Regulation of investment funds in Luxembourg in 2024

Introduction

In 2024, anticipated revisions are forthcoming in the regulatory structure that oversees investment funds in Luxembourg, triggered by the implementation of Act No. 8183. This law, approved by the Parliament on July 24, 2023, and in effect from July 28, 2023, marks a new era in the regulatory environment.

Act No. 8183 seeks to ensure that Luxembourg continues to be appealing to asset managers and international financial investors by updating the regulatory and fiscal framework for investment collectives. In order to bring structures like SICARs, SIFs, UCITS, and RAIFs into compliance with contemporary European standards, it proposes modifications to their regulation.

Reducing the minimum amount needed to be considered a "knowledgeable investor" from €125,000 to €100,000 is a noteworthy improvement. This change broadens the pool of financiers who may access specialist funds. The qualifying standards and liquidity requirements for managing companies have also been improved. In 2024, Luxembourg will offer additional tax advantages for European Long-Term Investment Funds (ELTIFs) in an effort to promote long-term contributions to the EU economy.

These measures aim to fortify depositor safeguards, enhance market transparency, and bolster the stability of the monetary sector, thereby reinforcing Luxembourg’s status as a pivotal international monetary hub.

Primary classifications of investment vehicles in Luxembourg

Legislative changes and their impact

In 2024, significant alterations are set to impact the regulation of investment funds in Luxembourg thanks to the implementation of Law No. 8183, approved by Parliament on July 24, 2023, and scheduled to be enforceable starting from July 28, 2023. This legislation seeks to update the legitimate and tax structure regulating the activities of investment pools, thus allowing Luxembourg to sustain its appeal to international investors and asset managers.

Law No. 8183 and its key provisions

Law No. 8183 has introduced significant amendments to Luxembourg's legislation governing investment funds. Key provisions of the law encompass updating legal norms concerning various fund categories such as SICARs, SIFs, UCITS, and RAIFs. The aim of these juridical adjustments is to align Luxembourg's laws with the newest European guidelines and boost the competitiveness of the nation's monetary industry.

The initial capital requirement of 125,000 EUR will drop to 100,000 EUR in accordance with Law No. 8183 in order to become a "well-informed investor." This change will make it possible for more people to invest in specialist funds such as SICARs and SIFs. A decrease in the capital requirement allows a larger group of people to access investment opportunities that were previously exclusive to institutional and professional investors.

Impact of changes on UCITS

Legislative updates have also profoundly impacted UCITS. Funds designed for retail investors face stringent regulations, even those domiciled in Luxembourg. The new legal regulations mandate that UCITS follow more stringent asset diversification guidelines and leverage caps. UCITS are expressly prohibited from taking on debt exceeding 10% of their total assets or from allocating more than 10% of their assets to securities that are issued by the same issuer.

Under Law No. 8183, Luxembourg has introduced updated guidelines for the reporting and disclosure conditions of UCITS. Investors should be provided with audited annual statements, detailing financial information, within 4 months after the fiscal year ends. Additionally, it is obligatory to deliver semi-annual reports within 2 months following the end of the reporting period. The CSSF requires submissions from UCITS, which now include a self-evaluation form and a letter from the auditor, replacing the previous "long form report."

Updating standards for AIFs and their managers

AIFs and their management have also had significant adjustments implemented. Law No. 8183's new provisions mandate that AIF managers follow liquidity management and delegation of power guidelines more closely. The legal name, jurisdiction, and supervisory body of their delegates are among the details that management organizations are required to furnish. Regular descriptions of the tools utilized for managing risk and portfolios are also necessary.

The regulation also outlines requirements for choosing and implementing liquidity management tools (LMTs). Management firms of alternative investment funds (AIFs) registered in Luxembourg must select at least two LMTs that align with their investment approach and withdrawal policies. For money market funds, a single LMT is adequate. Examples of acceptable LMTs include notice periods, swing pricing, redemption charges, and halting subscriptions and redemptions.

The fresh rules governing custodians are dictated by the legislation. Depositaries situated in other European Union member states could be designated if management firms show that essential services are not available in Luxembourg. To conform with the new standards, AIF management firms must regularly review and revise their policies and processes.

Based on the foregoing, the oversight of investment funds in Luxembourg in 2024 has greatly strengthened, thereby enhancing clarity and reliability in the currency market, as well as safeguarding investor rights. These changes aim to strengthen Luxembourg's position as a key international currency center and create favorable conditions for the growth of investment funds.

Prerequisites for management companies in Luxembourg

New requirements for delegation of authority and reporting

Law No. 8183 in 2024 in Luxembourg, higher standards for delegation of authority and reporting have been established for investment fund managers. These obligations are aimed at enhancing asset management quality.

Management firms must furnish:

• Each delegate must be listed with its full legal name and associated ID.
• The domain where the delegate is based, along with any overseeing authority, should be specified.
• Comprehensive explanation of the resources used for daily management of portfolios and risk.
• A synopsis outlining the tasks assigned to portfolios and the responsibilities associated with risk control for each AIF in Luxembourg, specifying whether delegation is comprehensive or incomplete.
• Periodic evaluations are conducted by the management firm to oversee delegated tasks effectively.

In addition, property management companies are required to regularly conduct audits and updates of their operations, encompassing delegated function management, to guarantee conformance with established protocols and conditions.

LMTs

The Law No. 8183 has imposed stricter and more specific regulations on liquidity management for investment fund management organizations operating in Luxembourg. It is the responsibility of management organizations to choose and use suitable LMTs that complement their investing approach and fund redemption policy.

AIFs supervising open-end funds must select at least 2 LMTs:

• This tool allows for the temporary halt of redemption and subscription transactions to protect investor interests and maintain fund stability.
• Redemption gate: the establishment of a limit on the number of shares redeemable within a specified period, facilitating the administration of fund liquidity.
• Increasing the notification period for share redemption, allowing the management company more time to oversee assets in Luxembourg.
• Redemption fee: introduction of a share buyback charge aimed at reducing capital outflows from the fund.
• Swing pricing and dual pricing are pricing methods designed to incorporate transaction costs and safeguard existing investors from expenses related with the entry or exit of new investors.
• Anti-dilution levy: the introduction of an additional tax to safeguard investor interests during significant asset acquisition or disposal transactions.
• Redemptions in kind and side pockets: the ability to facilitate redemptions through asset transfers rather than monetary payments, and the establishment of segregated compartments for less liquid assets.

These measures aim to enhance liquidity management, minimize threats, and protect investor interests in Luxembourg.

Credit risk management for lending funds

Credit risk assessment for funds involved in lending has become more organized and rigorous in compliance with Law No. 8183. It is obligatory for management organizations overseeing these funds to establish and periodically evaluate efficient protocols and guidelines for evaluating and handling credit risks.

Basic conditions encompass:

• Policies and procedures for issuing loans
  • In order to assess credit risk and oversee their loan portfolios, property management firms in Luxembourg should establish clear and effective guidelines and processes. The objective of these regulations should ensure timely and thorough evaluation of risks related to lending.
• Restriction on issuing loans
  • When disbursing funds to a lone debtor who operates as a financial company, an AIF, or a UCITS, AIF administrators must guarantee that the total nominal value of those advances does not surpass twenty percent of the fund's holdings.
• Restriction on the use of borrowed funds
  • For open-end funds, a restriction is established on the use of borrowed funds up to 175% of assets, and for closed-end funds — up to 300% of assets. This serves to monitor the fund's risk and liquidity levels.
• Portfolio monitoring and evaluation
  • Property management companies are required to regularly conduct monitoring and evaluation of their credit portfolios to promptly identify and mitigate potential risks.
• Reporting and disclosure
  • To preserve transparency and confidence among proprietors and regulatory bodies, real estate management businesses must furnish extensive details regarding their operations and the results of credit risk assessments. Law No. 8183's updated conditions are meant to improve stability, dependability, and transparency of Luxembourg's investment fund management. Stricter guidelines for authority and reporting delegation, the use of a variety of technologies for managing liquidity, and rigorous methods for managing credit risks related with funds in lending activities have been introduced.

All these measures are designed to safeguard investors' interests, promote transparency, and bolster monetary market stability, thereby reinforcing Luxembourg's position as one of the world's leading monetary centers.

Taxation and benefits

Benefits for ELTIFs

Under the recent Luxembourg law, ELTIFs have gained substantial tax benefits starting in 2024, making them more appealing to investors and asset managers. These revisions are intended to encourage extended-term investments that support economic expansion and sustainable progress.

The main tax benefits for ELTIFs in Luxembourg encompass:

• Generally levied at 0.05% of the net asset value each year, this tax is now entirely waived for ELTIFs that meet the criteria for SICARs, SIFs, RAIFs, or UCITS Part II, significantly reducing operational costs and enhancing yields for investors.
• Institutional investors investing in ELTIFs may benefit from additional taxation advantages, making such investments more advantageous. This includes reductions in tax rates on investment income and exemptions from certain types of taxes.
• Support for sustainable investments: ELTIFs directing funds towards sustainable and environmentally clean projects may receive additional tax incentives. This stimulates investments in initiatives focused on enhancing the environmental condition and fostering sustainable growth.

Innovations in tax regulation for various categories of investment funds

Tax reforms that have come into effect affect not only ELTIFs but also other types of investment funds in Luxembourg.

• SCR
  • Tax preferences have been introduced for SCR-type funds, exempting them from capital gains tax and corporate tax. These circumstances make SCR attractive to investors seeking investments in high-risk assets with the potential for significant returns.
• SIFs
  • Subject to certain limitations, such as investments in particular asset classes and adherence to diversification mandates, SIFs are free from corporate income tax and may also qualify for favorable tax treatment. This lowers tax burden and gives investors more flexibility in managing their investments.
• RAIFs
  • Equivalent to SIFs, RAIFs are not subject to corporate income tax and may qualify for tax reliefs upon meeting specific conditions. Introducing various legitimate forms for these funds provides management entities with additional opportunities for efficient governance.
• UCITS
  • Exemptions such as capital gains tax and corporation tax relief are still available to UCITS. Strict guidelines on asset diversification and transparency, however, should be followed.

Thus, the new tax changes for multiple categories of investment pools in Luxembourg create more favorable conditions for investors, fostering capital attraction and maintaining the country's status as one of the leading global monetary centers.

Reporting requirements and auditing

Mandatory reporting for UCITS and AIF

The new reporting and auditing obligations introduced in 2024 aim to strengthen transparency and integrity of investment portfolios in Luxembourg. These provisions apply to both UCITS and AIFs.

• Yearly reports: 4 months following the conclusion of the fiscal year, investors are obliged to submit yearly audited reports containing financial data. The reports should encompass extensive details regarding the fund's income, expenditures, composition of assets, and financial condition.
• Semi-annual reports: in addition to annual reports, those wishing to establish an investment fund in Luxembourg should submit semi-annual unaudited reports within 2 months after the end of the reporting period. These reports allow investors to receive up-to-date information regarding the fund's activities regularly.
• UCITS are required to deliver reports to CSSF, encompassing a "long form report" replaced by a self-assessment questionnaire and auditor's letter directed to CSSF. Auditors should also provide an annual report on AML/CFT issues.
• Alternative reporting: AIF engaged in lending activities must provide additional information about their credit portfolios, including loan structure, risk levels, and liquidity management.

New disclosure and sustainability prerequisites

In compliance with new regulatory requirements, those wishing to establish an investment fund in Luxembourg should stick to stricter standards of information disclosure and sustainable development. These measures aim to enhance transparency and investor trust, while supporting environmentally sound and sustainable investments.

Basic requirements encompass:

• Disclosure of threats
  • Investment funds are required to provide exhaustive information on all potential threats related to their investment strategies. This encompasses commercial, credit, liquidity, and operational hazards. The information should be provided in a clear and accessible format for investors.
• Sustainability compliance
  • Investment vehicles purporting to be sustainable or environmentally friendly are subject to Regulation (EU) 2019/2088 concerning the divulgence of details pertaining to sustainable finance, which mandates the inclusion of information on how investments influence ecological and societal dimensions.
• Using standard templates
  • Individuals aiming to create an investment vehicle in Luxembourg that emphasizes environmental or social values must employ uniform reporting formats. These templates provide structured information on achieved outcomes and impact on sustainable development.
• Audits
  • Auditors are required to conduct regular audits of the fund's compliance with sustainable development norms and provide reports thereof to regulators. This ensures an additional level of control and accountability.

Conclusion

The year 2024 marked a significant milestone for regulating investment funds in Luxembourg, characterized by sweeping reforms aimed at enhancing clarity, reliability, and stability in the currency market. Law No. 8183, which came into effect on July 28, 2023, substantially modernized the legislative and taxation structure, enabling Luxembourg to attract an increasing number of international investors and asset managers.

The most significant reforms addressed delegation of authority and accountability, improvement of liquidity management mechanisms, and implementation of additional measures to control credit risks in lending funds. These measures aim to ensure sustainable asset handling and prevent monetary perils.

Retail investors have faced heightened disclosure conditions and restrictions on incentive payments, aimed at minimizing conflicts of interest and enhancing the quality of investment recommendations. Meanwhile, professional investors have gained access to more complex currency instruments and services due to lowered qualification capital requirements.

Recent modifications in tax legislation and fiscal advantages for various formations of funds, encompassing ELTIFs, have heightened the attractiveness of Luxembourg as an investment destination. Eliminating the subscription taxation and giving institutional investors extra incentives would encourage long-term investments in sustainable development. Additional openness and control are ensured by new reporting guidelines and adherence to sustainable development standards, enhancing Luxembourg's standing as a preeminent financial hub.

Our team of specialists is prepared to provide comprehensive information and thorough support throughout the process of creating an investment fund in Luxembourg. Please contact us through the 'Contacts' section on our website, and we will assist you in achieving your investment objectives.