Fund Taxation Alert 2023-07

On 24 July 2023, a new law modernizing the legal framework for Luxembourg investment funds was published in the Official Gazette. The law will enter into force on 28 July 2023 and introduces very welcomed changes from both tax and regulatory perspectives. 

Retail funds are generally subject to an annual subscription tax at a rate of 0.05% on their net assets, whereas certain types of funds reserved to well-informed investors, such as SIFs or RAIFs benefit from a reduced rate of 0.01%, (without conditions). The 2021 budget law extended the scope of the reduced subscription tax. Accordingly, since 1 January 2021, UCITS and Part II UCIs (or their individual compartments) can benefit from a reduced subscription tax rate for their portion of net assets invested in “taxonomy” compliant assets (within the meaning of article 3 of EU regulation 2020/852 of 18 June 2020 on the establishment of a framework to facilitate sustainable investment, i.e., “sustainable assets”).

The new law now modernizes the current subscription tax regime to support the emergence of the new European long-term investment funds (ELTIF) and pan-European personal pension products (PEPP), and accordingly exempts those types of investment vehicles from subscription tax. This addresses the European Commission’s recommendations to introduce tax incentives as part of its initiative to create a true Capital Markets Union (CMU), i.e., a single market for capital. Similarly, the law also amends the existing favorable regime applicable to money market funds (MMF) to align the eligible MMF with the European standards defining such types of funds under EU regulation 2017/1131 of 14 June 2017 (“EU MMF regulation”).

According to the new law, a total exemption from subscription tax will be available for the following investment funds (or their compartments):

• Part II funds, RAIFs and SIFs taking the form of ELTIFs;
• UCITS and Part II funds reserved to investors who have subscribed to a PEPP; and
• UCITS, Part II funds, RAIFs and SIFs authorized as MMF, if they meet three cumulative conditions:
  • (i) they qualify as short-term MMF within the meaning of the EU MMF regulation,
  • (ii) they are reserved to institutional investors (only for UCITS and Part II funds), and
  • (iii) they have obtained the highest possible rating by a recognized credit rating agency.

The existing requirement on the residual duration of the MMF portfolio of maximum 90 days is accordingly repealed, as this is no longer necessary based on the provisions of the EU MMF regulation on short term MMF.

All other UCITS and Part II funds will continue to benefit from the reduced subscription tax rate of 0.01%, provided they are authorized as MMF within the meaning of the EU MMF regulation.

Funds with investments in money market instruments eligible for the reduced rate or exemption before the entry into force of the law (i.e,. before alignment with the definitions of the EU MMF regulation) are grand-fathered.

In order to benefit from the exemption or the reduced rate, the respective investment funds must indicate the value of the net assets that benefit from the exemption/reduced rate in their quarterly subscription tax returns to be filed with the Luxembourg indirect tax authorities (Administration de l’Enregistrement, des Domaines et de la TVA).

The main regulatory changes are as follows:

Changes applicable to several sectorial laws

• Review of the definition of well-informed investor:
  The new law aligns 'Well-informed investors' definitions with EU standards, reducing the minimum investment threshold from EUR 125,000 to EUR 100,000.
• More time to reach the minimum capital:
  The new law doubles the timeframe for SICARs, SIFs, and RAIFs to achieve the minimum regulatory capital, extending it from 12 to 24 months. For Part II funds, the timeframe is also doubled, from 6 to 12 months.

Changes applicable to Part II funds

• New corporate forms available:
  The new law broadens corporate form options for Part II funds, granting greater flexibility to fund initiators and managers. This includes options such as corporate partnership limited by shares (SCA), common and special limited partnerships (SCS/SCSp), private limited liability company (SARL), and cooperative organized as a public company limited by shares (SCoSA).
• More flexibility in the share price for Part II funds:
  The new law allows closed-ended Part II funds to set their own rules for determining the issue price of shares/interests in their constitutive documents. This offers an alternative to the current requirement of using Net Asset Value (NAV) for issue price determination.

Changes applicable to the RAIF

• Retention of notarial acknowledgement requirement for private deed RAIFs only:
  Under the new law 's provisions, the obligation for a notary to acknowledge the establishment of a RAIF and the appointment of an AIFM within five days is preserved solely for RAIFs formed under a private deed.
• More flexibility regarding the notice period of the depositary agreement and the suspension of redemptions of shares/interests:
  The new law removes the 2-month deadline for depositary replacement, requiring a notice period for smooth replacement. Failure to appoint a new depositary leads to fund withdrawal and liquidation, with suspension of share/interest subscriptions and redemptions in certain situations.
• The marketing and constitution of RAIFs in Luxembourg clarified:
  The new law introduces a new article in the AIFM law to clarify that RAIFs can be distributed to non-professional investors in Luxembourg. This clarification became necessary as the RAIF law allowed such distribution, but it was not explicitly permitted in the relevant articles of the AIFM law.

Changes applicable to AIFMs

• Rules on judicial liquidation for AIFMs and management companies of UCIs aligned:
  The new law introduces new rules for withdrawn AIFMs, requiring written authorization from a supervisory commissioner for legal acts until dissolution and liquidation, with a report on asset usage provided to the court during liquidation.
• Voluntary liquidation for AIFMs:
  The new law introduces rules deeming the AIFM's existence after dissolution, mandating CSSF-approved liquidators, and requiring liquidation only after ceasing all management activities, while aligning the legal framework for voluntary liquidation of UCIs' management companies with the new AIFM regime.
• AIFMs allowed to use tied agents:
  The new law allows AIFMs in Luxembourg to appoint tied agents as defined by the Law of 5 April 1993 on the financial sector. AIFMs must fully take responsibility for their tied agents' actions and monitor their compliance with relevant laws and regulations.
• New requirements for own funds:
  The new law requires management companies of UCIs to invest their own funds in liquid or easily convertible short-term assets and prohibits speculative positions. It also grants an extended deadline option from the CSSF for compliance or cessation of activities if necessary.