Investment Funds in Luxembourg

Investment Funds in Luxembourg

Updated on Tuesday 17th January 2023

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Foreign investors who are seeking for a financial market where they can set up their investments are advised to choose Luxembourg, as it provides a stable and an advantageous environment for fund domiciliation. Luxembourg has a long history related to the establishment of investment funds, as it was one of the first economies which have implemented an attractive legislation in this sense. Our team of financial representatives can provide an in-depth presentation on the evolution of the investment funds in Luxembourg. 
 
Foreign investors interested in a reliable market where they could keep their financial assets are advised to open an investment fund in Luxembourg as the local business environment is ideal for such activities. One of the main advantages for starting a fund here is that Luxembourg is ranked as the first economy in Europe in this field, being the most important investment fund center. Businessmen who want to find out more about the local investment market can receive an in-depth presentation from our experts in Luxembourg. 
 
Our team of financial consultants has the necessary expertise in handling all the procedures related to the registration of an investment fund in this country, following the latest modifications of the legislation. Investors can also receive assistance during the registration with the country’s financial institutions and may provide in-depth information regarding the compulsory documents that are requested in this case, depending on the type of fund selected for registration. 

The first investment fund in the Grand Duchy was established in 1959 and ever since this sector has known a great development. With a legislation targeting to attract professional investors, Luxembourg is currently one of the most important financial centers in the world, and the first in Europe. The main law providing for various types of investment funds in Luxembourg is the Collective Investment Act and its adjacent circulars, among which the ones referring to the Financial Supervisory Authority.

 

What are the main types of investment funds in Luxembourg?

The Luxembourg legislation provides for the following types of investment funds:

  • undertakings for collective investments (UCIs);
  • retail funds, which can be open-ended or closed-ended;
  • hedge funds;
  • alternative investment funds.

UCIs are fund dedicated to professional investors and ca be set up as:

  • specialized investment funds (SIFs);
  • common investment funds (FCPs);
  • companies with fixed capital (SICAVs);
  • companies with variable capital (SICAFs);
  • companies with risk capital investments (SICARs).

Luxembourg also allows foreign investors to establish real estate investment funds.

 

Reasons to invest in Luxembourg 

 
Foreign investors are advised to open an investment fund here because Luxembourg is the leading domicile for investment funds starting with the 1980s. Luxembourg is also one of the most stable economies in the world, developed as a financial and banking center. More importantly, the country provides one of the most reliable investment legislations designed to address to the needs of a wide category of investors. 
 
 
 
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An important aspect is that the state is a founding member of the European Union and a member of the most important international organizations. Luxembourg’s economy was awarded the ranking “AAA”, which is given by the credit rating agencies to countries with a very stable economy; our financial consultants can provide you with further details on the local economy. 
 

Why is Luxembourg an appealing market for investment funds? 

 
Luxembourg is the country in which the first investment fund was incorporated (in 1959), now having approximately 4,000 investment vehicles. The investment market in Luxembourg is actively promoted across the world by the Association of the Luxembourg Fund Industry (ALFI); the industry is regulated by the Commission for the Supervision of the Financial Sector (CSSF) and most of the vehicles incorporated here have to obtain an approval for operating from this body. Some of the most relevant traits of the investment market in Luxembourg are given by the following: 
 
  • Luxembourg is seen as a brand for the investment industry, enjoying a high level of reputation in the sector;
  • the industry’s regulators have a high level of responsiveness in terms of the market needs and trends;
  • Luxembourg offers a wide range of investment funds, its main legislative pillars being given by the UCITS regime and the alternative investment funds (AIFs) regime;
  • Luxembourg benefits from a cultivated workforce, with a high level of qualifications.   
 

Exceptional results for fund investments in Luxembourg 

 
At the end of 2014, the total value of the fund center in Luxembourg reached a value of EUR 3 trillion. The financial result was mostly an effect of the net sales, which accounted for more than half of the total fund value. Businessmen who are interested in opening a Luxembourg fund should also consider the fact that investment vehicles in this country can be registered as umbrella funds, which will provide the main benefit of applying multiple investment strategies under the same structure.
 
Luxembourg has been an attractive market, which offered support to foreign investors, by providing a set of incentives and a solid legal system. Luxembourg was the first state which implemented the UCITS (Undertakings for Collective Investments in Transferable Securities) Directive, with the purpose of creating a single market for retail investment funds; our financial experts in Luxembourg can provide you with more details on this topic. 
 
Foreign investors interested in investing on this market should also know that Luxembourg offers an attractive taxation system, in the sense that the following taxes are not applicable for an investment fund: the income tax, the capital gain tax, the withholding tax and the wealth tax. 
 

What are the tax benefits of a Luxembourg fund? 

 
Some of the investors who choose this country for opening an investment fund also take into consideration the taxation system and the tax benefits that are applicable to investment vehicles. The taxation of a Luxembourg fund is performed depending on its type. For example, in the case of a SIF in Luxembourg, the following will apply:
 
  • the fund will be liable to a subscription tax of 0.01% of the fund’s net assets;
  • the SIF is exempted from the payment of the capital gains tax (which is also available for non-residents investors), the income tax and the wealth tax; 
  • the fund is also entitled to an exemption on the payment of the value added tax (VAT), in the case of VAT applicable to management services;
  • this type of vehicle may also benefit from the provisions of the double taxation treaties that were signed by Luxembourg, but this is available only in certain situations. 

 

More details on the main reasons for starting an investment fund in Luxembourg are provided in the video below: 

 

What are the main pillars of the financial sector in Luxembourg? 

 
The financial sector in Luxembourg is comprised of several main sectors. The main component is given by the fund industry (represented by fund managers and asset promoters), which has attracted over the years all the leading financial groups operating at a global level and working in the field of asset management. 
 
The country is a great destination for investment management services provisioned to institutional investors (Luxembourg is characterized by a large number of institutional investors). In this sense, we mention that the country benefits from an increasing number of companies which deliver portfolio management services for investment funds, pension funds and institutional entities. 
 
Another important sector is represented by services delivered in the field of wealth management in Luxembourg. The services offered by wealth management companies can be delivered to high net worth individuals who are interested in protecting and increasing their assets, or to corporate clients and they are generally provisioned by wealth managers, who have an in-depth knowledge of the financial sector. 
 
Persons or companies that offer services related to wealth management are required, under the local legislation, to obtain an authorization from the CSSF; more importantly, such entities will also need to obtain the status of Financial Sector Professional. Wealth management in Luxembourg also includes asset management services and services delivered by banking institutions.    
 
 

Luxembourg, the main market for UCITS 

 
Those who want to invest in Luxembourg should know that the country represents the first destination chosen by foreign investors in terms of funds established as UCITS (Undertaking for Collective Investment in Transferable Securities), a type of investment model first introduced in 1985. 
 
UCITS were introduced under a measure of the European Union and they were firstly addressed to the European member-states, which, at that moment, were seeking to establish a single market, under a single regulatory framework. However, since then, UCITS have evolved and are now used as an international product; our team of financial agents can offer more details on this matter. 
 
During time, the way in which UCITS could be managed has also evolved and, since 2009, the UCITS IV regulation states that UCITS can be managed by a management company established and authorized in another EU member state, not only in the home country. 
 

The UCITS Directive in Luxembourg

UCITS and alternative investment funds in Luxembourg fall under the Undertakings for Collective Investment in Transferable Securities Directive which is based on the law with the same name enabled by the European Union in 2002. The Luxembourg UCITS legislation has been modified since then and not long ago, Luxembourg incorporated the new UCITS V Directive in its national law on investment funds.

Under this legislation, investors can set up the following types of investments funds:

  • undertakings for collective investments (UCI);
  • risk capital investment funds (SICAR).

UCIs and AIFs in Luxembourg can be established under three forms:

  • investment company with variable capital;
  • investment company with fixed capital;
  • common investment fund.

AIF managers are subject to more stringent requirements.

 

The Luxembourg Specialized Investment Fund Law

In 2007, Luxembourg enabled the Specialized Investment Fund Law in order to facilitate the establishment of alternative investment funds. This type of funds can now be registered without prior approval from the Luxembourg Financial Regulator.

The main difference between UCIs and AIFs is that AIFs are recommended to qualified and experienced investors only as they offer less protection to the investors. AIFs must achieve a minimum share capital of 1,250,000 euros within a year from its incorporation.

 

Historic aspects of the investment funds in Luxembourg 

 
It is important to know that the first investment fund in Luxembourg was established in 1959 and that the industry is regulated by several bodies. The main institution in this sense is the Commission for the Supervision of the Financial Sector (CSSF), which authorizes the activity of funds established here. Starting with 2008, the industry is also represented by the Luxembourg for Finance agency, established to promote the development of the field. 
 
Entrepreneurs who need more details on the history of the investment funds in Luxembourg can address to our financial consultants, who can provide an in-depth presentation on the subject. 
 
As mentioned above, one of the ways to start an investment fund here is by opening a SIF in Luxembourg. The SIF must be approved for its activity and for this, the investors must prepare the fund’s incorporation documents/prospectus. 
 
These documents will be analyzed by the CSSF, which will issue a decision at the end of the examination period. If the answer is a positive one, the fund can be registered. 
 
Another way to engage in an investment activity is to register a SICAR in Luxembourg, which must go through similar registration procedures as the SIF. 
 
The CSSF will review the documentation of the fund and if the documents are satisfactory, the institution will issue a positive answer at the end of the examination. When this will happen, the fund will be included in the CSSF’s official list. 
 
We also invite you to address to our team in the case in which you are interested in the characteristics of the SOPARFI in Luxembourg. This is a type of fund which is created for holding purposes. 
 
It must be incorporated as a legal entity (there are 5 options in this sense). The fund can also benefit from the provisions of the double tax treaties signed in Luxembourg. 
 
Besides the funds mentioned here, our consultants can help you prepare the documentation required for the registration of a RAIF in Luxembourg, which can be registered under 3 forms. 
 
This is a type of fund that does need to be reviewed for registration by the CSSF. However, it must meet certain requirements. One of them is to appoint an AIFM, which is an entity that must be approved by the CSSF.