A Brief Overview of the Luxembourg Fund Regime - Damalion - Independent consulting firm.

Luxembourg is a leading financial hub within the European Union for financial services activities with strong connections with Asian and North American markets. The country is one of the most popular domiciles for investment finds in Europe and the second most ideal location for investment funds globally after the United States. Its Collective Investments landscape consists of more than 15,000 domiciled funds with assets under management mean amounting to $4.6 trillion.

Luxembourg’s financial authority (CSSF) functions as one of the biggest investment regulators in Europe and internationally recognized for its flexible regulatory framework. As a result of the country’s well organized framework, the funds industry in the Grand Duchy offers the best fund structuring expertise, servicing capabilities, and distribution access to run and operate different investment fund vehicles. 

Luxembourg’s Investment Funds Landscape

  • AAA-rated economy, politically stable, robust regulatory and compliance framework. 
  • Well-known among international fund managers due to its famous toolbox for alternative investment funds.
  • The dynamic investment funds ecosystem caters to the needs of private equity groups regardless of location.  
  • Comprehensive fund structuring offers immense flexibility among fund managers. 
  • Features excellent alternative investment structures, including limited partnerships (SCS), special limited partnerships (SCSp), and Reserved Alternative Investment Funds (RAIFs).
  • Luxembourg fund service providers offer general partners a one-stop-shop that allows them to outsource management, administration, accounting, and reporting services by taking advantage of the country’s Alternative Investment Fund Manager Directive (AIFMD). 
  • The Alternative Investment Fund Manager Directive (AIFMD) allows eases the burden of fund managers, this allowing them to focus on strategizing for their respective fund vehicles. 
  • Luxembourg promotes responsible investing due to its firm environmental, social, and governance reputation. 
  • The Grand Duchy takes pride in its growing fintech ecosystem which brings more investment opportunities for domestic and international investors alike. 

Fund Managers Consider Luxembourg as Fund Domiciles for Various Reasons

  • Luxembourg is a premier location for private debt, private equity, real estate, and infrastructure funds. 
  • The country adapted the European Union’s Alternative Investment Fund Managers Directive (AIFMD) into local law. This was soon followed by expanding its fund structure offerings to provide fund managers a dynamic and flexible toolbox of investment choices. 
  • Fund managers can choose from a wide range of investment structures, including the Reserved Alternative Investment Fund (RAIF), Undertaking of Collective Investment in Transferrable Securities (UCITS), specialized investment fund (SIF), and financial participation company (Soparfi), to name a few. 
  • All fund structures in Luxembourg feature its own set of legal forms, tax regimes, reporting requirements, and regulations, which in turn enable fund managers to develop a well-organized investment strategy and attract more investor capital when setting-up a Luxembourg fund. 
  • Fund managers enjoy passporting rights under the Alternative Investment Fund Managers Directive (AIFMD) that allows them to deploy capital anywhere in the European Union. 
  • Fund managers with passporting rights in the Luxembourg  are fully authorized to perform transactions and distribute their funds throughout the the unified European Union market. 
  • Fund managers enjoy complete fund transparency under the Alternative Investment Fund Managers Directive (AIFMD) in Luxembourg. 
  • Opportunities for alternative investment managers experience increase in capital in Luxembourg, provided they adhere to the provisions under the Alternative Investment Fund Managers Directive (AIFMD). 

The Benefits of Luxembourg’s Undertaking of Collective Investment in Transferrable Securities Directive (UCITS) and Alternative Investment Fund Managers Directive (AIFMD) 

The Undertaking of Collective Investment in Transferrable Securities Directive (UCITS) and Alternative Investment Fund Managers Directive (AIFMD) legislations launched in the European Union guarantee greater level of protection coverage for retail investors and professional investors respectively.

  • Undertaking of Collective Investment in Transferrable Securities Directive (UCITS) are open-ended funds utilized by investors for transferrable securities like bonds and shares under the unified EU regulatory regime. Investment funds that meet Undertaking of Collective Investment in Transferrable Securities Directive (UCITS) requirements benefit from a passport that allows them to conduct business throughout all EU member nations.
  • Investments in private equity, real estate, hedge funds, venture capital, and debt funds are not within the Undertaking of Collective Investment in Transferrable Securities Directive (UCITS) scope, but instead will be under the Alternative Investment Fund Managers Directive (AIFMD), the regulatory framework that oversees Alternative Investment Funds (AIFs)
  • Fund managers under the Alternative Investment Fund Managers Directive (AIFMD) also benefit from passporting which allows them to freely market to professional investors throughout the EU.
  • Luxembourg was the first EU member nation to integrate the Undertaking of Collective Investment in Transferrable Securities Directive (UCITS) into their local laws, and one of the first EU member states to implement the Alternative Investment Fund Managers Directive (AIFMD). Their pioneering activity in employing these innovative regulatory frameworks contribute to their success in investment fund landscape.

Primary Alternative Investment Fund Types in Luxembourg

Below are the available investment vehicles if you wish to set-up an alternative investment fund in Luxembourg.

I. Regulated investment funds are directly supervised by the Financial Sector Supervisory Commission (CSSF):

  1. Part II Undertakings for Collective Investment Part II UCI)
  2. Specialized Investment Funds (SIFs)
  3. Investment Company in Risk Capital (SICAR)

II. Unregulated investment funds which do not require approval nor oversight by the Financial Sector 

Supervisory Commission (CSSF) for funds set-up:

  1. Reserved Alternative Investment Funds (RAIFs) indirectly regulated by Luxembourg regulating authorities, including an alternative investment fund manager (AIFM)
  2. Financial participation company (Soparfi)

Fund Managers Criteria Prior to Launching a Luxembourg Fund

Here are the primary considerations that fund managers assess and evaluate when strategizing the launch of an investment fund in Luxembourg:

  • Investor base and fund size
  • Existing investor strategy, asset type, and asset location
  • Marketing and/or distribution strategy
  • Regulatory landscape and adherence requirements
  • Initial set-up cots and ongoing maintenance costs
  • Period and speed required in setting up a fund vehicle and existing management structures
  • Available choices between regulated and unregulated structures
  • Risk diversification strategies
  • Choice between standalone or umbrella structure
  • Degree of flexibility in governance and corporate structure
  • Applicable tax advantages
  • Fund industry ecosystem

The Appeal of Luxembourg Funds to Global Investors

The increasing growth of the European and Asian investor community and excellent performance by non-EU fund managers, and challenges faced by investors provide more reasons for dun managers to distribute their products in Luxembourg. 

  • Luxembourg fund structures help in raising more capital as they can be passported across the European Union with little difficulty, without having to depend on customized private placement strategies in individual European Union member states. 
  • Fund activities are more consistent as regulators work through a unified market to organize distribution rules for both Undertaking of Collective Investment in Transferrable Securities Directive (UCITS)  and Alternative Investment Fund Managers Directive (AIMFD).
  • While setting up a Luxembourg fund structure may be costly, especially for a sub $100 million firm, but the endless possibilities of being awarded with high investments is an attractive prospective for non-EU fund managers. 
  • The strict regulatory oversight and supervision in Luxembourg reassures global investors that their capital investments will be taken protected in the long run. 
  • Undertaking of Collective Investment in Transferrable Securities Directive (UCITS)  and Alternative Investment Fund Managers Directive (AIMFD) vehicles are required to appoint a depositary for each fund, which assigns liability to the depositary in case os lost or stolen assets in the custody or sub-custody chain. 
  • Non-EU fund managers can easily appoint a third-party depositary for its respective investment funds, which further enforces strong investor protection in Luxembourg. 

Luxembourg Cross-Border Marketing Rules

Luxembourg adheres to the European Union’s Directive 2019/1160 and Regulations 2019/1156, also known as cross-border distribution of funds (CBDF) that came into force in 1 August 2021. This directive provides greater clarity among fund managers on how to market alternative investment funds. 

The new set of rules introduces changes to the Alternative Investment Fund Managers Directive (AIFMD) and Undertaking of Collective Investment in Transferrable Securities (UCITS) Directive. The goal is to harmonize rukes on the marketing of Alternative Investment Funds (AIFs), reduce regulatory challenges, improve cost-efficiencies, and enhance investor protection coverage.  Cross-Border Distribution of Funds (CBDF) will greatly benefit EU managers. 

Cross-Border Distribution of Funds (CBDF) introduces the following rules:

Pre-Marketing

  • Alternative investment fund managers can engage in pre-marketing activities to test investment strategies with EU professional investors. 
  • Testing may also be performed by an established fund, but only if it is not yet aware of marketing in EU member states where potential investors are domiciled or have set-up their registered office. 
  • Alternative investment fund managers are deemed to follow a specific process when filing pre-marketing notifications with Luxembourg’s Financial Regulatory Commission (CSSF).
  • Luxembourg’s Financial Regulatory Commission (CSSF) has successfully created a standard notification letter of fund managers to complete. 
  • Alternative investment fund managers are required to provide pertinent information, including intended name of the Alternative Investment Fund, countries where pre-marketing will take place, a description of the investment strategy, and intended period for pre-marketing activities. 
  • The same rules will apply to non-EU investment funds who have appointed an EU fund manager to distribute to European investors. 

Reverse Solicitation

  • The Cross-Border Distribution of Funds (CBDF)  has limited the availability of reverse solicitation. 
  • Subscriptions made within 18 months of the start of pre-marketing activities will be required to file corresponding marketing notifications. 
  • Clearly establishes a link between pre-marketing activities and investors being admitted to the fund in Luxembourg. 

De-Notification of Funds

  • Cross-Border Distribution of Funds (CBDF) unifies the de-notification process across all EU member nations. 
  • Fund managers marketing an Alternative Investment Fund or Undertaking of Collective Investment in Transferrable Securities (UCITS) in Luxembourg and wishes to stop marketing activities may send de-notification notice to the Financial Regulatory Commission (CSSF). 

Initial and Maintenance Costs to Launch a Luxembourg Fund

The initial set-up and maintenance costs of a Luxembourg investment fund are the same as those established on offshore jurisdictions.

Initial Formation (one-time payment)

  • Notary fee: €2,000- €5,000
  • Financial Sector Supervisory Commission (CSSF) initial authorization:

> Single compartment: €4,000

> Multi compartment: €8,000

  • Legal fees:

> Specialized Investment Fund (SIF): €50,000- €60,000

> Reserved Alternative Investment Fund: €40,000- €50,000

  • Other costs: advisory fees, printing if prospectus, and offering of document

Maintenance Cost (annual)

  • Financial Sector Supervisory Commission (CSSF) annual fee
  • Single compartment: €4,000
  • Multiple compartment: €8,000
  • Portfolio management or investment advisory service fees ranging from 0.05% to 2% of net assets
  • Minimum amounts or reduced fees for certain assets may be applicable.
  • Performance fee ranges between 5% and 20%. may be applicable.
  • Management fee: differ based on strategy size, target market, and many more. Typically, the fee is between 0.03% to 0.12% of total net assets.
  • Depositary: 0.5% to 0.1% of total net asset value. Minimum amounts and reduced fees are applicable to certain assets.
  • Administrator fee: 0.1% to 0.3% of total net asset value. Minimum amounts and reduced fees are applicable to certain assets.
  • Audit fee: depends on the size and complexity of a fund.
  • Miscellaneous costs: directors’ fees, legal fees, cross-border registration application fee, authorization fee, and other maintenance fees.

If you are considering setting up an investment fund or plan to re-domicile your funds in Luxembourg, contact our team of experts here at Damalion. We will be more than happy to help address your concerns and kickstart your investment journey in Luxembourg.

This information is not intended to be a substitute for specific individualized tax or legal advice. We suggest that you discuss your specific situation with a qualified tax or legal advisor.