Luxembourg modernises its investment funds toolbox by implementing important legal and tax changes

In the context of a constantly evolving investment fund industry and considering that other fund centres around the world continue to develop to stay attractive, the Luxembourg government tabled a draft law with the aim to maintain Luxembourg’s leading position as financial centre and asset management hub. One of the key objectives of the Law is also to implement necessary measures to account for the critical role that investment funds play in meeting the long-term investment needs of the European Union. By adopting the Law, the Luxembourg legislature recognises the increasing interest by managers of alternatives investment funds for fund products supervised under Part II of the UCI Law (i.e., the law of 17 December 2010 relating to undertakings for collective investment, as amended) in the context of the adoption of European Long Term Investment Funds (https://www.pwc.lu/en/alternative-investments/new-eltif-regulation.html).

In this context, the Law amends the five special laws relating to investment funds and/or their managers, namely:

• the law of 15 June 2004 relating to the investment companies in risk capital (SICAR), as amended (the SICAR law);
• the law of 13 February 2007 relating to the specialised investment fund, as amended (the SIF law);
• the law of 17 December 2010 relating to undertakings for collective investment, as amended (the UCI law);
• the law of 23 July 2016 relating to reserved alternative investment fund, as amended (the RAIF law); and
• the law of 12 July 2013 relating to alternative investment fund managers, as amended (the AIFM law).

The most important changes enacted through the new law are highlighted hereafter.

New legal forms of companies for Part II funds structured as SICAV and other changes modernising the Part II regime

The Law introduces the possibility for SICAVs subject to Part II of the UCI law to adopt, alongside the form of a public limited company (société anonyme - SA), the form of:

• a partnership limited by shares (société en commandite par actions - SCA);
• a common limited partnership (société en commandite simple - SCS);
• a special limited partnership (société en commandite spéciale – SCSp);
•  a private limited company (société à responsabilité limitée – S.à r.l.); or
• a cooperative in the form of a public limited company (société coopérative organisée sous forme de société anonyme),

allowing an initiator to select from a wider range of options for their Part II funds, be it from a tax or governance standpoint. 

The UCI law is also modified to allow Part II funds to evaluate their assets using another methodology than the fair-value method, under the condition, however, that such alternative methodology is provided for in the constitutive documents of the Part II funds.

Finally, the possibility for closed-ended Part II funds to issue shares at a price which differs from the net asset value (i.e., in most of the cases a fixed issue price or an issue price based on a listing price for listed funds) has been introduced. 

Amendment of the definition of “well-informed investor”

The Law amends the definition of “well-informed investor” included respectively in the SICAR, SIF and the RAIF laws to ensure consistency between the different laws and to align the Luxembourg regime with the European standard by, among other things, lowering the current investment threshold from EUR 125,000 to EUR 100,000¹ for investors that are not professional or institutional investors. The Law also clarifies that the definition of “professional investors” is the one covered by the MiFID II Directive.

Extension of the period to reach the minimum capital

The Law extends the period from 12 to 24 months² during which the minimum capital must be constituted for funds governed by the SICAR, SIF as well as the RAIF laws. The Law also extends the term from 6 to 12 months³ for Part II of the UCI law in order to adapt these laws to market needs.

Modernisation of the subscription tax regime (taxe d’abonnement)

The Law modernises the subscription tax system on three specific pillars in order to support the emergence of new European fund products such as European long-term investment funds (ELTIF) and pan-European personal pension products (PEPP) as follows:

• Removal of the condition of a weighted residual duration of the portfolio of a maximum of 90 days to benefit from the subscription tax exemption for money market funds. This condition has become redundant as the portfolio rules relating to short-term money market funds defined in Regulation (EU) 2017/1131 already provide for criteria in terms of residual maturity of the portfolio;
• Subscription tax exemption for ELTIFs pursuant to Regulation (EU) 2015/760;  

• Subscription tax exemption for the savers of a PEEP established pursuant to Regulation (EU) 2019/1238.

Appointment of tied agents for AIFMs (Alternative Investment Fund Managers) and marketing of AIFs in Luxembourg

In addition, the Law introduces the possibility for the AIFMs to appoint so-called tied agents, thereby aligning the legal framework applicable to them with that of UCITS (Undertakings for Collective Investments in Transferable Securities) management companies.

Changes are also made to the AIFM law with the aim to clarify the relationship between the AIFM law and other legal texts regarding the marketing of AIFs to retail investors established or resident in Luxembourg by clarifying that ELTIFs, European Social Entrepreneurship Funds (EuSEF) and European Venture Capital Funds (EuVECA) can only be marketed to retail investors in Luxembourg provided that the conditions laid down in the regulations governing these products are met.

Furthermore, the Law clarifies that SICARs and SIFs may be marketed in Luxembourg to retail investors to the extent these investors qualify as well-informed investors. While a RAIF can benefit from that possibility, other Luxembourg AIFs that are not supervised by the CSSF cannot.

Extension of the non-judicial liquidation regime to AIFMs

The Law extends to management companies and managers the non-judicial liquidation (liquidation non judiciaire) regime which currently applies to undertakings for collective investment regulated by the UCI law and reforms the supervisory commissioner (commissaire de surveillance) regime in the event of withdrawal from the official list by the CSSF of an entity supervised by it.

Measures related to UCITS and Chapter 16 Management Companies

In line with the CSSF’s practice, the Law specifies that the mandatory capital of management companies may only be invested in liquid assets or assets that are easily convertible into short-term liquidities and shall not invest in speculative positions.

For Chapter 16 management companies that are not also AIFMs, it is also specified that the minimum share capital shall be EUR 125,000 or such amount as determined by a CSSF regulation. If the share capital falls below the required minimum, the CSSF also has the possibility to allow the management company to rectify its situation.

It is also specified that Chapter 16 management companies are subject to the duties to (i) act honestly and fairly, in the best interest of the funds they manage and the integrity of the market, (ii) with due skill, care and diligence in the best interest of the funds they manage and the integrity of the market, (iii) have and employ efficiently the resources and procedures that are necessary for the proper performance of its business activities, (iv) try to avoid conflicts of interest and, when they cannot be avoided, ensure that the funds they manage are fairly treated and (v) comply with all regulatory requirements applicable to the conduct of its business activities so as to promote the best interests of their investors and the integrity of the market.

Measures related to RAIFs

The notarial confirmation of the set-up of a RAIF will not be required anymore when the RAIF is already set-up through a notarial deed.

Any modification to the information included in the registration of a RAIF in the official list of RAIFs must now be communicated to the register of commerce and companies within 20 working days from the effectiveness of such modification.

Entry into Force

The entry into force of the Law will depend on its publication date, which is expected over the course of July/August 2023, subject to some transitional period notably with respect to subscription taxes.

_{¹ Being the threshold applicable for investors in EuVECA and EuSEF}

_{² From the date of creation for RAIF and from the date of authorisation for SIF and SICAR}

_{³ From the UCI’s authorisation}