Luxembourg

Details

  • Service: Advisory, Regulatory and tax reporting services, Tax, International Executive Services (IES), Financial Services, Investment Management, Private Equity, Real Estate & Infrastructure
  • Industry: Financial Services, Fund Management, Private Equity, Real Estate & Infrastructure
  • Type: Business and industry issue, KPMG information, Regulatory update
  • Date: 7/10/2013

Contact

Georges Bock

Managing Partner

Tel. +352 22 51 51 - 5522

georges.bock@kpmg.lu

 

Ravi Beegun

Partner
+352 22 51 51 - 6248

ravi.beegun@kpmg.lu

 

Charles Muller

Head of European Centre of Excellence Investment Management Regulation

Tel. +352 22 51 51 - 7950

charles.muller@kpmg.lu

Luxembourg Parliament adopts new AIFM Act 

On 10 July 2013 the Luxembourg Parliament voted the Bill of law n°6471 transposing the AIFMD (Alternative Investment Fund Managers Directive 2011/61/EU) in Luxembourg.   The AIFM Act will enter into force on the day of its publication in the Mémorial (official gazette) which is expected to occur within days, and in advance of official EU deadline for transposition of 22 July 2013. The accompanying detailed AIFMD implementing rules take the form of EU Regulations and as such are directly applicable in Luxembourg, without the need for any local transposition.

The AIFM Act represents a significant reform of the management of alternatives funds, by extending regulation and oversight across the sector as well as through the introduction of a rigorous depositary regime for AIFs. The AIFMD may also herald the beginning of a new era of increased cross-border competition in the industry due to the EU-wide passport that will be available for EU AIFMs to manage and market AIFs across the EU.


Luxembourg is among the forerunners to fully transpose the AIFMD, which is testament to the Grand Duchy's determination to provide the investment management industry with legal certainty as to the treatment of fund managers, their regulated funds and other investment structures under the new AIFM regime. Luxembourg has also seized the opportunity to strengthen its competitiveness as a first-class international financial centre for both the management and the structuring of alternative funds and the revamping of the limited partnership regime, as well as the carried interest regime contained in the new law are expected to generate considerable interest among promoters, investors and fund managers.

 

The full text of the AIFM Act is available on the website of the Chambre des Deputés.

 

To follow we outline the main aspects of the new Act.

 

General overview 

 

Chapters 1 to 11 of the AIFM Act closely follow the wording of the AIFMD and set out the legal framework that will apply to the AIFM including authorisation, capital requirements and operating conditions, governance and risk management, delegation rules, remuneration, reporting, depositary regime and marketing conditions.  Luxembourg has opted to allow AIFMs to request authorisation to provide ancillary services including individual discretionary portfolio management, under its AIFM license.

 

Chapter 12 of the AIFM Act introduces amendments to the regulated fund laws, part II of law of 2010 on Undertakings for Collective Investment, the Specialised Investment Fund (SIF) law of 13 February 2007 and the Investment Companies in Risk Capital (SICAR) law of 15 June 2004, to ensure their consistency with the AIFMD regime, in particular in relation to the new depositary regime, annual report requirements, valuation rules and disclosure to investors.  This chapter also contains amendments to various other Luxembourg laws with the aim of modernising the general investment management legal, regulatory and taxation frameworks.  These include amendments to the 1915 company to revamp and modernise the Luxembourg limited partnership regimes, as well as the creation of a new category of PSF, the 'Professional Custodian of Assets other than Financial Instruments' under the 1993 Banking law that can act as depositary for specific types of AIFs.

 

Chapter 13 of the Act covers the amending, repealing and final provisions.

 

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Which Luxembourg entities are considered AIFs? 

 

The concept of AIF is broad and regulated funds set up under the Product laws as well as unregulated structures may qualify as AIFs.  Retail non-UCITS funds that are set up under Part II of the law of 17 December 2010 will automatically qualify as AIFs.   In contrast SIFs, SICARs and unregulated investment structures will have to be appraised on a case by case basis to determine whether or not they qualify as an AIF.

 

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Which Luxembourg entities can apply for an AIFM license? 

 

Each AIF will need to be managed by an AIFM, which can either be an external AIFM or should the AIF so elect, shall be an internally managed AIFM.

 

The AIFM is defined as any entity whose regular business is managing one or more AIFs.  The AIFM will need to perform portfolio management and risk management for the AIFs managed, and may additionally perform administration, marketing and activities related to the assets of the AIFs.  Luxembourg has opted to allow the AIFM to extend its authorisation to perform individual discretionary portfolio management, to provide investment advice, to provide safe-keeping and administration services in relation to shares/units in UCIs and to provide services in relation to the reception and transmission of orders in relation to financial instruments under the AIFM license. 

 

Depending on the assets under management the manager will either be subject to the full AIFM authorisation regime or a lighter registration regime.  Sub-threshold managers that would fall under the registration regime have the possibility to opt-in to the full AIFM regime on request.  Existing Luxembourg managers will have a 12-month transition period up until 22 July 2014 to file an application for AIFM authorisation and the application questionnaires and other relevant documents are available on the CSSF website.  A new manager of AIFs that has not exercised the activity of managing AIFs before 22 July 2013 will not be able to benefit from any transitional rules and will have to obtain the full AIFM license before it can start to manage AIFs. 

 

Chapter 15 UCITS Management Companies will be permitted to extend their license and obtain an AIFM authorisaton, however Luxembourg banks and PSFs are not permitted to combine their licenses with an AIFM license.

 

The law will repeal as of 22 July 2014 the PFS 'Manager of non-coordinated UCIs' under article 28-8 of the 1993 Act and these managers will have to apply for an AIFM license before that date.

 

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What are the transitional rules for AIFs? 

 

Existing AIFs and any new regulated AIF created up until 22 July 2014 that has an external manager will have to comply with the product rules contained in the new law as from the date that their AIFM is formally authorised.  AIFs that are managed by a fund manager that operates under the registration regime are not subject to the AIFM rules, and will continue under the old regime.

 

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Which entities can act as depositary for AIFs? 

 

In addition to banks the new law allows investment firms to act a depositary for AIFs, as well as a newly created PFS 'Professional Custodians of Assets other than Financial Instruments'.  The latter is restricted to specific types of AIFs that do not offer redemption rights during a five year period after the initial investments are made, and according to the investment policy generally will not invest in 'custody' assets or will generally invest in issuers or non-listed companies to acquire control.  The possibility to appoint this new category of PFS has also been extended to part II UCIs, SICARs and SIFs that are not subject to the AIFM regime.

 

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An overview of new Luxembourg Limited Partnerships 

 

New Luxembourg limited partnership regime – a very flexible fund raising vehicle

 

The Luxembourg legislator took the opportunity of the AIFMD transposition to soundly amend its corporate and tax regime by modernising the range of limited partnership vehicles ('LP') available to investors and fund promoters.  The AIFM Act further increases the flexibility and provides for a full tax transparency and tax neutrality. In a nutshell, the new Luxembourg LP regime is aligned, on a level playing field, with models existing in England, Scotland, Jersey, Guernsey and other common law jurisdictions and will be tailor-made for alternative investment fund raising and for carried-interest structuring.

 

The new Luxembourg LP regime consists in (i) the modernization of the pre-existing common limited partnership ("Société en Commandite Simple" or "SCS") and (ii) the introduction of a new special limited partnership ("Société en Commandite Spéciale" or "SCSp"). The main difference between the SCS and the SCSp is that the SCS is vested with legal personality, unlike the SCSp, which is a transparent entity.

 

At last but not least, the legal regime applicable to the Partnership limited by shares (Société en commandite par actions, SCA) has also be updated  As a result, Luxembourg law now displays the whole range of partnership investment vehicles available to investors, promoters and fund managers:

 

  • SCA: joint stock company ;
  • SCS: intuitu personae partnership ; and
  • SCSp: partnership without legal personality

 

Modernisation of the existing common limited partnership ("SCS")

 

The SCS will be governed by the limited partnership agreement ("LPA"), with an outstanding  contractual freedom to fulfill   all specific business requirements of the fund managers and investors, while safeguarding full confidentiality in respect of the limited partners and their partnership interests.

 

Based on the above, the Luxembourg company law  has been modernised and includes the following interesting features:

 

  • possibility of contributions in industry (services, know-how) by general partners ("GPs") and limited partners;
  • contractual freedom to allocate profits or losses between partners;
  • no statutory repayment of undue distributions;
  • full flexibility to determine voting rights;
  • publication of the LPA limited to excerpts to safeguard the confidentiality of the identity of the limited partners and their partnership interests;
  • No minimum share capital / no payment & capital calls thresholds;
  • Transfer of partnership interests fully subject to the LPA (suppletive legal provisions only);
  • Characteristics of partnership interests  (nominal value or not, un-equal nominal value, rights attached fully  subject to LPA provisions


Introduction of a new special limited partnership ("Société en Commandite Spéciale" or "SCSp")

 

The SCSp will be a brand new type of vehicle in Luxembourg, benefiting from the same flexible legal regime as the SCS (please refer to Section 2 above), yet without being vested with legal personality. As a result, investors have the choice  between a Luxembourg LP with legal personality (SCS, similar to a Scottish LP) and a Luxembourg LP without legal personality (SCSp, similar to an English LP).

 

Full tax transparency and tax neutrality

 

The SCS is currently treated as transparent for corporate income tax ("CIT") and net worth tax ("NWT") purposes. The same treatment will apply to the future SCSp.

 

If the GP(s) taking the form of limited company(ies) hold(s) less than 5% of the partnership interests, the income of the Luxembourg LP will no longer be deemed to be a business income. Moreover, if the activity of the SCS and SCSp is limited to private wealth management (which generally corresponds to the activity of private equity and real estate funds), the income of the SCS and SCSp should not be classified as business income. Consequently, no permanent establishment should be recognized, especially for municipal business tax ("MBT") purposes.

 

The new provisions will allow a full tax transparency and tax neutrality of both the SCS and SCSp in Luxembourg.

 

The tax treatment of SCS set up before entry in force of the AIFM Act will remain unaffected by the new rules.

 

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Management of investment funds – Recast of the scope of the VAT exemption 

 

The AIFM Act includes changes to Article 44, 1, d) of the Luxembourg VAT law covering the investment funds management services exemption.

 

Art. 206 of the AIFM Act is the consequence of a recent Luxembourg case-law according to which subcontracted investment management services received by a Luxembourg investment manager for the benefit of a SICAV established in an European Union Member State other than Luxembourg should not benefit from the VAT exemption of Article 44, 1, d) of the Luxembourg VAT law ("VATL").

 

Indeed, in its current wording the exemption applies only to the management of investment funds subject to the supervision of the Luxembourg supervisory authority (the CSSF or the CAA) and not to another European Union supervisory authority.

 

This leads to a situation where a management company can incur input VAT on subcontracted investment funds management services without any recovery possibility considering that the management services it renders to an European Union regulated fund would be VAT exempt if located in Luxembourg.

 

To remedy this situation, the AIFM Act recasts Article 44, 1, d) VATL to include within the scope of the VAT exemption the management of investment funds located in other EU Member States and subject to supervisory bodies similar to the CSSF or the CAA.

 

The enactment of this AIFM Act should reach its aim to avoid a situation where a management company would have incurred non-recoverable input VAT on subcontracted investment funds management services.

 

It should be noticed that the AIFM Act also includes within the scope of the VAT exemption the management of AIF, whatever their place of establishment.

 

The impact of this provision should be threefold. First, the supply of management services to a Luxembourg AIF should be VAT exempt. In this respect please note that it is currently discussed whether management services supplied to AIF and linked with the risk management function should or not be exempt. Second, subcontracted AIF management services received by a Luxembourg manager should also benefit from the exemption. And third, in return for this exemption, the input VAT recovery right of a Luxembourg AIF manager would have to be carefully monitored, even if the AIF managed is established outside the European Union.  The interpretation of those provisions, if enacted as such, could be further detailed in a Grand Ducal Decree or in a Circular from the Luxembourg VAT authorities.

 

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Comprehensive tax regime for carried interest 

 

The AIFM Act also introduces a carried interest regime. The provisions cover the taxation of gains realized by the disposal of units, shares or other securities issued by an alternative investment fund in the framework of a carried interest as well as the mere carried interest.

 

The provision applies to employees of alternative investment fund managers or alternative investment fund management companies. The tax provisions will qualify the income of carried interest as other income (not as income of salaried activity).

 

Capital gains realized upon sale of units, shares or securities covered by the new law are tax free if held for more than 6 months except if the individual holds or held a substantial participation.

 

Carried interest not represented by units, shares or other securities are taxed as extraordinary income at a quarter of the global tax rate (around 12%).

 

The tax regime will apply to individuals that become tax resident in Luxembourg during the year or the 5 subsequent years of the introduction of the present law. The provisions only apply for income realized within 10 years after the year the individual took its functions in Luxembourg. They do, however, not apply to individuals that have been tax residents or taxed on professional income in Luxembourg anytime during the 5 last years. Neither do the provisions apply to carried interest where prepayments have been made.

 

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AIF managed out of Luxembourg 

 

Non resident AIFs are not subject to Luxembourg direct taxation by the mere fact that they are effectively managed in Luxembourg.


For more information kindly contact Nathalie Dogniez, Charles Muller or your KPMG contact person.

 

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