Our CMS lawyers had the pleasure to write an article in the 5th edition of the SFF Magazine: ESG, talent attraction and structuring funds in Luxembourg, in collaboration with the Spanish Fund Platform.
Benefits for Spanish investors and sponsors
Luxembourg boasts a rich pool of investors, including Spanish investors, who are comfortable with its legislation, which is constantly evolving to meet the needs of the financial market participants. These investors are encouraged by Luxembourg’s location at the heart of the European Union (EU) and its access to EU passporting rights. Also, its legislation offers a complete toolbox of different types of funds, depending on the size, geography, regulatory requirements, or operating sector, providing full flexibility, and attracting Spanish sponsors/ managers aiming to set up a fund and raise capital from investors located or not in Spain.
Luxembourg’s high concentration of investment fund experts specialized in all aspects of product development, legal, tax, accounting, administration, and distribution has positioned its fund ecosystem as one of the most attractive in the world and elevated it as a worldwide leader in cross-border fund distribution, with funds distributed in more than 80 countries around the world. Such wide range of expertise and experience guarantees a high-quality assistance through the whole process of setting up a fund.
Structuring investment funds in Luxembourg
Legal regimes
Luxembourg investment funds can be split in three broad categories, namely (i) regulated funds, supervised by the Luxembourg regulator (the CSSF), such as collective investment in transferable securities (UCITS), specialized investment funds (SIFs) or investment companies in risk capital (SICARs), (ii) semi-unregulated funds such as reserved alternative investment funds (RAIFs) which are indirectly supervised through the prudential supervision of their authorized alternative investment fund manager (AIFM) by the CSSF, and (iii) pure unregulated funds such as alternative investment funds (AIFs) which are managed by registered (or de minimis) AIFMs.
Authorized AIFMs may market both regulated and unregulated funds to professional investors within the EU through the marketing passport provided that the fund qualifies as an AIF under the European Directive 2011/61/EU on AIFMs (AIFMD).
Legal forms
A fund may take several corporate forms such as a partnership limited by shares (société en commandite par actions – SCA) or a public limited company (société anonyme – SA). It may also take one of the two limited partnership forms inspired by the Anglo-Saxon limited partnership model: a common limited partnership (société en commandite simple – SCS) having legal personality, or a special limited partnership (société en commandite spéciale – SCSp) having no legal personality.
Structuring options
Luxembourg funds can be structured as an openended or closed-ended fund – allowing or not the investors to request the redemption of their interests/units/shares – depending on whether the fund invests in rather liquid or illiquid assets.
Luxembourg also offers a wide variety of structuring options depending on the strategy adopted, such as infrastructure, private equity, venture capital, real estate or debt.
In terms of control over the investment process, Luxembourg funds can be managed by either a Spanish AIFM or a third-party AIFM. In the latter case, the Spanish fund sponsor can remain involved in the investment process by acting as portfolio manager making investment decisions under the oversight of the AIFM, provided that it is duly authorised to carry out such activity in Spain, or as an investment advisor of the AIFM, which may not need to be authorized in Spain if it does not provide any investment advice activity in Spain and only advises the third-party AIFM.
Tax features
Luxembourg funds are usually either not subject to tax (except for an annual subscription tax), or benefit from a broad exemption depending on their legal form and regulatory regime. In certain cases, they are also entitled to the benefits of the double tax treaties (DTTs) signed by Luxembourg. This is the case concerning the DTT with Spain where, subject to conditions, certain funds may have direct access to such DTT.
When funds do not benefit from such treaties it is common to set up special purpose vehicles (SPVs) to hold the assets for different reasons, including better asset management, segregation of risks and diversification when required. Such SPVs generally take the legal form of an opaque entity which is fully taxable and as such benefit from the wide treaty network and EU tax directives applicable in Luxembourg (subject to adequate substance and business reasons). From a Spanish tax point of view, income obtained by Spanish investors (i.e., dividends and interests) could be taxed in Spain by Personal Income Tax (from 19% to 26%) and Corporate Income Tax (25%).
Said income could be also taxed in Luxembourg but if the fund and the Spanish investors can apply the DTT provisions, reduced tax rates (15% in case of dividends and 10% in case of interests) could be applied.
In the event of an eventual disinvestments, eventual gain would be taxed in Spain by Personal Income Tax or Corporate Income Tax at the rates mentioned above. Additionally, said gain would not be taxed in Luxembourg if: (i) the DTT provisions apply and (ii) the underlying asset of the fund is not mainly composed by real estate assets located in Luxembourg.
In case of individuals, Spanish Personal Income Tax Law foresees a special tax regime for certain gains derived from the sale of Undertakings for UCITS units when, amongst other requirements, said gains are totally reinvested in other UCITS.
Conclusion
With circa EUR 6 trillion in assets under management and close to 14,500 domiciled funds as of 31 December 2021, Luxembourg stands today as the largest investment fund center in Europe and the second largest in the world after the US. Its AAA-rated economy, favorable regulatory and robust tax regimes, sound public finances, as well as political and social stability, make it an ideal location for Spanish investors and Spanish sponsors.
Luxembourg offers a wide range of regulatory regimes, legal forms and structuring options, allowing maximum flexibility to establish an investment fund. This, considering its investment strategy, targeted investors, applicable tax and regulatory requirements. Therefore, it is the jurisdiction of predilection for establishing an investment fund with the purpose to raising capital and channeling investment within the European Economic Area and beyond.
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