08 Feb 21

Luxembourg - The Outlook for 2021

2020 was a challenging year in Luxembourg with business having to rapidly adapt to the implications of COVID-19 and on-going Brexit negotiations. In this article, we focus on the key issues the alternative investments industry faced in Luxembourg and look forward to how 2021 might shape up.

Luxembourg landscape
Covid-19 and Brexit

According to a PwC Trend Report published in early 2020[1], which analyses the last five years within the industry, deal activity in the Benelux region increased from 11% to 12% of all European buyout deals during the period 2014-2019. It was anticipated that 2020 would continue in the same direction. At the beginning of 2020, the European Union (“EU”) alternative investments funds market was valued at €5.8 trillion[2] and prior to COVID-19, the European private equity market continued to trend upwards.

In the first two quarters of 2020, COVID-19 created considerable uncertainty in the alternative funds sector, particularly within Q2. This was mostly attributed to the tougher decision-making process required by fund managers in their due diligence procedures. In normal circumstances, fund managers are expected to scrutinise prospective projects and to provide analysis as to how targets are financially viable and aligned to their own investment objectives. COVID-19 added a broad new variable to this already complex analysis, to determine whether such targets could survive the pandemic.

Fund managers were able to adapt quickly to the effects of the pandemic and in Q3 2020, there was a resurgence in investment deals within the industry. This was notably prevalent within the private equity buyout market[3]. This momentum also carried into Q4 2020, which indicates that the strong start to 2021 could continue the upturn in investment deals and opportunities.

In the United Kingdom (“UK”), over the past five years, the volume of private equity deals declined. Could this be a by-product of Brexit? This correlates with another growing trend of fund managers seeking to establish a presence within the EU, prior to the Brexit deadline. With the added restrictions for business operations in the UK because of Brexit, will we continue to see an accelerated shift to mainland Europe of fund managers not already transitioned?

With pan-European investment consistently performing well, Luxembourg remains well-positioned to be influential over the coming year. In 2019, the number of funds in Luxembourg with a value greater than €1bn doubled, as Luxembourg also looks to establish itself as the jurisdiction of choice for North American fund managers[4]. Luxembourg is considered an attractive jurisdiction to investors and fund managers as it boasts a wide variety of vehicles to compliment investment strategies, a pro-active regulator and the ability to attract knowledge and expertise from Europe and across the globe.

2021 Alternative Investments industry outlook

In 2021, the fund industry will be looking to continue the upward trend that was observed towards the end of 2020. With a full year of fundraising campaigns, it will hopefully, once again feel like “business as usual”. It is anticipated that within the alternative funds domain and as a result of this increase, we can anticipate more transactions and deal activity in 2021, akin to the upward trend evidenced during the period between 2014-2019. We may find that this is more prevalent particularly on the side of exits and IPOs (“Initial Public Offerings”) which may have otherwise been postponed or cancelled because of COVID-19.

Markets have now returned to pre-COVID-19 levels. With a more stable economy, progress on vaccinations, certainty from the US presidential election and governments extending stimulus packages across Europe and beyond, this may encourage fund managers to exit their investments through public listing strategies, such as an IPO.

As part of a sustainable business model, there is a growing demand for fund managers to consider the Environmental, Social and Governance (“ESG”) impact on their targets. With investors trending towards ethical investments, green policies introduced into legislation and an increased awareness around climate change efforts, this may have contributed to ESG funds outperforming public markets during COVID-19[5].

The pandemic has enhanced the scrutiny on key ESG issues such as the social welfare of employees, their ability to work from home and diversity within the workplace. Could this create a transition to a greater focus on conscious investing? Private equity and real estate managers may factor in ESG policies into their valuation of potential targets and may see the implementation of ESG policies as a value-add across their existing portfolio and any future target investments.

Brexit will remain a part of the agenda for 2021 particularly within the alternative investments domain in Q1 as a Memorandum of Understanding (“MoU”) in relation to financial services regulatory arrangements are yet to be agreed between the UK and the EU. This is due to be agreed in March 2021. Currently, the existing free trade agreement (“FTA”) between the UK and the EU does not provide passporting rights to EU headquartered fund managers that previously had a right to engage with UK investors through the EU single market. Instead, fund managers based in the EU are required to apply for authorisation with the UK Financial Conduct Authority (“FCA”).

In contrast, UK fund managers and subsequently UK-based Alternative Investment Fund Managers (“AIFMs”), lost their financial services passport rights to EU member states and marketing fund vehicles within the EU now requires authorisation in an EU member state. Should the authorisation not be submitted or approved, the alternative option for UK firms will be to cease operations in the EU and vice-versa.

The FTA between the EU and the UK is yet to address several other factors that impact fund managers and the financial services industry in the upcoming months; the limits on the delegation of services from the EU to the UK, the impact of withholding tax leakage in cross-border arrangements and the effect on transfer of personal data with the UK in conjunction with General Data Protection Regulation (“GDPR”). As the year continues, there will likely be several developments and changes as a result of Brexit.

New legislation on the horizon

During 2020, there were multiple changes to laws and regulations that will impact on how business is conducted in Luxembourg in the coming 12 months and beyond, such as

  • On 9 June 2020, the Parliament passed a law amending both the CRS law of 18 December 2015 (CRS Law) and the FATCA law of 24 July 2015 (FATCA Law). The law clarifies that as part of Common Reporting Standard (“CRS”) reporting, financial institutions have an obligation to file a “nil report” in the absence of reportable accounts under CRS as well as document actions taken, and evidence used in a specific register to ensure the fulfilment of their reporting and due diligence obligations. This will be applicable for reports relating to the 2020 fiscal year due by 30 June 2021[6].

  • DAC 6 – First Reporting requirements. The EU has introduced a new set of regulations to strengthen tax transparency and to address aggressive tax planning. Mandatory Disclosure Regime (MDR), or DAC6 as its commonly known, is the requirement for the reporting of certain cross-border arrangements[7]. As a result, certain Reportable Cross-Border Arrangements (RCBA) entered into after 25 June 2018 must be reported by certain dates, as determined by the date on which the first step of implementation of the cross-border arrangement is taken. The first reporting deadline to report cross-border arrangements was 31 January 2021.

  • Extension for the submission date of tax returns for 2019 to 31 March 2021[8]. The deadline to file 2019 individual tax returns (i.e. for individual income taxes and the commercial profits of natural persons) is extended until 31 March 2021 and was extended in response to COVID-19.

  • The Simple, Transparent and Standardised (“STS”) Securitisation Regulation is a set of securitisation disclosure templates aiming to improve and standardise the information made available to investors, potential investors and competent authorities. The STS Securitisation Regulation entered into force on 23 September 2020[9]. The disclosure templates must be used to update any new information available about a securitisation, in accordance with Article 7 of the Securitisation Regulation.

  • Flexible measures on how companies and other legal entities are permitted to hold meetings have been introduced in Luxembourg to address the pandemic[10]. In the early phases of the crisis, the Luxembourg government took measures to facilitate the holding of board and shareholder meetings. The Grand Ducal Regulation of 20 March 2020, and subsequently the Act of 20 June 2020, authorised Luxembourg-based companies to organise virtual shareholder and board meetings even if the company’s articles of association do not provide for this possibility. This option was set to expire on 30 September 2020 but the Act of 23 September 2020 extended the possibility to organise virtual shareholder meetings to 31 December 2020. Under the Act of 25 November 2020 this was extended again until the 30 June 2021[11].

  • Approval of the annual accounts process – As part of its targeted efforts to mitigate the negative effects of the COVID-19 outbreak in Luxembourg, the law of 22 May 2020 grants companies an extension of 3 months to approve their annual accounts[12]. The law extends the filing and publication deadlines for annual accounts, consolidated accounts and related reports (such as consolidated management reports and audit reports), where the financial period ended between 18 August 2019 and 24 June 2020, to avoid exposing company managers and directors to liability and sanctions that are disproportionate given the exceptional circumstances.

  • On 11 February 2020, the OECD released its transfer pricing guidance on financial transactions. The new guidance provides recommendations regarding the application of the arm’s length principle to financial transactions and addresses the pricing of intra-group loans, cash pooling, guarantees and captive insurance premiums.

  • The Luxembourg Tax Authorities published a Circular on 8 January 2021 clarifying details around the interest limitation rules. These rules limit the deductibility of taxpayers’ borrowing costs to the higher of 30% of taxable EBITDA or €3 million.

With a strong finish in 2020, there is a positive outlook in 2021 both locally in Luxembourg and within the alternatives investments industry. As we move forward from the key issues faced in 2020, the industry will look to improve practices and Luxembourg will continue to maintain its status as a jurisdiction of choice for alternative investments.

As IPO and exit strategies are likely to become more evident in 2021, this will also allow both fund managers and investors to make more informed decisions by using the learnings from 2020 to support the continued growth within the alternative investments industry.

We can of course expect Brexit to play a role in 2021 with developments due to take place throughout the year and beyond.

Overall, 2021 should prove to be an exciting year in the alternative funds industry with regulatory and legislative changes paired alongside the expected growth in business activity.


[1] PwC – Private Equity Trend Report 2020

[2] Esma News

[3] Dechert Global Private Equity Outlook 2021

[4] Deloitte Private Equity Venture Capital Investment Fund Survey

[5] Value Walk

[6] Le Gouvernement Luxembourg newsletter

[7] Cafico International LinkedIn post - DAC 6 reporting deadlines

[8] Deloitte - Tax return filing extensions

[9] ESMA Europe confirms securitisation regulation requirements entry into force 23 September

[10] Ardent, Assessing and mitigating the impact on corporate governance and day-to-day management

[11] Nuata Dutilh, How to continue to organise board and shareholder meeting in difficult times

[12] Ardent, Approval of annual accounts during state of emergency