Luxembourg: a premier destination for global investment

Recent years have witnessed heightened interest in private equity exposure, especially across Luxembourg's dominant fund administration and asset management industries. Generating annual revenues of €7.7 billion, the asset management ecosystem accounts for 6% of national GDP and yields 10% of fiscal receipts.

Its competitive edge lies in the structuring flexibility afforded to managers and investors alike, allowing bespoke vehicles to be crafted around specific strategies. Coupled with its lengthy track record of smoothly facilitating even the most complex investor demands, fund sponsors around the globe turn to Luxembourg when bringing products to market.

Underscoring this long-standing success is Europe’s top legal system, ensuring asset safety and earnings stability. Bushy bureaucratic obstacles like capital controls or trade barriers are equally absent thanks to Luxembourg's integral placement within both the EU single market and the Eurozone.

Whether pursuing fund launch, holding company formation, or investment-linked immigration, Luxembourg warrants consideration. Grasping applicable legislative nuances, minimum capital requirements, and frequently utilised legal structures constitutes critical starting points before committing capital. Aligning expert counsel early when charting an investment course can illuminate this financially pragmatic but structurally complex jurisdiction.

Luxembourg fund regulation

Owing to its robust regulatory framework and extensive fund structuring expertise, Luxembourg has become the preferred European domicile for international asset managers launching UCITS retail funds and AIF alternative vehicles. Currently representing 58% of the cross-border fund market, Luxembourg regulated €5.1 trillion in net assets as of 2023. Its pioneering 1988 implementation of the EU’s original UCITS Directive built the foundations for this success.

Luxembourg fund governance adheres to overarching European financial services directives as well as national legislation issued by domestic regulators like the CSSF Commission. Tasked with safeguarding financial stability, the CSSF has cultivated an environment of investor protection that still enables product innovation.

For fund sponsors, understanding key regulatory considerations is essential when establishing a Luxembourg-domiciled vehicle. These include:

With investor safeguards at its core yet hungry for financial innovation, Luxembourg fund regulation strikes the optimal balance between oversight and growth.

Luxembourg fund industry: key regulatory updates

Keenly attuned to investors' needs, Luxembourg continually enhances its fund ecosystem through regulation that calibrates oversight with business-friendly flexibility.

Fund regulation: 2023 enhancements elevate global appeal

Entering into force on 28 July 2023, Luxembourg’s sweeping fund ecosystem enhancements uphold its preeminence as Europe’s leading cross-border fund domicile. Amending five core statutes governing fund establishment and management, the legislative package fine-tunes regulation to sponsor needs while cementing investor protections.

Luxembourg fund structures: tailoring governance to strategy

When opting Luxembourg for fund jurisdiction, global asset managers enjoy unparalleled structural flexibility alongside rigorous regulation. Though many elect an unregulated SOPARFI private equity conduit, or select one of the described modes:

Investment companies in risk capital (SICAR)

Permitted to pursue multi-asset alternatives like venture capital, private equity, and hedge funds, the SICAR delivers ultimate strategy adaptability. Sponsors may establish segregated sub-funds beneath a SICAR umbrella to isolate distinct objectives, assets, and investors within a single, overarching framework.

Free from standard diversification and risk spreading directives, each sub-fund benefits from independent governance and operational autonomy. And with no mandatory dividend reserves or restrictions upon distributions, SICARs optimize investor payout potential.

Sponsors seeking outsized returns, compressed timelines, and elevated risk exposure routinely leverage Luxembourg SICAR capabilities when bringing novel products to market.

Specialized investment funds

Available only to well-informed investors, Luxembourg’s specialized investment fund (SIF) offers qualified participants versatile exposure to sophisticated asset classes beyond the scope of traditional retail funds. As externally managed alternative investment vehicles, SIFs employ heightened operational agility to capture opportunities across diverse markets. Encompassing real estate, venture capital, hedge funds, commodities and more, SIFs constitute regulated EU AIFMD funds while bypassing standard UCITS directives. Streamlined CSSF registration demands merely the approval of designated directors, administrator, depositary, and auditor prior to securing SIF status.

Crucially, sponsors face no constraints upon leverage deployment or investment restrictions. Structuring itself bends to manager preferences, with SIFs constituable as fixed or variable capital investment companies, or contractual fund frameworks tailored around specific partner demands.

Tax obligations are equally light, limited to a 0.01% annual subscription tax levied upon the net asset value.

Undertakings for collective investment (UCIs) & Reserved alternative investment funds (RAIFs)

As leading fund domiciles under EU regulation, Luxembourg UCIs and RAIFs offer global asset managers unmatched structural choice when bringing sophisticated products to market.

Available as open-ended (FCPs) or closed-ended corporate vehicles, UCIs impose few constraints around asset classes, diversification, or leverage — making them ideal turnkey solutions for hedge, real estate, and private equity strategies. Appointing an authorized EU Alternative Investment Fund Manager (AIFM) then unlocks professional investor passporting rights across Europe.

The RAIF functions as an externally managed, qualified-investor AIF specifically targeting institutional capital. Bypassing CSSF registration requirements, RAIFs instead leverage their manager’s existing permission's framework, thereby optimizing time-to-market while upholding full regulatory oversight.

Common legal configurations encompass the FCP structure of contractual rights alongside corporate frameworks like fixed/variable capital investment companies. Minimum capitalization thresholds must still be respected, detailed disclosures submitted, and local service providers appointed to handle custody, administration, and audit functions.

SICAVs & SICAFs as Luxembourg fund solutions

As pillar fund structures within the Luxembourg ecosystem, open-ended SICAV investment companies and closed-ended SICAF counterparts furnish global asset managers unmatched versatility to house sophisticated strategies.

Available as private limited partnerships or public companies, SICAVs issue redeemable shares tied to net asset value, thereby furnishing investors daily liquidity. SICAFs instead offer fixed capitalization, requiring amendments to increase equity. Both models enable self-managed or third-party operated vehicles.

For SICAVs, adherence to UCITS retail directives enables promotion to ordinary investors. Yet, configuring under SIF legislation alternatively restricts participation to informed participants in return for widened investment powers.

Irrespective of form, appointed custodians safeguard fund assets as administrative and audit functions connect to local service providers. And with board oversight mandated from Luxembourg, sponsors retain full control while harnessing the jurisdiction’s regulatory rigour.

Registering a fund in Luxembourg: structuring private equity and venture capital investments

For international private equity and venture capital managers, Luxembourg furnishes bespoke structural solutions to house sophisticated investment strategies. Alongside flexibility and tax efficiency, fund governance adapts to sponsor preferences through:

Irrespective of the model, LP frameworks dissolve fund-level taxation. For SCS/SCSp vehicles, VAT registration attaches only when eschewing regulated fund status. Umbrella structures also enable segregated asset pooling.

In melding overseas investor access with onshore regulation, these structures cement Luxembourg’s reputation as a premier private capital hub. Global managers continually pinpoint the jurisdiction’s creative latitude as instrumental when bringing novel strategies to market.

Marketing and governance rules

Understanding Luxembourg’s investment fund nuanced governance protocols is essential when aiming for pan-EU scale. Though common standards govern EU AIFMs, additional obligations attach depending upon strategy, investor type, and registered status.

Private equity and venture capital funds typically avoid leverage to mitigate investor risks. Leverage at the portfolio company level remains isolated from these funds' financial structures. Luxembourg funds may employ NAV or asset-backed financing programs, with loan proceeds leveraging the fund’s asset portfolio. Limited exceptions allow borrowing for UCITS funds on a temporary basis or for real estate acquisition, subject to regulatory caps.

Establishing holding structures in Luxembourg

A holding company constitutes a legal entity formulated to retain control or ownership interests in other companies' equity or assets. For assistance with establishing a Luxembourg holding company, our business consultants welcome your inquiry.

Holding company models in Luxembourg

A passive holding company is mandated solely to administer a securities' portfolio, chiefly comprising other companies' equity stakes, with aims to profit through capital appreciation and dividends over the long term. These vehicles facilitate investment diversification and capital preservation.

An active holding company not only stewards investments but exerts control over subsidiaries by establishing strategic objectives, operational processes, governance protocols, and furnishing financial and operational support. This oversight can encompass joint ventures, resource sharing, collaboration initiatives, and general synergy creation across the holding structure.

The preferred holding vehicle in Luxemburg is a SOPARFI, chiefly purposed to own and manage equity interests in other companies. SOPARFIs can incorporate under different legal constructs per stakeholder needs like limited partnership, private limited company, and public limited company.

• Fully taxable Luxembourg company eligible for participation exemption
• Exempted from tax on dividends, sale proceeds and liquidation distributions
• Dividend distributions to shareholders are tax-exempt
• Property tax exemptions on ownership interests apply
• The EU parent-subsidiary directive abolishes dividend withholding taxes between affiliated entities and removes double taxation of subsidiary profits at the parent level.

• 15% on income below €175K
• 17% rate over €200K
• 6.75% municipal business tax
• Extensive double tax treaties can significantly reduce effective tax rates.

Holding companies mandate both a Management Board and Supervisory Board with at least three directors, even for single shareholder entities.

SOPARFIs can hold various securities including bonds, listed/unlisted equity, property globally, cash, commodities, and intellectual property. Investors might include institutional investors, investment funds, individuals, trusts, or other SOPARFIs.

Smaller holding companies mandate an appointed auditor. Medium and large entities require certified independent auditors. Qualifying criteria include exceeding two of the three following thresholds:

• €6.25 million turnover
• €3.125 million balance sheet totals
• 50 employees
• Annual tax returns and annual general meetings to review accounts are mandated within 6 months of the financial year ends.

Luxembourg residence by investment programme

In late 2017, Luxembourg instituted its Residence by Investment Programme, tendering affluent international investors residency rights spanning 3–5 years in exchange for prescribed investment thresholds. Upon completing the 5-year tenure, participants become eligible for permanent residency and prospective naturalisation.

The programme confers flexibility to deploy either passive or operational investments across a range of approved investment routes. One such pathway permits a €3 million investment into permissible fund structures, including private equity, venture capital and real estate funds.

Process for obtaining residence

Investment vehicles

Assignment of investment capital into Luxemburg's fund may transpire directly into permissible domiciled funds or via intermediary offshore vehicles constituted to invest into said funds thereafter. Irrespective of approach, all underlying funds must evidence robust governance, controls, and accounting procedures.

In terms of qualifying funds, participants may elect across a spectrum covering equities, fixed income, real estate and more, aligning with personal risk tolerances and investment objectives accordingly. Luxembourg funds proffer access to global, well-regulated asset classes.

Conclusion

Luxembourg evidences compelling credentials as a jurisdiction for residence, as well as a platform for international investment and asset diversification more broadly. Determining the optimal approach requires reconciling one's specific aims, resources, and circumstances against prevailing policy frameworks. YB Case legal and tax advisers would be best placed to elaborate on the possibilities and particulars involved through a confidential consultation. Please fill out the form below to explore how we may serve as a trusted partner.