Bill 8183

Long-awaited investment fund law adopted in Luxembourg

MPs voted to adopt bill 8183, which covers the modernisation of the Luxembourg investment fund toolbox, on 11 July 2023. Photo: Maison Moderne Publishing SA

MPs voted to adopt bill 8183, which covers the modernisation of the Luxembourg investment fund toolbox, on 11 July 2023. Photo: Maison Moderne Publishing SA

Parliament has given the green light to two measures demanded by the fund industry: lowering the minimum investment threshold to €100,000 and extending the minimum capital accumulation period. The subscription tax, however, remains.

Bill 8183, tabled on 24 March by the ministry of finance, makes a number of one-off changes to Luxembourg’s investment fund toolbox. It includes five sector-specific laws relating to investment funds and managers: Sicars (investment companies in risk capital), Sifs (specialised investment funds), Ucits (undertakings for the collective investment in transferable securities), AIFMs (alternative investment fund managers) and Raifs (reserved alternative investment funds) laws. The parliamentary documents state that the text has been “drawn up on the basis of close dialogue with the competent authorities concerned and representatives of the Luxembourg investment fund industry.”

The aim of this draft law, which is designed to “bring existing legislation into line,” is to “promote the competitiveness and attractiveness of the Luxembourg financial centre in terms of alternative funds,” said rapporteur André BaulerAndré Bauler (DP). This text does not transpose any provision from a European text, he insisted, in order to avoid the debate on the government’s current tendency to go ever further in transposing texts from Brussels.

The fund sector heard

The main changes introduced by the draft are in response to requests from professionals in the fund sector. The first is the lowering of the alternative investment fund threshold from €125,000 to €100,000. €100,000 is the threshold used in most competing markets. It’s “the European standard,” explained Bauler.

Alternative funds are reserved for sophisticated investors. Professionals are supposed to measure their level of knowledge of these products as well as their risk profile. The bill also provides guidance on how this assessment should be made.

Another major filter relates to investment capacity. In Luxembourg, the entry threshold has been set at €125,000. Professionals believe that this is too high, and that it puts Luxembourg at a competitive disadvantage compared with other jurisdictions, such as Ireland.

Lowering the thresholds too much is out of the question. The very philosophy of these funds--closed-end funds, using capital calls and aiming for a long-term strategy--forbids it. Too many subscribers with too “small” holdings would force fund managers to sacrifice a huge amount of performance to create a sufficient cushion of liquidity.

The bill also extends the minimum capital accumulation period for Sicars, Sifs, Ucits (Part II) and Raifs. The period will be extended to 24 months, compared with 12 months at present. The idea is to adapt to the operating methods of illiquid strategies, where capital is only called up when the manager has found the right investment opportunities.

Subscription tax clarified, but not abolished

The other major issue for professionals is the subscription tax. There is no question of abolishing it. In fact, it was not the subject of a text focused on the alternative fund sector. It did, however, come up in the discussions in committee and in plenary at the time of the vote, giving rise to a tug-of-war that went completely beyond the subject of the day.

CSV MP Laurent MosarLaurent Mosar called for its abolition in the name of competitiveness, a demand brushed aside by Yves CruchtenYves Cruchten (LSAP), who was attached to the €1bn in revenue brought in to the state budget. Cruchten was supported by François BenoyFrançois Benoy (déi Greng), to support the investment needed to finance the transition to a sustainable economy. Unsurprisingly, Fernand KartheiserFernand Kartheiser (ADR) wanted this tax to disappear.

The law clarifies many of the technical elements of the subscription tax--how it is calculated, who has to pay it, to whom, how and within what timeframe--by unifying the previously disparate regimes depending on whether the structure was a Sicar, a Sif or a Raif.

However, the subscription tax has been adapted to meet the wishes of the European Commission, which wants member states to give a tax boost to Eltifs and the European pension product (Pepp). Preferential rates of 0.01% will be applied to these two vehicles instead of the standard rate of 0.50%. In some cases, they may even be exempt from contributions altogether.

Luxembourg affirms “leading position” in investment funds

In a press release, finance minister Yuriko BackesYuriko Backes (DP), welcomed this progress. “We are paving the way for new opportunities and consolidating Luxembourg’s role as a major financial centre, while promoting the development of new European products such as Eltifs and Pepps. With this modernised legislation, Luxembourg continues to innovate and anticipate market trends, affirming its leading position in the field of investment funds.”

Luxembourg has occupied a leading position in the internationalisation of the investment fund industry for more than 35 years. Already the European leader in terms of Ucits funds, Luxembourg has also become an essential centre for alternative funds. With more than €5,000bn in assets under management, 300 authorised investment fund managers and more than 3,300 undertakings for collective investment, the Luxembourg fund sector plays a key role in financing the European economy.

This story was first published in French on Paperjam. It has been translated and edited for Delano.

This article was updated at 17:50 with a quote from finance minister Yuriko Backes.