Luxembourg’s parliament, with 55 votes in favour and only two against, has embraced a highly anticipated law that revamps its legislative arsenal for investment funds. Several fund categories, including European Long Term Investment Funds (Eltifs) and money market funds, are to be exempted from the registration tax imposed on Luxembourg-domiciled funds.
The overhaul of the legal structure for investment funds is aimed at heightening Luxembourg’s competitiveness and appeal amidst competition with other nations, particularly Ireland, Finance Minister Yuriko Backes told the parliament on Tuesday. The bill, presented by Backes in March, was set to be ratified before the summer recess.
“This proposed legislation is intended to boost the competitiveness and attractiveness of Luxembourg’s financial sector with regard to alternatives,” MP André Bauler, the parliament’s coordinator for this legal reform, said, alluding to products like Eltifs, which make alternative private market investments accessible to retail investors. It’s about “updating and refining our toolkit,” he stated.
‘Highly competitive’
Luxembourg fund sector association Alfi said the initiative “demonstrates Luxembourg’s ability to keep up with new developments”. “The law further enhances the legislative framework applicable to the fund industry, which operates in a highly competitive international environment,” Alfi said in a statement.
An appeal by the industry to entirely abolish Luxembourg’s registration tax - commonly referred to as tax d’abonnement - for all investment funds was dismissed. However, the updated investment law does exempt several types of financial products, including Eltifs, individual pension savings funds, known as Pepps, and Money Market Funds (MMFs) from this levy.
The ‹exemption› implies that these funds - all anticipated to show substantial growth in the coming years - will face a minimal registration tax of 0.01 percent, instead of the standard rate of 0.05 percent. The tax, computed annually, is payable in quarterly instalments and is applicable to Ucits, SIFs, Raifs and family wealth management companies known as SPFs.
‘Go to’ domicile for Eltifs
Silke Bernard, partner at law firm Linklaters and chair of Alfi’s Eltif committee, said the exemption of all Luxembourg Eltifs from the registration tax is excellent news. “This, together with some other amendments under the new rulebook – such as the possibility to structure Part II Eltifs as SCAs or SCSps – will make the Luxembourg Eltif framework even more attractive,” she said. “I am confident that Luxembourg will maintain its position as a clear ‘go to’ domicile for Eltifs.”
In recent years, Luxembourg has emerged as a key player in the European Eltif market, acting as the legal domicile for 44 of the 77 Eltifs registered at the end of 2022. Considerable growth is anticipated in this market over the coming years, with overall market size projections ranging from 35 to 100 billion euros by 2028. A previous rough estimate by Investment Officer suggests that, maintaining a 50% market share, the tax benefit from Bill 8183 could save investors up to 30 million euros per year by the close of the decade.
Backes stated that the exemption for Eltifs and MMFs would result in an annual cost to Luxembourg of about 8 million euros, based on 2022 data. This expense is projected to be offset by the overall growth anticipated with these products. Addressing the industry push to completely abandon the registration tax, she clarified that this was impossible, given that this the fund registration tax generated 1.2 billion euros in 2022, a sum that Luxembourg requires to fund initiatives like combating climate change.
Modifying five existing laws
The novel legislation introduces modifications to five existing laws governing Luxembourg’s prevailing legal framework for investment funds and their managers. Numerous types of funds are involved, including widely favoured venture capital investment companies (Sicar), specialized investment funds (SIF), and reserved alternative investment funds (Raifs).
Bill 8183 also brings Luxembourg’s investment threshold for professional investors in line with common practices across the European Union, reducing it to 100,000 euros from 125,000 euros. This shift is not expected to dramatically impact the investment landscape in Luxembourg, except that it aligns regulations with the rest of Europe, according to investment specialists in Luxembourg.
Bill 8183 includes provisions permitting the outsourcing of functions to third parties who may not reside on national territory. However, the bill mandates that these procedures must be appropriately reported to the Luxembourg financial supervisor, CSSF.
Before the parliament’s adoption of Bill 8183 becomes official, one more stage needs to be completed. Without a senate or first chamber, the parliament is typically required to vote a second time on a proposal within three months. However, such a second vote can be waived with the Council of State’s approval. This waiver is currently being awaited, according to Luxembourg’s parliament.