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Lenders will analyse the underlying investments as well as cash flows and other distributions that the fund will receive from those investments. These financing arrangements constitute leverage and must be included in the leverage calculation of the borrowing AIF whether temporary in nature or not.
Less frequently, hybrid products mixing capital call financing and NAV financing features may also be used by Luxembourg funds. The tax regime applicable to Luxembourg alternative investment funds depends both on the legal form of the fund and whether it is subject to a specific product law.
Certain exemptions from subscription tax exist. A SICAR organised as a corporate entity is formally fully subject to tax, but benefits from a specific exemption on income and gains from risk capital securities. Foreign tax authorities may, however, take a different stance, in particular, following the Court of Justice of the EU's judgments in the so-called Danish cases. Importantly for unregulated funds organised as partnerships or other legal forms that allow them to be treated as tax-transparent entities for CIT purposes in Luxembourg, as from tax year , so-called reverse hybrid rules may result in the entity becoming subject to CIT if the following conditions are met:.
Investors are acting together, eg, if they are members of the same family, or if one acts in accordance with the wishes of another. The Luxembourg legislator considers, however, that investors in an investment fund generally do not have an effective control over the fund's investments. Non-resident investors should not be considered to have a permanent establishment in Luxembourg by mere reason of their investment in a Luxembourg partnership, unless that partnership carries out a business and the investor is seen as co-exploiting the business.
Usually, this is not the case, as partnerships that qualify as AIFs are deemed not to carry out a business. Amongst these, it is, in particular, worth mentioning the following. When opting for Luxembourg as domicile for their retail funds, initiators can choose between the following categories of regulated funds:. Specific attention will be given to the performance of portfolio management and risk management functions, as well as to the anti-money laundering procedures.
The minimum number of full-time employees who must be located in Luxembourg or the closer region is three. Depending on the nature, size and complexity of the firm's activities, the CSSF may allow part-time employees, certain delegation arrangements and outsourcing of certain functions eg, internal audit.
The proposed investment process, risk and liquidity management policies, valuation, conflict of interest, anti-money laundering and remuneration policies need to be submitted to the CSSF for review. Preparation of the filing may take several weeks or months depending on how quickly the local team is assembled and the required information is gathered. In practice, the CSSF generally takes six to eight months to review a licence application. They are usually set up as an SA. The authorisation process of a UCITS takes, on average, six to ten weeks from the filing of the initial application, while the authorisation process of a UCI Part II lasts, on average, two to five months.
The length and costs of the setting-up process will depend, amongst others, on the category of the investment vehicle. Please refer to the paragraph relating to the limited liability of limited partners in alternative investment funds. UCITS are subject to detailed and complex asset eligibility, liquidity and diversification requirements. They may only invest in transferable securities and other liquid financial instruments authorised by the UCI Law.
The central administration, the depositary and the auditor of a regulated retail fund must have their registered office in Luxembourg. EEA-based UCITS may be freely marketed in Luxembourg, provided that they or, as the case may be, their managers have been approved by their national supervisory authority and provided, further, that their local regulator has notified the CSSF of their intention to market their shares in Luxembourg.
A UCITS benefits from the European passport under the UCITS Directive, meaning that once authorised in a member state, it may be marketed in any other member state following a harmonised notification procedure instead of following any local rules of each target member state.
Part II UCIs that intend to target retail investors in other member states must meet specific conditions laid down by the regulatory authorities of the host member states. Where foreign funds are marketed to retail investors located in Luxembourg, a credit institution must be appointed in Luxembourg as a paying agent to ensure that facilities are available in Luxembourg for making payments to investors and redeeming shares or interests.
However, the obligation for closed-end funds to publish a prospectus does not apply to the following categories of offers:. Please refer to 2. Retail funds are all subject to borrowing and other related limitations. Below are some of the main features.
In principle, an investment fund or a management company acting on behalf of a common fund cannot borrow. Lenders will see their security package limited when dealing with UCITS due to the various restrictions applicable to them. Retail funds UCIs covered by the law of 17 December are subject to subscription tax at an annual rate of 0. The tax is payable quarterly. There is no withholding tax on distributions made by retail funds and non-resident investors are not subject to tax in Luxembourg on capital gains realised on units issued by a retail fund.
For resident investors, the ordinary tax rules on the taxation of dividends and capital gains apply. Fund managers shall assess their situation in respect of the new disclosure obligations and identify the actions to be taken.
From a tax perspective, in the context of the implementation of ATAD and ATAD 2, Luxembourg introduced interest deduction limitation and controlled foreign companies rules, and made changes to its already existing exit tax, anti-hybrid and general anti-abuse rules. These rules require planning, both in terms of investment structure and additional wording in the legal documentation limited partnership agreements, private placement memorandums, subscription documents.
Another relevant development is the mandatory disclosure rules to be introduced by EU member states when implementing the so-called DAC6 directive, which requires intermediaries and, on a subsidiary basis, taxpayers and entities established in the EU to report certain schemes that meet hallmarks deemed indicative of tax avoidance.
Luxembourg has not yet adopted the implementation bill, nor published guidance. 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. All Rights Reserved. Password Passwords are Case Sensitive. Forgot your password? Free, unlimited access to more than half a million articles one-article limit removed from the diverse perspectives of 5, leading law, accountancy and advisory firms.
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