Luxembourg, a suitable jurisdiction to act as a "hub" for your private wealth management
Luxembourg is a particularly suitable environment for alternative investment and wealth management industries due to its political and economic stability. The small size of the country has allowed Luxembourg to adapt its laws and institutions to favour its economic development through a high degree of specialisation in the financial services.
A favourable financial and legislative environment that promotes the country’s political stability has led Luxembourg to become a preferred location of investment platforms for ultra-high-net-worth individuals and enabled the country to become the largest investment fund centre in Europe and the second largest in the world.
Investment funds were originally set-up through regulated structures requiring the approval of Luxembourg regulatory bodies, but more recently, unregulated funds conquered the hearts of private clients mainly because of their flexibility and limited regulatory constraints.
As a result, this article aims to provide you with a flavour of Luxembourg’s eclectic opportunities by outlining four of the unregulated vehicles that are frequently proposed and, based on our experience, appreciated. However, we point out to you that more opportunities exist to fit different unique situations.
In Luxembourg, Holding entities such as Société à responsabilité limitée ("S.à r.l."), Société en commandite par actions ("SCA") or Société anonyme ("S.A"), are the most common tax opaque vehicles dedicated to holding and financing activities, which does not require specific authorization to perform said activities.
As fully taxable Luxembourg entities, it benefits from double tax treaties signed by Luxembourg as well as the parent subsidiary directive for dividend and the Grand Ducal Regulation of 21 December 2001 for capital gains (exemption regimes). These main characteristics enhance the attractiveness of the theses entities in an international environment. Over the years, we noticed an increased focus on substance and business rationale (see also our article on ATAD 3: the misuse of shell entities for tax purposes). It implies that the use of a SOPARFI should fit a business rationale and also be with the right level of substance.
The SOPARFI can adopt different legal forms, but within the private wealth sector, we mostly see Luxembourg S.à r.l. being used.
Another well-known wealth management vehicle is the Société de Gestion de Patrimoine Familial ("SPF") whose main objective is to create a legal framework for the management of a person's private assets. The SPF allows, among other things, the holding of liquid financial instruments in an attractive tax environment (full exemption of revenues derived by the SPF, no withholding tax levied, only a capital tax is due on a quarterly basis capped at EUR 125,000). With proper implementation and consistent management, the SPF is suitable for many investors, including wealthy families.
The SPF is strictly limited to the management of private assets as it cannot engage in any type of commercial activity and should only be set-up by individual persons.
More recently, the Luxembourg legislator created a new unregulated vehicle: The Reserved Alternative Investment Fund ("RAIF"). The RAIF is an investment fund that is indirectly supervised as it is not subject to the control and supervision of the Commission de Surveillance du Secteur Financier ("CSSF"), but it must nevertheless be managed by an Alternative Investment Fund Manager. It can invest in all types of assets, even atypical ones, as long as it complies with the diversification rules. RAIF can market their shares, units or partnership interests via a specific passport to well-informed investors across the EU. Recently, the CSSF has clarified that a RAIF could invest in virtual assets (crypto currencies, NFTs etc.). The RAIF can be used within the private wealth sector on a standalone basis, but we also see RAIFs being shared by different pools of investors via the use of sub-compartments.
The special limited partnership ("SCSp") is formed by the mere consent of the partners without having a legal personality separate from that of its partners. It can thus be an interesting legal form for investors wishing to invest together in predefined assets. Due to its great contractual freedom and flexibility, the SCSp is frequently used as a legal form of regulated or unregulated investment funds in Luxembourg. It may remain transparent from a tax perspective (taxation in the hands of the partners in the SCSp).
If the partners prefer to have a partnership with a legal personality, they may rather opt for the SCS ("Société en Commandite Simple").
In brief
The above vehicles contribute to positioning Luxembourg as the first wealth management centre within the eurozone with EUR 508 billion of assets under management at the end of 20201.
The Wealth Management team of PwC Luxembourg is mainly specialised in alternative investment and wealth management industries, and therefore advises a wide range of clients who wish to establish their structure in or through Luxembourg. In that regard we would be pleased to assist you throughout your Luxembourg journey, especially in:
- Assessing the potential benefits of setting up a vehicle in Luxembourg, and assisting you in the design phase;
- Assistance at the time of implementation;
- Analysing the tax considerations that arise once your structure is set-up;
- Ensuring the tax compliances requirements during the lifetime of your vehicle;
- Assessing the impact of any event that implies the termination of your structure; and
- Performing a sanity check of your current structure in the light of the latest international standards.
1. ABBL Private Banking Group, July 2021
