BSP Newsletter - January 2014

BANK LENDING, STRUCTURED FINANCE, SECURITISATION

UPDATED CSSF FAQ ON SECURITISATION AND CLARIFICATION OF POSITION ON THE IMPACT OF THE AIFM LAW ON SECURITISATION VEHICLES

On October 23rd 2013, the Luxembourg Supervisory Authority for the Financial Sector ("CSSF") published an updated version of its "Frequently Asked Questions" on securitisation vehicles ("FAQ") in order to clarify the impact on securitisation of the law dated July 12th 2013 on alternative investment fund managers (the "AIFM Law"), and in particular the CSSF's position in relation to the definition of "securitisation special purpose entities" under the AIFM Law.

The AIFM Law excludes from its scope vehicles carrying out transactions defined as securitisation transactions within the meaning of article 1 (2) of Regulation EC 24/2009 of the European Central Bank ("ECB") of December 19th 2008 (the "ECB Regulation"). Given that the AIFM Law provides for an autonomous definition of securitisation, it was not clear which Luxembourg securitisation vehicles were covered by the relevant legal exclusion, as the definition of securitisation under the Luxembourg law dated March 22nd 2004 on securitisation, as amended (the "Securitisation Law"), is different and somewhat broader than the one of the AIFM Law, which refers to the definition set out in the ECB Regulation.

As a result, each securitisation vehicle needed to assess its activities in light of the AIFM Law, in order to determine whether or not it may fall within its scope.

The CSSF provided useful guidance in its FAQ in order to determine whether Luxembourg securitisation vehicles qualify as alternative investment funds ("AIF") or not. In accordance with said FAQ, the following criteria apply to assess the impact of the AIFM Law on Luxembourg securitisation vehicles governed by the Securitisation Law:

Luxembourg securitisation vehicles qualifying as AIFs

• Luxembourg securitisation vehicles primarily acting as "first lenders" and originating new loans themselves, since no assets (and respectively, no credit risks) are transferred to, or purchased by, such securitisation entity, and hence it should not be considered as being engaged in a securitisation transaction within the meaning of the AIFM Law;
• Luxembourg securitisation vehicles issuing structured products linked to non-credit related underlying assets (i.e. equities, commodities, indices), where the transfer of risk attached to such assets is only accessory to the principal activity of the entity (synthetic exposure to non-credit related underlying assets).

Luxembourg securitisation vehicles not qualifying as AIFs

• Luxembourg securitisation vehicles, securitising credit risks, including vehicles issuing collateralised loan obligations;
• Luxembourg securitisation vehicles, issuing only debt instruments, and this irrespective of whether or not such vehicles meet the definition of "ad hoc securitisation structure" under the AIFM Law;
• Luxembourg securitisation vehicles not managed in accordance with an investment policy within the meaning of the AIFM Law.

Conclusion

Based on the above criteria, a majority of the Luxembourg securitisation vehicles (including authorised securitisation vehicles) do not qualify as AIFs.

In any case, each Luxembourg securitisation vehicle bears the responsibility of a self-assessment as to whether or not it qualifies as an AIF under the AIFM Law in light of the FAQ.

CAPITAL MARKETS

AMENDMENTS TO TRANSPARENCY DIRECTIVE - DIRECTIVE 2013/50/EC –

Directive 2013/50/EC of October 22nd 2013 (the "Amendment Directive") which has amended the Transparency Directive was published in the Official Journal of the European Union on November 6th 2013. It entered into force as of November 26th 2013.The transposition period is 2 years and therefore Member States will have to comply with its provisions by November 26th 2015 at the latest.

We have previously written about some changes to the Transparency Directive in our September 2013 newsletter: http://www.bsp.lu/publications/newsletters-legal-alerts/bsp-newsletter-june-september-2013

Other changes to the Transparency Directive affected pursuant to the Amendment Directive include:

1. the creation of a web portal that will serve as the European electronic "access point" of regulated information, thereby improving access to regulated information. Such web portal will be developed by the European Securities and Markets Authority ("ESMA");
2. the reinforcement of sanctions for non-compliance with key provisions of the Transparency Directive, as amended;
3. the enactment of new rules on when a decision about sanctions can be published, and whether competent authorities may delay such publication;
4. the amendment of the definition of "issuers" to include issuers of non-listed securities represented by depository receipts admitted to trading on a regulated market as well as issuers that are natural persons;
5. the clarification and simplification of the criteria for determining the home Member States of certain third-country issuers;
6. the abolition of the requirement to disclose new loan issues has been abolished because it overlaps with similar requirements of Directive 2003/6/EC of January 28th 2003 on insider dealing and market manipulation (market abuse);
7. the abolition of the requirement to communicate any amendment of an issuer's instruments of incorporation or by-laws to the competent authorities because it overlaps with similar requirements of Directive 2003/71/EC of November 4th 2003 on the prospectus to be published when securities are offered to the public or admitted to trading, as amended, and Directive 2007/36/EC of July 11th 2007 on the exercise of certain rights of shareholders in listed companies.

ESMA Q&A ON PROSPECTUSES

On October 28th 2013, the European Securities and Markets Authority ("ESMA") published an update of its Questions and Answers (the "Q&A") on prospectuses revising a number of current market practices and addressing some new issues related to the implementation of Directive 2003/71/EU of November 4th 2003 on the prospectus to be published when securities are offered to the public or admitted to trading, as amended by Directive 2010/73/EU of November 24th 2010 (the "Prospectus Directive").

The Q&A includes revisions of two previous questions and answers dealing with:

• pro-forma financial information (whereby ESMA has updated its illustrative examples
• of where issuers may be required to provide pro-forma financial information in a prospectus -question 51); and
• the level of disclosure concerning price information for share offerings (whereby ESMA considers the level of price disclosure in prospectuses for share offerings, the method disclosed in the prospectus to determine final price where it is not known, and when withdrawal rights are triggered - question 58).

As these revised questions set out changes to current market practices, they are applicable only from January 28th 2014 to allow market participants sufficient time to adjust.

The Q&A addresses three new issues (which apply immediately), specifically:

• the statement of auditors' agreement where a profit estimate is included in the prospectus (question 88);
• the application of the proportionate disclosure regime for prospectuses for rights issues that are not fully subscribed (question 89); and
• the proportionate disclosure regime for rights issues and admission to trading on a regulated market (question 90).

Answer 88 clarifies that whilst agreement needs to be reached between the issuer and auditor, the "statement" (that agreement has been reached) may be made by (i) the auditor or (ii) the issuer/offeror/person asking for admission to trading. Furthermore answer 88 confirms ESMA's opinion that the statement means that the auditors do not expect the figures to change substantially, except in case of unforeseen events.

Answer 89 confirms that unless exemptions set out under article 3.2 of the Prospectus Directive apply, the proportionate disclosure regime for rights issues is not applicable to a subsequent offer to the public of shares not subscribed by the existing shareholders and/or not subscribed by pre-emptive rights holders. Answer 90 confirms that the proportionate disclosure regime for rights issues is applicable to the admission to trading on a regulated market of new shares neither subscribed by existing shareholders nor by pre-emptive rights holders but placed with other investors by using the exemptions provided in Article 3.2 of the Prospectus Directive.

The updated Q&A is available at the following link: http://www.esma.europa.eu/system/files/2013-1537_qa_prospectuses_-_20th_updated_version_0.pdf

ESMA STATEMENT ON SHAREHOLDER COOPERATION AND "ACTING IN CONCERT"

On November 12th 2013, the European Securities and Markets Authority ("ESMA") published a statement on shareholder cooperation and acting in concert under Directive 2004/25/EC on takeover bids (the "Takeover Directive"). The statement clarifies the extent to which investors may cooperate on corporate governance issues without being regarded as "acting in concert" and therefore running the risk of triggering an obligation to make a mandatory offer under the Takeover Directive.

Background

Under the law of May 19th 2006 on takeover bids (the "Takeover Law"), a person (natural or legal) who, after adding to his/her existing holdings of securities is entitled to exercise 33 1/3 % of the voting rights in a Luxembourg company that has securities admitted to trading on a regulated market in the EU/EEA, is required to make a public offer for the remaining securities at an equitable price. For the purpose of determining whether the threshold has been met, the voting rights attached to securities held or acquired by parties acting in concert with such person are included.

Persons "acting in concert" is defined as "natural or legal persons who cooperate with the offeror or the offeree company on the basis of an agreement, either express or tacit, either oral or written, aimed at either acquiring control of the offeree company or at frustrating the successful outcome of a bid". Due to the ambiguous nature of the "acting in concert" rule it is often unclear whether the mandatory public offer obligation has been or will be triggered. Hence this can cause hesitation on the part of shareholders to cooperate with each other to the detriment of good corporate governance.

The White List

The ESMA statement sets out a "White List" of certain activities relating to shareholder cooperation. Where shareholders cooperate to engage in any activity on the White List, such cooperation will not, in and of itself, lead to such shareholders being regarded as acting in concert and therefore being at risk of triggering a mandatory takeover offer. ESMA has also emphasised that where shareholders engage in any activity on the White List with the aim of acquiring or exercising control over a company, or in fact have acquired or are exercising control, these persons will be regarded as acting in concert.

The activities included on the White List are as follows:

• entering into discussions with each other about possible matters to be raised with the company's board;
• making representations to the company's board about company policies, practices or particular actions that the company might consider taking;
• other than in relation to the appointment of board members, exercising shareholders' statutory rights to: (i) add items to the agenda of a general meeting; (ii) table draft resolutions; or (iii) call a general meeting other than the annual general meeting;
• other than in relation to a resolution for the appointment of board members, agreeing to vote the same way on a particular resolution put to a general meeting, in order, for example: (A) to approve or reject: (i) a proposal relating to directors' remuneration; (ii) an acquisition or disposal of assets; (iii) a reduction of capital and/or share buy-back; (iv) a capital increase; (v) a dividend distribution; (vi) the appointment, removal or remuneration of auditors; (vii) the appointment of a special investigator; (viii) the company's accounts; or (ix) the company's policy in relation to the environment or any other matter relating to social responsibility or compliance with recognised standards or codes of conduct or (B) to reject a related party transaction.

If shareholders cooperate to engage in an activity which is not included on the White List, that fact will not, in and of itself, mean that those shareholders will be regarded as persons acting in concert. Each case will be determined on its own particular facts.

Appointment of board members

Cooperation by shareholders in relation to the appointment of board members can be particularly sensitive in the context of the application of the mandatory bid rule. If shareholders cooperate they may be in a position to control the operational management of the company. ESMA notes that different approaches adopted by different Member States are a result of national company law and prevailing shareholder structures and hence have not included any activity relating to cooperation in relation to board appointments on the White List.

With regard to the appointment of members to the board of a company ESMA set out certain examples of what form this cooperation could take.

The statement also set out certain facts which the competent authorities should consider when examining whether such cooperation amounts to acting in concert.

ESMA emphasises the importance of early consultation with national competent authorities where there is any uncertainty.

CORPORATE

DRAFT LAW 6625 -A STEP TOWARDS TRANSPARENCY

On October 4th 2013, draft law 6625 concerning the immobilisation of shares and corporate units in bearer form and the keeping of the register of shareholders of both bearer and registered shares, amending the law of August 10th 1915 on commercial companies (Draft Law 6625) was filed.

The Draft Law stems from the updated forty recommendations of the Financial Action Task Force (FATF). The FATF recommends that Member States take measures to prevent the use of legal persons for money laundering and the financing of terrorism, primarily regarding the transparency of the beneficial ownership of legal entities, and particularly the issue and circulation of bearer shares and warrants thereto related.

The FATF sets out in the interpretive note to recommendation 24 a number of measures that should allow competent authorities to obtain or access, in a timely fashion, adequate, accurate and up to date information regarding the beneficial ownership and control of companies and other legal persons.

The Luxembourg legislator considered the immobilisation of securities of bearer form with a financial institution or a professional intermediary as the most appropriate measure to meet such recommendations.

Henceforth, bearer shares (issued by companies and investment funds) will have to be deposited with a custodian. This does not apply to listed bearer shares.

The transferability of bearer shares will be considerably impacted by Draft Law 6625. Indeed the transfer of bearer shares will no longer take place by simple transfer ("traditio"), but by a declaration of transfer entered in the shareholder's register in accordance with the requirement of article 1690 of the Luxembourg Civil Code. Ownership of bearer shares shall be operated not by simple possession but by registration in the shareholders' register.

Since such requirements will also apply to securities in bearer form issued before the entry into force of the new law, the Draft Law 6625 provides for a transitional period. Issuers will have six months to appoint a custodian and shareholders will have an additional period of twelve months to deposit and register their securities. Bearer securities not transferred within eight years of the entry into force of the new law shall be cancelled and the issuer must reduce the subscribed capital correspondingly.

As usual, the Luxembourg legislator maintains a pragmatic view and emphasises flexibility in choosing this mechanism while ensuring its implementation by imposing criminal sanctions on management bodies and custodians who fail to comply, within a transitional period.

INVESTMENT FUNDS

PROPOSAL FOR A REGULATION ON MONEY MARKET FUNDS

The European Commission issued a proposal on September 4th 2013 for a new regulation on Money Market Funds ("MMFs") within the scope of the shadow banking initiative (the "Proposal").

This Proposal, if adopted as it is currently drafted, will lead to a substantial reform of the industry. The new rules will apply to all undertakings for collective investments in transferable securities ("UCITS") within the meaning of the UCITs Directive and to all alternative investment funds ("AIFs") within the meaning of the AIFMD Directive that invest in short term assets and offer returns in line with money market rates or preserve the value of the investment. The Proposal is based on certain principles of the existing CESR/ESMA guidelines, but it also introduces supplementary rules that will have a considerable impact on the MMF industry.

The main changes introduced by the Proposal are:

General

• UCITS and AIFs subject to the scope of the Proposal shall be identified as MMFs and obtain an authorisation as such.
• Limitation of the scope of eligible assets to the following:
  
  
  1. money market instruments;
  2. deposits with credit institutions;
  3. reverse repurchase agreements; and
  4. financial derivative instruments for hedging interest rate and currency risk.
• The use of short-selling money market instruments and the borrowing and lending of cash and securities will be prohibited.
• No exposure to equities or commodities will be allowed.

Investment policies

• Issuer diversification and portfolio concentration such as:
  
  
  1. No more than 5% of its assets in any of the following:
     
     
     1. money market instruments issued by the same body; and
     2. deposits made with the same credit institution.
  2. The aggregate of all exposures to securitisations shall not exceed 10% of its assets.
  3. The aggregate risk exposure to the same counterparty of the MMF stemming from OTC derivative transactions shall not exceed 5% of its assets.
  4. The aggregate amount of cash provided to the same counterparty of a MMF in reverse repurchase agreements shall not exceed 20% of its assets.
  5. A MMF shall not combine, where this would lead to investment of more than 10% of its assets in a single body, any of the following:
     
     
     1. investments in money market instruments issued by that body;
     2. deposits made with that body; and
     3. OTC financial derivative instruments giving counterparty risk exposure to that body.
  6. Competent authorities may authorise a MMF to invest in accordance with the principle of risk-spreading up to 100% of its assets in different money market instruments issued or guaranteed by certain authorities, central banks or public international bodies, if special requirements are met.
  7. Companies which are included in the same group for the purposes of consolidated accounts shall be regarded as a single body for the purpose of calculating the limits referred to here above.
  8. A MMF may not hold more than 10% of the money market instruments issued by a single body except in respect of holdings of money market instruments issued or guaranteed by certain authorities, central banks or public international bodies.
• Managers will need to establish and document:
  
  
  1. an internal assessment procedure; and
  2. an internal rating system to determine the credit quality of issuers.

Risk management

• MMFs will be subject to certain efficient portfolio management rules and stress testing processes and they will need to implement a "know your customer" policy.

Valuation rules

• Constant net asset value ("CNAV") MMFs will need to compare the CNAV and the variable net asset value (the "VNAV").
• MMFs shall calculate on a daily basis for variations and escalate significant variation to the authorities.

Specific requirements for CNAV

• CNAV MMFs shall maintain a capital buffer of 3%, with existing MMFs having 3 years to progressively build this buffer.
• An escalation procedure shall be implemented.

External support

• External support for MMFs will only be permitted in extreme circumstances.

Transparency requirements

• A MMF shall clearly indicate whether it is a short-term or a standard MMF and if it is a CNAV MMF.
• New quarterly reporting obligations to competent authorities are introduced as well as a new authorisation procedure for AIFs mirrored on the UCITS approach which when taken together will give the authorities the additional information needed to monitor the sector for systemic risk.

The proposal has opened a great debate in the Luxembourg fund industry, notably concerning the "buffer" rules, which were initially designed for the banking sector, which are deemed to impose a high burden on investment funds.

The Proposal is now in the hands of the EU Parliament and Council for negotiation and is likely to be agreed in 2014. Existing MMFs would have six months after the entry into force of the regulation to submit an application to their local authority demonstrating their compliance with the same.

The text of the proposal is available at: http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=COM:2013:0615:FIN:EN:PDF

UPDATE ON PROPOSAL FOR AN EU REGULATION ON KEY INFORMATION DOCUMENTS FOR INVESTMENT PRODUCTS

We reported in our newsletter of June 2013 that the voting of the Committee of Economic and Monetary Affairs of the European Parliament ("ECON Committee") on the proposed amendments to the draft regulation of the European Parliament ("EP") and of the Council on key information documents for investment products was supposed to occur on July 9th 2013.

The ECON Committee voted in favour of the report on October 21st 2013, but refused to give the rapporteur a mandate to negotiate with the Council because certain members of the ECON Committee were against some key provisions contained in the report. The EP then adopted, on November 20th 2013, amendments to the proposal and gave the rapporteur a mandate to engage in negotiations with the Council. The vote on the draft legislative resolution was postponed in accordance with rule 57(2), second subparagraph of the rules of procedure of the EP. As a consequence, the matter has been sent back to the ECON Committee for reconsideration.

The text adopted by the EP contains the following changes:

1. Certain investment products are excluded from the scope of the proposed regulation:
   
   
   • deposits other than structured deposits as defined under MIFID;
   • insurance products which do not offer a surrender value;
   • other securities which do not embed a derivative with the exception of corporate bonds and instruments issued by special purpose vehicles;
   • officially recognised occupational pension schemes and individual pension products
   • for which a financial contribution from the employer is required by national law and where the employer or employee have no choice as to the pension product or provider; and
   • officially recognised social security schemes subject to national or EU law.
2. The EP endorsed the measures aiming to strengthen the powers of national and European supervisory authorities. Therefore they shall have the right to restrict or prohibit the marketing, distribution or sale of investment products pursuant to article 13(b) 5.6. of the proposed regulation.
3. The EP approved provisions concerning the product approval process. Thus article 5a provides, inter alia, that the product manufacturer establishes a documented product approval process and that each investment product meets the needs of an identified consumer group and that the product manufacturer has undertaken an assessment of all likely risks relevant for the needs of the identified consumer group. Such assessment shall include stress testing of the investment product. This approval process shall also ensure that investment products that are already available on the market are regularly reviewed in order to ensure that the investment product continues to be compatible with the interests of the identified consumer group. This approval process shall be reviewed annually.
4. Finally, the EP endorsed the introduction of a complexity label as provided for in article 8a. Such label should be created when an investment product is considered to be very complex and may not be appropriate for all retail investors.

The full text of the amendments are available at: www.europarl.europa.eu/sides/getDoc.do?pubRef=-//EP//NONSGML+COMPARL+PE-504.398+01+DOC+PDF+V0//EN&language=EN

UPDATE ON Q&A ON ESMA GUIDELINES ON ETFs AND OTHER UCITS ISSUES

On November 27th 2013, the European Securities and Markets Authority ("ESMA") published an updated version of its Q&A on guidelines on ETFs and other UCITS ISSUES ("Q&A").

Two questions were added. The first one concerns the question of collateral management. The issue was whether the reinvested cash collateral by a UCITS should be taken into account for the calculation of the issuer concentration limit as provided for in the UCITS directive. ESMA answered affirmatively to this question.

The second question deals with financial indices. In particular, the issue was to determine if the provision which prohibits UCITS to invest in financial indices whose methodologies permit retrospective changes to previously published index values covers calculation mistakes. ESMA responded negatively to this issue.

The full text of the update Q&A is available at: http://www.esma.europa.eu/system/files/2013-1547_qa_on_guidelines_on_etfs_and_other_ucits_issues.pdf

CSSF REGULATION N°13-02 RELATING TO OUT-OF-COURT DISPUTE SETTLEMENT

CSSF Regulation 13-02 relating to out-of-court dispute settlement, published on October 28th 2013 (the "Regulation") partly entered into force on January 1st 2014. It applies to entities under the supervision of the CSSF, including undertakings for collective investment in transferable securities ("UCITS") and part II undertakings ("Part II UCIs") within the meaning of the law of December 17th 2010 ("UCI Law").

The purpose of the Regulation is twofold.

It enhances on the one hand the regulatory framework of the CSSF in order to handle customer and investor complaints. The Regulation offers the possibility to investors to submit a written complaint to the CSSF (which may be filed in English, German, French or Luxembourgish) if, after a period of one month from submission of a written complaint to the financial entity, it has not received a satisfactory answer. The CSSF then requests the financial entity to take a position, analyses the complaint and forms its reasoned conclusions. If it concludes that the request is totally or partially justified it asks the parties to contact each other to settle their dispute. The CSSF has no judicial power. Its conclusions are not binding. If the parties fail to reach an agreement, they may refer the matter to the competent court. The provisions regarding the procedure before the CSSF apply as from January 1st 2014.

On the other hand, the Regulation also requires, among others, UCITS and Part II UCIs to establish a complaints management policy which shall be described in a formal written procedure and approved by the governing body of the entity. Such policy shall be efficient, transparent and objective. It shall set forth the registering and follow-up of all complaints filed by investors. In respect to such policy, there shall be a continuing cooperation with the CSSF, including the requirement to describe the content of such policy and to provide relevant data on investor complaints on an annual basis. The complaints management policy shall also be publicly disclosed in an easily accessible manner. It is not necessarily required for UCITS and Part II UCIs to insert such information in their prospectus or subscription agreements. A disclosure on an internet web site or via a brochure or leaflet shall be sufficient. The provisions regarding the establishment of a complaints handling procedure are applicable as from July 1st 2014.

The full text of the Regulation is available at http://www.cssf.lu/fileadmin/files/Lois_reglements/Legislation/Reglements/RCSSF_No13-02eng.pdf

CROWDFUNDING: EUROPEAN COMMISSION LAUNCHES CONSULTATION

The European Council, in its June 2013 conclusions, emphasised the need to develop alternative sources of financing in close cooperation with Member States.

Crowdfunding may be set-up under various forms (donation, reward, equity or lending) and is commonly defined as "asking a crowd to donate a certain amount of money for a specific cause, project, or other use within a predetermined timeframe. If your goal isn't met, all donations are refunded". The European Commission considers that crowdfunding has the potential to bridge the financing gap many start-ups face and thus to stimulate entrepreneurship.

Crowdfunding has long existed in the United States and has just recently started to emerge in different Member States, though without a common European legislation or framework. This lack of a common framework has left the governments with the task of regulating this new type of financing in order to allow the local development of such platforms. Nonetheless experience has proven that the level of regulation, the capital and organisational requirements but also the protection of the contributors vary greatly amongst Member States.

On June 3rd 2013 the European Commission organised a workshop on crowdfunding where it confirmed that it was timely and necessary to determine how and where European action could add value to encourage the growth of this new form of financing, all while ensuring an adequate level of protection of contributors.

Following such workshop the European Commission, with a view to promoting the development of a crowdfunding regulation and to exploring how the EU could promote crowdfunding in Europe, launched in October 2013 the consultation document "Crowdfunding in the EU - Exploring the added value of potential EU action", to invite stakeholders to share their views about crowdfunding. In particular, its potential benefits, risks, and the design of an optimal policy framework to untap the potential of this new form of financing.

The expected benefits of this new way of financing are considered as fitting with the objectives of the European Commission as far as they improve the access to credit and financing for sustainable and inclusive growth of SMEs and thus also increase the level of employment and entrepreneurship across Europe.

The consultation closed on December 31st 2013 and the summary of this consultation is expected to be published shortly on the European Commission's website.

Luxembourg has witnessed an increasing interest in the matter and recently the bankers association and the investment funds association ABBL/ALFI have formed working groups to start discussions on the orientations of a specific regulation in the country.

The consultation document is available at: http://ec.europa.eu/internal_market/consultations/2013/crowdfunding/docs/consultation-document_en.pdf

INVESTMENT FUNDS –AIFM/AIFMD

AIFMD DEADLINE FOR REPORTING THE COMPLIANCE OF THE AIF

All funds established either as Part II UCIs, SICARs or SIFs and which qualify as alternative investment funds pursuant to the Luxembourg Law of July 12th 2013 on alternative investment fund managers ("AIFM Law"), must comply with specific product aspects as introduced by their relevant law (i.e. annual report, valuation rules, disclosure to investors, depositary rules).

Alternative investment funds which benefit from the transitional provisions of the AIFM Law have to comply with the above product regulation aspects by July 22nd 2014.

Pursuant to CSSF's FAQ on alternative investment fund managers (see below) such funds are requested to submit to the CSSF, by April 1st 2014 at the latest, a file containing information as regards their plan for compliance with the relevant AIFM Law product rules by July 22nd 2014.

ESMA GUIDELINES ON REPORTING OBLIGATIONS UNDER AIFMD

On October 1st 2013, the European Securities and Markets Authority ("ESMA") published its final guidelines on the reporting obligations for alternative investment fund managers ("AIFM") under the AIFM Directive. On November 15th 2013, ESMA published its revised final guidelines (the Guidelines").

The revised guidelines are available at: http://www.esma.europa.eu/system/files/2013-1339_final_report_on_esma_guidelines_on_aifmd_reporting_for_publication_revised.pdf

The purpose of the Guidelines is to provide clarification on the information that AIFMs must report to the national competent authorities, the timing of such reporting together with the procedures to be followed when AIFMs move from one reporting obligation to another.

Pursuant to article 110 of regulation 231/2013 of December 19th 2012 (the "Regulation"), the reporting frequency for the AIFM and all the AIFs it manages is as follows:

• Semi-annually if the total assets managed by the AIFM are above the thresholds of EUR 100 million or EUR 500 million but less than EUR 1 billion, for each of the EU AIFs they manage and for each of the AIFs they market;
• Quarterly if the total assets managed by the AIFM exceed EUR 1 billion, for each of the EU AIFs they manage and for each of the AIFs they market;
• Quarterly for AIFMs which fall under the first bullet point, in respect only of each AIF whose assets under management, including assets acquired through use of leverage in total exceed EUR 500 million.
• Annually in respect of each unleveraged AIF under the management of an AIFM, which, in accordance with its core investment policy invests in non-listed companies and issuers in order to acquire control.

AIFMs must realise their reports as of the last business day of the reporting period and notify them to the regulator within one month or 45 days for funds of funds. ESMA confirms that the reporting period should be aligned with the calendar year. ESMA clarifies that reports should be submitted once per reporting period.

Initially, ESMA proposed in its consultation paper that AIFMs which are either registered or authorised between July 23rd and December 31st 2013 should provide the regulator with a first report as of January 31st 2014 (mid-February for funds of funds) covering the period from July 23rd to December 31st 2013. As the market participants considered this provision to be inconsistent with the transitional provisions laid down in article 61(1) of the AIFM Directive, ESMA now recommends that existing AIFMs will be permitted to take account of the one year grace period provided for in article 61(1) of the AIFM Directive and the status of their authorisation when determining the nature and timing of their reporting obligations.

The Luxembourg competent authority (the "CSSF") will have two months from the publication of translations of the Guidelines on ESMA's website to confirm whether the CSSF complies with the Guidelines or explains non-compliance. After this deadline, the CSSF will be considered as non-compliant. However, the CSSF announced on October 8th 2013 that it will issue a circular which includes the practical aspects of reporting and clarification on the information to be reported to the CSSF as well as the timing of such reporting via the reporting template as provided for in Appendix IV of the Regulation.

In addition to the Guidelines, ESMA published on its website technical documents that should help regulators and the AIFMs to transmit the requested reporting in a standardised way to national competent authorities and to ESMA.

The CSSF, in their updated FAQ set out further advice on reporting requirements and deadlines.

CSSF PUBLISHES UPDATED FAQ ON AIFM

On January 10th 2014 the CSSF published an updated version of its FAQ concerning the Luxembourg Law on AIFM ("AIFM Law") as well as the Commission Delegated Regulation (EU) No 231/2013 of December 19th 2012.

The definition section has been updated and now the terms "authorised AIFM", "Marketing", "Professional Investor" and "Registered AIFM" have, among others been clarified.

In addition, two new questions relating to AIFs structured as FCPs or as limited partnerships have been added to the FAQ. Such questions (i) clarify that FCPs are always to be considered as externally managed, (ii) provide guidance as to how to determine whether limited partnerships are to be considered as internally or externally managed and (iii) clarify when the external manager is responsible for seeking the relevant authorisation or registration for the AIF.

The section relating to the entry into force of the provisions of the AIFM Law has also been updated to invite all entities which need to be authorised pursuant to the AIFM Law to submit to the CSSF, as soon as possible, and by April 1st 2014 at the latest, their application file.

The FAQ has further been enlarged with four new questions to cover more extensively the marketing passport aspects of the AIFM Law as well as the reporting requirements AIFMs need to comply with.

The updated FAQ is available at: http://www.cssf.lu/aifm

INVESTMENT FUNDS - EMIR

EMIR REPORTING OBLIGATIONS TO START ON FEBRUARY 12TH 2014.

On November 7th 2013, ESMA approved the registration of the first four trade repositories ("TRs") under the European Union regulation on derivatives, central counterparties and trade repositories ("EMIR"), therefore setting the date of February 12th 2014 as the starting day for the reporting obligations set forth under the EU regulation (the "Reporting Start Date").

Today six TRs have been approved by ESMA and one of them is located in Luxembourg.

TRs enable market players to report derivative trades. The data collected by the TRs allows the regulators to identify and reduce the risks related to the derivative market.

As from February 12th 2014, any counterparty located in the European Economic Area and subject to EMIR will need to report on behalf of themselves or their counterparty all their over the counter ("OTCs") and exchange-traded derivatives ("ETDs") transactions to TRs.

The derivatives transactions to be reported cover all derivative asset classes, irrespective of whether these are traded on or off exchange.

Counterparties of a same contract are allowed report to a different TR as far as the common data to be reported has been agreed upon.

A participant may choose to delegate the reporting obligation to the other counterparty to the contract but also to a third party appointed for such function.

Each transaction will need to be reported within the business day following the day that it is concluded, modified or terminated. The reporting encompasses all derivatives contracts that where concluded before August 16th 2012 and which remain outstanding or derivative contracts entered into on or after August 16th 2012, even if they were terminated before this reporting date.

Derivative contracts concluded before or after August 16th 2012 and which remain outstanding on the Reporting Start Date must be reported to a trade repository within 90 days of the Reporting Start Date (May 13th 2014). Derivative contracts that were outstanding on August 16th 2012 or which were entered into on or after August 16th 2012, and which are terminated (no longer outstanding) on or after the Reporting Start Date must be reported to a trade repository within three years of the Reporting Start Date (February 11th 2017).

ESMA RELEASES DRAFT TECHNICAL STANDARDS ON EMIR

The reporting required is substantially more significant than the reporting regulated firms are currently providing to the CSSF.

On November 15th 2013 ESMA released its final report on the draft technical standards on EMIR ("RTS") in relation to the contracts that are considered to have a direct substantial and foreseeable effect within the EU and in relation to non-evasion. The RTS provide more detail on the application of EMIR to transactions between non-EU counterparties with a direct, substantial and foreseeable effect within the Union and in relation to non-evasion from EMIR provisions. The final report is available at: http://www.esma.europa.eu/content/Draft-technical-standards-under-EMIR-contracts-direct-substantial-and-foreseeable-effect-wit

UPDATED EUROPEAN COMMISSION FAQ ON EMIR

On December 18th 2013, the European Commission published an update to its FAQ document on EMIR.

The document now clarifies that, "non-profit entities" shall be considered as "undertakings" -in the context of the definition of non-financial counterparty- "if they offer goods and services in the market. Individuals carrying out an economic activity are also considered to be undertakings, provided they offer goods and services in the market."

The FAQ also explains that "municipalities which are not charged or do not intervene in the management of public debt, and which cannot be considered as "public sector entities" within the meaning of letter (b) of paragraph 5 of Article 1 of EMIR, are to be considered as "non-financial counterparties" provided they are undertakings in the sense that they carry out economic activities in the market and therefore they are subject to EMIR requirements.

The updated FAQ is available at: http://ec.europa.eu/internal_market/financial-markets/docs/derivatives/emir-faqs_en.pdf

UPDATED EMIR IMPLEMENTATION Q&AS (INCLUDING REPORTING OF EXCHANGE TRADED DERIVATIVES)

ESMA published an updated version of the Questions & Answers on EMIR implementation on December 19th 2013. The update relates to the questions on OTCs, Central Clearinghouses and reporting to trade repositories, and now includes a Q&A clarifying which parties have to report exchange traded derivatives.

Indeed ESMA has clarified that the following participants will need to report their ETD trades to TRs:

• CCPs clearing the trades;
• clearing members of the CCP clearing the trades;
• MiFID investment firms executing derivative trades on a trading venue of which they are a member; and
• counterparties to derivative contracts that do not fall into any of the categories above, except when they are exempt because of their status.

Any of these participants is obliged to report all derivative contracts concluded with any of the other participants.

The updated Q&A is available at: http://www.esma.europa.eu/content/EMIR-QA

LABOUR LAW

MODIFICATION OF LABOUR CODE

On December 23rd 2013, the Luxembourg Parliament adopted a law (the "Law") modifying Article L.122-10 of the Labour Code and extending certain temporary measures aimed at promoting employment and at adapting the modalities of indemnification in the event of unemployment.

The Law inserts a new paragraph into Article L.122-10 stating that any employer contemplating to hire a new employee under an employment contract concluded for an indefinite duration must inform employees that are employed with the undertaking under a fixed term employment contract of that fact. Such notification must be made at the time the vacancy arises.

The Law also extends, until 2015, the period of time over which the Luxembourg State will compensate the financial loss incurred by employers as a result of the reduction of working hours that arises when, instead of dismissing their employees for economic reasons, these employers decide to maintain their employment relationship.

Finally, the decisions taken by the Labour Ministry designating the companies to benefit from financial subsidies and any other financial aid in order to avoid redundancies due to the economic climate will remain valid until December 31st 2015.

The Law also extends, until December 31st 2014, the period of validity of the decisions taken, in case of partial unemployment, to reduce employees' working hours by up to 50%, without exceeding, at the end of the concerned year, a duration of work equivalent to 10 months.

TAX

VAT EXEMPTION OF RISK MANAGEMENT SERVICES

On November 7th 2013, the Luxembourg VAT Authorities issued Circular N° 723ter (the "Circular") regarding the risk management of investment funds.

Luxembourg legislation provides that management companies of UCITS are required to establish a risk management method enabling to permanently supervise the risks associated with the assets and their impact on the risk profile of the investment fund. Similar legislation exists for alternative investment fund managers.

The Circular confirms that risk management is part of the management of investment funds and therefore should benefit from the VAT exemption applicable to investment fund management services. This exemption is not only available for services performed by the management company itself, but also when the services are outsourced to a third party. In the latter case, according to the principles applicable in case of outsourcing of VAT exempt services the services should, viewed broadly, form a distinct whole, be specific to and essential for the management of funds in order to be VAT exempt (cfr Abbey National and GfBK cases of the ECJ). The exemption does therefore not apply to single isolated services like the making available of software or certain auxiliary or technical supportive services.

CLARIFICATION OF THE NET WEALTH TAX CREDIT RULES

On November 14th 2013, the Luxembourg tax administration issued a circular (the "Circular") which develops some of the elements covered in previous circulars (Circular Eval. n°51/I. Fort. 42 dated October 10th 2002 and the Circular LIR n°164 bis/1 dated September 24th 2004) and clarifies the rules for the determination of the net wealth tax credit ("NWT Credit") considering the minimum corporate income tax ("CIT").

The NWT Credit allows companies to obtain a NWT credit equal to the amount of the net wealth tax ("NWT") due for the corresponding year and thus to eliminate their NWT charge. The NWT Credit is limited to the amount of corporate income tax due for the same year ("First Limitation") and requires that the company allocates an amount equal to five times the NWT Credit to a non-distributable reserve which must be maintained for a five-year period.

As from the year 2013, in addition to the First Limitation, the NWT Credit is not granted up to the amount of the minimum CIT regardless of the company being liable to the minimum CIT or not. Taking as an example a company which is characterised as a finance company and is therefore subject to a minimum CIT of EUR 3,210; if the CIT due by that company for a given year is EUR 7,000 and the NWT is EUR 5,000, the company will be allowed to obtain a maximum NWT Credit of EUR 1,790 (EUR 5,000 – EUR 3,210).

In addition, in line with the judgement of the Administrative Court of October 1st 2013 following the decision of the ECJ of September 6th 2012, the Circular states that the NWT Credit will not be withdrawn if a company transfers its legal seat to another EU Member State. The Circular however specifies that this decision does not prevent the tax authorities from withdrawing the NWT Credit if a company is liquidated.

The Circular also clarifies the rules applicable in a tax consolidation scenario which is only available for CIT but not for NWT. The aggregate NWT Credit of the entities forming the fiscal unity is limited to the CIT due by the tax group. As from 2013, in addition to this first limitation, the aggregate NWT Credit available is reduced by the aggregate minimum CIT that would be due by each of the consolidated companies if they were not consolidated; whether they would be liable to the minimum CIT or not. The Circular confirms that in case of a de-merger of an entity which is part of the tax group, the benefit of the NWT Credit will be maintained if any entity part of the tax group takes over and continues the NWT reserve. A previous circular had already confirmed that this rule is applicable to mergers and absorptions.

PROPOSAL FOR AMENDMENT OF THE EU PARENT-SUBSIDIARY DIRECTIVE

On November 25th 2013, the European Commission published a proposal for amendment of the EU Parent-Subsidiary Directive 2011/96/UE (the "Directive").

The proposal is a result of the fact that the benefits of the Directive are abused by companies to avoid paying taxes in any Member State. The European Commission wishes therefore to amend the Directive in order to close loopholes and to introduce a general anti-abuse rule.

The proposal focuses on hybrid loan arrangements which have been identified as a tax planning tool. A hybrid loan arrangement is a financial instrument to which EU Member States may give a different tax characterisation: the instrument is treated as debt in the source country and therefore payments under the instrument are deductible, while it is treated as equity in the receiving country and consequently benefits from the participation exemption. In order to cope with this double non-taxation situation, the European Commission proposes to deny the benefit of the tax exemption to income from a participation in an EU subsidiary if such income is deductible in the jurisdiction of the subsidiary.

In addition, the European Commission proposes to update the current anti-abuse provision in the EU Parent-Subsidiary Directive in light of the general anti-abuse rules proposed in the Recommendation on aggressive tax planning of the European Commission from December 2012. Accordingly, a common anti-abuse rule shall be adopted. Under such anti-abuse rule, the EU Member States shall withdraw the benefit of the Directive in cases of artificial arrangements which have been put in place for the principal purpose of obtaining an improper tax advantage under the Directive and which are contrary to the objective, spirit and purpose of the tax provisions invoked.

These amendments need to be approved by each of the EU Member States before the Directive can be amended.

FISCAL POLICY OF NEW LUXEMBOURG GOVERNMENT

In December 2013, the new Luxembourg government released its programme which includes a section outlining its tax policy.

The primary objective is to render Luxembourg more attractive as a business location both for enterprises and individuals through a coherent and foreseeable fiscal policy. The main measures announced by the government are as follows:

The new government aims at consolidating and raising tax revenues, which are necessary to reduce public debt (which is at a very low level compared to most of the other EU Member States). This will be achieved primarily through economic growth. Increase of taxes will only be considered as a last resort save for VAT where the government has to increase the VAT rate in order to compensate for the loss of VAT on e-commerce. The standard VAT rate will however remain the lowest in the EU. The government intends to improve the collection of taxes through a broadening of the self-assessment system and a systematic application of penalties and fines in case of a delay in the filing of the tax returns and payment of taxes. Combatting tax fraud and reforming the criminal tax law and the tax procedure law is also on the agenda.

The government announced that it would seek to attract headquarters of international groups to Luxembourg. In this respect it will introduce new measures in the fields of (i) transfer pricing in line with international standards, (ii) intellectual property, (iii) the parent-subsidiary regime and (iv) a statute provision regarding the functional currency allowing to submit the tax return in the currency of the financial statements (which can be drawn up in a currency other than the Euro).

The setting up of an advisory committee of tax experts is also mentioned in order to ensure that the Luxembourg legal and tax systems are in line with the needs of the market.

A notional interest deduction system has also been announced with the objective of reinforcing capital endowments to companies.

As with any government programme, there is no certainty that all these measures will eventually be implemented but the tax policy announced by the government makes it clear that the main objective will be to maintain Luxembourg as a primary choice for business location.

INTRODUCTION OF THE AUTOMATIC EXCHANGE OF INFORMATION FOR CERTAIN INCOME

On December 17th 2013, a draft law transposing article 8 of the EU Directive 2011/16/UE on the administrative cooperation in the field of taxation (the "EU Directive") was submitted to the Luxembourg Parliament (the "Draft Law"). The other articles of the EU Directive have already been introduced into Luxembourg law by the law of March 29th 2013.

Article 8 of the Directive prescribes the automatic exchange of information for five categories of income (salaries, director fees, life insurance products, pensions and ownership and income from immovable properties). Each EU Member State shall apply the automatic exchange of information to at least three of these five categories of income and is free to choose to which income the automatic exchange of information will be applied. Pursuant to the Draft Law, Luxembourg will apply the automatic exchange of information to (i) salaries, (ii) director fees and (iii) pensions. The tax authorities will communicate to the competent authorities of other EU Member States information regarding the taxable period as from January 1st 2014, concerning the respective residents of such other Member States.

The automatic exchange of information will be applicable as from January 1st 2014. It will be performed on a regular basis, at least once a year and at the latest, by June 30th of the year following the one during which information has been made available. The first automatic exchange of information should hence take place, at the latest, on June 30th 2015.

UPDATE ON DOUBLE TAX TREATIES AND PROTOCOLS WITH LUXEMBOURG

Draft law n° 6633: Income tax treaties with Saudi Arabia, Guernsey, Isle of Man, Jersey and Czech Republic

Draft law n° 6633 filed with the Luxembourg parliament on December 17th 2013 provides for the approval of the double tax treaties signed by Luxembourg with Guernsey, Isle of Man, Jersey, Czech Republic (together, the "New Treaties") and Saudi Arabia (please refer to our newsletter dated September 2013 in respect of the tax treaty with Saudi Arabia).

The withholding tax on dividends is limited to 5% of the gross amount of the dividends paid under the treaties with Jersey, Isle of Man and Guernsey and to 0% under the treaty with the Czech Republic provided the beneficial owner of the dividends is a company (other than a partnership) which holds directly 10% in the share capital of the distributing company. Otherwise, the withholding tax rate on dividends is limited to 15% under the double tax treaties with Guernsey, Isle of Man and Jersey, and to 10% under the double tax treaty with the Czech Republic. No withholding tax applies on interest under the New Treaties. No withholding tax applies on royalties under the treaties with Jersey, Isle of Man and Guernsey. The withholding tax on royalties is limited at 10% under the double tax treaty with the Czech Republic. However, this rate will be automatically adjusted and reduced down to the rate foreseen in a double tax treaty concluded by Czech Republic with another Member State and providing for a lower withholding tax rate.

With respect to permanent establishments ("PE"), an "enterprise services PE" clause is included in the double tax treaty with the Czech Republic. According to such clause, the provision of services (including consultancy services) by a company through employees or other personnel engaged by the company for such purpose for a period exceeding 6 months within a 12 month period will give rise to a PE. The double tax treaties with Guernsey, Isle of Man and Jersey do not provide for an "enterprise services PE" clause.

Under the protocols to the double tax treaties with Guernsey, Isle of Man, Jersey and the Czech Republic, Luxembourg collective investment vehicles will be considered as tax residents of the contracting State in which it is established. Such tax benefits will however not be available under the double tax treaty with Czech Republic if the Luxembourg collective investment vehicle has a transparent form e.g. FCP (Fonds commun de placement).

The New Treaties will enter into force upon the completion of the ratification process and their provisions will apply as from January 1st of the following year.

Income tax treaty with Kazakhstan – entry into force

Luxembourg signed an income tax treaty with Kazakhstan on June 26th 2008 and a protocol to such tax treaty on May 3rd 2012 ("Treaty"). The Treaty entered into force on December 11th 2013 and its provisions apply as from January 1st, 2014.

Income tax treaty with Denmark – Protocol regarding taxation of pension income

Luxembourg signed a protocol to the income tax treaty with Denmark on July 9th 2013 ("Danish Protocol"). Currently, the tax treaty with Denmark provides that pensions and similar remunerations paid to a person with respect to a former employment activity are taxed in the resident State of the recipient. Under the Danish Protocol, the general rule will be that the former State of activity i.e. the State making the pension payment will have the right to tax pensions or similar income. The Danish Protocol will enter into force upon the completion of the ratification process by Luxembourg and Denmark and its provisions will apply as from the following tax year.

Income tax treaty with Slovenia – Protocol regarding the exchange of information

Luxembourg signed a protocol on June 20th 2013 to the income tax treaty with Slovenia ("Slovenian Protocol"). Further to the Slovenian Protocol, the international standard of exchange of information upon request is integrated into the tax treaty with Slovenia thus ensuring that this treaty complies with OECD international standards on tax information exchange. The Slovenian Protocol will enter into force upon the completion of the ratification process by Luxembourg and Slovenia and its provisions will apply to the tax years starting on or after January 1st of the calendar year next following the year in which the Slovenian Protocol enters into force.

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