A Q&A guide to investment funds law in Luxembourg.
This Q&A is part of the PLC multi-jurisdictional guide to investment funds. It provides a high level overview of investment funds in Luxembourg, looking at both retail funds and hedge funds. Areas covered include a market overview, legislation and regulation, marketing, managers and operators, restrictions and requirements, tax and upcoming reform.
To compare answers across multiple jurisdictions, visit the Investment Funds Country Q&A tool. For a full list of jurisdictional Q&As visit www.practicallaw.com/investmentfunds-mjg.
Luxembourg has experienced continued growth in the retail fund market and in the fund market in general, which is the second largest in the world after the United States. This success partially relies on open-ended retail funds being set up in Luxembourg under the form of undertakings for collective investment in transferable securities (UCITS), subject to Part I of the Law dated 17 December 2010 on undertakings for collective investment (UCI Law) (see Question 2, Open ended retail funds: UCITS funds: Regulatory framework).
According to the Supervisory Commission of the Financial Sector (Commission de Surveillance du Secteur Financier) (CSSF), the financial market regulator in Luxembourg (see Question 2, Open-ended retail funds: UCITS funds: Regulatory bodies), net assets managed by Luxembourg retail funds have risen 14.58% during 2012. In Luxembourg, all closed-ended and open-ended retail funds (referred to as UCI) are subject to the UCI Law. There are two types of UCIs, which are:
UCITS funds, subject to Part I of the UCI Law, implementing Directive 2009/65/EC on undertakings for collective investment in transferable securities (UCITS) (UCITS IV Directive). Under Part I of the UCI Law, UCITS funds must always be open-ended (that is, these funds must offer their investors the possibility of redeeming their units/shares at least twice a month).
Funds governed by Part II of the UCI Law (Part II Funds). Part II Funds can be open-ended or closed-ended. Open-ended Part II Funds also enjoy greater flexibility regarding investment restrictions offered by Part II of the UCI Law compared to Part I.
Part II Funds are less widely represented in Luxembourg than UCITS but do have a noticeable presence. There are currently 561 Part II Funds (including open-ended retail funds) managing EUR196 billion.
Unlike UCITS funds, Part II Funds do not benefit from the European Passport (see Question 3, Open-ended retail funds).
Closed-ended retail funds must be set up under Part II of the UCI Law.
Regulatory framework. The CSSF regularly enacts regulations and Circulars applicable to the fund industry. For UCITS funds, the main regulations and circulars are:
CSSF Regulation N° 10-04 as regards organizational requirements, conflicts of interest, conduct of business, risk management and content of the agreement between a depositary and a management company (CSSF Regulation N° 10-04).
CSSF Regulation N° 10-05 on fund mergers, master-feeder structures and notification procedure (CSSF Regulation N° 10-05).
Circular CSSF 12/546 on authorisation and organisation of the Luxembourg management companies managing UCITS funds (Circular 12/546). This Circular repeals the previous CSSF Circular 03/108, CSSF Circular 05/185 and CSSF Circular 11/508.
Circular CSSF 11/512 on the main regulatory changes in risk management following the publication of CSSF Regulation 10-4 and ESMA clarifications, on further clarifications from the CSSF on risk management rules and on the definition of the content and format of the risk management process to be communicated to the CSSF.
Circular CSSF 11/509 on notification procedures to be followed by a UCITS governed by Luxembourg law wishing to market its units in another member state of the European Union and by a UCITS of another member state of the European Union wishing to market its units in Luxembourg.
Circular CSSF 02/77 on protection of investors in case of net asset value calculation error and correction of the consequences resulting from non-compliance with the investment rules (Circular 02/77).
Circular IML 97/136 (as amended by Circular CSSF 08/348) on financial information for the IML (replaced by the CSSF) and Statec (Circular IML 97/136).
Circular IML 91/75 (as amended by Circular CSSF 05/177) on the revision and remodelling of the rules to which Luxembourg undertakings governed by the Law dated 30 March 1988 (replaced by the UCI Law) on undertakings for collective investment (UCI) are subject.
The Luxembourg government also enacts regulations applicable to UCIs, which are:
Grand-ducal regulation of 29 September 2012 relating to the fees to be levied by the CSSF.
Grand-ducal regulation of 8 February 2008 relating to certain definitions of Law of 20 December 2002 (as amended) (replaced by the UCI Law) on undertakings for collective investment.
Grand-ducal regulation of 14 April 2003 determining the conditions and criteria for the application of the subscription tax, referred to in Article 129 of the Law of 20 December 2002 relating to undertakings for collective investment (replaced by the UCI Law).
Regulatory bodies. The CSSF regulates all investment funds in Luxembourg.
Regulatory framework. Part II Funds are subject to:
Part II of the UCI Law.
Some of the circulars also applicable to UCITS funds, such as Circular 02/77 and Circular IML 91/75
Regulatory bodies. See above, Open-ended retail funds: UCITS funds: Regulatory bodies.
For the regulatory framework for closed-ended Part II Funds, see above, Open-ended retail funds: Part II Funds.
Luxembourg UCITS funds must be authorised by the CSSF to market their shares in any jurisdiction. The authorisation procedure requires the completion of an application questionnaire and filing several documents with the CSSF.
The documents to be filed with the CSSF are:
The articles of incorporation of the UCITS (or its management regulation if established as a common fund (fonds commun de placement) (FCP)).
A prospectus which includes all information required under the UCI Law.
A Key Investor Information Document (KIID), which provides a summary of all relevant information for prospective investors.
The agreements entered into by the UCITS and its service providers (among others, the funds' management company, the investment manager, the custodian and so on), which are the:
custodian agreement;
investment adviser agreement (if any);
management company agreement (if any);
administrative agent (including registrar and transfer agent) agreement; and
all other agreements that the CSSF deems necessary.
The CVs, certified copies of passports and extracts of the criminal records of the directors to be approved by the CSSF.
A declaration of honour of the directors, stating, among other things, that they:
do not have any judicial records;
are insured for the risks incurred by their profession; and
are not involved with any insolvency procedures or fraud.
The template for the declaration of honour can be found on the CSSF's official website (see box, Online resources).
The risk management process, as required by Circular 12/546.
Non-UCITS open-ended retail funds are subject to Part II of the UCI Law (see below, Closed-ended retail funds).
The CSSF also requires an approved statutory auditor (réviseur d' entreprisesagréé) to be appointed.
Foreign funds approved as UCITS in another EU member state can market their shares in Luxembourg without CSSF approval thanks to the European Passport provided by the UCITS Directive (EU Passport). In this case, a simple notification to the supervisory authority of their home member state is sufficient.
Foreign non-UCITS open-ended retail funds must be authorised by the CSSF to publicly market their units/shares in Luxembourg.
The procedure for authorisation of Part II Funds is similar to that of Luxembourg UCITS funds (see above, Open-ended funds), with the difference that a KIID does not need to be submitted.
The marketing of foreign closed-ended retail funds' units/shares in Luxembourg is subject to the Law of 10 July 2005 on prospectuses for securities.
Luxembourg UCITS units/shares and foreign open-ended retail funds can be marketed by:
The UCITS fund itself.
Management companies managing UCITS (ManCos).
Credit institutions (subject to the Law of 5 April 1993 on the financial sector (as amended)).
Investment firms (subject to Directive 2004/39/EC on markets in financial instruments) (MiFID).
The rules for the marketing of UCITS funds also apply to open-ended Part II Funds.
The rules for the marketing of UCITS funds also apply to closed-ended Part II Funds (see above, Open-ended retail funds).
Luxembourg UCITS units/shares can be marketed to all retail clients. In addition, it is possible for UCITS to create unit/share classes or sub-funds that are restricted to professional or institutional investors.
The rules for the marketing of UCITS funds also apply to open-ended Part II Funds.
The rules for the marketing of UCITS funds also apply to closed-ended Part II Funds (see above, Open-ended retail funds).
ManCos of UCITS are subject to:
Chapter 15 of the UCI Law.
CSSF Regulation N°10-04.
Circular 12/546.
The CSSF must approve all ManCos. Approval is granted if the ManCo complies with Chapter 15 of the UCI Law. For approval with the CSSF, all of the following requirements must be complied with (Chapter 15):
The ManCo must have a certain amount of initial capital.
The ManCo's application for authorisation must be accompanied by a programme of operations setting out its organisational structure (among other things).
The ManCo's head office and registered office must be located in Luxembourg.
The directors of the ManCo must be of sufficiently good repute and sufficiently experienced.
In respect of the organisational structure, the ManCo must maintain:
Compliance, internal audit and permanent risk functions.
Supervision of delegated activities to external service providers.
At least two persons conducting the roles of its operations.
The ManCo is also subject to reporting requirements (see Question 12, Open-ended retail funds).
The UCITS Directive also allows foreign management companies established in another EU member state to manage, under the ManCo European passport, Luxembourg UCITS if they are approved in their home member state.
A ManCo of Part II Fund must comply with either Chapter 15 or Chapter 16 of the UCI Law to be approved. The provisions set out in Chapter 16 regarding, among other things, organisational requirements and substance, are less strict than the provisions under Chapter 15.
UCITS funds. Assets managed by a UCITS must be held by a depositary bank, which must be a Luxembourg credit institution regulated by the CSSF. The depositary bank is responsible for supervising the custody of the assets (that is, the depositary bank must know at all times which assets the UCITS' funds are invested in and which financial entities the assets are entrusted with).
The depositary bank is subject to further obligations if the UCITS is set up as an FCP (see Question 8, Open-ended retail funds: Legal vehicles). In this case, the depositary bank must:
Carry out all operations concerning the day-to-day administration of the UCITS' assets.
Ensure the sale, issue, repurchase and cancellation of units are carried out in accordance with the law and management regulations.
Ensure the value of units is calculated in accordance with the law and management regulations.
Carry out the ManCo's instructions, unless these conflict with the law or management regulations.
Ensure that in transactions involving the FCP's assets, any consideration is remitted to it within the usual time limits.
Ensure the FCP's income is applied in accordance with the management regulations.
If the UCITS are set up as an investment company with a variable capital (société d' investissement à capital variable) (SICAV) or with a fixed capital (société d' investissement à capital fixe) (SICAF) (see Question 8, Open-ended funds: Legal vehicles), the depositary bank must:
Ensure the sale, issue, repurchase and cancellation of units effected by or on behalf of the SICAV/SICAF are carried out in accordance with the law or the SICAV/SICAF's articles of incorporation.
Ensure that in transactions involving the SICAV/SICAF's assets, any consideration is remitted to it within the usual time limits.
Ensure the SICAV/SICAF's income is applied in accordance with its articles of incorporation.
Part II Funds. Open-ended Part II Funds must designate a depositary bank to take responsibility for the safekeeping of the assets and other supervisory duties. The responsibilities of FCP Part II Funds' depositary banks are less stringent than those applicable to the depositary banks of UCITS's FCP (see above, Open-ended retail funds: UCITS funds).
Depositary banks of Part II Funds established as SICAV/SICAF are subject to the same requirements as those applicable to depositary banks of UCITS established as SICAV/SICAF (see above, Open-ended retail funds: UCITS funds).
The rules applicable to closed-ended Part II Funds are the same as for open-ended Part II funds (see above, Open-ended retail funds: Part II Funds).
Legal vehicles. UCIs (UCITS or Part II Funds) can be structured as:
SICAV.
SICAF.
FCP.
Participant's interests in a SICAV are called "shares" and in an FCP are called "units".
Advantages. The advantages of these legal vehicles are:
SICAV. The main advantage of a SICAV is that its capital is always equal to its net asset value (NAV). This means the capital structure does not need to be changed by a general meeting of the shareholders. As a result, shares of a UCI structured as a SICAV can be easily redeemed and issued.
SICAF. A SICAF has a fixed capital and must therefore convene a general meeting to change its capital. For this reason, SICAFs are less common than SICAVs in Luxembourg (see also below, Open-ended retail funds: Disadvantages). As a result, the SICAF vehicle is more suited for closed-ended funds.
FCP. The advantage of an FCP is its non-corporate structure. FCPs are contracts and therefore provide their participants with great flexibility in relation to the organisation of their investment vehicle.
Disadvantages. SICAFs must convene a general meeting and appoint a notary to change the amount of their capital. This makes any redemption or issue of shares more laborious and time consuming.
Legal vehicles. The available legal structures are the same as for open-ended funds (see above, Open-ended retail funds: Legal vehicles).
Advantages. See above, Open-ended retail funds: Advantages.
Disadvantages. See above, Open-ended retail funds: Disadvantages.
UCITS funds. For UCITS, the main investment restrictions are the following:
Maximum 10% of their net assets can be invested in transferable securities and money market instruments of the same issuer.
Maximum 20% of their net assets can be invested in deposits with the same entity.
Maximum 10% of risk exposure to a counterparty for over-the-counter (OTC) derivatives.
Maximum 20% of their net assets can be invested in another UCI.
The total value of the transferable securities and money market instruments held by a UCITS in the issuing bodies, in each of which it invests more than 5% of its assets, must not exceed 40% of the value of its net assets.
In addition, a UCITS can only borrow if the borrowing is either:
On a temporary basis and represents:
for SICAVs or SICAFs, no more than 10% of their assets; or
for FCPs, no more than 10% of the value of the fund.
To enable the acquisition of immovable property essential for the direct pursuit of its business and in the case of SICAVs or SICAFs represents no more than 10% of its assets.
In any case, the borrowing must not exceed 15% of the UCITS's (regardless of the chosen legal vehicle) assets in total.
Part II Funds. As a general rule, open-ended Part II funds must not:
Invest more than 10% of their net assets in transferable securities not admitted to official listing on a stock exchange or dealt in on another regulated market, which operates regularly and is recognised and open to the public.
Acquire more than 10% of the securities of the same kind issued by the same issuer.
Invest more than 10% of their net assets in securities issued by the same issuer.
The borrowing restriction is set at 25% of the net assets of the Part II Fund.
However, the CSSF can grant derogations from the Part II restrictions if a detailed justification is provided by the Part II Fund. The CSSF has provided specific rules for hedge funds, real estate funds, futures funds and venture capital funds (see Questions 15 to 27).
The rules regarding closed-ended Part II Funds are the same as for open-ended Part II Funds (see above, Open-ended retail funds: Part II Funds).
UCITS funds. Although UCITS must offer investors the possibility of redeeming their shares/units at least twice a month, a UCITS can provide in its articles of incorporation and in its prospectus that the management bodies may, in adequately justified circumstances (such as a temporary shortage of liquidity), provide for a:
Delay of settlement of redemptions during a pre-determined period of time.
Proportional reduction of all redemption requests.
Part II Funds. Open-ended Part II Funds have a lot of freedom to establish rules on the issue and redemption of their units/shares.
The rules regarding closed-ended Part II Funds are the same as for open-ended Part II Funds (see above, Open-ended retail funds: Part II Funds).
UCITS funds. There are no restrictions on the transfer of rights held in UCITS funds to third parties.
Part II Funds. The UCI Law does not provide for restrictions on transferring rights to third parties. Any restrictions to transfer such rights must be stipulated in the Part II Fund documents.
The rules regarding closed-ended Part II Funds are the same as for open-ended Part II Funds (see above, Open-ended retail funds: Part II Funds).
Investors. UCIs (UCITS funds and Part II Funds) must provide investors with annual and semi-annual reports.
Regulators. UCIs must submit the following documents to the CSSF on a regular basis:
Annual, semi-annual and monthly financial reports (as set out in Circular 97/136).
For UCITS which are self-managed investment companies and ManCos subject to Chapter 15 of the UCI Law, financial information every three months (as set out in Circular CSSF 12/546).
See above, Open-ended retail funds.
Funds. Luxembourg UCIs must pay an annual subscription tax (taxe d' abonnement) of 0.05% per year of the fund's net asset value (NAV). A rate of 0.01% is applicable to:
UCIs which qualify as money market fund or fund investing in deposits.
UCIs whose sole object is the collective investment in deposits with credit institutions.
Sub-funds or classes of security reserved to institutional investors.
The following are exempt from annual subscription tax:
The value of the assets represented by units held in other UCIs provided such units have already been subject to the subscription tax.
Special institutional money market funds.
Pension funds.
UCIs investing in microfinance.
Exchange traded funds.
Management services provided to UCIs are exempt from value added tax (VAT).
Resident investors. There is no withholding tax and resident investors are only subject to Luxembourg income tax for capital gains and distribution of dividends (among other things).
Non-resident investors. Non-resident investors are not subject to Luxembourg income tax when investing in Luxembourg UCIs. However, a withholding tax may be levied if Directive 2003/48/EC on taxation of savings income in the form of interest payments (Savings Directive) applies.
Funds. See above, Open-ended retail funds: Funds.
Resident investors. See above, Open-ended retail funds: Resident investors.
Non-resident investors. See above, Open-ended retail funds: Non-resident investors.
The EU has plans to amend the current version of the UCITS Directive. The European Commission (Commission) has drafted a proposal for a new Directive (UCITS V), which will become effective at the end of 2014. The changes introduced by UCITS V will:
Clarify the functions of the UCITS depositary and improve provisions governing its liability if any assets are lost while in its custody.
Introduce rules on remuneration policies that must be applied to key members of the UCITS managerial staff.
Harmonise the minimum administrative sanctions available to supervisors where there is a clear violation of the UCITS rules.
The Commission has also launched a consultation paper for a prospective UCITS VI. The consultation paper focuses on:
Eligible assets and use of derivatives.
Efficient portfolio management techniques.
OTC derivatives.
Extraordinary liquidity management rules.
Depositary passport.
Money market funds.
Long-term investments.
Luxembourg is the second largest domicile for investment funds and has implemented a legal infrastructure for hedge funds from the very beginning of the industry.
The hedge fund industry in Luxembourg recovered quickly after the 2007 financial crisis and has resumed its continuing growth.
From 30 June 2011 hedge fund assets worth EUR70 billion were administered in Luxembourg (source: Association of the Luxembourg Fund Industry (ALFI)).
The main legal vehicles used for hedge funds are specialised investment funds (SIFs), which are subject to the Law of 13 February 2007 relating to specialised investment funds (SIF Law).
SIFs are regulated by:
SIF Law.
Grand-ducal regulation of 27 February 2007 determining the conditions and criteria for the exemption from the subscription tax.
CSSF Regulation N° 12-01 laying down detailed rules for the application of Article 42a of the law of 13 February 2007 relating to SIFs concerning the requirements regarding risk management and conflicts of interest.
Circular CSSF 08/372: Guidelines for depositaries of specialised investment funds adopting alternative investment strategies, where those funds use the services of a prime broker (Circular 08/372).
Circular CSSF 07/310: Financial information to be provided by SIFs.
Circular CSSF 07/309: Risk-spreading in the context of SIFs.
UCIs can also be used by hedge funds, but this is less common due to the greater flexibility of SIFs. In addition to the standard regulatory framework applicable to UCIs (see Question 2), UCIs pursuing alternative investment strategies are subject to Circular 02/80 on specific rules applicable to Luxembourg undertakings for collective investment (UCIs) pursuing alternative investment strategies (Circular 02/80).
SIFs are regulated by the CSSF, though the CSSF's supervision of SIFs is less stringent than for UCITS and Part II Funds.
SIFs must put appropriate risk management systems in place to identify, measure, manage and monitor the risks arising from positions and their contribution to the general risk profile of the portfolio.
In addition, SIFs must comply with the risk diversification requirements set out in Circular CSSF 07/309. This means that SIFs cannot invest more than 30% of their net assets in securities issued by a same issuer.
Unless otherwise provided in the SIF's articles of incorporation or offering document (that is, the equivalent of a prospectus for UCIs, see Question 22), the valuation of the SIF's assets must be based on fair value and the value must be determined in accordance with the rules set out in the articles of incorporation or in the offering document.
SIFs must establish both:
Risk management processes.
Conflict of interest policies.
Insider dealing and market abuse are prohibited by the Law of 9 May 2006 on market abuse.
See Question 22.
All funds' transfer agents in Luxembourg, including hedge funds' transfer agents, must comply with anti-money laundering/know-your-customer (AML/KYC) regulations, such as the recent Regulation N° 12-02 dated on 14 December 2012 on the fight against money laundering and financing of terrorism.
Circular 02/80 applies to UCIs and provides certain restrictions on short selling.
The financial actors authorised to market hedge fund units/shares are the same as for retail funds (see Question 4).
While units/shares of Part II Funds and hedge funds qualifying as UCITS can be sold to retail clients, shares of SIFs can only be marketed to well-informed investors.
A well-informed investor is a:
Professional investor.
Institutional investor.
Investor who has confirmed in writing that he adheres to the status of well-informed investor and:
invests a minimum of EUR125,000 in the specialised investment fund; or
has been the subject of an assessment made by:
a credit institution within the meaning of Directive 2006/48/EC relating to the taking up and pursuit of the business of credit institutions;
an investment firm within the meaning of the MiFID; or
a ManCo within the meaning of Directive 2001/107/EC amending Directive 85/611/EEC on undertakings for collective investment in transferable securities (UCITS) with a view to regulating management companies and simplified prospectuses (UCITS Management Directive).
Director or another person responsible for the management of SIFs.
The same requirements apply to both local and foreign investors.
SIFs must appoint a depositary bank which safeguards the assets and supervises the custody of assets by third parties. The depositary bank must be approved by the CSSF (see Question 7).
If a SIF uses the services of a prime broker for the custody of assets, the depositary bank is responsible for supervising the prime broker after approving his appointment (Circular 08/372).
SIFs must keep their offering documents (that is, the equivalent of a prospectus for UCITS) up-to-date when changes occur and submit the amended documents to the CSSF.
SIFs must also produce an annual report for each financial year. The accounting information provided in the annual report must be audited by an approved statutory auditor (réviseur d' entreprises agréé). SIFs must submit monthly and annual financial reports to the CSSF.
In addition, the CSSF may require SIFs to provide any information relevant to the fulfilment of its duties and for that purpose may (either itself or through appointees) examine the SIF's books, accounts, registers or other records and documents.
For Part II Funds, see Question 12, Closed-ended retail funds. In addition, Circular 02/80 provides additional requirements applicable to Part II Funds which adopt alternative investment strategies (such as disclosure of potential loss, leverage and liquidity risk). Circular 02/80 also provides requirements in relation to short selling, borrowings and the use of other financial derivative instruments (see Question 16, Regulatory framework).
ManCos of Part II Funds and SIFs are subject to either Chapter 15 or Chapter 16 of the UCI Law. In addition, when a ManCo manages an SIF, must also comply with the provisions set out in the SIF Law.
In both structures, the managers/directors will only be approved by the CSSF if they are of good repute and have sufficient experience to carry out their duties.
The same legal vehicles are available to hedge funds as retail funds (see Question 8).
SIFs must pay an annual subscription tax 0.01% per year of the fund's NAV. The following are exempt from annual subscription tax:
The value of the assets represented by units held in other UCIs provided such units have already been subject to the subscription tax.
Special institutional money market funds.
Pension funds.
SIFs investing in microfinance.
Management services provided to SIFs are exempt from VAT.
For Part II Funds, see Question 13, Closed-ended retail funds.
See Question 13, Open-ended retail funds.
See Question 13, Open-ended retail funds.
Like Part II Funds, SIFs can be open or closed-ended. The rules for the redemption of interests are set out in the fund documents (subscription agreement, prospectus and articles of incorporation).
Transfers of shares of SIFs to third parties are not restricted by law or the regulator, provided the transferee is a well-informed investor (see Question 19). The rules for the transfer of interests are set out in the fund documents (subscription agreement, prospectus and articles of incorporation).
A draft law (Draft AIFM Law) to implement the Directive 2011/61/EU on alternative investment fund managers (AIFM Directive) was introduced before the Luxembourg parliament on 24 August 2012. It is expected to enter into force early in 2013.
The main changes introduced by the Draft AIFM Law will include:
Conditions and procedure for the determination and authorisation of alternative investment fund managers (AIFMs), including the capital requirements applicable to AIFMs.
Operating conditions for AIFMs, including rules on remuneration, conflicts of interest, risk management, liquidity management, investment in securitisation positions, organisational requirements, rules on valuation.
Conditions for delegation.
Rules on depositaries, including the depositary's tasks and liability.
Reporting requirements and leverage calculation.
Rules for co-operation arrangements.
Description. This is the official website for the Luxembourg financial market regulator. This website includes online versions of the CSSF Circulars and Regulations. It also includes co-ordinated versions of the relevant legislation and its translation in English.
T +352 26025 1
F +352 26025 999
E lcourtois@bsp.lu
W www.bsp.lu
Professional qualifications. Luxembourg Bar, 1994
Areas of practice. Investment funds.
Non-professional qualifications. LLM, Georgetown University Law Center, US, 1995; Bachelor in Law, Education in Public and International Affairs, Université Catholique de Louvain-la-Neuve, Belgium, 1993
