Luxembourg is the second largest fund centre in the world after the United States and offers a vast range of investment vehicles.
In this article, we set out the advantages associated with choosing Luxembourg as the jurisdiction for your fund vehicle, and provide a brief introduction to the various fund vehicles that are available in Luxembourg.
Why Luxembourg should be the jurisdiction of choice for your fund vehicle
Luxembourg has earned itself a reputation for excellence in the investment sector. As of the end of 2022, there were over €5 trillion in assets under management in Luxembourg, making it the largest fund domicile in Europe. These funds are distributed globally resulting in Luxembourg being a leading pan-European and global distribution centre.
Luxembourg is a trusted jurisdiction for investment. Factors that contribute to this reputation are its AAA credit rating, low crime rate, and its fiscal stability. There is also significant political ambition and support to grow Luxembourg into a dominant alternative fund centre.
As a founding Member State of the European Union (the “EU”), Luxembourg acts as a gateway to Europe. Funds and their managers can benefit from management and marketing passports in growing their business within the EEA. The international and multilingual business environment as well as its central location in Europe attracts a highly educated talent pool from neighbouring countries, the wider EU and the rest of the world. The three official languages of Luxembourg are Luxembourgish, French and German, however there is a multitude of languages spoken in the jurisdiction, including English.
Fund promoters are also attracted to the jurisdiction by the tax environment applicable to funds. Luxembourg funds are, for the most part, subject to minimal or no Luxembourg tax and Luxembourg has an extensive tax treaty network.
“Luxembourg is a trusted jurisdiction for investment. Factors that contribute to this reputation are its AAA credit rating, low crime rate, and its fiscal stability.”
There exists a pragmatic legal and supervisory framework. The regulatory environment is accessible, as it is led by a multilingual regulator, which accepts application files and communications in English, French and German. An e-filing system is also available. Furthermore, the regulator for the financial sector, the Commission de Surveillance du Secteur Financier (the “CSSF”) is largely responsive and maintains a strong relationship with the investment management industry, with the objective of designing an efficient operating framework, while at the same time keeping investor protection to the forefront.
The fund industry is constantly seeking to improve Luxembourg legislation in order to retain its competitive edge and fulfil business needs. It is actively engaged in reviewing and being prepared for new legislation coming from the European legislative process. A case in point is the upcoming amendments to Directive 2011/61/EU of the European Parliament and of the Council on Alternative Investment Fund Managers (the “AIFMD”). This steady growth and forward-looking mindset demonstrate the likelihood of Luxembourg continuing to thrive as a fund domicile.
The final reason why Luxembourg should be the jurisdiction of choice for your fund vehicle is the exceptionally innovative toolkit of investment products that it boasts. These dedicated vehicles range from those regulated vehicles available to retail investors such as Undertakings for Collective Investment in Transferrable Securities (UCITS) and Part II Funds to slightly less regulated vehicles available to more sophisticated investors such as the Specialised Investment Funds (SIFs) and investment companies in risk capital (SICARs), to non-regulated funds such as Reserved Alternative Investment Funds (RAIFs) and limited liability partnerships.
Fund vehicles available in Luxembourg
• Funds regulated and supervised by the CSSF
UCITS are the highest-ranked vehicles for global distribution, and invest mainly in listed securities. This type of fund is available to both retail and institutional investors. There is a requirement for UCITS to be managed by a European-based management company with an authorised investment manager. A UCITS fund can be sold throughout the EEA to any type of investor with minimal notification requirements.
Part II funds are alternative investment funds that are permitted to be marketed to retail investors and are subject to a less stringent diversification policy and investment rules than UCITS. They are fully subject to the supervision of the CSSF. Part II funds can rely on the AIFMD marketing passport in order to be marketed throughout the EEA to professional investors and they are accepted by many jurisdictions for marketing to retail investors.
SIFs are fund vehicles dedicated specifically to institutional or professional investors and high-net-worth clients. They can only be marketed to well-informed investors. SIFs are used to invest in all types of investment strategies with minimum diversification.
SICARs are designed specifically to invest in risk capital, which includes private equity and venture capital strategies. There are no diversification limitations. These funds are only available to well-informed investors.
In the case of a SIF or a SICAR any delegated portfolio manager needs to be authorised and licensed to carry out such activity for the fund vehicle. Depending on how it is structured the SIF or SICAR may also use the services of an Alternative Investment Fund Manager. To the extent the AIFM is fully authorised under AIFMD it can market the shares or units of a SIF or SICAR throughout the EEA to professional investors.
• Unregulated funds
A RAIF is a fast-to-market vehicle, available only to well-informed investors. RAIFs can invest in all investment strategies with potentially minimum diversification. This type of fund must be managed by an authorised Alternative Investment Fund Manager (AIFM) and thus its units/shares can be marketed throughout the EEA relatively easily to professional investors.
Finally, and increasingly, funds are being created in the form of Luxembourg limited partnerships that appoint fully authorised AIFMs. There are minimal requirements from a legal and corporate perspective governing such funds, which provides great flexibility, but funds do need to comply, through the AIFM, with the provisions of AIFMD and would, as a result, benefit from the marketing passport to professional investors throughout the EEA.