Non-retail pooled fundsAvailable vehicles
What are the main legal vehicles used to set up a non-retail fund? How are they formed?
Non-retail funds can be organised as:
- specialised investment funds (SIFs) governed by the SIF Law;
- reserved alternative investment funds (RAIFs) governed by the RAIF Law;
- investment companies in risk capital (SICARs) governed by the SICAR Law; or
- unregulated AIFs governed by the Companies Law and the AIFM Law.
What are the key laws and other sets of rules that govern non-retail funds?
See question 23. In addition, key laws and regulations applicable to non-retail funds are:
- the AIFM Law if the fund qualifies as an AIF;
- the Companies Law;
- the Financial Sector Law;
- the Luxembourg Civil Code;
- the Luxembourg laws, regulations and CSSF circulars regarding AML and CTF;
- the GDPR;
- CSSF Regulation No. 16-07 regarding out-of-court complaint resolution (if the fund is regulated); and
- various ESMA guidelines and CSSF regulations and circulars.
Must non-retail funds be authorised or licensed to be established or marketed in your jurisdiction?
SIFs and SICARs require prior CSSF approval. RAIFs and unregulated AIFs may be established and marketed without prior CSSF approval. If marketing is intended to be performed based on the AIFMD passport, notification requirements must be met prior to commencing any marketing activity.Marketing
Who can market non-retail funds? To whom can they be marketed?
Non-retail funds may be marketed by authorised AIFMs on the basis of the AIFMD passport or by authorised distributors on the basis of the MiFID passport. Investors in SIFs, SICARs and RAIFs must qualify as well-informed investors (see question 27). In the European Economic Area (EEA), non-retail funds may be marketed to professional investors within the meaning of the AIFM Law (see question 27).Ownership restrictions
Do investor-protection rules restrict ownership in non-retail funds to certain classes of investor?
SIFs, SICARs and RAIFs are reserved to well-informed investors only. Unregulated AIFs may only be marketed under the AIFMD passport in the EEA to professional investors. Well-informed investors are institutional investors, professional investors or any other investor that:
- has confirmed in writing that it adheres to the status of well-informed investor; and
- either invests a minimum of €125,000 in the fund, or obtains an assessment certifying its expertise, experience and knowledge in adequately appraising an investment in the fund, made by:
- a credit institution within the meaning of Regulation (EU) No. 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and investment firms;
- an investment firm within the meaning of MiFID;
- a management company within the meaning of the UCITS Directive; or
- in respect of a RAIF, an AIFM.
Directors and other persons who are involved in the management of the fund do not need to qualify as ‘well-informed’ in order to invest in the fund.
Professional investors within the meaning of the AIFMD are investors considered to be professional clients (or eligible, upon request, to be treated as such) within the meaning of Annex II of MiFID.Managers and operators
Are there any special requirements that apply to managers or operators of non-retail funds?
Managers of non-retail funds qualifying as AIFs must be either authorised or registered as AIFMs in the EEA or meet the requirements of a third-country AIFM.
It is of importance to note that, while registered AIFMs are not subject to authorisation under the AIFM Law, they are not entirely exempt from the AIFM Law requirements. They are required to be registered with the CSSF, disclose the AIFs they manage (including their investment strategies) and regularly report to the CSSF the principal instruments in which they trade and relating investment exposures. Registered AIFMs may nonetheless elect to subject themselves to the AIFM Law (especially if they want to benefit from the AIFMD passport).Tax treatment
What is the tax treatment of non-retail funds? Are any exemptions available?
SIFs and RAIFs (save for RAIFs investing exclusively in risk capital) are subject to an annual subscription tax of 0.01 per cent, subject to certain exemptions. The taxable basis of the subscription tax is the fund’s aggregate net assets as valued on the last day of each quarter. Generally speaking, SIFs and RAIFs are characterised by their tax neutrality, as they are exempt from tax on income or capital gains, as well as from net wealth tax. Any distributions (including dividends and liquidation surpluses) made by a SIF or RAIF to investors are not subject to withholding tax in Luxembourg.
A SICAR can, generally speaking, be described as a tax-neutral vehicle for private equity investments.
The SICAR regime for fiscally opaque entities (such as an SA, a private limited liability company or a corporate partnership limited by shares) follows the ordinary income tax regime. Accordingly, it is subject to corporate income taxes and to specific domestic or treaty exemptions, and should qualify as a resident company for domestic and Luxembourg tax-treaty purposes. However, income from securities, as well as income derived from the transfer, contribution or liquidation thereof (namely, bonds, shares and other transferable securities, as well as negotiable instruments giving the right to acquire the aforementioned securities), is exempt. All other income is fully subject to ordinary Luxembourg direct taxation rules. Fiscally opaque SICARs are subject to a minimum net wealth tax. A SICAR formed as a fiscally transparent common limited partnership (SCS) or a special limited partnership (SCSp) is itself not liable for direct taxation or net wealth tax in Luxembourg. Neither dividends nor liquidation proceeds distributed by a SICAR to investors are subject to withholding tax.
RAIFs investing exclusively in risk capital assets are taxed according to the same tax rules as those applicable to SICARs.
The tax treatment of unregulated AIFs depends on the legal form of the fund. While an SCS or SCSp is fully tax transparent, funds set up under other corporate forms are subject to the general tax regime.Asset protection
Must the portfolio of assets of a non-retail fund be held by a separate local custodian? What regulations are in place to protect the fund’s assets?
The appointment of a depositary is required for SIFs, SICARs, RAIFs and unregulated AIFs that are managed by authorised AIFMs, and the fund’s assets must be segregated from the depositary’s assets. Unregulated AIFs that are managed by a registered AIFM are not required to appoint a depositary.
The depositary shall be liable to the fund and its investors for the loss of financial instruments held in custody either by him or herself or any third party to whom custody was delegated. In the case of such a loss of a financial instrument held in custody, the depositary shall return a financial instrument of identical type or the corresponding amount to the fund without undue delay. The depositary may contractually discharge itself of its liability under certain circumstances.Governance
What are the main governance requirements for a non-retail fund formed in your jurisdiction?
Regulated funds, such as SIFs or SICARs, following the successful completion of the CSSF examination phase (see question 3), must be registered on the relevant official list of supervised entities held by the CSSF.
For unregulated funds, such as RAIFs and unregulated AIFs, no prior authorisation from the CSSF is required before their set-up and there is no direct ongoing supervision by the CSSF.
A fund organised as an FCP must be managed by a ManCo or AIFM, which is in charge of the governance of the FCP, under the oversight of the depositary in respect of certain aspects.
If organised as a SICAV or SICAR, the fund is managed by its governing body (ie, board of directors or general partner). In such a case, the fund may either appoint a ManCo or AIFM (ie, be externally managed) or manage itself (ie, internally managed AIF).
Luxembourg funds must have their central administration in Luxembourg.Reporting
What are the periodic reporting requirements for non-retail funds?
Both SICARs and SIFs must comply with certain disclosure requirements. They must, inter alia, produce an offering document and an annual report that they also need to communicate to the CSSF and to investors. These documents must include the information necessary for investors to be able to make an informed judgement on the proposed investment and the related risks. The annual report must be finalised within six months of the end of the financial period to which it pertains. Although the annual reporting obligations are in line with the common reporting obligations of commercial companies, neither the SICAR nor the SIF are subject to consolidated reporting.
The annual accounts must be audited, furthermore, by a certified Luxembourg independent auditor, which must inform the CSSF of serious violations of the applicable legal provisions or of any facts or decisions that could potentially threaten the continuity of the SICAR or SIF. A SICAR must submit half-yearly financial information to the CSSF. A SIF must submit yearly and monthly financial information to the CSSF.
Although a RAIF is neither subject to any prior regulatory approval nor to any ongoing direct supervision, it must qualify as an AIF and be managed by an authorised AIFM. It must also produce an offering document and an audited annual report.
In terms of reporting requirements, the AIFM Law contains obligations applicable to the manager of any AIF in scope. For SIFs and SICARs, those requirements will apply alongside the specific reporting rules of the SIF Law or SICAR Law that, to a large extent, are in line with the reporting rules of the AIFM Law. The AIFMD reporting framework mainly consists of annual reporting, disclosure to investors and regulators’ requirements. Annual reports must be prepared at least once a year and within six months following the end of the financial year for each Luxembourg AIF managed or marketed in the EU. The annual reports will be audited and provided to investors upon request and to the CSSF. Disclosure requirements entails communication of certain information to be provided to investors before they invest in the fund (generally contained in an offering document). Such information relates, inter alia, to the AIF’s investment strategy and objectives, techniques it may employ and associated risks, the use of leverage and collateral and the procedures for issue and sale of shares, units or interests. Further aspects that need to be disclosed are as follows:
- the AIF’s valuation procedure and pricing methodology;
- a description of liquidity risk management and redemption arrangements;
- a description of all fees, charges and expenses and maximum amounts thereof, which are directly or indirectly borne by the investors;
- the policy on ensuring fair treatment of investors; and
- a description of any preferential treatment of investors.
In respect of reporting to the CSSF, a Luxembourg AIFM should regularly report on the principal markets and instruments in which its AIFs trade and is required to disclose certain additional information encompassing, inter alia, the following:
- the percentage of the AIF’s assets that are subject to special arrangements arising from their illiquid nature;
- any new liquidity management arrangements;
- the AIF’s risk management systems;
- information on the AIF’s main categories of assets; and
- the results of any stress tests.
Frequency of reporting depends on the amount of assets under management.