26 Jul 23
Why Luxembourg for investment funds?
For the last number of decades, Luxembourg has remained one of the most highly sought-after locations for establishing investment funds. Its stellar reputation as a worldwide leader in cross-border fund distribution continues to attract large investment platforms and prominent fund and asset managers.
As of May 2023, there were over €5,37 trillion net assets under management in Luxembourg making it the second largest investment fund centre globally after the US. However, Luxembourg can boast to being the largest cross-border distribution centre for investment funds with Luxembourg-domiciled funds being offered in more than 70 countries. While many EU institutional investors have a preference or limitation to invest in EU-domiciled funds, which has undoubtedly benefitted Luxembourg, there are several additional reasons which have led to Luxembourg’s reputation as a top location for investment funds.
Source: EFAMA, International Quarterly Statistics, December 2022
Stable pro-business environment
A significant factor in Luxembourg’s ability to attract investment funds is its stable, pro-business environment. Luxembourg’s economy is rated ‘AAA’, backed by high income per capita, strong governance indicators and robust economic policies which have allowed the region to withstand pandemic and geo-political related volatility without undermining the country’s credit fundamentals.
The Grand Duchy has long held a strong focus on developing the fund industry. The Commission de Surveillance du Secteur Financial (CSSF), the national authority responsible for supervision of the professionals and products of the Luxembourg financial sector and legislators, has adopted favourable regulatory and tax regimes, in line with international standards. Additionally, Luxembourg domiciled funds benefit from a wide network of international tax treaties which help minimise tax leakage from the structures. To date, Luxembourg has signed 86 double taxation treaties, most of which include provisions for the exchange of information between tax authorities. Luxembourg’s reputation as a well-regulated, tax transparent fund jurisdiction has contributed to increased investor confidence in the region.
Evolution of an established fund industry
In recent years, the Grand Duchy has built on its traditional strengths in private banking, insurance, corporate lending and alternative investment funds. There is an abundance of satellite service providers available in the country specialising in aspects such as legal, administration and distribution, regulatory oversight, risk management and tax services.
As a result of evolving international tax developments over recent years, such as the Organisation for Economic Co-operation and Development’s (OECD) Base Erosion, the Anti-Tax Avoidance Directive (ATAD) and Profit Shifting (BEPS), asset managers are increasingly tending to consolidate legal entities and tax structuring in Europe. Many have seen value in using a Luxembourg-based Alternative Investment Fund Manager (AIFM) to manage a Luxembourg investment fund and a Luxembourg sub-holding structure to create commercial and administrative efficiencies. This also helps to address requirements for intermediary holding entities to demonstrate both beneficial ownership of the income they receive and commercial purpose for their use in cross-border structures.
Continued innovation brings increased flexibility for managers
Another reason for Luxembourg’s continued attractiveness to investment funds is the wide range of structuring options available to fund managers. Luxembourg’s regulatory authority has gained a reputation for continuous innovation bringing greater flexibility and increasing the appeal of the region as a location. Recent innovations include:
On 11 July 2023, a law reforming Luxembourg investment funds was adopted by the Luxembourg Parliament. The Luxembourg alternative investment toolbox proposes a large choice of regulations and legal forms to the five sectorial legal toolboxes guiding the investment funds industry, namely the laws on SICAR, SIF, RAIF, UCI, and AIFM. These changes aim to provide more flexibility and opportunities for investors.
The introduction of Special Limited Partnership or Société en Commandite Spécial (SCSp), offering contractual freedom and flexibility similar to a UK Limited Partnership;
The introduction of the Reserved Alternative Investment Fund (RAIF), which qualifies as an Alternative Investment Fund (AIF) (the fund type must appoint an external AIFM, however is not subject to CSSF approval); and
Updates to the securitisation legislation. See our guide here to Securitisation in Luxembourg.
Luxembourg was the first EU member state to transpose UCITS into national law and one of the first EU member states to implement AIFMD. These first mover effects contributed to the success of the investment fund industry.
Luxembourg’s authorities were also quick to respond to the challenges posed by the Covid-19 pandemic. During this time for example, tax authorities permitted board meetings to take place virtually.
Why Cafico International
All indications suggest that Luxembourg will continue to be a dominating region in terms of investment fund establishment for the foreseeable future. Cafico International regularly supports organisations through the process of establishment, as well as the day-to-day management and operations of their Luxembourg-based entities.