Proceeds from the Luxembourg registration tax for investment funds remained flat at 1.3 billion euro last year as a small decline at Ucits funds was offset by a steep increase in proceeds from reserved alternative investment funds, or Raifs. The development reflects the growing importance of alternative investments for Luxembourg, although this market remains relatively small when compared to Ucits.
The registration tax collected on Raifs increased 81.6 per cent to 26.4 million euro last year, reflecting the rapid numerical growth in Raif registrations during that period.
The increased collection amounted, however, to only 2 per cent of the total 1.3 billion euro in government receipts from this investment tax on all fund types, according to an annex to the ministry of finance’s annual report. The amount in registration tax from these Raifs, introduced in 2016, rose steadily over the five years to 2022 - see the graph below. A record total of 472 new Raifs were created last year, Investment Officer has reported.
Ucits remain main source
The total collection from the taxe d’abonnement – as the registration tax is known in Luxembourg – from all fund types, however, remained flat during 2021 and 2022. This is explained by a slight percentage drop in the amount taken from collective investment funds – mostly Ucits– which are by far the largest source of registration tax, accounting for over 92 per cent in 2022.
The government has responded to calls from European Commission to use tax measures to encourage investments in European long-term investment funds or Eltifs, seen as a European economic development vehicle. Luxembourg’s finance minister Yuriko Backes recently sent a new bill to the parliament proposing to make Eltifs exempt from this tax. The move can be seen in the light of Luxembourg’ high level of tax collected from other types of funds
The tax taken from collective investment funds dropped 1.4 per cent, or over 16 million euros. The contribution of family wealth funds – SPFs—grew less strongly, at only 7.8 per cent, or just over 18 million euros.
The finance ministry document - a 332-page annex to the ministry’s annual report - noted that these figures may underestimate the level of interest in Raifs, as not all of them are subject to registration tax. A Raif that limits its investments to capital at risk and specifies this in its constitutive documents may opt to not be subject to registration tax, and pay corporate or individual income tax instead.
Taxing presumed trading
The finance ministry described the registration tax as being based on the sales of the fund’s shares. It is intended to tax the presumed trading of these shares, while accounting for variations in their current value. The tax is applied to SPFs, SIFs, and OPC funds as well as certain Raifs. The tax rate varies between 0.01 per cent and 0.25 per cent.
Tax exemptions are provided for certain OPCs, SIFs and Raifs. Reduced rates of 0.01 per cent to 0.04 per cent are available for OPCs or OPC compartments invested in sustainable activities under the Paris Agreement.
Macro stability
According to the finance ministry document, another reason why registration tax receipts were stable in 2020 was because the depreciation of the euro compensated in part for the loss of value on the financial markets. The euro/dollar exchange rate dropped 15.4 per cent between September 2021 and September 2022.
Receipts from the tax were strongest in the fourth quarter of 2021 and the first quarter of 2022, which set a record in terms of tax collected, at an amount of nearly 350 billion euros, up nearly 12 billion or 3.6 per cent over the previous quarter. The subsequent drop in the second quarter of 2022 was especially due to the market falls caused by the Ukraine war.
The document noted that the ratio of net asset value of the funds to registration tax receipts had increased during this period, which implied that the share of entities subject to the 0.05 per cent rate had decreased in comparison to those who are exempted from the tax or, particularly, were subject to the lowest rate of 0.01 per cent.