partnership and that do not carry out (or are not deemed to carry out) a commercial activity should be considered as tax-transparent entities. In such case, income (and wealth) received (and held) by tax-transparent AIFs are taxable at the level of the investors.
The direct tax treatment applicable to AIFs structured as tax-opaque entities (ie, under the legal form of a joint stock company, private limited company or corporate partnership limited by shares) depends on the legal regime to which they are subject. Undertakings for collective investment (UCIs), specialised investment funds (SIFs) and reserved alternative investment funds (RAIFs) are exempt from corporate income tax, municipal business tax and net wealth tax. Sociétés d'investissement en capital à risque (SICARs) and RAIFs that opted for the SICAR regime are subject:
- to corporate income tax and municipal business tax, but are exempt on their profits derived from securities; and
- to a minimum net wealth tax of €4,815.
Sociétés de participations financiéres (SOPARFIs) are subject to corporate income tax, municipal business tax and net wealth tax. For companies located in Luxembourg City, the aggregate corporate income tax and municipal business tax rate ranges from 22.80% to 24.94%. The net wealth tax rate is 0.5% on that part of the net asset value which is lower or equal to €500 million and 0.05% on that part of the net wealth exceeding €500 million, with a flat minimum net wealth tax of €4,815 for qualifying SOPARFIs (ie, a SOPARFI with financial assets, transferable securities, bank deposits and receivables against related parties representing more than 90% of its balance sheet and exceeding €350,000) or a minimum net wealth tax ranging from €535 to €32,100 for non-qualifying SOPARFIs.
UCIs, SIFs and RAIF are subject to an annual subscription tax ranging from 0.01% to 0.05% (exemptions available), which is levied quarterly on the net asset value as of the last day of each quarter.
From a Luxembourg value added tax (VAT) perspective, AIFs are considered as VAT taxable persons and must register for VAT purposes under certain conditions. As per the Luxembourg VAT law, management services provided to AIFs benefit from a specific VAT exemption.
8.2 How are alternative investment fund managers and advisers treated for tax purposes in your jurisdiction?
Luxembourg managers and advisers structured as a SOPARFI under the legal form of a tax-opaque entity (ie, a joint stock company, private limited company or corporate partnership limited by shares) are subject to corporate income tax, municipal business tax and net wealth tax at the standard rates as described in question 8.1.
Individual managers and advisers that are Luxembourg tax residents are subject to Luxembourg personal income tax on their worldwide income (subject to tax treaty provisions). The Luxembourg income tax liability is based on the individual's personal situation and takes into consideration various personal tax allowances and deductions. Management and advisory fees qualify as income from independent activities. The Luxembourg personal income tax is calculated in accordance with a progressive rate ranging from 8.56% on taxable income in excess of €11,265 to 45.78% on income in excess of €200,004 for singles. The beneficiaries of the management and advisory fees should also be liable for social security for self-employed persons at a rate of 24.68% up to an annual ceiling of €128,519.64 (ie, a dependent contribution of 1.40% will be due above the ceiling). Social security contributions are deductible for personal income tax purposes (except for the dependent contribution).
Carried interest paid to qualifying employees as an incentive for the AIF's performance can be taxed at the maximum progressive rate of 11.44%. However, qualifying employees can benefit from such tax incentive only for a maximum of 10 years and to the extent that they transferred their tax residence to Luxembourg before 31 December 2018.
8.3 How are alternative investment fund investors treated for tax purposes in your jurisdiction?
Individuals that are Luxembourg tax residents and that invest in AIFs structured as tax-transparent entities (ie, limited partnership or special limited partnership) are directly subject to personal income tax (under the rules described in question 8.2) on their respective share in the profits realised by the AIF (irrespective of any actual distribution).
Luxembourg tax resident individuals investing in SIFs, SICARs, RAIFs and SOPARFIs structured as tax-opaque entities (ie, joint stock company, private limited company or corporate partnership limited by shares) are subject to personal income tax on income and gain received and realised from these entities (under the rules described in question 8.2). Capital gains and liquidation proceeds received by individuals acting in the course of the management of their private wealth are exempt from personal income tax if there are realised on a non-substantial participation (ie, below 10%) and at least six months after their acquisition. Individuals can claim a 50% exemption on dividends distributed by SICARs, RAIFs (that opted for the SICAR regime) and SOPARFIs.
Investors structured as standard Luxembourg companies (eg, SOPARFIs) are subject to corporate income tax, municipal business tax and net wealth tax at the standard rates as described in question 8.1. However, dividends, liquidation proceeds and capital gains received by such investors from SICARs, RAIFs (that opted for the SICAR regime) and SOPARFIs can benefit from an exemption from corporate income tax and municipal business tax (and from a net wealth tax exemption on qualifying shareholding) under certain conditions.
8.4 What effect do international laws such as the US Foreign Account Tax Compliance Act and international standards such as the Common Reporting Standard have in your jurisdiction?
Luxembourg enacted Foreign Account Tax Compliance Act (FATCA) regulations in a law dated 24 July 2015, based on the Intergovernmental Agreement (IGA) Model 1 dated 28 March 2014. Luxembourg also enacted the Common Reporting Standard (CRS) and Directive 2014/107/EU in a law dated 18 December 2015.
These two sets of law share similar goals and concepts, as they create specific due diligence and reporting obligations for financial intermediaries based in Luxembourg. Investment funds are within the scope of these rules, except for certain exemptions provided by IGA Model 1 (among others, Luxembourg retirement funds and local banks).
Based on these rules, Luxembourg-based investment funds must collect self-certification forms from their investors in order to evidence the tax residence of the individuals who invest directly or indirectly in them. Furthermore, Luxembourg-based investment funds must report, on an annual basis, the amounts of their interests in the funds, as well as any type of income deriving from the funds for these investors.
Besides these obligations, funds must provide their own FATCA/CRS qualification to their financial counterparts. This qualification is based on a tax analysis of the activity of the fund and will usually involve acting as a financial institution (a FATCA/CRS status which involves the maximum level of due diligence and reporting obligations according to FATCA and CRS), and registering with the Internal Revenue Service in order to obtain a global intermediary identification number (ie, a FATCA tax code issued for each reporting entity).
8.5 What preferred tax strategies are typically adopted in the alternative investment fund context?
The international and European tax landscape for AIFs has been significantly reshaped since 2013. In Luxembourg, several measures have been implemented to adapt the country tax toolkit in accordance with international and European tax changes. The measures that affect tax strategies for AIFs include:
- the implementation of the anti-tax avoidance Directives 2016/1164 (ATAD 1) and 2017/952 (ATAD 2) into Luxembourg law, with effect as at 1 January 2019 (for most of the ATAD 1 measures dealing notably with interest limitation, general anti-abuse rule and hybrid mismatch within the European Union) and 1 January 2020 (for most of the ATAD 2 measures extending hybrid mismatch rules to relations between EU and non-EU countries);
- the entry into force on 1 August 2019 of the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (BEPS), allowing a relatively rapid inclusion in existing bilateral tax treaties of measures against BEPS (introducing notably the principal purposes test); and
- the so-called ‘Danish case' jurisprudence of the Court of Justice of the European Union relating to beneficial ownership.
Therefore, tax strategies for AIFs have focused on maximising interest deductibility and cash-flow efficiency while reinforcing the substance and beneficial ownership by using, notably, regulated structures with a mix of tax-transparent and tax-opaque vehicles.
AIFs investing in real estate could be structured with a RAIF having the legal form of a special limited partnership or a joint stock company with variable capital. The RAIF holds a Luxembourg master holding SOPARFI set up as a private limited company, which then holds various local property companies. The investment funding is done with a mix of equity and third party/intra-group loans
9 Trends and predictions
9.1 How would you describe the alternative investment fund landscape and prevailing trends in your
Luxembourg remains the first investment fund centre in Europe and the second in the world. The net assets under management in Luxembourg funds stood at €4.7 trillion in 2019, according to the latest figures communicated by Luxembourg for Finance, the Agency for the Development of the Financial Centre. Luxembourg is also a major hub for EU and global asset managers, with the presence of 98 of the 100 largest European asset managers.
There is continued interest in the market in unregulated alternative investment funds (AIFs), such as the reserved alternative investment fund (RAIF) and the limited partnerships (société en commandite simple and société en commandite spéciale). Unregulated AIFs offer legal structuring flexibility while allowing for timely marketing and launch, without being subject to the prior authorisation or ongoing supervision of the Luxembourg regulator, thus saving time and cost for managers.
9.2 Are any new legal or regulatory developments anticipated which will impact on alternative investment funds or alternative investment fund managers in your jurisdiction?
With the adoption of a directive and regulation on the cross-border distribution of collective investment funds in summer 2019, a new legal and regulatory framework will harmonise the rules and reduce the barriers and costs for the cross-border distribution of investment funds within the European Union, including Luxembourg. The regulation entered into force on 1 August 2019, while the directive must be transposed into national law by July 2021.
The directive introduces a new harmonised pre-marketing regime with respect to AIF managers (AIFMs). Pre-marketing will be allowed for EU AIFMs, so that fund managers will be able to test the appetite of potential investors for new investment strategies. However, pre-marketing activities will be subject to certain requirements - in particular, formal notification of the home regulator.
In case of pre-marketing, EU AIFMs will not be allowed to rely on reverse solicitation for 18 months from the beginning of the pre-marketing activity, which will substantially limit the possibility to have recourse to reverse solicitation. Pre-marketing and marketing activities will be permitted only for certain entities, such as AIFMs, investment firms, credit institutions, undertakings for collective investment in transferable securities management companies and tied agents.
New requirements have also been introduced regarding the de-notification of marketing activities. Requirements applicable to regulatory fees and charges will also be aligned across EU member states.
9.3 Do you envisage any particular industry strategy of attracting particular interest in the next 12 months?
The steady growth of the number of unregulated AIFs, such as the RAIF and limited partnerships, should continue apace in the coming years. There is a clear preference and market demand for a single-tier regulatory model (ie, regulation of the AIFM only), instead of a double-tier regulatory model (ie, regulation of the AIF and regulation of the AIFM).
The implementation of Directive 2019/1160 on cross-border distributions will ensure a more harmonised approach across the European Union, thus fostering cross-border pre-marketing and marketing activities of AIFMs.
The ongoing review of the AIFM Directive by the European Securities and Markets Authority may give greater insight into the key topics which will be probably addressed at level 2, via regulations or a full review of the AIFMD, such as the rules on remuneration, the depository rules, the national private placement regimes and the AIFMD third country passport.
10 Tips and traps
10.1 What are your top tips for the smooth establishment and management of an alternative investment fund in your jurisdiction, and what specific challenges would you note?
Luxembourg offers a wide range of legal structuring tools which may address the requirements and specificities of different projects.
The choice of structure will largely depend on a combination of several factors, including:
- the investment strategy;
- the assets;
- the size of the alternative investment fund (AIF);
- the profile and location of the investors;
- the time to market;
- the level of regulation needed;
- cost efficiency; and
- tax considerations.
While a tailored approach will always be preferred over a ‘one size fits all' approach, some general trends may be observed.
Managers targeting a lower level of assets under management with minimum regulatory obligations may consider setting up a non-regulated AIF in the form of a Luxembourg special or common limited partnership and appointing a registered AIFM, thus eliminating the costs and regulatory burden associated with the appointment of an authorised AIFM and depositary. The special limited partnership is an efficient launch pad, as it is quick to set up and well suited for projects requiring contractual flexibility and cost efficiency. The major drawback is the absence of a marketing passport and the impossibility of setting up an umbrella structure with segregated compartments.
Should the targeted level of assets under management exceed the thresholds set out in Article 3(2) of the AIFM Law, it may be worth considering a reserved alternative investment fund, which may be structured as an umbrella fund. Although an authorised AIFM will have to be appointed, it will make the EU marketing passport available to market the fund to professional investors across the European Union, thus turning costs into additional opportunities.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.