Luxembourg: adapting to remain attractive for investment

In our first blog in this series, we considered why asset managers are rethinking historical jurisdictions for cross-border investment arrangements, particularly in light of the changing tax environment and in anticipation of government measures in response to COVID-19. Then, we looked at why Abu Dhabi is becoming a top jurisdiction for investment as organizations transform for the new reality ahead, and how Ireland has remained a center for internationally distributed investment funds and securitizations structures for over 30 years. In this article, we look at how Luxembourg is adapting in an attempt to retain its rank as one of the largest investment centers in the world.

1. Stability and reputation

With more than EUR 4,500 billion net assets under management in regulated funds[1], Luxembourg is the largest investment fund center in Europe and the second largest in the world after the U.S. It is the largest global distribution center for investment funds, and its funds are offered in more than 70 countries around the world. In June 2020, net assets under management by Luxembourg investment funds had grown by over 9.5 percent in the last 12 months[2].

Since the COVID-19 crisis hit, the Luxembourg investment fund sector has proved resilient due to the ability to quickly switch to remote working models. For example, the Luxembourg tax authorities permitted board meetings to take place virtually via telephone or video conference. Cross-border commuters from France, Belgium and Germany are allowed to work from their home countries without suffering any (additional) social security or personal income tax consequences. And, the smooth and regularly updated communication from the Luxembourg government, the tax administration, and the Financial Sector Supervisory Body (CSSF) helped to maintain efficient business operations.

At the beginning of the lockdown in March 2020, a clear reduction in the number of transactions began to occur, which was confirmed throughout Q2. Nevertheless, the alternative sector is still very much in favor with investors and there are encouraging signs that prior levels of activity will resume.

There is considerable activity in real estate and infrastructure/renewable energy structures, and growth is expected to continue. There is also a large and growing appetite for private debt, venture capital funds and securitization structures. These moves suggest that the flexible tax and regulatory regime in Luxembourg is meeting the needs of the market.

2. Investor-friendly ecosystem

Luxembourg has been a well-established fund industry center for over 30 years with a reputation for attracting large cross border investment platforms and reputable prominent fund and asset managers. The long-term stability of the country and ecosystem, coupled with a robust regulatory framework, a credible and reputable regulator and a flexible company law regime are among its key features.

Luxembourg has historically catered to the needs of the funds industry spanning from back-office to front office services. And, Luxembourg’s international and multilingual workforce (English is widely spoken) has helped attract local AIFMs (Alternative Investment Fund Managers) and third-party service providers.

A strong business market was built over the past years with Germany, and now many German investors use Luxembourg real estate funds when investing cross-border. Also, many sovereign wealth and large pension funds have established investment platforms, holding companies, and feeder funds in Luxembourg because of the regulatory controls, tax and legal frameworks, and ability of doing business there. High-net-worth individuals and family offices also increasingly utilize Luxembourg for the same reasons.

3. Luxembourg’s toolbox for investment fund structure types

Luxembourg has a well-established tradition of innovation in the fund industry with a broad range of investment vehicles which combine different legal forms, fund regimes, tax qualifications and regulatory frameworks. While it has historically provided traditional structures, it continually innovates to meet the needs of the market. Recent developments include:

  • the SCSp (Special Limited Partnership), introduced in 2014, is a popular fund entity for alternative investments, including real estate. Its contractual freedom is similar in flexibility to that of a traditional Anglo-Saxon limited partnership. 
  • the RAIF (Reserved Alternative Investment Fund), introduced in July 2016, qualifies as alternative investment fund (AIF) and is not itself subject to CSSF product approval. RAIFs must appoint an authorized external AIFM.
  • the project to launch a flexible cross border REIT regime, focusing on real estate and infrastructure investments.

Luxembourg’s fund “tool box” offers a spectrum of legal, regulatory and structural choice.

legal and regulatory requirements

A detailed overview of the legal and regulatory requirements for regulated and supervised entities can be found here.

4. Increasing business presence in Luxembourg

Evolving international tax developments, such as the Organisation for Economic Co-operation and Development’s (OCED) Base Erosion and Profit Shifting (BEPS) project, have inspired a trend toward consolidating legal entity and tax structuring for alternative investments in Europe. Some investors and asset managers have seen value in using a Luxembourg-based Fund Manager / AIFM to manage a Luxembourg investment fund and a Luxembourg sub-holding structure to create commercial and administrative efficiencies and to help address requirements outlined in recent European Union (EU) court cases, which have highlighted the need for intermediary holding entities to demonstrate both beneficial ownership of the income (interest/dividends) they receive and commercial/business purpose for their use in cross-border structures.

Luxembourg’s participation exemption regime and extensive double tax treaty network can help reduce tax leakage for investment structures. However, these tax efficiencies can generally only be achieved when the structure has credible substance and business purposes. To that end, KPMG in Luxembourg’s 2019 edition of its substance survey[3] highlighted the increasing substance being created in Luxembourg. For example, 65% of the general partners (GP) surveyed planned to increase the middle office and front office staff, including focusing on senior management level recruitment. The 2020 edition of the substance survey results are currently being compiled with intention to publish the report in October 2020.


Driving and implementing innovation is an ongoing strategy of Luxembourg’s fund industry. It is continually reviewing its legal and regulatory framework and expanding its toolbox of products and services in an attempt to maintain a place at the forefront of fund management. Luxembourg hopes that the focus on market leading products and services will help ensure that it remains an attractive option for investors and asset managers.

In our next article, we will look at structuring options in Hong Kong. We welcome your questions and feedback on this overview in the meantime.

Unless otherwise noted, all information within this article was contributed by KPMG professionals in Luxembourg based on their experience in Luxembourg as well as local laws and regulations within Luxembourg.

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