Requirements to open a hedge fund in Luxembourg
Depending on the type of structure used to establish the hedge fund, investors is subject to certain capital and shareholding requirements imposed by the law. The minimum capital required to open a hedge fund in Luxembourg is:
- - 12,500 euros for a private limited liability company;
- - 31,000 euros for a public company and corporate limited liability partnership.
FCPs have no minimum share capital requirements. All types of companies must have at least one shareholder.
Taxation applicable to regulated hedge funds in Luxembourg
According to the applicable legal framework, regulated hedge funds in Luxembourg are the following: hedge funds under the Part I Law on UCITS and hedge funds under the Part II Law on UCIs and SIFs. In the case of the above mentioned legal forms, the taxation system is comprised of the following taxes: the registration duty and the annual subscription tax.
As a general rule, these types of funds are exempted from other taxes, such as the income tax on profits or the net wealth tax. In the case of hedge funds established as SICAVs (investment companies with variable capital) or SICAFs (investment companies with fixed capital), the tax regulations stipulate that they can qualify for the tax exemptions and deductions prescribed under the double tax treaties signed by the local authorities.
Also, it is important to know that hedge funds in Luxembourg can be set up as FCP (common fund), in which case the provisions of the double tax treaties may not apply. However, there are certain exemptions, which can be detailed by our team of financial representatives. Those interested in setting up a SICAR in Luxembourg should know that the business structure can be established as a hedge fund as well.
Subscription tax in Luxembourg
For most of the investment funds in Luxembourg, the annual subscription tax is imposed at the rate of 0.05% on the fund’s net assets, but a special category of hedge funds can benefit from a subscription tax applicable at the rate of 0.01%.
The following types of funds are imposed with the lower subscription tax: funds performing investments in money market instruments, investments carried out in bank deposits, hedge funds regulated by the SIF Law, umbrella funds created under an UCI structure and the shares of UCIs.
The obligation to pay the subscription tax is not imposed in specific cases, which means that certain types of hedge funds can benefit from a full exemption on this type of tax. This is the case of pension funds, funds registered as SIFs or RAIFs that invest in microfinance activities.
What are the main taxes for SIFs and RAIFs in Luxembourg?
Hedge funds in Luxembourg are taxed in accordance with the legal framework applicable to the specific type of vehicle chosen for registration. Thus, in the case of Luxembourg hedge funds registered as SIFs and RAIFs, the tax legislation is slightly different than in the case of other types of hedge funds. Below, we present the tax structure available for this types of funds:
| Subscription tax || Imposed at a rate of 0.01% of the fund’s net assets, calculated on a quarterly basis |
| Registration tax || A standard fee of EUR 75 is paid upon incorporation, but the same tax is available when performing amendments to the fund’s statutory documents |
| Direct taxes || Such taxes are not applicable, with the exception of hedge funds registered as RAIFs investing in risk capital, which benefits from a different tax system |
| Value added tax (VAT) || Hedge funds in Luxembourg are considered entities that must be registered for the payment of VAT, but some exemptions can be granted |
As mentioned above, the risk capital RAIF in Luxembourg has to be registered for the payment of certain direct taxes. The direct taxes to which this structure is liable to are the corporate income tax and the municipal business tax, but the fund can benefit from an exemption on the payment of the net wealth tax.
When referring to the VAT, those who want to open a Luxembourg fund must know that the obligation to register and pay this tax as an investment vehicle is prescribed under the Circular no. 723 of 29th of December 2006. The VAT is also charged to hedge funds registered as FCPs, but the tax will be applied to the management company that manages the fund, as the vehicle itself does not have a legal personality.
According to the Luxembourg tax legislation, an exemption on charging the VAT to an investment fund is available, as per Article 44 (1) (d) of the VAT Law. In this case, the VAT is not charged when performing specific services, such as portfolio management services, investment advisory services or administrative services.
What is the tax structure for a Luxembourg SICAV?
In the case of a SICAV in Luxembourg numerous tax exemptions are applicable. This type of fund is not liable to paying the corporate tax, nor is it required to pay the net wealth tax, the withholding tax on the distribution of dividends and it may also benefit from an exemption on the payment of the VAT. The latter is applicable as long as we refer to the provision of fund management services. Any other types of VAT related activities are liable to the payment of the tax.
What are the taxes applicable to Luxembourg SICARs?
In the case of a SICAR in Luxembourg, the investors will be required to pay the corporate tax at a rate of 29.22%. However, this type of fund benefits from several tax exemptions, applicable to taxes such as: the net wealth tax, the withholding tax on the distribution of dividends, the subscription tax, and it can also be exempted from paying the VAT, in special conditions.