CORPORATE
AIFMD – Implementation In Luxembourg – New Provisions Relating To SCS And SCA.
The draft law of August 24th 2012 (the "Draft Law") implementing the European Directive 2011/61/EU of the European Parliament and of the Council of June 8th 2011 on alternative investment fund managers (AIFMD) aims at improving and developing the Luxembourg alternative investment fund industry. The success of Luxembourg in this respect will depend on its ability, on the basis of its long term experience, to attract ever more foreign investors.
To this effect the Draft Law also intends to amend the Luxembourg laws of August 10th 1915 on commercial companies as amended and of December 19th 2002 on the Luxembourg Trade and Companies' Register:
- As regards partnerships limited by shares (sociétés en commandite par actions - the "SCA"), the amendments mainly consist in confirming that the SCA can also be managed by non-shareholders (there being then no longer an obligation, but merely a right, for the unlimited shareholder (associé commandité) to manage the SCA), and clarifying which functions the limited shareholders (associés commanditaires) can play without engaging unlimited joint and several liability.
- The regime of limited corporate partnerships
(sociétés en commandite simple - the
"SCS") is modernized, the Draft Law creating more
flexibility by enabling the partners to freely determine in their
partnership agreement (contrat social):
- the name, the capital structure (the sub-division of the capital contributions into partnership interests (parts d'intérêts),
- which may be represented by an instrument, becoming possible),
- the management (which may, just as for the SCA, now also be run by non-partners whose liability is limited, like agents, to the exercise of their manager functions),
- their financial rights (in terms of sharing in any distributions and repayments with the possibility to even totally exclude a partner in this respect),
- the decision-taking process for partners, and
- any transfer restrictions and redemption conditions for the
partnership interests.
- Finally and most importantly, the Draft Law introduces the new special limited partnership (société en commandite spéciale - the "SCSp"), which follows substantially the same regime as the above amended SCS, but has no legal personality separate from that of its partners.
Hence, by offering foreign investors optimised structuring opportunities for Luxembourg investment products, with comparable features to the internationally well-known and accepted standards, i.e. the Anglo-Saxon limited partnership regime, the Draft Law's main purpose is to achieve the building of an on-shore European investment centre.
BANK LENDING, STRUCTURED FINANCE, SECURITISATION
Questions & Answers (Q&A) On Securitisation – CSSF July 2012
In July 2012 the Commission de Surveillance du Secteur Financier (CSSF) published a Questions / Réponses (Q&A) on securitisation replacing the explanations on the regulatory oversight set out by the CSSF in its 2007 annual report.
For further information on this topic we refer you to our legal alert of September 2012 available on our website http://bsp.lu/publications.html
CAPITAL MARKETS
Circular 12/539 – Technical Specifications Regarding The Communication To The CSSF Of Documents Under The Law On Prospectuses For Securities (The "Prospectus Law") And General Overview Of The Aforementioned Law
On July 6th 2012 the CSSF published circular 12/539 (the "New Circular") which replaced with immediate effect circular 05/226 of December 16th 2005 (the "Previous Circular").
Part I of the New Circular has not changed significantly from Part I of the Previous Circular save that it presents the changes introduced by the law of July 3rd 2012 (the "2012 Law") transposing Directive 2010/73/EU of November 24th 2010.
The Previous Circular had only set down technical procedures for submission of documents for the purposes of approval. The New Circular amends those procedures slightly and introduces new technical procedures regarding submissions for:
- the purposes of obtaining a notification (i.e. passporting),
- filing purposes, and
- communication purposes.
Furthermore, Section 8 of the Previous Circular setting down the technical procedures for submitting notices for offers to the public and admission to trading on a regulated market is not included in the New Circular. These notices which were referred to in articles 5, 6 and 30 of Parts II and III of the Prospectus Law (prior to its amendment) are no longer required since the enactment of the 2012 Law.
Pursuant to the New Circular the submission of documents to the CSSF can be validly made by an issuer, an offeror or by a person asking for the admission on a regulated market or a person acting on behalf of one of these persons (the "Déposant(s)") via email. The CSSF has designated new email addresses (prospectus.filing@cssf.lu and prospectus.communication@cssf.lu) for submissions for filing/communication purposes. If a Déposant uses other means of communication, such as filing of paper copies, the latter must enclose an electronic support (DC/DVD/USB key). All files should, in principle, be submitted in PDF format.
All submissions must be accompanied by the relevant form. The Circular provides for four new types of forms: the Entry Form which must be filed with documents first filed for approval, the Notification Request Form for the purposes of passporting, the Filing Form which must be filed with the final terms and the Communication Form for filing final terms with the CSSF when Luxembourg is the host Member State. The New Circular outlines the information which must be contained in each of these forms and the documents which must be submitted with each file.
Circular 12/542 – Amending Circular 08/337 On The Entry Into Force Of The Law Of January 11th 2008 (The "Transparency Law") And Of The Grand-Ducal Regulation (The "Grand-Ducal Regulation") Of January 11th 2008 On Transparency Requirements For Issuers Of Securities.
On July 17th 2012 the CSSF published circular 12/542 (the "Amendment Circular") which amended and updated with immediate effect circular 08/337 of February 6th 2008 (the "Existing Circular"). The Amendment Circular was published following the introduction of the law of July 3rd 2012 (the "2012 Law") which transposed Directive 2010/73/EU of November 24th 2010.
The changes to the Existing Circular are as follows:
- The explanation in the Existing Circular as to the scope of the Transparency Law and the Grand-Ducal Regulation has been amended to remove the reference to issuers of third countries that file the annual document provided for in Article 14 of the law of July 10th 2005 on prospectuses for securities with the CSSF, article 14 having been abrogated by the 2012 Law.
- The explanation in the Existing Circular as to the applicability of the periodic disclosure requirements provided for in the Transparency Law, has been amended to take account of the recent amendments thereto, namely: the exemption for issuers of debt securities to publish annual and half yearly financial reports and interim management statements is amended to apply to debt securities the denomination of which is at least EUR 100,000 rather than EUR 50,000. There is a grandfathering clause pursuant to which debt securities with a denomination of at least EUR 50,000 at the time of issuance remain exempt from such publication requirements provided that they were admitted to trading on a regulated market before December 31st 2010.
Revised Rules & Regulations Of The Luxembourg Stock Exchange
The Luxembourg Stock Exchange (the "LxSE") has issued a new set of rules and regulations (Edition 2012/07), which replace those dated 2012/05 that entered into force in May 2012. Edition 2012/05 replaced the rules and regulations dated 2009/08 which entered into force on August 1st 2009. All terms used and not otherwise defined herein shall bear the meaning ascribed to them in Edition 2012/07 of the LxSE rules and regulations.
The most recent changes to the rules and regulations, included within Edition 2012/07 are as follows:
- The exemption for Issuers of debt securities admitted to trading on the Euro MTF market to make available to the public its latest annual accounts and its latest management report, the publication of which is mandatory in accordance with the respective national law, has been amended to apply to bonds the denomination of which is at least EUR 100,000 rather than EUR 50,000 (Article 1003).
- The European Stability Mechanism has been added to the list of supranational institutions and organisations that are exempt from the obligation to publish a prospectus for the admission to trading on a market regulated by the LxSE. This list is set out in Appendix VII of the rules and regulations.
Edition 2012/05 of the LxSE rules and regulations had previously incorporated the following changes with respect to market access arrangements in Part 3: a new Rule 3.3 of the rules and regulations was included to provide for the possibility for Members of the LxSE to provide Sponsored Access for their Clients, to a Securities Market of the LxSE and sets down the requirements in relation thereto. Sponsored Access is an access mode allowing a Client (the "Sponsored Participant") to make use of direct connectivity solutions to a Securities Market of the LxSE, subject to the consent and under the responsibility of a Member (the "Sponsoring Member"). The LxSE will only consider applications in respect of Sponsored Participants and Affiliates located in jurisdictions with satisfactory regulatory arrangements (Rule 3.5). Electronic access facilities for Members' Affiliates was already provided for in Edition 2009/08 of the rules and regulations.
The Law Of July 21st 2012 Relating To Squeeze Out And Sell Out Of Securities Admitted Or Having Been Admitted To Trading On A Regulated Market Or Having Been The Object Of A Public Offer
On July 27th 2012 the law of July 21st 2012 relating to the squeeze out and sell out of securities admitted or having been admitted to trading on a regulated market or having been the object of a public offer (the "Law") was published in the Mémorial. In accordance with article 11, the Law will enter into effect on October 1st 2012.
For further information on this topic we refer you to our newsletter of June 2012 and our legal alert of July 2012 available on our website http://bsp.lu/publications.html.
Delegated Regulations And Implementing Regulations Concerning Regulation (Eu) No 236/2012 Of March 14th 2012 (Short Selling) (The "Regulation")
The European Commission has now adopted four implementing measures covering all the technical details which the Commission is empowered to adopt in accordance with the Regulation.
On June 29th 2012 the Commission adopted a delegated regulation laying down regulatory technical standards covering (i) common technical standards on notification and disclosure requirements with regard to net short positions to be disclosed to national competent authorities and the public, (ii) details of quarterly information to be provided to ESMA by competent national authorities regarding net short positions and (iii) method for calculating turnover by the national competent authority to determine exempted shares whose principal trading venue is outside the EU.
Also on June 29th 2012 the Commission adopted an implementing regulation laying down technical standards specifying (i) means by which information on short positions is disclosed to the public and format for such publication, (ii) means by which information on short positions is provided to ESMA and format for such exchange, (iii) types of agreements, arrangements and measures that adequately ensure that shares respectively sovereign debt are available for settlement ("locate rule") and types of third parties with whom arrangements can be made and (iv) date and period of principal trading venue calculations and date of notification to ESMA by national competent authorities.
Both the delegated regulation and the implementing regulation shall apply from November 1st 2012 except for (i) the method of calculating turnover and (ii) the rules determining the principal trading venue, both of which are to apply from the day following the publication of the relevant regulation in the Official Journal of the EU.
On July 5th 2012 the Commission adopted a delegated regulation covering in particular the following (i) certain definitions, (ii) method of calculation of significant short positions, (iii) method of calculation for funds managing several funds or portfolios and for different entities within a group company, (iv) specification as to the cases that are not considered uncovered sovereign credit default swap positions, (v) notification thresholds for net short positions in sovereign debt, (vi) parameters and thresholds for calculating liquidity thresholds allowing regulators to temporarily suspend restrictions on short sales of sovereign debt, (vii) threshold for a significant fall in value of financial instruments other than liquid shares that can trigger a short term suspension of short selling by national regulators and (viii) meaning of adverse events or developments that can trigger temporary restrictions on short selling by national regulators and in cross border exceptional situations, by ESMA.
The Commission further endorsed, on July 5th 2012, a delegated regulation covering the method of calculation of the fall in value for certain instruments that can trigger a short term suspension of short selling by national regulators.
Once they enter into force, both the implementing regulation and delegated regulation are to apply from November 1st 2012.
ESMA has published on September 13th 2012 a Q&A document that aims to promote common supervisory approaches and practises amongst the EU national regulators and provide more clarity on the application of the Regulation to market participants and investors. It gives answers in relation to certain questions regarding the territorial scope of the Regulation, timing and method of notifications, the method of calculating net short positions, the handling of notifications, the application of the locate rule and enforcement of the Regulation. Such document is to be updated periodically following the receipt of new questions.
INVESTMENT FUNDS
Proposal For A Directive Of The European Parliament And Of The Council Amending Directive 2009/65/EC As Regards Depositary Functions, Remuneration Policies And Sanctions ("UCITS V")
On July 3rd 2012, the European Commission published a proposal for a directive of the European Parliament and of the Council amending directive 2009/65/EC ("UCITS IV") as regards depositary functions, remuneration policies and sanctions ("UCITS V").
The aim of this proposal is to improve investors' confidence in UCITS. Following the bankruptcy of Lehman Brothers and the Madoff fraud, differing national requirements in the liability standard within the European Union attracted attention and it was therefore required to define exactly the duties of depositaries.
UCITS V proposes to amend the UCITS IV directive by introducing rules on (i) depositary duties, (ii) delegation of depositary duties, (iii) eligibility to act as a UCITS depository, (iv) liability of depositaries, (v) the remuneration of the senior managers, risk takers and those who exercise control functions in a UCITS and (vi) the sanctions that the competent authorities may be entitled to apply in case of breaches.
The proposal provides that only credit institutions and investment firms will be entitled to act as depositories of UCITS. Each UCITS shall have one single depositary.
The depositary shall be liable to the UCITS and to the unit holders for the loss by the depositary (or a third party in case of delegation) of financial instruments held in custody, unless such loss results from an external event beyond the reasonable control of the depositary the consequences of which would have been unavoidable despite all reasonable efforts to the contrary. In such case, the UCITS depositary will be responsible for returning a financial instrument of the identical type or the corresponding amount to the UCITS. The depositary shall also be liable to the UCITS and its unit holders for all other losses suffered as a result of the depositary's negligent or intentional failure to properly fulfil its obligations.
It is proposed that the conditions in which the depositary's safekeeping duties can be delegated to a sub-depository are aligned with those applicable under the alternative investment fund management directive and that the depositary remains responsible even in case of such delegation.
It is also proposed that management companies of UCITS establish and apply remuneration policies and practices for staff whose professional activities have a material impact on the risk profile of the management company or UCITS they manage. The proposal sets out certain principles which must be complied with in applying such remuneration policies.
It is expected that the Economic and Monetary Affairs Committee of the European Parliament will vote on the proposed directive in January 2013 and the European Parliament in March 2013 and the date of entry into force of this proposal is expected to be by the end of 2014.
Proposal For A Regulation Of The European Parliament And Of The Council On Key Information Documents For Investment Products
On July 3rd 2012, the European Commission published a proposal for a regulation of the European Parliament and of the Council on key information documents for investment products.
The aim of this proposal is to improve transparency for retail investors of investment products by imposing an obligation that European retail investors receive a standardised disclosure document known as a "key information document" ("KID") when considering investment products.
An investment product is an "investment where, regardless of the legal form of the investment, the amount repayable to the investor is exposed to fluctuations in reference values or the performance of one or more assets which are not directly purchased by the investor". In practice it may cover (i) products with capital guarantees and those, where in addition to capital, a proportion of the return is also guaranteed, (ii) investment funds including UCITS, whether close-ended or open-ended, (iii) all structured products, (iv) insurance products whose surrender values are determined indirectly by returns on the insurance companies own investments or even the profitability of the insurance company itself as well as derivative instruments.
The regulation will not apply to products such as (i) insurance products, (ii) deposits with a rate return determined by the interest rate, (iii) securities referred to in points (b) to (g), (i) and (j) of article 1(2) of Directive 2003/71/EC as amended, (iv) other securities which do not embed a derivative, (v) occupational pension schemes falling under the scope of Directive 2003/41/EC or Directive 2009/138/EC and (vi) pension products for which a financial contribution from the employer is required by national law and where the employee has no choice as to the pension product provider.
The KID shall be accurate, fair, clear, not misleading, short and expressly written in non-technical language that is easy to understand for any retail investor. The aim of the KID is to (i) ensure that every retail investor is fully and clearly informed of the risks of the investment before its decision to invest and (ii) allow comparison between investment products within the EU by imposing on the investment product manufacturer ("IPM") a common format so that the design, the structure and the information contained in every similar investment product are the same within the EU. The IPM must publish the KID on a website of its choice before the investment product can be sold to retail investors. The draft regulation also foresees that a person selling an investment product to retail investors shall provide them, free of charge, with the KID in sufficient time before the conclusion of a transaction relating to the investment product.
The regulation also foresees some transitional measures for UCITS in order to allow them to continue to use the key investor information document ("KIID") in accordance with Directive 2009/65/EC for five years from the entry into force of the regulation. At the end of this transitional period, the EU Commission shall review the regulation in order to further extend the transitional period for UCITS or to replace, after identification of the necessary adjustments, the KIID with the KID under this regulation.
The regulation will be supported by detailed delegated/ implementing acts. It is expected that it would enter into force by the end of 2014.
ESMA Q&A On Risk Measurement And Calculation Of Global Exposure And Counterparty Risk For UCITS.
On July 9th 2012 the European Securities and Markets Authority (ESMA) published a set of Questions and Answers, providing additional information on Risk Measurement And Calculation Of Global Exposure And Counterparty Risk for UCITS.
The aim of such Q&A, which is constantly updated, is to provide precise guidelines and support to competent authorities and UCITS management companies by clarifying the content and the purpose of the texts published by ESMA thus ensuring the convergence of actions taken amongst member states and avoiding the burden of additional legislation.
The Q&A brought additional clarification on:
- strategies that could qualify as hedging strategies
- diversification rules applying in case of investment by a UCITS of 100% of its assets in transferable securities issued by certain issuers i.e. sovereigns;
- the fact that the look-through approach is not compulsory for the calculation of global exposure when UCITS invest in other funds (UCITS may treat the NAV of the target fund as an equity and use it as a substitute in the calculation of the global approach); and
- the method of disclosure of leverage for UCITs using the Value at Risk approach for the calculation of their global exposure (the "VaR").
In response to this Q&A, the CSSF issued, on July 31st 2012, a press release to further clarify the impact of the method to be used for the calculation of leverage, a figure disclosed by UCITS in their prospectus and annual report.
From now on the CSSF has imposed the "sum of the notionals" as the common method of calculation for the leverage disclosure in Luxembourg. As a consequence, newly established UCITS and new sub-funds of existing UCITS using the VaR method shall now calculate their leverage by using the "sum of the notionals" approach.
Existing UCITS will have to conform to the text as from January 1st, 2013. Meanwhile the commitment approach may still be used.
In terms of practical impact, the disclosed leverage may be completed by figures based on the commitment approach and all existing UCITS are required to update their prospectus with this information by December 31st 2012 at the latest.
As from January 2013, the leverage, based on the sum of notionals, shall have to be disclosed in the UCITs' annual reports.
CSSF Circular 12/540 Of July 9th 2012 Relating To Sub-Funds Authorised But Not Yet Launched, Sub-Funds Waiting For Their Reactivation And Those Put Into Liquidation (The "Circular")
The Circular applies to all undertakings for collective investment (i.e. UCITS/UCI governed by the law dated December 17th 2010 relating to undertakings for collective investment and SIFs governed by the law dated February 13th 2007 relating to specialised investment funds, as amended) whose sub-funds (i) are authorised by the CSSF but have not been launched (the "Not Yet Launched Sub-Funds"), or (ii) have become inactive after the redemption of all their shares/units (the "To Be Reactivated Sub-Funds"), or (iii) have been put into liquidation (the "Liquidated Sub-Funds").
Not Yet Launched Sub-Funds and To Be Reactivated Sub-Funds have 18 months from, respectively, the date of the CSSF approval letter, to be launched, or the date on which they became inactive, to be reactivated.
References to Liquidated Sub-Funds shall be deleted from the prospectus or the issuing document of the UCI on the first subsequent update, which shall take place within 6 months from the date of the liquidation decision.
Sub-funds existing on the date of the Circular but pending launch or re-activation are granted a period of 18 months from the date thereof to be launched or re-activated.
At the expiration of the 18 month period, and in the event the status of such sub-funds has not changed, any references to them shall be deleted from the prospectus or the issuing document of the UCI on the first subsequent update, which update shall take place within 6 months of the expiry date.
In addition, the Circular provided that all UCI file a form indicating the existence, or not, of Not Yet Launched Sub-Funds, To Be Reactivated Sub-Funds or Liquidated Sub-Funds. Such form which is to include data up to the end of September 2012 should be filed by October 15th 2012.
ESMA Guidelines On Exchange-Traded Funds And Other UCITS Issues
On July 25th 2012 the European Securities and Markets Authority ("ESMA") published guidelines on Exchange-Traded Funds (ETFs) and other UCITS issues (the "Guidelines"). ESMA also published a consultation paper on the treatment of repurchase and reverse repurchase agreements. The Guidelines set out (A) the information that should be given to investors about index-tracking UCITS and UCITS ETFs, (B) specific rules for UCITS when entering into over-the-counter financial derivative transactions and effective portfolio management techniques, and (C) criteria for financial indices in which UCITS may invest.
The Guidelines will increase the level and the quality of information provided by index-tracking UCITS to their investors. For example a clear description of the indices including information on their underlying components will have to be provided in the prospectus as well as information on how the index will be tracked and the anticipated level of tracking error. UCITS ETFs will, in the future, be obliged to have the identifier "UCITS ETF" in their name. A UCITS ETF should disclose clearly in its prospectus the policy regarding portfolio transparency and where information on the portfolio may be obtained.
A UCITS using techniques and instruments for the purpose of efficient portfolio management ("EPM") will have to disclose in its prospectus the policy regarding direct and indirect operational costs/fees arising from such EPM techniques that may be deducted from the revenue delivered to the UCITS. All the revenues arising from EPM techniques, net of direct and indirect operational costs, should be returned to the UCITS. A UCITS should ensure that it is able at any time to recall any security that has been lent out or terminate any securities lending agreement into which it has entered. In addition the annual report of the UCITS will have to include certain specific information relating to the use of such techniques.
The Guidelines provide that the prospectus of a UCITS using total return swaps or other financial derivative instruments should include certain specific information. For example, information on the underlying strategy and composition of the investment portfolio or index. The Guidelines set out an extensive list of criteria with which collateral received to reduce counterparty risk exposure should comply at all times. In addition to being highly liquid, collateral should be of high quality and should be sufficiently diversified. Collateral received should be capable of being fully enforced by the UCITS at any time without reference to or approval from the counterparty.
Finally, the Guidelines set out detailed criteria for the financial indices in which a UCITS may invest.
Once adopted by ESMA the guidelines on repurchase and reverse repurchase arrangements will be integrated into the Guidelines and the entirety will become effective two months after publication on ESMA's website. Generally speaking UCITS will have 12 months from the effective date to align their investments with the Guidelines.
European Commission Consultation Document Relating To UCITS ("UCITS VI")
On July 26th 2012 the European Commission issued a consultation document relating to UCITS. The consultation is complementary to the publication of the ESMA guidelines on ETFs and other UCITS issues (see above) and is aimed at providing input to the Commission in order to determine their future policy in the field of asset management and in particular in keeping the UCITS framework relevant and up to date.
The consultation covers eight different topics:
- Eligible assets: UCITS funds can gain exposure to non-eligible assets through financial derivative instruments. In this respect, the Commission is contemplating to change the scope of eligible assets and to find ways to reduce the fund's exposure to non-eligible assets.
- Efficient portfolio management ("EPM"): In order to decrease systemic risks connected with EPM techniques, the Commission considers measures increasing the transparency of those techniques and assessing the counterparty risks and the quality of collateral.
- OTC derivatives: A UCITS fund may be exposed to a single counterparty if sufficient collaterals are provided. This exposure contains a counterparty risk (insolvency and conflicts of interest with the counterparty) that the Commission contemplates to regulate (e.g. through the requirement to calculate the UCITS global exposure to the counterparty on a daily basis).
- Extraordinary liquidity management tools:
- EU-wide definition for the term "exceptional circumstances" during which redemptions of shares may be suspended.
- Use of side-pockets i.e. the possibility to create a new fund
with assets that became illiquid in order to maintain the liquidity
of the original fund.
- Depositary passport: the Commission contemplates to introduce a cross border passport for the performance of depositary bank functions.
- Money market funds ("MMF")
- Plans to introduce liquidity buffers in order to maintain a stable NAV and to limit a downside risk.
- Plans to introduce liquidity fees for investors who redeem their shares first.
- Plans to ban references to credit rankings for the risk
assessment of the MMF and the assets in which it invests.
- Long term investments: the Commission seeks ways to open up long term investments, which due to their low level of liquidity are generally reserved to institutional investors, to retail investors.
- UCITS IV improvements: it is proposed to assess whether certain
areas of UCITS IV require improvement:
- Level 2 measures regarding administrative procedures and internal control mechanisms to be applied to self-managed investment companies.
- When a feeder UCITS converts into an ordinary UCITS, the same information requirements to be applicable as those applicable when a UCITS becomes a feeder UCITS and when a master UCITS changes.
- Notification procedures between regulators to be completely in electronic form.
- The timelines regarding fund mergers to be more consistent.
- Several alignments with the AIFM directive are proposed.
Interested parties are invited to submit their contributions to the consultation paper by October 18th 2012.
Regulation 648/2012 Of The European Parliament And Of The Council Of July 4th 2012 On OTC Derivatives, Central Counterparties And Trade Repositories ("EMIR" – European Market Infrastructure Regulation)
The "EMIR" Regulation was published in the Official Journal of the European Union on July 27th 2012. It entered into force on August 17th 2012. The aim of EMIR is to improve the functioning of the OTC derivative markets in the EU. The ways it aims to do this are threefold:
- Clearing and bilateral risk-management requirements
for OTC derivative contracts:
All OTC derivative contracts pertaining to a class of OTC derivative that has been declared subject to the clearing obligation in accordance with the regulation and its implementing measures, shall henceforth be cleared whether they were concluded by financial firms or non-financial firms. This clearing obligation shall be performed through a central counterparty ("CCP"), which has been duly authorised thereto by the competent authority. OTC derivatives subject to this obligation shall be enumerated on a public register maintained by the European Securities and Markets Authority ("ESMA"). Financial actors who entered into OTC derivative contracts which are not subject to the clearing obligation shall introduce risk-mitigation techniques, especially in respect of operational and counterparty credit risk. - Reporting requirements for derivative
contracts:
All OTC derivative contracts subject to the regulation shall be reported to a trade repository registered with ESMA. - Uniform requirements for the performance of
activities of central counterparties and trade repositories:
CCPs shall apply for authorisation in their respective Member State of establishment. Authorisation is granted if the CCP complies with the requirements laid down in the regulation, such as minimum capital requirements, organisational requirements (including the establishment of a risk committee), record keeping requirements and reporting obligations. Once the CCP has been authorised in its Member State of establishment, it may pursue its activity in the entire EU. The competent national authority shall supervise its activities.
Trade repositories shall register with ESMA. Registration is granted if the trade repository meets certain general requirements, such as robust governance arrangements and adequate policies. It shall also ensure its operational reliability by identifying operational risk and establishing an adequate business continuity policy. Trade repositories may also pursue their activities in the EU upon registration.
Draft technical standards have been published by ESMA and subject to consultation. ESMA has until September 30th 2012 to submit final draft technical standards to the European Commission for endorsement.
CSSF Regulation NO 12-01 Adopting The Implementing Measures Of Article 42bis Of The Law Of February 13th 2007 On Specialised Investment Funds As Regards The Requirements In Respect Of Risk Management And Conflicts Of Interest (The "Regulation")
On August 13th 2012 the CSSF issued the Regulation, it was published in the Mémorial on September 6th 2012 and will enter into force on October 1st 2012. The Regulation will apply to all new SIFs established on or after that date. Existing structures will have up to December 31st 2012 to comply with the Regulation.
The Regulation follows on from the CSSF's press release of April 26th 2012 and contains additional specifications to what was required by such press release in terms of the description of the risk management systems and the policy for management of conflicts of interest.
The Regulation contains definitions of counterparty, liquidity, market and operational risk. It specifies that the risk management function required pursuant to Article 42bis shall be hierarchically and functionally independent from operating units.
The risk management function shall implement and maintain an adequate and documented risk management policy intended to detect, measure, manage and monitor appropriately the exposure to the various risks and shall ensure compliance with the SIF's risk limitation system.
The Regulation sets out the criteria for the identification of conflicts of interest. It provides that SIFs shall establish (in writing), implement and maintain an effective conflicts of interest policy and sets out what such policy should contain. The procedures and measures put in place for managing conflicts of interest shall be designed to ensure that the relevant persons engaged in different business activities involving a conflict of interest carry on those activities at an appropriate level of independence. The Regulation sets out certain procedures and measures to be adopted in this regard.
A SIF must keep and update a record of the types of activities undertaken in which a conflict of interest entailing a material risk of damage to the interests of the SIF has arisen or may arise. Where the procedures put in place for managing conflicts of interest are not enough to prevent risks of damage to the interests of the SIF or of its unitholders then the directors must be promptly informed in order for them to take any necessary decision. Such situations will be reported to investors and reasons given for the board's decision.
AIFMD – Implementation In Luxembourg – AIFMs And AIFs
The draft law ("Draft Law") implementing Directive 2011/61/EU of the European Parliament and of the Council adopted on June 8th 2011 on alternative investment fund managers ("AIFMD") was filed with the Luxembourg Parliament on August 24th 2012. The Draft Law goes beyond a mere transposition of AIFMD. In fact, besides the creation of a new category of professionals - being the alternative investment fund managers ("AIFMs") - the Draft Law introduces a new corporate form, the special limited partnership, a new category of depositary as well as tax improvements, such as a new regime for taxation of carried interest, in order to better compete with Cayman or Delaware limited partnerships.
The Draft Law applies to AIFMs who are legal persons whose regular business is managing one or more alternative investment funds ("AIFs"). AIFs are defined as undertakings for collective investment, other than UCITS, which raise capital from a number of investors with a view to investing it in accordance with a defined investment policy for the benefit of those investors. The concept of AIF should include all Part II funds of the law of December 17th 2010 and may include the specialised investment funds of the law of February 13th 2007, as amended, the investment companies in risk capital of the law of June 15th 2004, as amended, and certain unregulated entities that meet the criteria for being considered as an AIF. Managers of (i) AIFs whose assets under management do not exceed EUR100 million or (ii) unleveraged AIFs whose assets under management do not exceed EUR500 million with a 5-year lock-up period, shall be out of scope but subject to limited identification and disclosure duties. The Draft Law does not apply to entities such as holding companies, securitisation vehicles, employee savings schemes and institutions for occupational retirement.
The Draft Law not only impacts AIFMs but also the funds themselves. In fact, AIFs will have to comply with specific rules in terms of valuation, disclosure to investors and liabilities of their depositaries. UCITS management companies will be entitled to apply for an AIFM license whereas non-UCITS management companies will continue to be able to act as management company for FCP, SICAV and SICAF qualifying as AIFs provided an AIFM has been appointed.
Luxembourg, having the reputation of being the quickest mover within the European Union in implementing European legislation in the area of investment funds, is aiming to transpose AIFMD into national law by the end of this year. As a consequence, Luxembourg AIFMs will be able, as from July 2013, to benefit from the passport to cross-manage and cross-market EU AIFs throughout the European market.
ESMA Q&A Key Investor Information Document (KIID) For UCITS.
On September 25th 2012 ESMA issued Questions and Answers regarding the Key Investor Information Document (KIID) for UCITS.
ESMA clarifies that an up-to-date version of the KIID should be available to the existing investors even if the UCITS is no longer marketed to the public whereas there is no obligation to prepare a KIID for a UCITS that is in liquidation.
Existing investors within a UCITS are to be provided with a KIID in case of additional investments or in case they switch or exchange units in one sub-fund for units in another. Professional investors are also to be provided with a KIID.
ESMA confirms that a UCITS may select a class to represent one or more other classes of the UCITS and this is the responsibility of the UCITS to select the most appropriate representative class having regard to the characteristics of the UCITS, the nature of the differences between the share classes and the range of choices on offer to each investor.
For UCITS that do not yet have performance data for one complete calendar year, there is no need to insert a blank performance chart. Where there is no data available for a specific year, then the year shall be shown as blank with no annotation other than the date.
Where a UCITS refers to an index in its investment objectives and policies as a benchmark and will measure the performance against this but does not intend to track that index, it is necessary to show the performance of the benchmark in the past performance section of the KIID. Where a UCITS refers to an index in its investment objectives and policies but does not intend to measure the performance against that index, it is not necessary to show the performance of the benchmark in the past performance section of the KIID.
If the benchmark is modified, the bar chart should display the performance of the previous benchmark for the period preceding the change.
ESMA clarifies that it is possible to show the complete name of the fund or the share classes when first mentioned and then simply refer to it thereafter in the KIID as "the Fund", respectively "the share class of the fund".
Finally the name of the investment manager(s) of the UCITS, if any, is not to be disclosed in the KIID.
TAX
New Protocol To Poland-Luxembourg Tax Treaty Signed
On June 7th 2012, a Protocol (the "Protocol") to the income tax treaty between Luxembourg and Poland (the "Treaty") was signed. The main amendments are: (i) introduction of a specific provision regarding the tax treatment of capital gains realised upon disposal of shares in a "real estate rich" company, (ii) change of the methods for the avoidance of double taxation, (iii) reduction of the withholding tax rate on dividends, interest and royalties.
Capital gains on shares in real estate companies
A "real estate rich companies" clause in line with the OECD Model Tax Convention is included in the Protocol. According to such clause, the State of source is authorised to tax capital gains realised upon disposal of shares in a company, whose value consists, directly or indirectly, of more than 50% of immovable properties, including real estate, located in the source State. Under the existing Treaty, such capital gains are exclusively taxable in the State of residence and if the shares are held by a Luxembourg company, the capital gain is generally exempt under Luxembourg domestic law.
Avoidance of double taxation
Luxembourg continues to apply the exemption with progression method as a general method. The tax credit method already applicable to dividends, interest and royalties is expanded to capital gains derived from the disposal of shares in real estate rich companies and income of sportsmen and artists.
Poland will continue to apply the exemption with progression as a general method. The tax credit method that was initially applied to interest and royalties under the Treaty is extended to business income, dividends, capital gains and income from independent professions. The exemption available to Polish residents with respect to Luxembourg source dividends will no longer be available once the Protocol enters into force.
Reduction of withholding tax rate
The withholding tax rate on dividends is reduced from 5% to 0% if the beneficial owner is a company (other than a partnership) holding directly at least 10% of the share capital of the distributing company for an uninterrupted period of at least 24 months preceding the distribution.
The maximum withholding tax on interest and royalties is reduced from 10% to 5%.
Other relevant amendments
- Exchange of information: Article 27 relating to the exchange of information has been amended and complies now with the OECD Model Tax Convention.
- Limitation of benefits: A new provision is introduced and prevents the application of the Treaty to income paid or received in relation to an artificial arrangement. The additional Protocol adds that the limitation on benefits of the Treaty is also applicable to persons taking advantage of laws, regulations and administrative practices qualifying as a harmful tax measure by the EU Code of Conduct Group (Business Taxation).
Entry into force
The Protocol will apply to income and wealth taxes due with respect to any tax year starting on or after January 1st of the calendar year following the year during which the procedures for entry into force of the Protocol have been accomplished in both contracting States (from a Luxembourg perspective, it may be applicable as from 2013, at the earliest). With respect to withholding tax, the new provisions will be applicable to distributions made as from the first day of the second month following the date of the Protocol's entry into force.
The following are links to an explanation note and the text of
the Protocol in Polish:
http://www.mf.gov.pl/dokument.php?const=1&dzial=153&id=300219
http://www.mf.gov.pl/dokument.php?const=3&dzial=150&id=9741
Commission Questions France And Luxembourg About Reduced VAT Rate On Ebooks
In December 2011, the Luxembourg tax authorities issued a circular stating that the VAT rate applicable to "classic" books i.e 3% is also applicable to digital books ("Ebooks"), on the grounds that (i) no distinction should be made between books and Ebooks as they have the same function and (ii) this interpretation is in line with the communication of the European Commission of December 2011 providing that similar goods and services should be subject to the same VAT rules and progress in technology should be taken into consideration in this respect.
In July 2012, the European Commission launched an infringement procedure against France and Luxembourg because the VAT rates they are applying to Ebooks are potentially incompatible with EU law. According to the European Commission, the Ebooks are not included in the list of goods and services set out in the VAT Directive on which a reduced VAT rate can be applied and an amendment to the VAT directive is required to allow the application of the reduced VAT rate to Ebooks.
France and Luxembourg had one month to subject their comments to the European Commission which may, if the information provided by the two countries is not sufficient, state formally that there is an infringement and ask for a change of their respective laws.
ECJ Rules On VAT Treatment Of Discretionary Portfolio Management Services
On July 19th 2012, the ECJ ruled that services consisting in the discretionary management of a securities portfolio are subject to VAT without exemption.
In the case at hand, Deutsche Bank ("DB") was rendering services to its clients consisting in the discretionary management of their portfolio of securities according to the investment strategy chosen by the clients. The clients were remunerating DB for the management of the portfolio on the one hand and the purchasing and selling of the securities on the other hand. DB did not charge VAT on the ground that the discretionary management of the portfolio was VAT exempt pursuant to Article 135 1. (f) (i.e. transactions, including negotiation, in shares, debentures and other securities) and Article 135 1. (g) (management of investment funds) of the VAT Directive.
The ECJ considered that although the services rendered by DB could have been rendered separately, the split of the services proposed by DB would be artificial since the average client investor seeks precisely the combination of these two elements. Therefore, the services proposed by DB must be viewed as a single supply of services which is subject to VAT and does not benefit from the VAT exemption as set out in Article 135 1. (f) and (g) of the VAT Directive since the VAT exemptions must be interpreted strictly.
AIFMD – Implementation In Luxembourg – Tax Aspects
On August 24th 2012, the Luxembourg government submitted a draft law to the Parliament with regard to the implementation of Directive 2011/61/EU of the European Parliament and of the Council adopted on June 8th 2011 on alternative investment fund managers ("AIFMD"). With this draft law, the Government seized the opportunity to introduce some modifications with respect to the tax treatment of (i) common limited partnerships (société en commandite simple - SCS) and special limited partnerships (société en commandite spéciale - SCSp), this latter vehicle being newly created by this draft law and (ii) carried interest paid to employees of companies managing an alternative investment fund.
Tax transparency of SCS and SCSp
According to the Luxembourg income tax law, a SCS is considered to be a transparent entity for income tax ("CIT") and net wealth tax purposes ("NWT"). However, the SCS will be subject to municipal business tax ("MBT") to the extent the SCS is engaged in a commercial activity. This is deemed to be the case, even in the absence of commercial activities, if one of the general partners of the SCS is a Luxembourg capital company e.g. a SA (société anonyme) or SARL (société à responsabilité limitée). If so, the SCS will be deemed to realize a commercial profit subject to MBT at a rate of 6.75% (for Luxembourg city) because its general partner, due to its commercial form, will "taint" the nature of income realized by the SCS as commercial income ("Geprägetheorie").
With this draft law, the application of the Geprägetheorie will be restricted to situations where the general partner holds 5% of the interest in the SCS or SCSp. Below such threshold, full tax transparency will be achieved at the level of the SCS or SCSp (i.e. absence of CIT/MBT/NWT) provided that the partnership does not engage in activities of a commercial nature. The purpose of this draft law is to create a new vehicle for private equity investment, which would not be subject to any taxes in Luxembourg if the vehicle does not carry out activities of a commercial nature, which should generally be the case in the private equity sector.
Carried interest
From a personal tax angle, this draft law introduces specific provisions with respect to the taxation of carried interest (i.e. profit participation in an alternative investment fund – "AIF") paid to employees of AIF managers and of companies managing an AIF who move to Luxembourg. According to such provisions, carried interest will be subject to tax in the hands of such employees at a reduced rate of roughly 10%. Such tax regime would apply for a period of 11 years as from the year the employee takes up in Luxembourg the position entitling them to carried interest.
ECJ Rules Luxembourg Net Wealth Tax Credit Incompatible With The Freedom Of Establishment
On September 6th 2012, the ECJ ruled that the Luxembourg legislation granting a net wealth tax credit provided that the tax payer remains subject to such tax during the next 5 years, is contrary to the freedom of establishment as provided by Article 49 of the Treaty on the Functioning of the European Union (the "TFEU").
The case before the Court was a case taken against the Luxembourg tax authorities by a taxpayer ("DADV") having transferred its legal seat from Luxembourg to Italy. DADV was a company incorporated in Luxembourg in 2000. In 2004 the company had been granted a net wealth tax reduction as prescribed by §8a of the NWT Law.
In December 2006 DADV migrated both its place of management and legal seat to Italy and was further merged into DIVI, an Italian company. DIVI, as successor of DADV, asked for the grant of the net wealth tax reduction for the years 2005 and 2006.
In July 2009, the tax authorities issued the 2005 and 2006 tax assessments refusing the granting of the net wealth tax reduction for such years and claimed for the payment of an amount corresponding to the 2004 net wealth tax reduction for which they considered that the conditions for the benefit of the net wealth tax reduction were not met anymore, in particular DADV did not meet the condition requiring a liability to net wealth tax for the next 5 years.
The ECJ ruled that the Luxembourg legislation at issue leads to a less favourable treatment of the Luxembourg company transferring its legal seat outside Luxembourg than a Luxembourg company which continues to have its legal seat in Luxembourg. Such difference in treatment constitutes a restriction to the freedom of establishment which is neither justified by the requirement of the balanced allocation of powers of taxation between Member States nor the need to ensure the coherence of the national tax system.
The ECJ concluded that the main objective of the legislation at issue, namely the increase of the national tax revenue, is not an overriding reason in the public interest which may be relied on to justify a measure which is contrary to a fundamental freedom.
Latest Luxembourg Case Law On Exchange Of Information
Case n° 30644C – July 2012
In this case, the Luxembourg tax authorities requested information from a Luxembourg company in order for the French tax authorities to determine the taxable wealth of French resident individuals.
The court of appeal overturned the decision of the lower administrative court (case n° 29869) and considered that the information given by the French tax authorities was sufficient to establish a link between the French resident individuals and the Luxembourg company namely the description of the different steps of a reorganization involving a Luxembourg company and a French company. Consequently, the information requested was viewed as "foreseeably relevant" and the request declared valid by the court of appeal.
Case n° 30177 – May 2012
In this case, the Swedish tax authorities requested information regarding the cash movements on Luxembourg bank accounts of a Swedish company subject to a control in Sweden with respect to its 2010 corporate income tax.
As the request for information made by the Luxembourg tax authorities to the Luxembourg bank merely stated in a succinct way that the underlying request of the Swedish tax authorities was compliant with the legal conditions on exchange of information, the court concluded that the Luxembourg tax authorities failed to adequately justify their request for information thus hindering the plaintiff in exercising its right to ascertain whether the legal conditions of an information request were respected. Consequently, the request for information was declared null by the court.
Case n° 30251 – May 2012
In this case, the Swedish tax authorities requested information with respect to the Luxembourg bank accounts of a company resident in Malaysia.
The court of appeal, by overturning the decision of the lower administrative court (case n° 29592), considered that the request for information of the Swedish tax authorities was incoherent with respect to the "identification of person under tax control". It was unclear whether such request intended to obtain information on the Malaysian company itself or the Swedish resident consultants in respect of payments made by the Malaysian company to them, the latter being however not identified in the request. The information requested under such circumstances could not be regarded as "foreseeably relevant" and therefore the request for information was declared null.
LABOUR LAW
EUROPEAN COURT OF JUSTICE, C-415/10, APRIL 19th 2012 – The employer does not have to justify the rejection of an application for employment
The German referring court asked whether a job applicant who shows that he fits the requirements set out by the employer in a job advertisement, who was not called for a job interview and whose application was rejected, had a right to information indicating whether the employer engaged another applicant at the end of the recruitment process and, if so, on the basis of which criteria.
This question refers to the relevant provisions of (i) Directive 2000/43/EC of June 29th 2000 implementing the principle of equal treatment between persons irrespective of racial or ethnic origin, (ii) Directive 2000/78/EC of November 27th 2000 establishing a general framework for equal treatment in employment and occupation, and (iii) Directive 2006/45/EC of July 5th 2006 the scope of which includes conditions of access to employment.
It must be noted that according to European case law (ECJ, case C-104/10 "Kelly"), the presumed victim of discrimination must first sufficiently establish the facts from which it may be presumed that there has been discrimination. It is only when this presumption has been properly established, that the burden of proof lies on the defendant.
The ECJ ruled that the abovementioned Directives must be interpreted as not entitling a worker, who claims plausibly that he meets the requirements listed in a job advertisement and whose application was rejected, to have access to information indicating whether the employer engaged another applicant at the end of recruitment process.
Nevertheless, it cannot be ruled out that a defendant's refusal to grant any access to information may be one of the factors to take into account in the context of establishing facts from which it may be presumed that there has been direct or indirect discrimination.
LABOUR COURT, CASE NUMBER 1982/2012, MAY 15th 2012 – determination of the amount of salary to be paid to an employee during sick leave
According to Article L.121-6 (3) of the Labour Code, an employee who is unfit for work is entitled to have his salary and any other benefits resulting from his employment contract maintained until the end of the month during which the 77th day of incapacity for work occurs.
In this case, the judge was faced with the question as to the amount of the salary in question.
The court ruled that such salary payment must include all "structural" components of the salary being regular and constant, resulting from the normal working time.
COUR DE CASSATION, CASE NUMBER 29/12, MAY 25th 2012
In the case at hand, the Court of appeal had dismissed an employee's claim for compensation for damages as a result of a dismissal ruled as abusive, on the ground that the employee through his behaviour, had contributed to the dismissal.
The Cour de Cassation overruled this decision and ruled that any employee unfairly dismissed for gross misconduct, is entitled to compensation for financial and moral damages, irrespective of his behaviour.
EUROPEAN COURT OF JUSTICE, C-78/11, JUNE 21st 2012 – an employee unable for work during his paid annual leave is entitled to a period of leave of the same duration as that of his sick leave
The question was whether Article 7(1) of Directive 2003/88 must be interpreted as precluding national provisions under which a worker who becomes unfit for work during a period of paid annual leave is not entitled subsequently to the paid annual leave which coincided with the period of unfitness for work.
According to the ECJ and to settled case-law, the entitlement of every employee to paid annual leave must be regarded as a particularly important principle of European Union social law from which there can be no derogations and whose implementation by the competent national authorities must be confined within the limits expressly laid down by Council Directive 93/104/EC of November 23rd 1993 concerning certain aspects of the organisation of working time.
The ECJ recalled, in addition, that the purpose of entitlement to paid annual leave is to enable the worker to rest and to enjoy a period of relaxation and leisure. However, the purpose of entitlement to sick leave is to enable a worker to recover from an illness that has caused him to be unfit for work.
The ECJ ruled that the abovementioned Directive must be interpreted as precluding national provisions under which a worker who becomes unfit for work during a period of paid annual leave is not entitled subsequently to the paid annual leave which coincided with the period of unfitness for work.
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.
