EU Directive 2009/65/EC (also often referred to as the "UCITS IV Directive"), which was adopted by the European Parliament and the European Council on 13 July 2009, entered into force on 7 December 2009. Although EU Member States only have to implement the UCITS IV Directive in their national legislations by 1 July 2011, Luxembourg has already taken the lead in the implementation process and deposited a bill with the Luxembourg Parliament on 6 August 2010 in order to implement Level 1 provisions of the UCITS IV Directive into national law (the "Bill"). The aim is to have the Bill adopted before the end of this year with the new law (the "Law") ideally entering into force as of 1 January 2011.

Apart from the implementation of the UCITS IV Directive, the Bill also addresses non-UCITS IV related changes that will have an impact on the Luxembourg investment fund legislation. This article summarizes the non-UCITS IV related changes proposed in the Bill.

Cross-investments Between Sub-funds of the Same Umbrella Structure

The important proposed change to allow crosssub- fund investments has long been awaited by the Luxembourg fund industry.

The Bill allows cross-sub-fund investments within both corporate and contractual types of funds, subject to several conditions. The investment by one sub-fund into another sub-fund of the same UCITS (or of the same non-UCITS retail fund) ("Target Sub-Fund") is not permitted under the current legislation, due to provisions in Luxembourg corporate law that restrict the acquisition by a company (such as a Société d'Investissement à Capital Variable (SICAV) in the form of a Société Anonyme (SA)) of its own shares. Although there existed no specific similar rules for contractual type funds (i.e., Fonds Communs de Placement (FCP)), the same approach was taken so as not to provide preferential treatment to FCPs.

The conditions for cross-sub-fund investments are the following:

  • For UCITS funds, the standard UCITS investment rules and restrictions apply, which means that:
    • a sub-fund cannot invest more than 20% of its net assets in a Target Sub-Fund;
    • a sub-fund may acquire all the shares of the Target Sub-Fund, provided that those shares do not represent more than 25% of the aggregate number of shares issued by the UCITS as a whole;
    • a sub-fund may invest 100% of its net assets in additional sub-funds as long as the conditions above are complied with; and
    • a sub-fund may not invest in a Target Sub- Fund if the latter is permitted to invest more than 10% of its net assets in UCITS and other undertakings for collective investment.
  • Circle investments are not permitted, which means that the Target Sub-Fund may not in turn invest in the sub-fund that is invested in the Target Sub- Fund.
  • The double charging of management fees, subscription and redemption fees is prohibited.
  • The voting rights that are attached to the acquired Target Sub-Fund's shares are suspended.
  • The net asset value of the acquired Target Sub- Fund's shares will not be taken into consideration for the calculation of the net assets of the UCITS or the non-UCITS for the purposes of verifying the minimum threshold of 1,250,000 €. '. A sub-fund of a UCITS or non-UCITS cannot become a feeder sub-fund of another sub-fund of the same UCITS or non-UCITS. '. Cross-sub-fund investments will be permitted as from the date of the entry into force of the Law, provided that the articles of incorporation of the fund have been duly amended by such date.

Annual Report

The Law will amend the current law to provide that the annual report (including the report of the auditor and the management report) will not need to be sent to the shareholders of a corporate UCITS or non- UCITS retail fund, together with the convening notice for the annual general meeting of shareholders. This cost-saving measure provides that the convening notice shall indicate the place and the practical arrangements for providing these documents to the shareholders and shall specify that each shareholder may request that the annual report be sent to such shareholder.

Record Date for Shareholders' Meetings

The convening notice for a general meeting of shareholders of a corporate UCITS or non-UCITS retail fund may provide that the quorum and the majority shall be determined by reference to the shares issued and outstanding at midnight (Luxembourg time) on the fifth day prior to such meeting (the "Record Date"). The Record Date would be an improvement for large funds with a large number of investors; for such funds, drawing up of the attendance list of the meeting is not always an easy task.

Articles of Incorporation: Language Requirement

For registration purposes, the articles of incorporation of a corporate UCITS or non-UCITS retail fund drawn up in English must be followed by a translation in French or German. Once the Law becomes effective, if the articles of incorporation of such UCITS or non-UCITS retail fund are drawn up in English, it will no longer be necessary to attach a French or German translation.

Tax Change for Sale of Large Participations

If the tax law change set out in general terms in the Law enters into force, tax would no longer be imposed on any revenues that may result from the sale of shareholdings of more than 10% of the net asset value of a sub-fund of a corporate UCITS or non- UCITS fund held for less than six months.

Taxation of Exchange-traded Funds (ETFs)

UCITS or non-UCITS retail funds are generally subject to an annual subscription tax (taxe d'abonnement). This tax is 0.05 percent (0.01 percent in certain cases and with possibilities for exemptions), calculated on the basis of the total net assets at the end of each calendar quarter. The Bill provides that Luxembourg ETFs will be exempt from the payment of the subscription tax. As a consequence, Luxembourg ETFs would, in principle, not be subject to any taxes.

Provisions Regarding the Entry into Force of the Law

UCITS or non-UCITS retail funds will remain subject to the current law of 20 December 2002 regarding undertakings for collective investment, as amended, until 1 July 2011 and become subject to the Law only as of 1 July 2011, unless such funds elect to become governed by the Law earlier. It is currently anticipated that the Law will enter into force on 1 January 2011. All the tax provisions of the Law will have effect as of 1 January 2011, with retroactive effect to such date if the Law does not enter into force on 1 January 2011.

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.