As the European Parliament, during this month’s plenary session in Strasbourg, debated the proposed changes to the EU’s regulation for long-term investment funds, a plan also known as Eltif 2.0, Luxembourg was discussing a special tax regime for this new type of fund that can target investors in 30 European countries under a single passport.
The Eltif proposal is widely expected to pass after a substantial majority in the Economic and Monetary Affair Committee already approved it. Related article from 16 February: European parliament adopts Eltif upgrade with 70% majority.
The grand duchy, meanwhile, is discussing a special tax regime for Eltif funds. How that regime will look remains to be determined. A specific tax regime for Eltifs was attempted when the regulation was first introduced in 2015, but it was not successful at the time.
A webinar on Eltif 2.0 hosted on Thursday heard that Luxembourg now seems more receptive to such a proposal. “We’re looking into a lighter tax regime for investments into Eltifs in Luxembourg. So hopefully there is some good news to come,” said Silke Bernard, the head of the investment funds practice at law firm Linklaters. She also chairs the Eltif working group at the Association of the Luxembourg Fund Industry, Alfi.
Several other EU member states, including Italy, already have a lighter tax regime in place for these funds.
Final stages
In Strasbourg, the Eltif 2.0 proposal now is entering its final stage of decision making, following the agreement reached at the end of last year in direct trilogue talks between representatives of the parliament, the EU member states and the European Commission. With the green light, the first new investment products are expected to emerge by the end of this year and early in 2024.
Thanks to the updated Eltif rules, products like private funds can be targeted directly at retail investors in all 30 countries in the European Economic Area.
“I don’t think it’s going to be now the magical product where it’s going to be a one-size-fits-all solution for the democratisation of funds in Europe, but still one that will offer much room for retail investors to access those vehicles, and there is actually an interest of retail investors here,” said Claire Guilbert, partner at Norton Rose Fulbright.
“What I think is really good is that the legislator has really tried to come up with a product that better reflects the business and the needs of the business.”
Obstacles removed
In the trilogue discussions, a number of obstacles were removed, including criteria for minimum investment participation and on a maximum size of companies in which these funds can invest. Another important change agreed was the way that Eltif funds will have to deal with sustainability requirements.
Specific sustainability requirements have been removed from the initial Eltif regulation, but the long-term funds now have to comply with the same requirements as other types of funds under the EU’s Sustainable Finance Disclosure Regulation. That means Eltifs also have to be classified as Article 6 (not sustainable), Article 8 (’green‘) or Article 9 (‘very green’).
“The proposal now clearly and expressly specified that the eligibility of real assets should not depend on their nature and objective or upon environmental, sustainability or social and governance related disclosures and conditions,” Guilbert said. “Now it is made clear that the sustainability and ESG features of the product has to be dealt with under SFDR.”
Democratisation of private funds
The new framework is expected to encourage the uptake of private funds among retail investors, and is seen as a key element in what sometimes is described as the “retailisation” or “democratisation” of private equity. The European Parliament is due to vote on the new Eltif rules during its mid-February plenary meeting in Strasbourg. From there, publication of the regulation is expected in the EU’s official journal. The new regime then is expected to enter into force nine months later.
Luxembourg, home to some 300 management companies and Alternative Investment Fund Managers, already has a market share of 57 percent in the relatively small existing Eltif market, according to the Association of the Luxembourg Fund Industry, Alfi. At the end of 2021, 82 Eltifs were in circulation with net assets under management of 2.4 billion euro. While Luxembourg accounted for more than half, the rest was issued in France, Italy and Spain.