Luxembourg as a Domicile for Investment Funds: A Tax Perspective

In the ever-evolving landscape of global asset management, Luxembourg has emerged as a jurisdiction of unparalleled sophistication and strategic relevance. Its prominence as a domicile for investment funds, particularly alternative investment funds (“AIFs”), is not merely a function of geography, but rather the result of a deliberate and sustained policy framework that combines legal innovation, regulatory clarity and fiscal benefits. This guide explores the tax treatment of investment funds in Luxembourg, elucidating the jurisdiction’s unique advantages and recent legislative developments that continue to reinforce its global standing.

A Jurisdiction of Choice

Luxembourg’s ascendancy as a fund domicile is underpinned by a confluence of factors. As of the most recent data released by the Commission de Surveillance du Secteur Financier (CSSF), over EUR 5.7 bn in assets are domiciled in Luxembourg, a testament to the jurisdiction’s enduring appeal among global asset managers. The country is home to 3,124 investment funds, comprising 13,519 sub-funds, and boasts 297 authorised investment fund managers, including 18 of the world’s 20 largest asset managers. This concentration of expertise and capital has made Luxembourg a gravitational centre for fund structuring and cross-border distribution.

Moreover, the jurisdiction has become a strategic hub for the world’s largest private equity firms, many of which have established substantive operations in Luxembourg to leverage its legal flexibility and tax benefits. The availability of diverse fund vehicles, ranging from UCITS and Part II funds to Specialised Investment Funds (SIFs), Société d’Investissement en Capital à Risque (SICARs) and Reserved Alternative Investment Funds (RAIFs), further enhances its versatility. These vehicles may be constituted under a variety of legal forms, including the société en commandite spéciale (SCSp), which has proven particularly attractive for private equity, infrastructure, and real estate strategies.

Luxembourg’s regulatory framework is harmonised with European Union directives, notably the Alternative Investment Fund Managers Directive (AIFMD), which enables Luxembourg-domiciled AIFs to benefit from pan-European marketing passports. Coupled with its political stability, multilingual workforce and AAA credit rating , Luxembourg offers a uniquely compelling proposition for fund sponsors seeking both operational efficiency and investor confidence.

Tax Advantages and Fund-Level Treatment

At the heart of Luxembourg’s attractiveness lies its commitment to tax advantages at the fund level. Most investment funds domiciled in Luxembourg are exempt from corporate income tax (CIT), municipal business tax (MBT) and net wealth tax (NWT). Instead, they are subject to a modest subscription tax (taxe d’abonnement), the rate of which varies depending on the fund type and investor profile.

UCITS and Part II funds are generally subject to a subscription tax of 0.05% per annum on their net asset value, although this may be reduced to 0.01% for certain institutional share classes. SIFs and RAIFs benefit from a reduced subscription tax of 0.01% and are fully exempt from CIT, MBT, and NWT. SICARs, while technically subject to corporate taxation, enjoy a full exemption on income and gains derived from transferable securities, thereby preserving tax neutrality in practice.

Luxembourg adheres to the European Union VAT Directive, under which fund management services are exempt from value-added tax. This exemption, however, is narrowly construed and does not extend to all ancillary services. Fund managers must therefore exercise diligence in determining the VAT treatment of outsourced or delegated functions.

Recent Legislative Developments

Luxembourg continues to refine its legal and fiscal framework in response to evolving market dynamics and regulatory imperatives. Notably, the 2023 legislative reform introduced by Law No. 8183 modernised the legal forms available to Part II funds, allowing them to adopt structures such as the SCSp and société à responsabilité limitée (S.à r.l.), thereby enhancing structuring flexibility.

In parallel, Luxembourg has aligned its domestic legislation with the European Long-Term Investment Funds (ELTIF) Regulation and the forthcoming AIFMD II framework, ensuring continued access to the European market and reinforcing investor protection standards.

Substance Requirements and Anti-Avoidance Measures

In line with the OECD’s Base Erosion and Profit Shifting (BEPS) initiative and the EU’s Anti-Tax Avoidance Directives (ATAD I and II), Luxembourg has implemented robust substance requirements. Fund structures must demonstrate genuine economic activity and operational substance to benefit from tax treaty access and avoid recharacterisation risks. The introduction of the “single entity group” concept under ATAD I has further clarified the application of interest limitation rules, thereby reducing uncertainty for fund sponsors.

Conclusion

Luxembourg’s tax regime for investment funds is a cornerstone of its global competitiveness. By combining fiscal benefits, legal flexibility and regulatory sophistication, the jurisdiction offers a compelling proposition for fund promoters and institutional investors. As the asset management industry continues to evolve, Luxembourg remains at the forefront, adapting its framework to meet the demands of innovation, transparency, and cross-border efficiency.

How We Can Help

Navigating the intricacies of fund management and compliance requires a dedicated and experienced team. At Cafico International, we understand the complexities surrounding alternative investment funds. We offer a comprehensive suite of services tailored to our clients’ exact requirements, domiciliation, corporate services, fund accounting, transfer agent, financial and regulatory reporting. Our client-centric approach ensures a single dedicated point of contact and a 24-hour response time. With state-of-the-art technology, we guarantee complete transparency across all processes. By entrusting your back-office responsibilities to us, you can focus on your core competencies and foster the growth of your assets. We handle the administrative complexities, allowing you to operate with confidence and peace of mind. For more information on the above, please contact Philip J. Murphy, Director of Fund Services.