Caroline Bormans and Marc Lenaers consider how Luxembourg has consolidated its postion as a leading European fund center.
Luxembourg is known as the largest European fund domicile and the second largest fund center globally after the United States. The fund industry is constantly on the rise as the latest statistics indicates a growth rate of more than 30 per cent over the last twelve months. At the end of March 2015, the net assets under management reached three and a half billion Euros. The investment fund industry has entered into a ‘post-AIFMD’ maturity phase. The emergence of numerous third-party management companies and depositary-lite service providers contributes making Luxembourg a competitive and sound jurisdiction for investors and promoters worldwide.
Luxembourg has also proven its status of worldwide recognized financial center. Luxembourg has successfully attracted the biggest Chinese banks, which have established their European headquarters and chosen Luxembourg as the gateway to their European operations. Chinese authorities have also confirmed Luxembourg’s international recognition by granting an initial RQFII quota of RMB 50 billion.
Chinese Market - RQFII Quotas and Shanghai Hong Kong Stock Connect
On 29 April 2015, the People's Bank of China announced that Luxembourg joined the RQFII scheme (RMB Qualified Foreign Institutional Investor) and was granted with an initial quota of RMB 50 billion (approximately €7 billion). The RQFII scheme enables foreign qualified institutions to directly reinvest offshore RMB into the Chinese mainland capital market. This structure was initially launched in Hong Kong in 2011 then expanded to other jurisdictions as from 2013. Luxembourg is the fifth European jurisdiction to join the RQFII scheme. Luxembourg is regarded as a hub for the RMB business in Europe.
This RQFII scheme has a particular interest for qualified investment fund managers based in Luxembourg. Likewise, the Shanghai Hong Kong Stock Connect represents a concrete opportunity to invest directly in Chinese securities. Hong Kong and overseas investors, such as Luxembourg investment funds, may under certain conditions trade China A-Shares listed on the Shanghai Stock Exchange. The Shanghai Hong Kong Stock Connect was launched on 17 November 2014. On 27 November 2014, the Luxembourg regulator (Commission de Surveillance du Secteur Financier - CSSF) had already approved the first UCITS trading through this new platform. This emphasizes Luxembourg’s responsiveness to new market opportunities and confirms its position as leading jurisdiction for investment funds.
Special Limited Partnerships
The increasing success of Luxembourg may also be explained by its adaptive legislative framework. In addition to implementing the AIFMD, the law of 12 July 2013 on the alternative investment fund managers introduced a significant innovation to promote alternative investment funds: the creation of a new special limited partnership (société en commandite spéciale or SCSp) inspired by the Anglo-Saxon limited partnership. This new vehicle is characterized by flexibility and contractual freedom, it has no legal personality and is transparent for tax purposes.
Given its presence in many Anglo-Saxon jurisdictions, our firm has seized the opportunity to promote its expertise in the set-up of these new vehicles. Ogier launched one of the first SCSp in Luxembourg and then expanded its expertise, from unregulated vehicles investing in offshore funds to regulated vehicles in the form of specialized investment funds investing in the North American market.
Leading Jurisdiction for UCITS
Luxembourg maintains is position as leading jurisdiction for UCITS. A couple of days before the adoption of the UCITS V Directive by the European legislator, the Luxembourg regulator (CSSF) adopted a new circular (CSSF Circular 14/587) to anticipate the implementation of UCITS V Directive. The UCITS V regime mirrors the AIFMD and provides for new requirements at the level of UCITS depositaries in terms of role, duties and obligations.
EU Member States have until 18 March 2016 to implement the UCITS V Directive into their national law. The Luxembourg regulator already provides Luxembourg UCITS and their depositaries with a national regulatory frame to guide them for the transition to the new UCITS V regime.
Tax Transparency and Exchange of Information
2014 has been a very turbulent year for Luxembourg, in particular following the LuxLeaks revelations of last November. Even though the latter did not reveal any illegal tax practices in Luxembourg, the country found itself immediately in the eye of a real media storm and had to react instantly which it did by speeding-up the reform of the ruling procedure. Hence as of the 1 January 2015, a new and formal ruling procedure is applicable which includes the publication of rulings on an anonymous basis.
In reaction to LuxLeaks, a mandatory exchange of advance cross-border rulings and advance pricing agreements has been proposed at EU level as an amendment to the Council Directive 2011/16/EU on administrative cooperation in the field of direct taxation (DAC Directive). If approved, the exchange between EU member States will take place as of the 1 January 2016.
Another amendment to the DAC Directive originates from the Council Directive 2014/107/EU adopted on 9 December 2014 which significantly expands the scope of exchange of information for tax purposes among EU Member States. The proposal is based on the Common Reporting Standard developed by the OECD, which draws in many aspects on FATCA, and shall become effective as early as the 1 January 2016, with a view of performing the first exchange of information between tax authorities in 2017.
In the meantime, the Council has invited the European Commission to present a proposal for the repeal of the EU Savings Directive (2003/48/EC) and to coordinate the repealing of the latter with the date of application of the revised DAC Directive. From a Luxembourg perspective, this means that the mandatory automatic exchange of information under the European Savings Directive will be in effect with respect to the year 2015 only (further to the law of 25 November 2014 abolishing the 35 per cent withholding tax) and shall be superseded as of 1 January 2016 by the revised DAC Directive.
Taxation of Funds and Fund Structures
In a move to protect its strongly developed and well–established fund industry, Luxembourg is vigilant to secure and retain the activities related to that industry, ie, holding and financing activities performed by Luxembourg special purpose vehicles (SPVs) and collective investment vehicles (CIVs).
It is clear that structures lacking all kind of economic substance will no longer be accepted by the international community as a whole of which Luxembourg manifestly confirms being a part of. Hence, the Luxembourg tax regime will evolve towards enforcing minimum levels of economic substance. In order to remain competitive with other jurisdictions such as the UK, the Netherlands and Ireland, Luxembourg will have to reduce and abolish certain taxes and to provide clarification for more legal security in a couple of areas.
In that respect the Luxembourg direct tax authorities issued a circular letter on 9 January 2015 on the taxation of Luxembourg limited partnerships (Circular LIR n°14/4) which has been very much welcomed by the alternative funds industry. Amongst others, the circular made clear that an alternative investment fund (AIF) established as an SCS or an SCSp is not deemed to perform a commercial activity, and its activities should therefore not be subject to municipal business tax (provided the general partner holds a stake of less than five per cent in the partnership).
Another clarifying circular letter was issued on 12 February 2015 (Circular L.G. – A. n°61) which lays down new rules regarding the issuance of certificates of residence for Undertakings for Collective Investment (UCI). The circular will markedly improve the tax position of UCIs. A certificate of residence can be obtained in the context of an applicable double tax treaty (type 1 for SICAV/SICAF and type 2 for FCPs, ie, contractual funds) or under Luxembourg domestic law (type 3 only for SICAV/SICAFs in the absence of an applicable double tax treaty).
Double Tax Treaty Network
Luxembourg further expanded and improved its treaty network during 2014, and has to date 76 treaties into force. Highlights are new treaties with Hungary and Uruguay and a circular letter L.G. –Conv. D.I. N°58 on the benefits under the Germany-Luxembourg double tax treaty, notably the reduced withholding tax on dividend and interest payments for collective investment funds (FCP in Luxembourg and Sondernvermögen in Germany). The circular letter confirms the treaty benefits to such funds provided the beneficiaries are tax resident in one of the treaty countries and have access themselves to the Germany-Luxembourg treaty.
Avocat à la Cour, Hong Kong
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