Luxembourg has cemented its status as a leading hub for fund management, particularly in the realm of private closed-ended funds. With its combination of robust legal and regulatory frameworks, international recognition, and strategic geographical advantages, Luxembourg offers an attractive proposition for fund managers looking to establish their next investment vehicle. Greg McKenzie, our Luxembourg Country Head, shares more on the benefits and opportunities this thriving jurisdiction can offer to ensure success.
The appeal of Luxembourg as a fund destination
Luxembourg, which is home to €5,840.177 billion in net assets under management as at November 2024[1], has been a cornerstone of the global financial sector for over 60 years, gaining international recognition for its stability, innovation, and adherence to high standards. It is also “white-listed” by the Financial Action Task Force (FATF), underscoring its commitment to combating money laundering and financing terrorism.
One of Luxembourg’s most compelling features is its robust legal and regulatory framework, which provides a secure environment for fund operations as well as offers unrestricted marketing opportunities into key regions like the US and the Middle East.
The country boasts an extensive network of double taxation treaties, ensuring tax efficiency and reducing the risk of double taxation on income, gains, and dividends. However, the applicability of these treaties depends on the specific legal form and tax status of the fund. Certain fund vehicles may be considered tax-transparent, meaning the tax treaties may apply at the investor level rather than the fund level. Therefore, careful consideration of the fund structure is essential to fully benefit from these treaties.
Luxembourg-based AIFs benefit from the ability to market into the European Economic Area (EEA) through the passporting mechanism provided under the Alternative Investment Fund Managers Directive (AIFMD). It is important to note that the AIFMD passport is available to AIFs managed by authorised AIFMs. This passport allows marketing to professional investors across the EEA without additional national requirements. However, marketing to retail investors or non-EEA investors may still be subject to national regulations and private placement regimes[2].
The country also offers a strategic location with strong transport links to major financial centers like London and other parts of Europe. Being in the European time zone allows for seamless coordination with global markets, making it easier for fund managers to conduct business across different regions.
Typical Fund Structures
The Special Limited Partnership (SCSp)
When it comes to fund structuring, the SCSp is one of the most commonly used legal forms in Luxembourg. Introduced in 2013, the SCSp is modelled after an ‘Anglo-Saxon’ GP/LP structure, offering flexibility and familiarity for managers accustomed to similar vehicles in other jurisdictions. Governed by the law of 10 August 1915, as amended, on commercial companies, the SCSp allows the general partner to manage the fund’s affairs while limited partners/investors participate without being involved in day-to-day operations[3].
The SCSp structure is particularly well-suited for funds, feeders, and co-investment vehicles and fund promoters play a crucial role in supporting the investment management and oversight activities, ensuring sufficient local management and control, which is vital for compliance with local regulations.
Luxembourg’s regulatory environment requires fund managers to demonstrate adequate local management and control, which may necessitate the appointment of local directors or establishing a physical presence in the country. These substance requirements are crucial for tax residency purposes and to benefit from Luxembourg’s extensive network of double taxation treaties[4]. Ensuring sufficient local substance helps in affirming that the central administration and decision-making processes are effectively conducted within Luxembourg[5].
Regulatory options in Luxembourg
Luxembourg offers two primary regulatory options for private capital funds: the Unregulated AIF and the Reserved Alternative Investment Fund (RAIF). Neither option is subject to direct supervision by the Commission de Surveillance du Secteur Financier (CSSF), Luxembourg’s financial regulator, nor do they require prior approval. This flexibility can be advantageous for managers looking to avoid the delays and costs associated with regulatory approvals. Other unregulated options may also be beneficial for funds not intended for marketing.
While Luxembourg offers unregulated fund structures, like the (SCSp) which are not subject to direct CSSF supervision, these structures must still comply with relevant laws, including the law of 12 July 2013 on alternative investment fund managers (AIFM Law), if they qualify as AIFs. This means that while the fund itself is unregulated, the AIFM managing the fund must be authorised or registered under the AIFM Law, ensuring compliance with certain regulatory standards.
However, fund managers should engage legal counsel early in the planning process to determine the most suitable structure and regulatory solution for their specific needs. Legal advisors typically assist with the drafting of constitutional documents, such as the Limited Partnership Agreement (LPA) and side letters, and provide guidance on marketing and tax considerations. This ensures compliance with local regulations and optimises the fund’s structure from a tax perspective.
Belasko in Luxembourg
Luxembourg stands out as a premier destination for fund managers looking to establish their next private closed-ended fund. With its internationally recognised finance sector, robust legal and regulatory framework, and strategic location, Luxembourg offers a wealth of opportunities for private capital fund managers and investors alike. However, its crucial to work closely with expert third party providers, leveraging their expertise in alternative investments to successfully navigate any challenges and unlock the potential of this dynamic jurisdiction.
Belasko in Luxembourg, incorporated in November 2020, has rapidly established itself as a trusted partner for Alternative Investment Funds (AIFs) in the Luxembourg market.
Our team, comprised of seasoned professionals, has extensive experience in servicing global private capital firms and investment companies. We excel in managing complex AIFs and holding structures, offering comprehensive end-to-end fund administration and corporate services.
With a deep understanding of the Luxembourg regulatory landscape, we provide a personalised, reliable, and proactive service, helping clients navigate the complexities of private capital investments with confidence.
If you’d like to speak to our team about setting up your fund in Luxembourg, please get in touch with Greg McKenzie (Country Head) at: [email protected].
[1] https://www.alfi.lu/en-gb/pages/industry-statistics/luxembourg
[2] https://www.cliffordchance.com/content/dam/cliffordchance/PDFDocuments/the-luxembourg-toolbox-A5-digital.pdf?
[3] https://www.cliffordchance.com/content/dam/cliffordchance/PDFDocuments/the-luxembourg-toolbox-A5-digital.pdf?
[5] https://www.cliffordchance.com/content/dam/cliffordchance/PDFDocuments/the-luxembourg-toolbox-A5-digital.pdf?
