Direct Investment Regulation in Luxembourg

Luxembourg is Europe's largest center of attraction for investment funds, whose total assets exceed 3 trillion euros.  It is the 2nd largest investment fund center in the world after the U.S. 

Over the past two years, there has been a sharp increase in the number of incorporated PEFs in Luxembourg. Their number has almost doubled. Some of the world's largest DI firms have chosen this particular state to register their fund. If you are also planning to follow in their footsteps in the coming year, then below we offer a brief overview of the regulation of PEFs in Luxembourg, which you may find useful.

For your info

Luxembourg is a highly developed and secure financial center. It was the first European country to introduce legislation regulating the activities of investment funds. The state was the first EU member state of to implement the EC UCITS Directive. UCITS are open-ended funds investing in shares and bonds which are subject to a harmonized regulatory regime.

In Luxembourg, the necessary infrastructure has been created: these are specialists employed in the industry, including lawyers, accountants, bankers, tax and administrative authorities. The main fund players in Luxembourg are private equity houses. 

Luxembourg corporate law is based on Belgian law. The norms of corporate law are characterized by a liberal approach to doing business since it is based on the principle of freedom of action in the absence of a direct prohibition. The legislation is known for its clearly defined rules governing the appointment and removal from office of managers, the execution of shareholder agreements, and provisions on arbitration in Luxembourg.

When it comes to disputes, the Luxembourg courts are widely known for their fairness and reliability. They allow the enforcement of decisions of foreign courts.

Registering an investment fund in Luxembourg: legal landscape

Several factors are driving the growth of the DI industry in this jurisdiction. Most prominent of them is that Luxembourg has implemented a targeted political strategy aimed at attracting FDI into the economy, in particular through a zero or very low corporate tax rate.

Another important factor is the adoption of pan-European rules, in particular, the AIFMD and the BEPS Action Plan aiming to offer a high level of investor protection.

Luxembourg legislation is flexible and allows the creation of various types of companies and partnerships that can be found in any highly developed jurisdiction: JSCs, LLCs, and various kinds of partnerships. The société en commandite spéciale legal form is similar to LP in English law. In this case, the company can be registered quite fast. American and UK sponsors can create their Luxembourg-based funds that are similar to their local PEFs. They can easily register a Luxembourg LP with some small adjustments. 

Registration of Luxembourg RAIF

Generally speaking, RAIFs should follow the principle of risk sharing. The sole purpose of the Luxembourg RAIF incorporation is to invest in risky capital. A good solution is being offered to managers who seek to avoid the double tier of regulation and at the same time take advantage of the platform that earlier was the preference of regulated funds. 

Crucially, Luxembourg RAIFs may be granted preferential taxation.

Final word

We’ve seen a reduction in the number of transactions in the beginning of 2020 when the Covid-19 outbreak started escalation. Nevertheless, the Luxembourg investment fund sector is still very much in favor with investors and there are encouraging signs that high levels of activity will resume.