Developments in the Luxembourg Financial Sector

March 26, 2015

The Luxembourg supervisory authority, the Commission de Surveillance du Secteur Financier (CSSF), has recently issued FAQs regarding the immobilisation of bearer shares and units, as well as a press release to remind Luxembourg alternative investment fund managers (AIFMs) and non-EU AIFMs that market alternative investment funds (AIFs) in Luxembourg under the AIFM Directive as to their reporting obligations. In other developments, the Luxembourg tax authorities have issued two circulars – the first confirms the tax treatment of limited partnerships, and the second relates to the issuance of tax residency certificates for undertakings for collective investment (UCIs). 

These developments are discussed below. 

CSSF Issues FAQs Regarding Immobilisation of Bearer Shares and Units 

The New Regime 

The Luxembourg legal regime applicable to bearer share and units was amended by the law of 28 July 2014 on the “immobilisation” of bearer shares and units (Law), which entered into force on 18 August 2014.1 According to the Law, units and shares issued or to be issued in bearer form by a Luxembourg entity – including investment funds – must be deposited with a professional depositary appointed by the issuer’s board of directors. The voting rights attached to bearer shares and units that were not so deposited by 17 February 2015 have been suspended until such time as they are deposited with the depositary2, and bearer shares and units shall be cancelled if they are not deposited with a professional depositary by 17 February 2016. 

Guidance for Investment Funds 

The CSSF issued FAQs3 regarding this new regime on 30 December 2014 – these focus on regulated investment funds impacted by the Law and aim to clarify certain specific practical aspects of the new regime. The FAQs indicate, among other matters: 

  • The Law applies to UCITS4, Part II funds5, SIFs6 and SICARs7 under the form of an SA8, SCA9 or FCP10, which have issued bearer shares or units that are still outstanding. 
  • In the context of FCPs, the depositary shall be appointed by the board of directors or the board of managers, as applicable, of the management company of the FCP. 
  • Any service provider of the investment fund (e.g., registrar and transfer agent, depositary bank) can be appointed as depositary to the extent such entity fulfills the requirements of the Law. 

The prospectus of the investment fund must be amended to include information as to the impact of the Law, the applicable deadlines and the identity of the depositary. In addition, the shareholders or unitholders of the fund must be informed in an adequate manner, and this can be achieved by all means, including through: (i) the usual information sources used by the investment fund, as mentioned in its prospectus; (ii) the website of the investment fund or its management company; (iii) a notice published in at least two newspapers with adequate circulation, at least one of which is a Luxembourg newspaper; and (iv) the distribution chain. 

Important Dates 

  • 18 August 2014: entry into force of the Law 
  • 17 February 2015: deadline for the depositary to be appointed deadline for the bearer shares and units to be deposited with the depositary (failing which their voting rights shall be suspended and rights to distribution deferred)
  • 17 February 2016: deadline for the bearer shares and units to be deposited with the depositary (failing which they shall be cancelled) 

Tax Authorities Issue Circular regarding Tax Residency Certificates for UCIs 

The Luxembourg tax authorities on 12 February 2015 issued a Circular relating to the issuance of tax residency certificates to UCIs subject to the Luxembourg law of 17 December 2010 on undertakings for collective investment, as amended (Law of 2010), and the Luxembourg law of 13 February 2007 on specialised investment funds, as amended (Law of 2007). 

The Circular is of particular interest as it clarifies the circumstances under which the tax authorities will issue a tax residency certificate to Luxembourg UCIs subject to the Law of 2010 or the Law of 2007, and therefore whether such entities can benefit from the double taxation treaties. 

A Luxembourg UCI can take the form of an investment company with variable capital (société d’investissement à capital variable, or SICAV), an investment fund with fixed capital (société d’investissement à capital fixe, or SICAF) or a common fund (fonds commun de placement, or FCP). 

From a Luxembourg perspective, SICAVs and SICAFs subject to the Law of 2010 or the Law of 2007 qualify as Luxembourg-resident companies, as they have their registered office or central administration in Luxembourg. In addition, from a Luxembourg perspective, such SICAVs and SICAFs are taxable entities, even if they are exempt from income tax in Luxembourg, as is the case under the Law of 2010 and the Law of 2007. 

Certain countries take a different approach and do not treat entities that are exempt from income tax as taxable entities. Under this approach, such entities cannot benefit from the double taxation treaties. 

The Luxembourg tax authorities will issue a "type 1" tax residency certificate if there is a double taxation treaty that applies to UCIs as a result of: (i) an express consent between the relevant authorities of two countries; (ii) the interpretation of a clear text; or (iii) the interpretation by the Luxembourg tax authorities. 

A “type 3” tax residency certificate will be issued if there is a double taxation treaty in place that does not apply to UCIs as a result of: (i) an express consent between the relevant authorities of two countries; (ii) the interpretation of a clear text, or if the text of the treaty expressly excludes such an application; or (iii) the interpretation by the Luxembourg tax authorities. 

The Circular provides that, despite the general principle that UCIs organised as FCPs cannot normally obtain a tax residency certificate because of their tax transparency (i.e., FCPs exist by virtue of a contract and do not have a legal personality), FCPs can obtain a “type 2” tax residency certificate: (i) when the double taxation treaty expressly states that it is applicable to FCPs; (ii) the treaty language includes all types of UCIs (whether they are tax transparent or not); or (iii) the treaty contains a specific provision to the effect that a fund without legal personality is considered a resident of Luxembourg. The Circular lists the countries for which a "type 1" tax residency certificate will be issued, and will be regularly updated once new treaties are entered into or when existing treaties are amended. 

Tax Authorities Confirm Tax Treatment of Limited Partnerships 

By means of a long-expected Circular Letter, the Luxembourg tax authorities have confirmed the treatment of tax transparent Luxembourg limited partnerships in the form of a société en commandite simple (SCS) or société en commandite spéciale (SCSp) (each, a Partnership) in which the general partner (in the form of a capital company) does not own an interest of 5% or more in the Partnership. 

The Circular Letter has been widely welcomed by the marketplace, as it provides legal certainty and broadly avoids the need for confirmatory rulings in relation to the tax treatment of Luxembourg limited partnerships. The Circular Letter: Confirms the tax treatment of Luxembourg limited partnerships that qualify as AIFs. 

  • Confirms the tax treatment of those Partnerships which are subject to Luxembourg regulatory regimes. 
  • Confirms the tax treatment of those foreign AIFs which are managed by Luxembourg-regulated AIFMs. 
  • Provides Partnerships that are not AIFs and not regulated under a specific regulatory regime with base information which allows them (and their advisers) to conduct an analysis to determine whether or not their activity could lead to taxation in Luxembourg. 

For further information regarding the Circular Letter, please refer to refer to DechertOnPoint, Luxembourg Tax Authorities Confirm Tax Treatment of Limited Partnerships. 

CSSF Issues Press Release Regarding Reporting Under the AIFMD 

One of the key drivers for the Alternative Investment Fund Managers Directive is to monitor systemic risk by, among other means, collecting relevant information through harmonised reporting by AIFMs on their AIFs managed or marketed in the EU. Reported information will be shared with ESMA, the financial regulators of EEA member states, and the European Systemic Risk Board. 

The CSSF has issued a press release in order to remind Luxembourg AIFMs, and non-EU AIFMs that market AIFs in Luxembourg under the AIFMD, as to their reporting obligations to the CSSF. The reporting obligations under the AIFM Law apply to AIFMs registered or authorised in Luxembourg, as well as all non-EU AIFMs marketing AIFs in Luxembourg under article 42 of the AIFM Law. 

For further information regarding these reporting requirements, including who is affected, the relevant reporting period and reporting frequency, and the content of the report, please refer to DechertOnPoint, Reporting Under the AIFMD for Luxembourg AIFMs and Non-EU AIFMs Marketing AIFs in Luxembourg. Return to main page 

Footnotes 

1) For further information regarding this regime, please refer to Changes to the Luxembourg Bearer Shares/Units Regime.
2) Such shares and units that were not deposited are not taken into account for quorum and majority purposes, and their holders may not be admitted to general meetings. Any distribution with respect to such shares and units must be postponed until they have been deposited with the depositary, subject to prescription, and without a right to interest on the deferred amounts.
3) Frequently Asked Questions in relation to investment funds established in Luxembourg (Version 1, 30 December 2014) concerning the Law of 28 July 2014 regarding immobilisation of bearer shares and units.
4) Undertakings for collective investment in transferable securities, within the meaning of part I of the law of 17 December 2010 on undertakings for collective investment.
5) Undertakings for collective investment, within the meaning of part II of the law of 17 December 2010 on undertakings for collective investment.
6) Specialised investment funds, within the meaning of the law of 13 February 2007 on specialised investment funds.
7) Investment companies in risk capital, within the meaning of the law of 15 June 2004 regarding SICARs.
8) Public company limited by shares (société anonyme).
9) Corporate partnership limited by shares (société en commandite par actions).
10) Contractual co-ownership schemes (fonds commun de placement).