The momentum behind protecting the planet and moving towards social justice is growing, and investors are playing a huge part in funding this transition. In recognition of this, the Luxembourg government recently announced a tax incentive to encourage even more investment in environmentally sustainable funds—a reduction in the subscription tax. But how do you know if your investment fund qualifies? Read on to find out.
Why is the Luxembourg government reducing the subscription tax on funds with environmentally sustainable investments?
A wave of new regulation will soon hit EU investments funds, introducing more stringent rules around sustainable investments. Read more about them here.
Complying with the rules will likely mean additional costs for fund houses, and governments are looking to support them so as not to discourage investments in these types of funds. That’s why the Luxembourg government is making this announcement now — to help ensure that ESG funds remain competitive despite the increased regulatory burden. And, in doing so, the Luxembourg government helps Luxembourg keeps its leading position on sustainable investments.
What did the government say in their announcement?
The reduction in the annual subscription tax rate will be granted to UCIs, and compartments of UCIs, investing in any kind of economic activity that qualifies as environmentally sustainable as per the EU’s Taxonomy Regulation (henceforth “environmentally sustainable activities”). The reduction enters into force on 1 January 2021. During a transition period, while a new IT system is developed, funds are being asked to submit reports to
How do I know if my funds qualify?
If you’d like your investors to benefit from the reduction, the first step is to get your funds certified by an external auditor. They’ll check the proportion of net assets invested in environmentally sustainable activities. This is calculated on the last day of the fiscal year, and the reduction is only granted to funds that have invested between 5% and 50% of net assets in activities that qualify. One very important point to look out for: the reduction only applies to the part of the fund judged environmentally sustainable, and not to the entirety of the fund.
How large is the reduction in subscription tax for ESG funds?
The subscription tax rate will decrease to between 0.01% and 0.04% depending on the total net assets invested in environmentally sustainable funds.
Rate applied to funds with between 5% and 20% of total net assets invested in environmentally sustainable activities.
Rate applied to funds with 20% of total net assets invested in environmentally sustainable activities
Rate applied to funds with 35% of total net assets invested in environmentally sustainable activities
Rate applied to funds with 50% of total net assets invested in environmentally sustainable activities
Environmentally sustainable refers to any kind of economic activity that qualifies as environmentally sustainable as per the EU’s Taxonomy Regulation.
The reduction only applies to the part of the fund judged environmentally sustainable, and not to the whole fund.