Professional Documents
Culture Documents
UCIs
Rémi Chevalier and Olivier Sciales of Chevalier & Sciales In contrast, UCIs (Part II) can only market
their units in other EU countries after
explain why Luxembourg is world leader in the formation complying with the specific conditions
and operation of investment funds stipulated by the authorities in the country
concerned. The criterion defining whether a
L
uxembourg is, behind the US, government to take the security of investors UCI is subject to Part I or Part II of the 2002
the world’s second ranking into consideration. Law is the intended investment objective, as
financial centre for the domicile Part I applies only to UCI whose sole objective
and servicing of investment Legal framework is to invest in transferable securities and/or
funds. Since 1959, when the first fund was The December 20 2002 law relating to other liquid financial assets (such as money
established, the investment fund industry undertakings for collective investments (2002 market instruments or cash deposits), whereas
has expanded to 3,395 funds in April 2009. Law) shaped the Luxembourg investment a UCI may also invest in activities such as
This success originated with the fund market by differentiating between alternative investments (such as hedge funds),
authorities’ encouraging attitude to foreign Undertakings for Collective Investment in venture capital, and real estate.
capital and investment, and has been Transferable Securities (Ucits, Part I of the
considerably strengthened by law) and Undertakings for Collective Sif
Luxembourg’s prime location in the heart Investment (UCIs, Part II of the law). Further The Sif Law provides a separate statutory
of Europe. It is close to the main markets to the February 13 2007 law relating to regime specifically designed for investment
targeted by investment funds, it has a Specialised Investment Funds (Sif) (Sif Law), funds dedicated to sophisticated investors.
highly qualified, multilingual workforce, the Luxembourg investment funds are now The Sif is a lightly regulated and tax efficient
and is politically, economically and socially divided into three categories: UCIs, or which fund which gives an onshore alternative to
stable. This unique business-friendly there were 698 in March 2009; Ucits of which consider (as compared to traditional offshore
environment is crucial to mitigate the there were 1,840 in March 2009; and Sif of jurisdictions such as the Cayman Islands or
effects of the financial turmoil the which 858 existed in March 2009. the British Virgin Islands) when deciding on
investment funds world is experiencing the jurisdiction for setting up a fund and the
and, indeed, Luxembourg seems to be Ucits type of fund vehicle to use. Sif are subject to
doing better than most major financial Ucits are designed for retail investors and each country’s distribution rules.
centres. benefit from a European Passport, enabling The regulatory body is the Commission for
As of March 31 2009, total assets of them to be freely marketed throughout the the Supervision of the Financial Sector,
undertakings for collective investment and EU with a minimum of formalities. These (CSSF). If it is subject to a continuous control
specialised investment funds reached funds are open-ended and must comply with by the CSSF, a fund set up under the Sif Law
€1,526.56 billion compared to €1,530.29 stringent requirements set by the EU legislator does not need prior approval to incorporate,
billion on February 28 2009 (a 0.24% in terms of eligibility of assets, risk-spreading but it is still a condition for funds set up under
decline). The Luxembourg government has requirements and, more generally, in terms of the 2002 Law. Directors of a Sif are still
implemented innovative fiscal measures and substance and supervision. subject to CSSF approval.
further reforms are due at the European level Major changes in this area of the law are due To help compliance with setting-up
(such as the implementation of the Ucits IV following the approval on January 13 2009 of requirements, investors benefit from the
Directive). Moreover, the events of the past the European Commission’s proposal to financial facilities offered by the high-profile
months have encouraged the Luxembourg improve the EU framework governing Ucits Luxembourg economic environment,
including 152 banks (as registered on the
Fund statistics official list on February 28 2009), a broad
range of international and local law firms
Number of funds as of March 31 2009: exceedingly qualified in this field, as well as
FCP Sicav Others Total audit firms and tax advisers.
pursuing alternative investment strategies. Investors should note that when the Ucits equity or debt, hence benefiting from
Those rules are laid down in Circular CSSF IV Directive comes into force, the simplified effective tax optimisation, and that there is
02/80 state that: prospectus is expected to be replaced by a no debt to equity ratio to be respected in
- Aggregate commitment in terms of key investor information document. the case of a Sif.
short selling may not exceed 50% of assets, In order to avoid double taxation,
and no more than 10% of the same type Issuing document Luxembourg has signed double taxation
issued by the same issuer may be sold short; Funds subject to the Sif law are only treaties with 52 countries, and 21 others are
- Borrowings must not exceed 200% of required to produce an issuing document, under negotiation or awaiting the approval
the net assets; and displaying, with no minimum content, the of the Luxembourg Parliament or the
- Counterparty risk, defined as the information necessary for investors to be foreign country. However, it has to be
difference between the value of assets given able to make an informed judgment about emphasised that only 27 of these treaties
as a guarantee and the amount borrowed, the investment proposed to them. The are applicable to Sicavs and Sicafs.
cannot represent more than 20% of the issuing documents and any modifications to
UCI’s assets per lender. them must be communicated to the CSSF. Stock exchange listing
A fund may be listed on the Luxembourg
Sif Financial statement Stock Exchange (LSE). A few conditions
Sif are not required to comply with any One difference between the 2002 Law and have been imposed for a foreign fund to list
detailed investment restrictions or leverage the Sif Law is that the obligation to publish on the LSE, mainly that the fund promoter
rules; the Sif Law merely stating that a Sif a financial statement is only annual in the must be of good repute, have adequate
should apply the principle of risk case of a SIF, whereas an investment fund professional experience, and that the
diversification. This principle provides that subject to the 2002 Law must publish an functions of investment manager,
the collective investment of funds must be audited financial statement annually and management company, custodian and
made in assets “in order to spread the semi-annually. transfer agent be carried out by a separate
investment risks”. The CSSF clarified in its Such financial statements must be entity.
Circular 07/309 that: audited by an authorised independent The Stock Exchange maintenance fee has
- A Sif may not invest more than 30% of auditor, namely a member of the been fixed at €1,875 for the first line of
its assets or commitments to subscribe Luxembourg Institute of Auditors. This quotation, €1,250 for a second one, €875
securities of the same type issued by the auditor is obliged, if any information for a third one, and €500 for the fourth
same issuer; provided to investors does not truly describe and the following lines of quotation.
- Short sales may not result in the Sif the financial situation of the fund, to report The Luxembourg investment fund
holding a short position in securities of the this promptly to the CSSF. The same industry, largely benefiting from its
same type issued by the same issuer obligation applies if the auditor becomes location in a strong financial centre, is now
representing more than 30% of its assets; aware during the audit that any fact or an internationally recognised onshore label
and decision is liable to constitute a material for investment funds. The greatest asset of
- When using financial derivative breach of the law or regulations, or to affect Luxembourg is undoubtedly political
instruments, the Sif must ensure, via the continuous functioning of the UCI. voluntarism, demonstrated by a constant
appropriate diversification of the anticipation of the need of investors –
underlying assets, a similar level of risk- Taxation of funds either in the transposing of European
spreading. Luxembourg funds are essentially tax- legislation or in the shaping of national
However, the CSSF may, upon exempt vehicles, and indeed Luxembourg legislation – in order to create a stable,
appropriate justification, grant exemptions Ucits, UCIs and Sif do not pay Luxembourg protective and favourable environment
to these rules on a case-by-case basis. income or capital gains tax, nor is a stamp according to the expected development of
duty on share issues or transfers to be paid. the market.
Reporting and audit The Luxembourg authorities are currently This pragmatism on the part of the
requirements working on a wide range of fiscal reforms. Luxembourg authorities, exemplified by
Prospectus The first main change, from January 1 2009, the recent fiscal exemptions and by the way
Funds are obliged to issue a prospectus is the abolition of fixed capital duty and of the CSSF dealt with the global financial
containing information concerning the fund the withholding tax on dividends paid to turmoil, is invaluable when shepherding
and its management company. The July 10 recipients resident in countries that have investors in days of global uncertainty.
2005 law on prospectuses for securities concluded a tax treaty with Luxembourg. Lastly, the increasingly important issue of
specified that the obligation to publish a full Under the Sif Law, an annual transparency is covered by national and
prospectus does not apply to units issued by subscription tax has been fixed at 0.01% of European regulations and provides new
UCI, other than the closed-end funds. Such net assets, compared to 0.05 % for funds investors with an especially protective
funds shall publish a simplified prospectus. under the 2002 Law. It is however only framework as compared to traditional
Public security offers representing units 0.01% for UCIs whose exclusive policy is offshore jurisdictions such as the Cayman
issued by UCI other than the closed-end the investment in money market Islands or the British Virgin Islands. For
type shall be subject to the sole provisions of instruments or deposits with credit instance, the European Commission has
the laws on UCI. According to the 2002 institutions. Other funds, such as certain proposed a Directive on Alternative
Law, both the simplified and full prospectus institutional cash funds and pension Investment Fund Managers (AIFMs) with
must include the information necessary for pooling funds, are exempt from this the objective to create a comprehensive and
investors to make an informed judgment of subscription tax, no matter which Law they effective regulatory and supervisory
the investment proposed to them, and are set up under. It should be noted that framework for AIFMs at the European
especially of the risks attached to it. investors may invest in a Sif by means of level.