A welcomed modernization of Luxembourg’s fund toolbox - Draft Law 8183

On 24 March 2023, the Luxembourg government published Draft Law n° 8183 (“the Draft Law”), which aims to modernize Luxembourg fund law and, in doing so, will ease the democratization of private assets as well as the ability to launch and maintain alternative investments products in Luxembourg.

Background

One of the key drivers of the significant growth and leading position of Luxembourg as a domicile for alternative funds has been the proactive approach of local authorities working hand in hand with the asset management industry. Some game-changing innovations have been the introduction of the special limited partnership (S.C.Sp.) in 2013 and the reserved alternative investment fund (RAIF) which have paved the way for a decade of tremendous growth for both regulated and unregulated alternative funds.

Considering the growing demand for alternative strategies from institutional, professional and retail investors, the needs of the real economy for diversification and stepping-up of long-term financing capacity as well as the demographic challenge posed to pension systems, the EU recently reformed the European Long-term Investment Fund (ELTIF) regime and introduced a pan-European Personal Pension Product (PEPP).

In order to optimize the Luxembourg legal framework for alternative fund managers and support these EU objectives, the Luxembourg government published a draft law modernizing the Luxembourg fund toolbox on 24 March. This welcomed modernization will ease the democratization of private assets in Luxembourg, as well as the ability to launch and maintain investment products in the Grand Duchy.

In a nutshell

This omnibus bill is the outcome of intense industry efforts to reinforce the competitiveness and attractiveness of Luxembourg as a fund domicile and to ease the retailization of funds investing in private assets.

The Draft Law notably adapts different sectoral laws:

• The Law of 17 December 2010 relating to undertakings for collective investment, as amended (2010 Law)
• The Law of 15 June 2004 relating to the investment company in risk capital, as amended (SICAR Law)
• The Law of 13 February 2007 relating to specialized investment funds, as amended (SIF Law)
• The Law of 23 July 2016 on reserved alternative funds, as amended (RAIF Law)
• The Law of 12 July 2013 on alternative investment fund managers, as amended (AIFM Law)

The ambition is to adapt them to the specific needs of real estate, private equity and loan funds which are frequently operating closed-ended structures on a capital commitment basis.

A favorable tax regime is introduced across fund types for ELTIFs and PEPPs to attract sponsors and reinforce Luxembourg’s leading position as a domicile.

The text also aligns the minimum investment amounts with EU standards and improves consistency of the SICAR regime with SIF provisions, notably on delegation.

Key changes to the Luxembourg product and fund manager regimes

Incentives for long-term investment products: Supporting the objective to channel savings into long-term finance

• Part II UCIs, SIFs and RAIFs authorized as ELTIFs and UCIs authorized as PEPPs will be exempt from subscription tax

Stucturation, authorization: Greater flexibility and streamlined requirements

• PART II UCI SICAVs will have the flexibility to use legal forms of  S.C.Sp.¹, S.C.S.², S.C.A.³ and S.à r.l.⁴ if they are managed by an authorized AIFM
• RAIFs time-to-market is further improved for investment companies (excluding S.C.S./S.C.Sp.) which will become exempt of the notarial deed confirming formation of the RAIF
• SICARs will be able to remain on the official list when the authorization of an individual sub-fund is withdrawn - Dirigeants will have to be approved by the CSSF
• With respect to SICARs, SIFs and Part II funds, the replacement of the depositary will no longer need to occur within two months after the termination of the contract. If no depositary is appointed CSSF will remove the fund from the official list

Distribution: Easing marketing to retail investors

• Minimum investment in SICARs, SIFs and RAIFs by well-informed investors will be lowered from EUR 125,000 to EUR 100,000
• Definition of well-informed investors 

Capitalization: Pragmatic adjustments to fit the capital commitment models used in the alternative world

• The period to reach minimum capital will increase from one year to two years for SICARs, SIFs and RAIFs and from six months to 12 months for Part II UCIs
• It will become possible to issue shares of closed-ended Part II UCIs at a price determined according to fund documentation
• In-kind contributions in SICARs will become subject to the independent auditor’s report

Fund management: Accommodating decentralized business models

• Tied agents of AIFMs with the MiFID top-up can provide the same MiFID services, such as reception and transmission of orders or investment advice
• Chapter 16 management companies must ensure their capital is at least equal to EUR 125,000 at all times
• Modernization of liquidation regime for Chapter 15 and 16 management companies and AIFMs

Exit and liquidation: Finding a right balance between asset/investor protection and efficiency

• Voluntary liquidation regime extended across product laws and reform of the role of the supervisory commissioner
• Prohibition for SICARs, RAIFs, SIFs and Part II UCIs to issue or redeem units/shares (i) during the period for which the mentioned funds do not have a depositary, or (ii) in case of liquidation or if similar measures are taken in respect of the depositary
• UCIs, SICARs and SIFs depositaries must keep accounts open to safekeep fund assets until the liquidation procedure has been completed