Luxembourg’s lawmakers are making strides in proposals aimed at alleviating the tax burden on actively managed Exchange Traded Funds (ETFs), aligning their fiscal treatment with that of standard passive ETFs. Efforts to reduce the ‘subscription tax’ for specific investment funds are underway, marking a key initiative by the newly elected government. This move, supported by the industry, is intended to ensure the Grand Duchy maintains its competitiveness as a global hub for investment funds.
Jean-Marc Goy, Chairperson of the Association of Luxembourg Fund Industry (Alfi), addressed the taxation of actively managed ETFs during Tuesday’s Amsterdam roadshow event. Goy expressed optimism about the steps being taken in the “right direction”. Alfi is engaged in an “exchange” with the government to “ensure that Luxembourg remains attractive and competitive,” he said, referring to active ETFs.
Currently, from a tax perspective, actively managed ETFs face treatment similar to mutual funds, contrasting with the more favorable tax treatment enjoyed by passively managed ETFs. This fiscal difference between different types of ETFs makes Luxembourg a bit less attractive than Ireland, where passive and active ETFs enjoy equal treatment and which has become the lead domicile for a significant number of active ETFs.
Government keen to support sector
Since he took office last November, Luxembourg prime minister Luc Frieden, himself a former finance minister, has made clear he is keen to support Luxembourg’s financial sector. “Having a former finance minister now in charge as prime minister gives confidence and reassurance that they understand the importance of ensuring Luxembourg’s competitiveness as a whole,” Goy told about 200 delegates at Alfi’s Amsterdam roadshow.
Within weeks of taking office, the new finance minister Gilles Roth promised to modernise the country’s legislative and tax framework “to allow our financial centre to stay at the cutting edge” and singled out easing taxation of actively managed ETFs as a priority.
“This is an emerging and growing trend that Luxembourg should not miss out on,” Roth told an industry event earlier.
Eltifs already subject to lower tax
The tax, known as taxe d’abonnement or ‘subscription tax’, applies a charge between 0.05 per cent and 0.01 per cent on the net assets of funds. It is calculated once a year and then has to be paid in quarterly instalments. The tax is applicable to Ucits, SIFs, Raifs and family wealth management companies known as SPFs.
One model that Luxembourg could follow is the reduction of the subscription tax for Eltifs, European Long-Term Investment Funds. These plans were already flagged last July. For Eltifs, this tax, previously set at 0.05 per cent of net assets under management has been adjusted to allow funds the option of benefiting from a reduced rate of 0.01 per cent or a complete exemption.
Active ETFs in recent years have experienced considerable investor interest across Europe, reflecting a similar boon in US markets. Within Europe, Luxembourg is seeing increasing competition from Ireland in the European market for ETFs.
Dutch account for 2% of Luxembourg AuM
Alfi’s Amsterdam roadshow on Tuesday delved into a spectrum of regulatory matters pertinent to the fund industry. According to Alfi data, approximately 51% of cross-border registrations in the Netherlands pertain to Luxembourg. Dutch promoters of Luxembourg funds oversee a substantial 118 billion euros in assets under management, distributed across around 314 fund structures, constituting about 2 percent of Luxembourg’s total assets under management amounting to 5,200 billion euros.
Jeroen van Wijngaarden, the Managing Director of Dufas, Alfi’s counterpart in the Netherlands, emphasized the significance of regulatory dialogue for both Luxembourg and the Netherlands. “We don’t want to look like the Bahamas,” he said. He also noted that attracting investments is “now even more important than ever”.
A discussion on valuations in the real estate sector made clear that buyers and sellers in this market still have to bridge a wide divide amid uncertainty over the impact of high interest rates. Sylvia Slaughter of GLP Capital Partners spoke about “a period of price discovery” with “lots of feedback”. Jeff Rup, public affairs director at Inrev, the European association for investors in non-listed real estate, noted that discussions on decarbonisation of office buildings have become an important part of real estate valuations. He made clear that the EU’s Sustainable Finance Disclosure Regulation, or SFDR, is ill suited for real estate investment funds and noted that the FCA’s regime in the UK, with an “improving” label, deserves follow-up in the EU.
A panel on private markets addressed Eltifs and the ‘democratisation’ of private assets. Education is a critical factor, speakers made clear, not only for retail investors but also for distributors and product managers. Like with real estate, valuations are becoming even more important in private markets now that these products can also be offered to qualified retail investors, instead of only institutional and professionals investors.
Marnix Mol of Dutch private equity investor Alpinvest, part of the Carlyle Group, said the firm has adjusted its valuation policies given that the democratisation process calls for swifter and speedier valuations. These updated policies now have been rolled out for all their funds.
In his regulatory update, Gast Juncker, partner at Luxembourg law firm Elvinger Hoss Prussen, outlined the 2024 priorities for Luxembourg supervisor CSSF. Among other things, CSSF is about to present updates on its rules for dealing with calculation errors in net asset valuations and for risk management. Valuations of funds - both Ucits and AIFs - will be made subject to a self-assessment questionnaire, he said, and the CSSF’s work on Know-Your-Customers this year will focus more on the financing of terrorism.
The CSSF plans to permit alternative investment funds, which require ‘well-informed investors’ to meet a minimum threshold of 100,000 euro, to invest in digital assets such as crypto currencies, Juncker said. Ucits funds will still not be allow to invest in this category.