The Luxembourg legislator has by enacting the law of 13 February 2007 on specialized investment funds (the ?SIF Law?) created a flexible new investment structure allowing any sponsor and/or asset manager (without a need to be approved by the Luxembourg supervisory authority (the Commission de Surveillance du Secteur Financier, ?CSSF?) to offer to qualified (well-informed) investors tailor-made financial products with a wide range of eligible assets (subject to risk diversification) and less reporting requirements than under the law of 19 July 1991 on undertakings for collective investment (?UCI?) (the ?1991 Law?, which was replaced) and the law of 20 December 2002 on UCIs (the ?2002 Law?), and under a wide range of available legal forms.
2. How are SIFs defined?
An investment vehicle qualifies as a SIF if:
- its sole object is the collective risk diversified investment of its funds to allow its investors to benefit from the results thereof;
- it issues securities only to one or more well-informed investors;
- its constitutive or issuing documents explicitly state that it is governed by the SIF Law; and
- it is located in Luxembourg, meaning that the registered office of the corporate SIF or of the management company of the FCP-SIF as well as the central administration of the SIF (which, in practice, can be organised through a Luxembourg third party service provider) are situated in Luxembourg.
3. What makes SIFs attractive?
The main advantages of SIFs are the kind of eligible assets, the level of permitted leverage, the multitude of available legal forms, the type of securities it can issue, the flexibility as to the valuation of its assets and its light prudential supervision.
3.1 Eligible assets
SIFs can invest in all asset classes, including, inter alia, equities, bonds, warrants, real estate, commodities, financial derivatives, loans, private equity and microfinance. Further, they can be used to be set up as hedge funds and fund of funds structures. Under certain conditions, SIFs may grant mezzanine loans without authorisation under the Luxembourg Bank Law (the ?Bank Law?).
Leverage of SIFs is permitted within the limits to be agreed on a case by case basis with the CSSF.
3.3 Available legal forms
SIFs can be set up either as:
- collective investment funds (fonds commun de placement) (?FCP-SIF?) managed by a Luxembourg management company; or
- investment companies (corporate type fund) with a large variety of available forms.
a. Fonds commun de placement - FCP-SIF
FCP-SIFs, which are co-ownerships of assets without a legal personality, are managed by a Luxembourg management company on behalf of and in the sole interest of the joint owners of the FCP-SIF.
Unitholders are only liable up to the amount contributed by them to the FCP-SIF.
Management companies authorised under Chapter 13 or 14 of the 2002 Law can act as management companies to FCP-SIFs.
The management company as well as the FCP-SIF itself must have their central administration in Luxembourg. They can however outsource the tasks related to the central administration to third party service providers in Luxembourg.
FCP-SIFs are governed by management regulations drawn up by the SIF?s management company that contain minimum provisions as set forth in the SIF Law.
b. Corporate SIF
The provisions of the Luxembourg companies law (the ?Companies Law?) are applicable to corporate SIFs insofar as the SIF Law does not derogate therefrom. Shareholders are only liable up to the amount contributed by them to the SIF.
Corporate SIFs can be set-up either as (i) SICAVs (société d?investissement à capital variable), offering variable capital, that are frequently used for open-ended structures which offer redemption facilities to their investors, or as (ii) SICAFs (société d?investissement à capital fixe), with fixed capital, that are normally used for closed-ended structures.
SIFs adopting the corporate form can be set up either as public limited companies (sociétés anonymes), partnerships limited by shares (sociétés en commandite par actions), limited liability companies (sociétés à responsabilité limitée) and cooperative companies organised as public limited companies (sociétés coopératives organisées sous forme de sociétés anonymes).
3.4 Types of securities that can be issued
Contrary to UCIs under the 2002 Law, SIFs are allowed to collect funds by the issue of other types of securities than common shares e.g., debt securities and/or preferential shares.
3.5 Valuation of assets
Asset valuation is in principle based on fair value unless otherwise stated in the SIF?s constitutive documents.
3.6 Prudential supervision
SIFs must be authorised by the CSSF which approves their constitutional documents as well as their custodian.
Further, the directors of a SIF (or of the management company of an FCP-SIF) will need to be of sufficiently good repute and sufficiently skilled in the SIF?s investment field and must be approved by the CSSF.
Contrary to UCIs under the 2002 Law, SIFs do not need to have a CSSF approved promoter (also known as ?deep pocket?) and the investment manager of the SIF will not need to be approved by the CSSF. In principle, SIFs will be authorised before they start their activity although the SIF Law provides for the possibility to start operations and issue securities beforehand, provided an application for a licence is filed with the CSSF within one month from such date.
4. Who can invest?
Any well-informed investor, beyond pure institutional and professional investors, has access to a SIF. Accordingly, any investor who confirms in writing that it adheres to the status of well-informed investor and either:
- invests a minimum of EUR 125,000, or
- is assessed by a credit institution or an investment company under the EU Directive 2004/39 or a management company under the EU Directive of 2001/107 as having the expertise, experience and knowledge in adequately appraising the investment, can invest in a SIF.
These restrictions do not apply to the persons active in the SIF?s management.
5. Is there a minimum required size for SIFs?
SIFs must, within 12 months of their authorisation by the CSSF, have net assets (share capital plus any share premium paid) of at least EUR 1,250,000.
6. Are there limitations as to distributions?
Payment of interim or annual distributions are not subject to any restrictions, subject to the compliance with the prementioned minimum net asset requirement.
7. Is it possible to create multiple compartments?
SIFs may issue securities in separate compartments with each compartment pursuing a different investment strategy and having its own assets and liabilities (umbrella structure). The liabilities of a compartment are, by law, ring fenced against the liabilities of the other compartments.
In addition, it is possible to issue, within each compartment, different classes of shares having different characteristics such as a different distribution policy or a different fee structure.
8. How does risk-spreading work in practice?
The CSSF has adopted the following guidelines on risk diversification. In case of umbrella SIFs, these are applicable on a compartment by compartment basis.
Exemptions from these principles may be granted by the CSSF upon providing them with appropriate justifications. The CSSF may apply additional restrictions to specific types of SIFs.
In principle a SIF may not invest more than 30% of its assets (or commitments to subscribe) in securities of the same nature issued by the same issuer.
8.2 Investments in other UCIs
A look-through approach is applied to investments in UCIs that are subject to risk-spreading requirements at least comparable to those applicable to SIFs.
Each compartment of an umbrella target UCI is considered a distinct issuer provided that the segregation of liabilities between the different compartments is ensured.
8.3 Short sales
Short sales must not result in the SIF keeping a short position on securities of the same nature issued by the same issuer that represents more than 30% of its assets.
A SIF has to ensure a comparable risk-spreading through appropriate diversification of the assets underlying the derivative contract. Similarly, the counterparty risk in OTC derivative transactions must be limited depending on the quality and the qualification of the counterparty.
9. What are SIFs required to publish?
SIFs must publish an issuing document that has to contain the necessary information to enable investors to make an informed investment decision, in particular, as to the investment risks. No issuing document must be published if a prospectus has been published in accordance with the Prospectus Directive law. The issuing document must be updated as to its material elements only in the case of issue of securities to new investors.
SIFs are further required to publish an annual report per financial year of which the reduced content is set forth in the SIF Law. The annual report must be put at the disposal of investors within six months of the end of the financial year. The annual report must be audited by an independent auditor (réviseur d?entreprises) appointed by the SIF.
10. Can SIFs be listed on the Luxembourg Stock Exchange?
SIFs can, subject to the applicable listing requirements, be listed on both segments of the Luxembourg Stock Exchange i.e., the EU regulated market and the exchange-regulated market Euro MTF (Multilateral Trading Facility).
11. What about anti-money laundering rules?
The Luxembourg Anti-Money Laundering Law imposes extensive ?know-your-client? rules on financial services professionals as well as obligations to possess an appropriate internal organisation and to cooperate with the authorities.
12. Are SIFs subject to privacy legislation?
SIFs are subject to the provisions of the Luxembourg Data Protection Law, which is largely based on European legislation. In particular, a SIF would have to apply to the National Commission for Data Protection (Commission Nationale pour la Protection des Données, CNPD) for authorisation to process solvency and creditworthiness data of its investors as a SIF is not an exempt professional of the financial sector under the Bank Law.
13. What is the impact of MiFID?
SIFs are likely to be considered as professional clients with less protection if considered as UCIs. It is also possible for SIFs to be treated as retail clients, if an agreement to that effect is put into place between the SIF and the credit institution or the investment undertaking.
14. What are the applicable tax benefits?
Neither corporate SIFs nor FCP SIFs are subject to Luxembourg taxes other than a nominal fixed registration tax and the annual subscription tax (taxe d'abonnement).
The fixed registration tax of EUR 75 will be payable upon incorporation and for the subsequent modification of the articles of incorporation of a corporate SIF. The fixed registration tax of EUR 75 is also due for the establishment of a FCP-SIF run by a management company although that tax will be levied upon incorporation or modification of the articles of incorporation of the management company. SIFs are subject to an annual subscription tax of 0.01% based on their net asset value.
The following assets or types of SIFs are exempt from such tax:
(a) the value of assets represented by units held in other UCIs if these have already been subject to the subscription tax;
(b) SIFs and sub-funds of umbrella SIFs provided that:
- their exclusive object is the collective investment in money market instruments and/or the deposit with credit institutions; and
- the weighted residual portfolio maturity does not exceed 90 days; and
- that have obtained the highest possible rating from a recognized rating agency.
(c) SIFs whose securities are reserved for:
- institutions for occupational retirement provision, or similar investment vehicles, set up at the initiative of one or several employers for the benefit of their employees; and
- companies of one or more employers investing their funds with a view to provide employee retirement benefits.
Save for the application of a potential withholding tax as a result of Council Directive 2003/48/EC of 3 June 2003 on taxation of savings income in the form of interest payments and the related agreements with dependant and associated territories of certain EU Members States, no tax is withheld on distributions made by a SIF.
In a limited number of cases, gains realized on the disposal of shares in the corporate types of SIF by non resident investors will be subject to income tax in Luxembourg. This may occur to the extent there is a disposal of shares when the investor holds or has held a substantial participation (i.e. holding more than 10% of the share capital) on the corporate SIF and that disposal took place within 6 months following the acquisition / subscription of the shares.
As a rule, FCP-SIFs do not benefit from the double taxation treaties concluded by Luxembourg. However, Coporate SIFs are considered tax resident of Luxembourg under a number of tax treaties concluded by Luxembourg. Structuring alternatives in order to improve tax efficiency can be elaborated. The management of SIFs is exempt from VAT in Luxembourg, as was already the case for UCIs governed by the 1991 Law.
15. SIFs - another Luxembourg success story
With the SIF Law, Luxembourg has created a legislative framework that allows a larger number of sponsors and asset managers to have more freedom and choice to set up their investment vehicles in Luxembourg. The success of SIFs is undeniable and they have become the best-seller of the Luxembourg fund industry, besides UCITS. They have proven very successful in the fields of private equity, venture capital and real estate. Also, SIFs have widely been used to structure alternative investments and hedge funds.