The Legal 500

Asset Classes - Hedge; Real Estate; Private Equity; Venture; Mezzanine; Infrastructure

A founder member of the European Union benefiting fully from free movement of capital and freedom of establishment within the EU, Luxembourg is also one of the largest global financial centres, benefiting from flexible and attractive legal, regulatory and tax regimes and a significant concentration of professional service providers to the financial services industry. 

The European Commission’s proposals for level 2 implementation measures for the Alternative Investment Fund Managers Directive has been circulated to European Union member states and to the European Parliament. The Commission’s draft has prompted criticism from hedge fund managers quoted in media reports and from a hedge fund industry body, the Alternative Investment Management Association, that in certain areas its proposals differ significantly from those put forward by the European Securities and Markets Authority (Esma) in its advice delivered to the Commission on November 16.

Luxembourg’s legislation amending the February 2007 law on Specialised Investment Funds came into force on April 1, following publication in the country’s official gazette, the Mémorial, on March 30. It is now identified as the law of March 26, 2012, the date on which it received royal assent.

The European Securities and Markets Authority has published on January 30 a consultation paper proposing future guidelines for exchange-traded funds established as Undertakings for Collective Investment in Transferable Securities and other issues related to the Ucits regime. The Esma proposals cover both physical ETFs, which replicate the performance of stock, bond, commodity, currency or other indices by holding shares or other securities in the proportions that make up the index in question, or a sample thereof, and synthetic ETFs, which use swap transactions to obtain the economic performance of the index, using a basket of securities as collateral.

The law of 26 March 2012 amending the law of 13 February 2007 relating to specialised investment funds (“SIFs”) was published today in the Mémorial A-063 and will enter into force on 1 April 2012. 

I. Law of 10 December 2010 relating to the introduction of the International Financial Reporting Standards (IFRS)
II. Grand-Ducal Regulation of 14 December 2011 relating to the procedure for filing financial information electronically with the Luxembourg Trade and Companies Register

The European Securities and Markets Authority has published on February 23 a discussion paper on key concepts of the Alternative Investment Fund Managers Directive and types of alternative fund manager to initiate a consultation process aimed at finalising its policy approach.

Esma says that in the light of responses to the discussion paper, it will draw up a consultation paper during the second quarter of this year setting out formal proposals for draft regulatory technical standards under Article 4(4) of the directive, “to determine types of AIFMs, where relevant in the application of this directive, and to ensure uniform conditions of application of this directive”.

The authority says it will use the results of the public consultation to finalising the draft regulatory technical standards, which it will submit to the European Commission for endorsement by the end of 2012. Comments must be received by March 23.

On 30 January 2011 ESMA released its consultation paper on draft guidelines for ETFs and other UCITS issues (ESMA/2012/44).

Luxembourg’s Parliament has adopted on March 6 legislation amending the February 2007 law on Specialised Investment Funds, adapting the highly successful SIF regime to European and international developments regarding regulation and transparency of alternative investments. The revised legislation reflects in particular the requirements of the European Union’s Directive on Alternative Investment Fund Managers, which will take effect on July 22, 2013. It also follows some aspects of Luxembourg’s funds legislation of December 17, 2010, which transposed into national law the Ucits IV Directive governing cross-border distribution of retail funds within the EU and introduced other changes affecting non-Ucits funds.                                                     

On 6 March 2012, the Luxembourg Parliament passed bill of law No. 6318 (the "Law") amending the Luxembourg law of 13 February 2007 on specialised investment funds. The Law foresees several important changes to the regime governing specialised investment funds or "SIFs", one of Luxembourg's most popular collective investment schemes among fund initiators and sophisticated investors, as evidenced by the almost 1,400 structures currently in existence. The SIF's success is based on the product's features which combine prudential supervision with a multipurpose and flexible legal and regulatory regime.

On March 6, 2012 was adopted the new Luxembourg Law relating to Specialised Investment Funds (the “2012 SIF Law”).

Luxembourg has traditionally been a hub for intra-group financing transactions. In 2011, new transfer pricing guidelines, following the OECD standards, were introduced in order to clarify the administrative practise and further strengthen Luxembourg's position in this respect.

The European Securities and Market Authority’s 500 pages of technical advice to the European Commission on Level 2 measures implementing the Alternative Investment Fund Managers Directive have helped to bring greater certainty to the global fund industry on what it can expect in July 2013 and thereafter.

Please find below the link to the 2011 guide on the setting-up of Luxembourg alternative investment funds.

The European Securities and Markets Authority has published on November 16 its final advice to the European Commission on the detailed rules underlying and implementing the Alternative Investment Fund Managers Directive. The Commission is expected to issue the rules in the form of subsidiary legislation and regulation by the middle of next year. According to Esma, its proposed rules should establish a comprehensive framework for alternative investment funds, their managers and depositaries, and by achieving the directive’s aim of increasing transparency and mitigating systemic risk, ultimately contribute to improved protection of investors.

A creditor facing the inaction and non-payment of its debtor, especially if the latter is facing financial difficulties or is showing an obvious lack of enthusiasm to fulfill its obligations, may, to say the least, be tempted to use coercive measures.

On 20 May 2011 a law was passed transposing into Luxembourg law the EU directive 2009/44/EC amending, in particular, the socalled Collateral Directive (directive 2002/47/EC of the European Parliament and the European Council of 6 June 2002). This Law modifies the Luxembourg Law of 5 August 2005 on Financial Collateral Arrangements.

Four and a half years after Luxembourg introduced the law creating the Specialist Investment Fund regime for alternative vehicles, the grand duchy’s government has drafted legislation amending the SIF rules. The new legislation, which was placed before the Chamber of Deputies (Parliament) on August 12 and which is expected to become law before the end of this year, aims principally to adapt the SIF law to the requirements of the European Union’s Directive on Alternative Investment Fund Managers, which will take effect in July 2013, including rules on delegation, risk management and the handling of actual or potential conflicts of interest.

(Luxembourg Tax administration’s circulars L.I.R. n°164/2 and n°164/2bis respectively of 28 January and 8 April 2011)

In accordance with the OECD’s principles and some specific Luxembourg tax law provisions, the determination of the price of any service (e.g. a financial or commercial one) between two companies of the same group is subject to the arm’s length principle. 

Further to a communication entitled "Modernising company law and enhancing corporate governance in the EU" from the European Commission to the Council and the EU Parliament, Directive 2007/36/EC, which deals with the exercise of certain rights of shareholders in listed companies, was enacted to introduce minimum standards with a view to protecting investors

The European Union’s Directive on Alternative Investment Fund Managers will come into force on July 21 following its publication in the Official Journal of the European Union on July 1.

In 2002, Luxembourg was the first European country to list sukuk. Today Luxembourg is already hosting 7% of Islamic investment funds worldwide, ranking fourth after Malaysia, the United Arab Emirates and Saudi Arabia. As at the end of 2010, sixteen sukuk were listed on the Luxembourg Stock Exchange.

In a move to clarify its transfer pricing policy, the Luxembourg tax administration issued on 28 January 2011 Circular Letter n°164/2 (the “Circular”) which provides guidance on the tax treatment of companies conducting intra-group financing activities.

Please find hereunder a link to our new brochure “Guide to the migration or relocation of offshore funds to Luxembourg” outlining the different ways in which funds established in offshore jurisdictions can be redomiciled to Luxembourg.

The European Union's Directive on Alternative Investment Fund Managers, which was given a first reading by the European Parliament in November, is now completing the final stages of the legislative process and is set to become law during the first quarter of this year.

Marc Kleyr and Pascal Sassel - "Restructuring & Insolvency 2010, Luxembourg chapter", in Getting the Deal Through, London 2009

The current turmoil in the investment fund industry has particularly drawn the attention of professionals, including "Directors", to the liabilities they may incur in the framework of their duties as director of an investment vehicle.

The following article was co-written by a partner of a well established law firm in Luxembourg and an expert in Islamic Finance with the objective to demonstrate the extent to which the Luxembourg microfinance vehicles an be used to foster the development of Islamic microfinance schemes. The argumentation is centred on the unique combination of the robust Western governance framework and structuring vehicles together with Oriental philanthropic and religious principles; this association is likely to meet the financing needs of the neediest who, so far, were kept aside of conventional interest-based microfinance solutions.

The Madoff scandal which has led to the quasi-collapse of the banking sector has changed the fund industry landscape. The ability to relocate in Luxembourg opens new horizons to offshore promoters and investors.

It goes without saying that the past few years have been quite unique. Over this period, we have seen the fall of many prominent banking institutions and have experienced some quite special situations. The repercussions of these events have greatly impacted global economies and in many jurisdictions, they have led to a spectacular level of bankruptcy, insolvency and restructuring cases.

I.  Introduction

Well established as a world leader in the investment funds industry (second only to the USA), Luxembourg firmly held its position throughout the economic crisis, totalling EUR 1,840.993 billion net assets under management as at 31 December 2009. This five decade long success story originates from a continuing intention on the part of the local authorities to make the most of promising opportunities in the financial market. Islamic Finance is unquestionably one such opportunity and initiatives taken by the various actors operating in Luxembourg show how determined they are to lead the way in this fast growing market. 

The current financial crisis has highlighted the possible side effects of the globalisation and, to a certain extent, proves a certain weakness of the European Union in this respect.

Earlier this year Luxembourg and Hong Kong put into motion a double taxation treaty offering international investors an interesting tax planning tool for investing into or out of Asia. Structuring investments through these locations has been made easier with this new treaty presenting straightforward opportunities to eliminate or mitigate direct taxes on the flow of income and profits from the countries where the target investment is located to the country where the ultimate investors or their investment vehicles are located.

As part of a legislative package to tackle the financial crisis, the European Commission submitted on 29 April 2009 a Directive on Alternative Investment Fund Managers (“AIFM”) to the European Parliament and to the Council. This proposal emerged rather swiftly following a general consensus across European leaders that AIFM, which managed around EUR 2 trillion in assets at the end of 2008, should be subject to closer regulatory scrutiny. This proposed Directive marks the first attempt to create a comprehensive and effective supervisory and regulatory framework for AIFM in the European Union (“EU”) by imposing on European investment managers of non-UCITS investment funds a common set of rules in terms of licensing and supervision. In return, AIFM would benefit from a European passport for cross-border distribution to EU professional investors. The main innovations focus on the regulatory supervision, the disclosure requirements and the distribution of Alternative Investment Funds (“AIF”). Key elements of the proposed Directive are set out below. However, it should be pointed out that those proposals will only introduce a minimum threshold for Member States, and countries such as France and Germany will probably pass harsher requirements.

Luxembourg has long been a significant domicile for private equity vehicles but the jurisdiction has emerged as a major European centre for the industry since the introduction of the Sicar, or risk capital investment company, five years ago. Now a series of changes to the rules governing Sicars that were enacted last year promises to consolidate Luxembourg’s role, even at a time when the private equity industry is battling to adapt to a much-changed economic and financial environment.

The legislation of October 29, 2008 allows the promoters of private equity funds to create segregated compartments in a Sicar, putting the vehicle on the same basis as Specialised Investment Funds, which are widely used for a broad range of Luxembourg-domiciled alternative investment products. The changes restore the Sicar’s position as the vehicle (depending on the particular circumstances) perhaps best suited to private equity funds because unlike the SIF, it is not subject to risk diversification rules.

At the beginning of October 2008, in the context of worldwide financial storm, three banks and a professional of the financial sector (FSP) were placed by the Luxembourg courts under the procedure of "suspension of payments", a step, which had almost never been taken up to this point...

In light of the latest discussions about the amendment to banking secrecy and the lists classifying countries in this respect which were published by the OECD after the G20 summit, please find below a summary of the current situation.

The current turmoil in the investment fund industry has particularly drawn the attention of professionals, including “Directors”, to the liabilities they may incur in the framework of their duties as director of an investment vehicle...

Recognising the close links between the securitisation activities of financial vehicles corporations engaged in securitisation transactions (FVCs) and monetary financial institutions, the European Central Bank (ECB) has adopted on December 19, 2008 Regulation (EC) No 24/2009 concerning statistics on the assets and liabilities of FVCs (the ECB Regulation).

The effect of the alleged Ponzi scheme in which Bernard Madoff was implicated - involving losses of more than $50 billion - are already widespread. The CSSF has recently announed in its press release of 23 January 2009 that a number of funds and sub-funds (as set out hereunder) have decided to suspend their NAV as well as redemptions, subscriptions and conversions of shares/units. A consequence is that the liability of the main actors of the investment funds involved is called into question. Any finding of liability in the forthcoming litigations is likely to involve thorny issues. Indeed a fund requires the services of a large number of actors (the board of directors of the funds, the promoter, the depositary, the central administration agent, the auditor, etc.) and it is unclear how far in the hierarchy the liability shall extend. In any case, the diversity of the regimes of responsibility under which each actor is subject (whether it is contractual liability or not) will probably cloud the issue. Matters will also be made more complex by the wide variety of legislations that come into play as a result of the internationalization of investments.

Undertakings for Collective Investment in Transferable Securities (UCITS III) were introduced by the law of 20 December 2002 (the “2002 Law”), and benefit from a European Passport enabling them to be freely marketable throughout the EU countries. However, unsatisfactory elements relating to the current state of the Law paved the way to discussions about a possible ‘mutation’ from UCITS III to UCITS IV.

In a Circular issued on 5 September 2008, the CSSF clarified the interaction between the prime broker and the custodian of a SIF. In Luxembourg, the prime broker must be a financial institution subject to the control of a supervisory authority of a State with a supervisory regime recognised to be equivalent to that provided by EU legislation. Prime brokers are essential to SIFs that implement a hedge fund strategy or that make use of derivatives. By setting up four guidelines, the Circular should facilitate the use of prime brokers by SIFs.

The Luxembourg Parliament adopted, on 15 October 2008, certain amendments to the law of 15 June 2004 relating to the investment company in risk capital (SICAR Law). These modifications aim at modernising the SICAR Law after four years of successful implementation. You will find below a summary of the principal points of attention:

Recognising the current situation affecting financial markets, and as part of an initiative by the Committee of European Securities Regulators (CESR), the Commission de Surveillance du Secteur Financier (CSSF) in Luxembourg has decided on September 19, 2008, to take certain prohibitive measures to ensure the integrity of financial markets and, in particular, to prevent certain transactions from distorting or manipulating such markets. Such measures have been clarified by the CSSF on September 29, 2008

On 15 October 2008, the Luxembourg Parliament amended the existing SICAR law of 15 June 2004 with the aim to make the SICAR regime more attractive to private equity and venture capital investors.

In spite of wavering economic context, Luxenbourg, during the May/ June 2008 period, consolidated its position of a leading investment funds hub.

The Luxembourg investment fund industry, largely benefi ting from its location in a strong financial centre, is now an internationally recognized label for investment funds. The greatest asset of Luxembourg is undoubtedly political voluntarism, demonstrated by a constant anticipation of the need of investors - either in the transposing of European legislation or in the shaping of national legislation - in order to create a stable and favorable environment according to the expected development of the market. hedgeweek_-_luxembourg_guide_on_alternative_investment_funds 

Over the past years an increasing number of Hedge Funds, and especially Funds of Hedge Funds, have been set up in Luxembourg following registration with the competent supervisory authority (Commission de Surveillance du Secteur Financier or "CSSF").  Luxembourg Hedge Funds and Funds of Hedge Funds are subject to the same legal and regulatory requirements applicable to other Luxembourg Funds, comprising the permanent supervision by the CSSF, the obligation to appoint a Luxembourg based custodian and an auditor, the obligation to produce a monthly net asset value calculation and to publish annual and semi-annual reports. The obligations may vary depending under which form the hedge fund is set up.  Luxembourg Hedge Funds may be set up under several wrappers: UCITS Fund, Fund submitted to CSSF Circular 02/80 or Specialised Investment Fund.

A Luxembourg law of 15 June 2004 relating to the investment company in risk capital (the "Law on SICAR") has created a Luxembourg vehicle ("SICAR") whose principal object is investing in risk bearing capital issued by domestic and foreign companies. The main features and advantages of the Law on SICAR are its legal flexibility and interesting tax treatment. This new legal framework for Luxembourg private equity and venture capital funds is expected to have a significant impact in European private equity deal structures.

The purpose of this comparison table is to set out the different Luxembourg investment vehicles (regulated, lightly regulated as well as unregulated) that Luxembourg offers to foreign investors such as private equity investors, real estate investors and hedge fund investors.

practical_approach_use_of_luxembourg_investment_vehicles_for_foreign_investors

For more information please visit www.cs-avocats.lu   

On 11th July 2007 the bill on the law on markets in financial instruments was adopted by the Luxembourg Chamber of Deputies and will come into effect 1st November 2007.

The SIF law has been voted on 13 February 2007. The aim is to create in Luxembourg a particular type of undertaking for collective investment "UCI" called "specialised investment funds" (or "SIFs"), which are subject to rather light statutory rules. Read more...

For more information please visit our website http://www.mnks.com/.

A new Luxembourg law of 22 March 2004 on Securitization (the "Law on Securitization") has laid the foundations for the legal, regulatory and tax framework for securitization vehicles in Luxembourg. The main features and advantages of the Law on Securitization as well as a practical application in which the firm was involved are discussed hereunder.

In the global context of ‘economic patriotism’, where governments battle against delocalisation of their national companies, European law continues to promote mobility of companies in Europe.

In the last few months, the European institutions have particularly facilitated crossborder mergers for the benefit of the companies themselves, since, up until then, the operators were confronted with huge constraints – or even the impossibility- of carrying out such transactions...

The “Société d’investissement en capital à risque" ("SICAR") has been implemented by a law dated 15 June 2004 (the "SICAR Law") in order to offer a new regulated vehicle for investment in private equity to wellinformed investors1 (the "Investors") in addition to the other investment vehicles already at their disposal. These other vehicles include the Undertakings for Collective Investment type vehicles (the "UCI") and the SOPARFI type companies (non-regulated commercial companies) investing in private equity. It offers the advantages of a considerably flexible corporate structure for the sole purpose of investing in risk capital while simultaneously offering the benefits of the supervision of the Commission de Surveillance du Secteur Financier (the "CSSF") as well as a neutral tax regime.

Click here to download this article