Luxembourg’s finance minister has tabled a proposal to the grand duchy’s parliament to encourage the uptake of European long-term investment funds known as Eltifs. If adopted, the proposal will exempt Eltifs from requiring to pay the quarterly registration tax levied on Luxembourg investment funds.
The legislative proposal, Bill 8183, will first be discussed in the finance and budget committee of Luxembourg’s parliament next Friday, when the committee is expected to appoint one of its members as rapporteur who will coordinate the legislative process. The bill also proposes to exempt individual pension savings funds from this particular 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 installments. The tax is applicable to Ucits, SIFs, Raifs and family wealth management companies known as SPFs.
Luxembourg is a dominant player in the European Eltif market, serving as the legal domicile for 44 of the 77 Eltifs that were registered at the end of 2022. Significant growth is expected in this market in the coming years, with overall market size projections ranging from 35 to 100 billion euro by 2028. A rough estimate by Investment Officer suggests that if Luxembourg were to maintain a 50 per cent market share, the tax advantage could be worth up to 30 million euro per year by the end of this decade.
Italy and Spain
Bill 8183 is Luxembourg’s first concrete step in providing a special tax regime to promote the creation of Eltif funds. Several other EU member states, including Italy and Spain, have already encouraged Eltifs under a special tax treatment since the EU bill came out in 2015. Following the adoption of the revised Eltif regime in the European Parliament in February, Luxembourg is keen to develop its international role in the market for these funds.
Finance minister Yuriko Backes first introduced the bill on 24 March in the Luxembourg parliament. The proposal was moved to the committee last Thursday. With more than eight months to go until the end of the year, Luxembourg thus looks to be on track for introducing the tax break at the same time that the Eltif 2.0 regime enters into force.
“The bill modernises the subscription tax regime on three specific points in order to support the emergence of new European products such as the European Long-Term Investment Funds (Eltif) and the Pan-european individual retirement savings products following the efforts of the European Commission to create a real Capital Markets Union,“ said the government in its justification for the bill.
Capital Markets Union
Referring to the EU’s plan to create more efficient financial markets under its Capital Markets Union plans, the Luxembourg government also noted that the European Commission has encouraged member states to put in place national tax incentives.
“The investment fund actor plays a key role in responding to Europe’s need for long-term investment,” said the justification. “These include financing the infrastructure necessary for greener and more resilient economies, but also to supply products making it possible to meet demographic challenges linked to the aging of Europe’s population.”
New EU-wide financial products such as Eltif and the pan-European individual retirement savings product, or Pepp, are regarded by the EU as key instruments for developing the European economy. For Luxembourg, these investment products also represent an opportunity to consolidate its role as a first-rank financial centre in Europe, also in the area of green and sustainable finance.
Luxembourg’s fund industry has actively pushed for tax advantages on Eltifs. It was first discussed in public in February, even before the European Parliament voted. When Eltifs were first introduced in 2015, an industry request for a similar tax proposal fell on deaf ears.
[This update corrects the fourth paragraph to reflect the potential value of the proposal in terms of tax revenue.]