The Legal 500

The law of April 6, 2013 on dematerialised securities was published in Luxembourg’s official gazette, the Mémorial, on April 15, coming into force the following day. It creates a third category of securities alongside securities in bearer or registered form and introduces a general regime for them. The legislation also amends various existing Luxembourg laws such as the legislation of August 1, 2001 regarding the circulation of securities and other fungible instruments.

The European Commission published two implementing regulations forming part of the detailed framework of the Alternative Investment Fund Managers Directive in the EU Official Journal on May 15. The regulations are automatically binding on member states without any need for transposition into national legislation. They will enter into force on June 5 and apply from July 22, the deadline for adoption of the directive into the national law of member states and the date on which it takes effect.

Double taxation avoidance treaties concluded between two states seek to prevent the taxation in both countries of income and capital. Chevalier & Sciales has created this treaty table to provide you with an accurate and updated view of Luxembourg double tax treaties in force or currently pending.

The purpose of this investment memorandum is to provide an overview of the investment vehicles (i.e. regulated, lightly regulated and unregulated) that Luxembourg offers to (foreign) entrepreneurs and managers. The table compares the UCITS, part II fund, SIF, SICAR, SPF, securitization vehicle and soparfi. The overview covers inter alia the legal and regulatory requirements, the shareholding, the approval and supervision, taxation issues (such as the benefit from the EU Parent Subsidiary directive and double tax treaties and thin capitalisation rules), etc.

Advisers to collective investment funds are henceforth included in the scope of application of the 1993 financial services legislation and must hold an investment adviser authorisation issued by the Finance Ministry, the CSSF has announced, following the entry into force of the law of December 21, 2012. The legislation transposed into Luxembourg law the so-called ‘Omnibus I’ Directive 2010/78/EU of November 24, 2010. The legislation came into force on December 31.

The CSSF has published on February 18 Circular 13/559 implementing the guidelines published by European Securities and Markets Authority on 18 December 2012 for EU regulators and UCITS management companies on exchange-traded funds and other UCITS issues. The guidelines set out the information that such funds must publish in their prospectus, key investor information document and annual report, including monitoring of tracking error, the index replication method and leverage policy. For leveraged funds, the requirements include information on global risk calculation and management. For ETFs that engage in some sort of active management, how the investment policy is implemented must be specified.

The European Securities and Markets Authority published on February 11 its final guidelines on sound remuneration policies under the Alternative Investment Fund Managers Directive. This is the latest step in Esma’s preparation of subsidiary measures and technical guidance ahead of the July 22, 2013 deadline for adoption of the directive by European Union member states into their national law, the date from which the guidelines will apply.

With the deadline for transposition of the European Union's Alternative Investment Fund Managers Directive into national law now barely nine months away, on July 22, 2013, the Luxembourg authorities have demonstrated their determination to adopt the directive in plenty of time in order to allow fund industry participants the maximum time to prepare.

The draft bill of law was submitted to the Chamber of Deputies by Finance Minister Luc Frieden on August 24. Following a detailed examining in committee and a debate and vote by the full parliament, the legislation is expected to become law before the end of 2012, making Luxembourg one of the first EU countries to complete the transposition process - as it has been in the past with a succession of Ucits directives.

As part of the legislation transposing the European Union's Alternative Investment Fund Managers Directive into national law, the Luxembourg authorities have seized the opportunity to make the country's fund region more attractive to promoters and managers of funds employing alternative strategies and/or aimed at sophisticated investors - in particular of private equity, venture capital and real estate vehicles. The legislation introduces into national law a new regime to be known as the société en commandite special, or special limited partnership, along with the updating of the existing société en commandite simple, or standard limited partnership. The grand duchy also offers the société en commandite par actions, or partnership limited by shares.

Luxembourg’s financial regulator, the Financial Sector Supervisory Authority (CSSF) has published on August 13 a regulation setting out the provisions implementing Article 42b of the revised Specialised Investment Fund legislation regarding risk management and conflict of interest requirements. CSSF Regulation N° 12-01 specifically concerns paragraph 1 of the article, regarding the criteria for assessing the suitability of risk management systems used by SIFs, and paragraph 2, regarding structures and organisational requirements designed to minimise the risk of conflicts of interest arising.

Luxembourg’s financial regulator, the Financial Sector Supervisory Authority (CSSF) published on July 9 a circular aimed at all Luxembourg undertakings for collective investment established under the funds law of December 17, 2010 (implementing the Ucits IV Directive) and the Specialised Investment Fund law of February 13, 2007.

The European Union’s Alternative Investment Fund Managers Directive is finally on the way to become law next July, at least in Luxembourg and other EU countries with ambitions to attract a larger shares of the continent’s alternative investment business. However, the grand duchy is already benefiting for the preference among some hedge fund managers for a regulated structure that is already in place and benefits not only from free distribution throughout Europe but widespread acceptance elsewhere in the worlds – UCITS.

Already the jurisdiction of choice for the establishment of UCITS funds, Luxembourg is carving out a competitive advantage for alternative funds as well, drawing on the success of the Specialised Investment Fund regime (and the Sicar vehicle for private equity and other risk capital investments). Recent updating has brought the SIF law into line with many provisions of the EU’s AIFM Directive, which the grand duchy is planning to adopt into national law before year-end – consolidating the country’s acknowledged strength as a regulated jurisdiction for the domicile and servicing of alternative investment funds and structuring vehicles, and for its proactive approach to meeting the fund industry’s needs.

The European Securities and Markets Authority has published on June 28 a consultation paper on proposed guidelines on remuneration of alternative investment fund managers, which will apply to managers of alternative funds including hedge funds, private equity funds and real estate funds.  Under the Alternative Investment Fund Managers Directive, which is due to be implemented by EU member states by July 22, 2013, all management firms covered by the directive will be asked to introduce sound and prudent remuneration policies and structures designed to increase investor protection and avoid conflicts of interest that could lead to excessive risk-taking.

The Alternative Investment Management Association has published an analysis of the divergences it has identified between the European Commission's draft Level 2 regulation implementing the Alternative Investment Fund Managers Directive and the technical advice provided to the Commission last November by the European Securities and Markets Authority.

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 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.

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.                                                     

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.

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.

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.

The European Union's Directive on Alternative Investment Fund Managers is expected to be formally adopted in the coming weeks and to take effect from around June 2013.

The directive will have extensive implications for managers based outside the EU. They will not be able to benefit from the directive's passporting arrangements for at least another two years, mid-2015 at the earliest, a period during which their only option will be distribution under national private placement rules.

This raises the question of whether non-EU managers of European-domiciled funds such as Luxembourg Specialised Investment Funds could gain access to professional investors in Europe by using a management company established in Luxembourg and able to benefit from the directive's provisions from 2013.

The European Securities and Markets Authority has issued a discussion paper on its proposed approach to implementing measures of the European Union’s Alternative Investment Fund Managers Directive.

Esma is soliciting views from market participants on the policy options it is proposing to recommend to the European Commission, which is responsible for drafting so-called Level 2 regulations and subsidiary directives setting out the details of how the AIFM Directive should be applied.

Last December the Commission requested advice on Level 2 measures from Esma’s predecessor body, the Committee of European Securities Regulators. Following delays to the finalisation of the directive’s text, the deadline for Esma to submit its advice to the Commission has been put back to November 26.

Due to the broad scope of the directive, the Commission’s request for advice has been divided into four parts. Part I covers general provisions, authorisation and operating conditions, Part II the role of the depositary, Part III transparency requirements and leverage, and Part IV supervision.

The discussion paper notably asks for stakeholders’ views on how to identify the portfolios of alternative investment funds under management by a particular fund manager and the calculation of the total value of assets under management, how leverage influences assets under management, how to determine the value of a fund’s assets under management for a given calendar year, and how to treat potential cases of crossholding among funds.

It seeks the industry’s views on how to treat managers whose total assets occasionally exceed and/or fall below the relevant threshold for authorisation under the directive, and what registration requirements should exist for entities falling below the threshold.

The paper also invites comment on how the obligation on managers to register with national authorities should be implemented, suitable mechanisms for gathering information, and what procedures should exist for small managers to opt in to regulation under the directive.

Market participants have until May 16 to respond to the discussion paper. Contributions should be submitted online at www.esma.europa.eu under the heading ‘Consultations’.

Esma says the responses it receives will help to narrowing down its policy approach and develop a formal proposal for possible implementing measures for the AIFM Directive in the summer of 2011. This proposal will be subject to a public consultation, whose results will be used by Esma to finalise its advice to the Commission.

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 latest directive on undertakings for collective investment in transferable securities, known as Ucits IV, which was formalised on July 13, 2009,will take effect from July 1 this year, the deadline for transposition of the directive into the national law of EU member states. Luxembourg became the first member state to do so on December 17, 2010.

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.

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.

For a long time, Luxembourg hedge funds and funds of hedge funds have been set-up under several wrappers, namely funds submitted under part II of the law of 20 December 2002 on UCIs (the “2002” Law) and specialized investment funds (SIF) governed by the law of 13 February 2007 (the “SIF Law”). As of today, hedge fund managers are considering launching UCITS platforms (especially “sophisticated UCITS”). As widely known, UCITS funds are harmonized European retail fund vehicles that can be sold globally and which benefit from the European passport enabling investment managers to easily market their funds within the EU.

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.

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.

On 16 December 2008, the Luxembourg Parliament has passed laws to enact the attractive measures already proposed by the bills number 5924 and 5913. These new measures which will be applicable as of 1 January 2009 aim at facilitating investments in and through Luxembourg. The main measures are: (i) the abolition of capital duty as of 2009, (ii) the exemption of withholding tax (under certain conditions) on dividends paid to treaty countries (in case of corporate shareholders), (iii) decrease of the combined corporate income tax to 28,59% as of 1 January 2009 and (iv) broadening the scope of the IP regime introduced by the law of December 2007.

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.

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.

On 1 October 2008, a draft bill (n°5924) introducing new favourable tax measures was submitted to the Luxembourg Parliament. We set out hereunder a brief overview of the main changes that are proposed and that relate to companies.

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 Luxembourg government has recently introduced a draft law on 6 November 2007 that would provide for an 80% tax exemption of income derived from intellectual property ("IP") as well as capital gains realized on the disposal of such intellectual property. The aim of this new incentive is to encourage companies to invest more in research and development and will increase the attractiveness of Luxembourg for the holding of intellectual property. It is intended that the regime is applicable as from January 2008.

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 2 November 2007, Luxembourg signed a tax treaty with Hong Kong. The maximum withholding taxes that are set out are:

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.