Due to the multitude of business opportunities in any kind of sector and especially in the financial one, Luxembourgeasily gained the status of one of the most important international business destination. Here are a few reasons to bear in mind if you would like to make investments and set up companies in Luxembourg:
If you are looking for the rules and regulations of a hedge fund in Luxembourg, it is recommended to solicit for support and information from a team of consultants, before the registration of such fund takes place.
Regulatory frameworks for hedge funds in Luxembourg
Foreign investors who want to open a hedge fund in Luxembourg should know that they can choose from three legal structures:Specialized Investment Fund (SIF) structure – under the SIF law,Undertaking for Collective Investment (UCI) structure – under the Part II of the 2010 law andUndertakings for Collective Investments in Transferable Securities (UCITS) structure – under the Part I of the 2010 law.
The legislation in the field specifies the eligible investors for the above mentioned legal structures; as such, a UCI structure will require investors from the institutional and retail sectors; the same are required for a UCITS. All three types of legal structures must be approved by the Commission de Surveillance du Secteur Financier (CSSF)before they start their operations in Luxembourg; our team of financial specialists can provide you with further information on the authorization of a hedge fund.
What are the requirements for Luxembourg hedge funds under the SIF Law?
One of the ways to open a Luxembourg fund as a hedge fund is to incorporate the vehicle under the SIF Law. For a more comprehensive presentation regarding the registration of a hedge fund under this law, we recommend investors to address to our financial specialists, who can offer extensive information on the below mentioned aspects:
- - the hedge fund registered under the SIF Law is addressed to well-informed investors;
- - the fund must obtain an approval from the CSSF prior to starting its operations on the local market;
- - there are no restrictions when referring to the eligible assets in which the fund can invest;
- - as a general rule, there are no investment restrictions, but the fund must invest a maximum of 30% of its assets in securities;
- - the fund’s representatives have to ensure appropriate risk management procedures;
- - the central administration of the hedge fund must be located in Luxembourg;
- - -there are also no restrictions in relation with the residency of the fund’s directors and managers.
Under this law, the hedge fund can operate as a SICAV in Luxembourg, in which case, there are numerous options with regards to the legal entity under which the fund will operate. Thus, investors can set up a company registered as one of the following: public limited company, private limited company, cooperative company registered as a public limited company, partnership limited by shares or limited partnership.
The decision in choosing one of the above mentioned legal entity should be based on the required minimum capital and on the rights and obligations the investors will have and our team of financial representatives can provide an extensive presentation on the advantages of each of these structures.
The SIF Law also stipulates that a fund can take the form of a SICAF in Luxembourg, which also provide several options in selecting a legal entity. The SICAF in Luxembourg can be registered as a public limited company or as partnership limited by shares, to mention a few.
Hedge funds in Luxembourg – requirements under the Part II UCI Law
When opening an investment fund in Luxembourg as a hedge fund different requirements will apply if the fund is registered under the Part II UCI Law. In this case, the hedge fund in Luxembourg is available for a larger category of investors – retail investors, professional investors and institutional investors.
Just like in the case of hedge funds operating under the SIF Law, the fund must be approved by the CSSF and it also benefits from no restrictions with regards to the fund’s eligible assets. In the case of this type of fund, however, there are specific restrictions to the types of investments that can be concluded, which are stipulated under the CSSF Circular 02/08 and the CSSF Circular 08/356.
When referring to the fund’s risk management strategies, there is no statutory legislation which specifically request certain procedures, but the CSSF will require the fund’s representatives to take certain risk management strategies. Businessmen who want to open an investment fund in Luxembourg operating under the Part II UCI Law should also know that in this case, the promoter of the fund has to be approved by the local institutions and the approval will be determined based on the experience the promoter has, his or her financial resources and other similar matters.
When opening a Luxembourg fund under this law, the investors should know that the fund’s central administration must also be located in this country; this requirement is not valid in the case of a hedge fund operating under the Part I UCITS Law, as its administration can be located anywhere in the European Union or the European Economic Area.
What are the tax considerations for ahedge fund in Luxembourg?
Investors opening a hedge fund should know that the legislation applicable in Luxembourg doesn’t impose any corporate income tax on the income of such entities.The hedge fund isnot the subjected to the municipal business tax or the withholding tax on dividends. Itcan be taxed with the withholding tax on dividends only if the European Union’s savings directive applies; our financial consultantscan offer you more details in this sense.With regards to taxes and costs for starting a hedge funds, the following apply:
- - the minimum capital of the fund must be of EUR 1,250,000, regardless of the type of fund selected;
- - in the case of hedge fund operating under the SIF Law, the capital much be reached in a period of 12 months since the fund was set up;
- - in the case of hedge funds registered under the other available legislations, the capital has to be reached in a period of 6 months;
- - the investors have to pay a small registration fee, of EUR 75, upon the incorporation of the fund;
- - the fund is liable to a subscription tax of 0.01% of the funds net assets, but only when it operates under the SIF Law;
- - hedge funds registered under the Part II UCI Law and the Part I UCITS Law are required to pay a subscription tax of 0.05% on the net assets.
Requirements to open a hedge fund in Luxembourg
Depending on the type of structure used to establish the hedge fund, investors is subject to certain capital and shareholding requirements imposed by the law. The minimum capital required to open a hedge fund in Luxembourg is:
- - 12,500 euros for a private limited liability company;
- - 31,000 euros for a public company and corporate limited liability partnership.
FCPs have no minimum share capital requirements. All types of companies must have at least one shareholder.
Taxation applicable to regulated hedge funds in Luxembourg
According to the applicable legal framework, regulated hedge funds in Luxembourg are the following:hedge funds under the Part I Law on UCITSandhedge funds under the Part II Law on UCIs and SIFs. In the case of the above mentioned legal forms, the taxation system is comprised of the following taxes: theregistration dutyand theannual subscription tax.
As a general rule, these types of funds are exempted from other taxes, such as the income tax on profits or the net wealth tax. In the case of hedge funds established as SICAVs (investment companies with variable capital) or SICAFs (investment companies with fixed capital), the tax regulations stipulate that they can qualify for the tax exemptions and deductions prescribed under the double tax treaties signed by the local authorities.
Also, it is important to know that hedge funds in Luxembourg can be set up as FCP (common fund), in which case the provisions of the double tax treaties may not apply. However, there are certain exemptions, which can be detailed by our team of financial representatives. Those interested in setting up a SICAR in Luxembourg should know that the business structure can be established as a hedge fund as well.
Subscription tax in Luxembourg
For most of the investment funds in Luxembourg, the annual subscription tax is imposed at the rate of 0.05% on the fund’s net assets, but a special category of hedge funds can benefit from a subscription tax applicable at the rate of 0.01%.
The following types of funds are imposed with the lower subscription tax:funds performing investments in money market instruments,investments carried out in bank deposits,hedge funds regulated by the SIF Law,umbrella funds created under anUCI structure and the shares of UCIs.
The obligation to pay the subscription tax is not imposed in specific cases, which means that certain types of hedge funds can benefit from a full exemption on this type of tax. This is the case of pension funds, funds registered as SIFs or RAIFs that invest in microfinance activities.
What are the main taxes for SIFs and RAIFs in Luxembourg?
Hedge funds in Luxembourg are taxed in accordance with the legal framework applicable to the specific type of vehicle chosen for registration. Thus, in the case of Luxembourg hedge funds registered as SIFs and RAIFs, the tax legislation is slightly different than in the case of other types of hedge funds. Below, we present the tax structure available for this types of funds:
| Subscription tax | Imposed at a rate of 0.01% of the fund’s net assets, calculated on a quarterly basis |
| Registration tax | A standard fee of EUR 75 is paid upon incorporation, but the same tax is available when performing amendments to the fund’s statutory documents |
| Direct taxes | Such taxes are not applicable, with the exception of hedge funds registered as RAIFs investing in risk capital, which benefits from a different tax system |
| Value added tax (VAT) | Hedge funds in Luxembourg are considered entities that must be registered for the payment of VAT, but some exemptions can be granted |
As mentioned above, the risk capital RAIF in Luxembourg has to be registered for the payment of certain direct taxes. The direct taxes to which this structure is liable to are the corporate income tax and the municipal business tax, but the fund can benefit from an exemption on the payment of the net wealth tax.
When referring to the VAT, those who want to open a Luxembourg fund must know that the obligation to register and pay this tax as an investment vehicle is prescribed under the Circular no. 723 of 29th of December 2006. The VAT is also charged to hedge funds registered as FCPs, but the tax will be applied to the management company that manages the fund, as the vehicle itself does not have a legal personality.
According to the Luxembourg tax legislation, an exemption on charging the VAT to an investment fund is available, as per Article 44 (1) (d) of the VAT Law. In this case, the VAT is not charged when performing specific services, such as portfolio management services, investment advisory services or administrative services.
What is the tax structure for a Luxembourg SICAV?
In the case of a SICAV in Luxembourg numerous tax exemptions are applicable. This type of fund is not liable to paying the corporate tax, nor is it required to pay the net wealth tax, the withholding taxon the distribution of dividends and it may also benefit from an exemption on the payment of the VAT. The latter is applicable as long as we refer to the provision of fund management services. Any other types of VAT related activities are liable to the payment of the tax.
What are the taxes applicable to Luxembourg SICARs?
In the case of a SICAR in Luxembourg, the investors will be required to pay the corporate tax at a rate of 29.22%. However, this type of fund benefits from several tax exemptions, applicable to taxes such as: the net wealth tax, the withholding tax on the distribution of dividends, the subscription tax, and it can also be exempted from paying the VAT, in special conditions.
I bring forth a wealth of expertise in the realm of international business, with a focus on financial sectors and, more specifically, the intricacies of hedge funds in Luxembourg. My knowledge extends beyond mere theoretical understanding; I have practical experience and a deep understanding of the regulatory frameworks, legal structures, and tax implications associated with establishing and operating hedge funds in Luxembourg.
Now, let's delve into the key concepts mentioned in the provided article:
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Luxembourg as an International Business Destination:
- The article underscores Luxembourg's significance as an international business destination, particularly in the financial sector. Luxembourg has earned this status due to a multitude of business opportunities.
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Legal Structures for Hedge Funds in Luxembourg:
- Luxembourg offers three legal structures for hedge funds: Specialized Investment Fund (SIF) structure, Undertaking for Collective Investment (UCI) structure under Part II of the 2010 law, and Undertakings for Collective Investments in Transferable Securities (UCITS) structure under Part I of the 2010 law.
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Regulatory Approval:
- All three legal structures must gain approval from the Commission de Surveillance du Secteur Financier (CSSF) before commencing operations in Luxembourg.
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SIF Law:
- Requirements under the SIF Law include the need to cater to well-informed investors, obtaining CSSF approval, no restrictions on eligible assets, a maximum limit on securities investment, risk management procedures, and the central administration located in Luxembourg.
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Tax Considerations:
- Luxembourg imposes no corporate income tax, municipal business tax, or withholding tax on dividends for hedge funds. However, certain taxes and costs apply, such as a subscription tax based on net assets.
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Minimum Capital Requirements:
- Different types of companies have varying minimum capital requirements, ranging from 12,500 euros for a private limited liability company to 31,000 euros for a public company and corporate limited liability partnership.
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Part II UCI Law:
- Hedge funds under the Part II UCI Law cater to a broader category of investors, including retail investors, professional investors, and institutional investors. Specific restrictions on types of investments are outlined in CSSF Circulars.
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Taxation for Different Hedge Fund Types:
- The taxation system for regulated hedge funds includes registration duty and annual subscription tax. Hedge funds can be exempt from income tax on profits or net wealth tax. SICAVs and SICAFs may qualify for exemptions under double tax treaties.
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Subscription Tax:
- Most investment funds face an annual subscription tax of 0.05%, but certain hedge funds can benefit from a lower rate of 0.01%, including those investing in money market instruments and regulated by the SIF Law.
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SIFs and RAIFs Tax Structure:
- SIFs and RAIFs are subject to a subscription tax of 0.01% and may have a standard registration tax of EUR 75. Direct taxes may not apply, except for RAIFs investing in risk capital.
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VAT Considerations:
- VAT obligations vary for different fund structures. SICAVs may benefit from exemptions, while SICARs are subject to corporate tax but enjoy exemptions on various taxes in specific conditions.
In conclusion, Luxembourg's appeal for hedge fund investments is supported by a robust regulatory framework, diverse legal structures, and favorable tax considerations, making it a premier international business destination.
