Luxembourg: Offshore Business Sectors
Investment Fund Management
There has been a significant volume of investment fund management activity in Luxembourg for twenty years.
Luxembourg's decision in July 2004 to allow the listing of offshore hedge funds has made it possible for the jurisdiction to attract offshore funds and to compete on a level basis with Dublin, removing a barrier that has acted as a handicap to the growth of the hedge fund sector in the Duchy in the past.
One major advantage of this decision is that offshore fund promoters often choose their administrator and service providers in the country where they have their listing for the convenience of having the stock exchange, the administrator and the custodian in the same place.
It has become common practice for hedge funds to domicile offshore in places like the Cayman Islands, the British Virgin Islands and Bermuda but be administered in Dublin and listed on the Irish Stock Exchange. However, the emergence of Luxembourg as a hedge fund centre, particularly for funds targeting the continental European market, is beginning to challenge this status quo.
The 13th annual Luxembourg Fund Encyclopaedia in 2007 showed that ever greater diversification of asset classes within the Luxembourg funds industry contributed to the latest record in total net assets for that year. Popularity of hedge funds and real estate funds helped the Grand Duchy to a fourth year of double digit growth (in both Euro and USD terms).
Domiciled fund assets rose by 13.7% to EUR2,383 billion by the end of 2012, reversing a fall of 7.6% (EUR2,097 billion) recorded for 2011. In its annual report for 2012-13, the Association of Luxembourg Fund Industry (ALFI) reported continued growth throughout the first quarter of 2013, with assets reaching EUR2,528 billion) by the end of March 2013.
By the end of 2012, Luxembourg net assets under management funds were occupying the top rank in Europe with a market share of 26.7%. France was second with 16.8% and Germany third with 14.4%.
Various legislative regimes were brought together by the law of 30th March 1988 which codified Luxembourg legislation for Undertakings for Collective Investment (UCIs). The legislation provided for three types of fund:
- A mutual fund (unit trust) or fond commun de placement, which does not have separate legal identity, but which has a set of legally-defined relationships between fund, manager and custodian;
- SICAV (Societe d'investissement a capital variable), an open-ended vehicle having a variable capital which is always equal to the net asset value of the fund; and
- SICAF (Societe d'investissement a capital fixte), which is a closed-end fund normally used for private placements.
This legislation included provision for funds of funds, and for UCITS, ie UCIs under EU legislation which invest in Transferable Securities and can be marketed in EU Member States. Several thousand UCIs have been formed in Luxembourg, which is the leading European jurisdiction for investment fund management.
Further legislation in the law of 19th July 1991 created 'dedicated' funds, which take advantage of UCI legislation but for the management of institutional assets.
Taxation of UCIs is traditionally very low, and no withholding tax is levied on distributions to investors. See Offshore Legal and Tax Regimes for further details. Funds are supervised by the Luxembourg Monetary Institute which authorises them and looks after investor protection. There is a Luxembourg Investment Fund Association (ALFI).
The EU's Savings Tax Directive, which came into effect in July, 2005, applies to certain Luxembourg UCIs, requiring the imposition of a withholding tax of 35% from July, 2011 (20% previously, from 2008, and 15% at the coming into effect of the Directive).
However Luxembourg has increasingly been the choice of US mutual funds looking for a European base.
As regards venture capital and private equity funds, in 2004 the Luxembourg Parliament passed the final text of legislation on SICARs (Sociétés d’Investissement en Capital à Risque), which were designed to offer an alternative to the traditional limited partnership structure which works well for fund managers and investors in countries such as the United Kingdom, but can pose problems for fund managers in continental Europe. The new law defined venture capital as direct or indirect investment in an entity to finance the launch, further development or flotation of the entity. This definition covers a wide variety of investment forms in addition to straight equity, such as corporate bonds, mezzanine finance and convertible bonds).
Investors seeking tax transparency will opt for a SICAR in the form of a limited partnership (SeCS). An SeCS is not liable to corporate income tax or net wealth tax. SeCS are exempt from the municipal business tax; income from the partnership and capital gains realized on units by non-resident partners will not be taxed in Luxembourg.
In February 2007 the Luxembourg Parliament adopted a law on Specialised Investment Funds (SIF), which offered a number of new features, including a broader definition of “eligible investors” to include both professional and private “well-informed” investors.
The new law replaced the law of 19 July, 1991 which concerned collective investment schemes reserved for institutional investors. According to the Association of the Luxembourg Fund Industry (ALFI) in November 2006, the 1991 law had been a success, with 207 institutional funds then in existence, with combined assets under management at that time of EUR76 billion (USD100 billion).
ALFI explained that all the provisions of the 1991 law were to be found in the new law, so existing institutional investment funds would not find that their legal base had disappeared. However, the SIF law offered a number of interesting new features. The new law likewise offered greater flexibility in terms of investment policy. The principle of risk spreading was maintained, but there were no quantitative investment restrictions, given that such vehicles would be reserved for sophisticated investors.
The law required that the directors (dirigeants) of a Specialised Investment Fund, as well as the directors of the custodian bank and the auditor, be approved by the CSSF. However, the promoter is not subject to CSSF approval. Furthermore, since the investors in funds targeted by this law are deemed to be sufficiently experienced to make their own decision with regard to the fund manager, there is no need for the CSSF to verify the status and financial standing of a company to which asset allocation has been subcontracted.