investment management

Transcription

1 investment management setting up an investment fund in luxembourg

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3 table of contents Definitions 5 I. Legal framework for setting up an investment fund in Luxembourg 6 II. Investment funds subject to the 2010 Law 7 III. Specialised investment funds ( SIFs ) 12 IV. Available structures FCP - SICAV - SICAF Umbrella funds/share classes Main features of the different company forms 16 V. Main players The management company The custodian bank The central administration agent The auditor 20 VI. Regulatory supervision 21 VII. Taxation 22 VIII. Once-off and ongoing costs at a glance 24 3

4 definitions 1993 Law Law of 5 April 1993 on the financial sector, as amended 2002 Law Law of 20 December 2002 on undertakings for collective investment, as amended 2007 Law Law of 13 February 2007 on specialised investment funds, as amended 2010 Law Law of 17 December 2010 on undertakings for collective investment, as may be amended from time to time EU Savings Directive MiFID Directive UCITS IV Directive Grand Ducal Regulation on eligible assets Circular 91/75 Circular 02/80 Circular 02/81 Circular 03/88 Circular 07/309 Circular 08/356 Council directive 2003/48/EC on taxation of savings income in the form of interest payments Directive 2004/39/EC of the European Parliament and of the Council of 21 April 2004 on markets in financial instruments Directive 2009/65/EC of the European Parliament and of the Council of 13 July 2009 on the coordination of laws, regulations and administrative provisions relating to undertakings for collective investment in transferable securities (UCITS) (recast) Grand Ducal Regulation of 8 February 2008 relating to certain definitions of the law of 20 December , as amended, concerning undertakings for collective investment and implementing directive 2007/16/EC of the European Commission implementing Council directive 85/611/EEC on the coordination of laws, regulations and administrative provisions relating to undertakings for collective investment in transferable securities (UCITS) as regards the clarification of certain definitions CSSF circular 91/75 of 21 January 1991 on the revision and remodelling of the rules to which Luxembourg undertakings governed by the law of 30 March 1988 on undertakings for collective investment ( UCIs ) are subject 2 CSSF circular 02/80 of 5 December 2002 concerning the specific rules applicable to Luxembourg undertakings for collective investment (UCIs) pursuing alternative investment strategies CSSF circular 02/81 of 6 December 2002 concerning the task of auditors of undertakings for collective investment CSSF circular 03/88 of 22 January 2003 concerning the classification of undertakings for collective investment subject to the provisions of the law of 20 December 2002 relating to undertakings for collective investment CSSF circular 07/309 of 3 August 2007 concerning risk diversification in relation to specialised investment funds CSSF circular 08/356 of 4 June 2008 concerning the rules applicable to undertakings for collective investment when they employ certain techniques and instruments relating to transferable securities and money market instruments 1 The title of this regulation has not been amended in order to take into account the fact that the 2002 Law will be replaced by the 2010 Law. 2 The title of this circular has not been amended in order to take into account the fact that the law of 30 March 1988 has been replaced by the 2002 Law itself replaced by the 2010 Law.

5 Circular 11/508 Circular 11/512 CSSF EEA EU FCP OECD Mémorial Regulation 10/4 SICAV SICAF SIF TA UCI UCITS CSSF circular 11/508 of 15 April 2011 concerning the new provisions applicable to Luxembourg management companies subject to Chapter 15 of the law of 17 December 2010 relating to undertakings for collective investment and to investment companies which have not designated a management company within the meaning of Article 27 of the law of 17 December 2010 relating to undertakings for collective investment CSSF circular 11/512 of 30 May 2011 determining (i) the presentation of the main regulatory changes in risk management following the publication of CSSF Regulation 10-4 and ESMA clarifications, (ii) further clarifications from the CSSF on risk management rules and (iii) the definition of the content and format of the risk management process to be communicated to the CSSF Commission de Surveillance du Secteur Financier (the Luxembourg supervisory authority of the financial sector) European Economic Area European Union Fonds Commun de Placement (common fund) Organisation for Economic Cooperation and Development The official gazette of Luxembourg, Mémorial C, Journal Officiel du Grand-Duché de Luxembourg, Recueil des Sociétés et Associations CSSF regulation N 10-4 transposing Commission directive 2010/43/EU of 1 July 2010 implementing directive 2009/65/EC of the European Parliament and of the Council as regards organisational requirements, conflicts of interest, conduct of business, risk management and content of the agreement between a depositary and a management company Société d investissement à capital variable (investment company with variable capital) Société d investissement à capital fixe (investment company with fixed capital) Specialised investment fund, subject to the 2007 Law Transfer agent Undertaking for collective investment, subject to Part II of the 2010 Law Undertaking for collective investment in transferable securities, subject to Part I of the 2010 Law 5

6 I. legal framework for setting up an investment fund in luxembourg 2010 LAW PART I (UCITS) or 2010 LAW PART II (UCIs) 2007 LAW (SIFs) Criteria to be cumulatively met in order to be subject to the 2010 Law or the 2007 Law The savings must be invested on a collective basis; The savings used for collective investment must have been collected from the public; The investment which forms the object of the collective investment must be made in accordance with the principle of risk spreading. The assets must be invested on a collective basis in order to spread the investment risks and to ensure that the investors receive the benefit of the results of the management of the assets; The securities of the SIF must be reserved to one or more well-informed investors; The constitutional documents or offering documents must provide that the SIF is subject to the 2007 Law. 6

7 II. investment funds subject to the 2010 law Key features 3 Part I (UCITS) Part II (UCIs) Part I funds invest in transferable securities and other liquid financial assets authorised by the UCITS IV Directive. They qualify as UCITS and, as such, benefit from the European passport. Part II funds may invest in securities other than those authorised by the UCITS IV Directive, but they do not benefit from the European passport, since they are outside the scope of the UCITS IV Directive. In order to qualify as a UCITS, the following criteria need to be met: The sole object must be the collective investment in transferable securities and/or in other liquid financial assets authorised by the UCITS IV Directive; The UCITS must be open to the public of the EEA; The UCITS must redeem the units at the request of the investors; The UCITS must not be excluded from the UCITS status by reason of its investment or borrowing policy. Part II of the 2010 Law applies to: All funds, the principal object of which is the investment in securities other than transferable securities and other liquid financial assets; All UCITS excluded from Part I of the 2010 Law, i.e.: UCITS of the closed-ended type; UCITS which raise capital without promoting the sale of their units or shares to the public within the EU or any part of it; UCITS, the units or shares of which may, under their constitutional documents, only be sold to the public in countries which are not members of the EEA; Specific categories of UCIs which, in light of their investment and borrowing policies, must be subject to Part II of the 2010 Law. Eligible assets and general investment restrictions Part I (UCITS) Article 41 of the 2010 Law sets out the list of eligible assets; The Grand Ducal Regulation on eligible assets clarifies a certain number of definitions contained in the 2010 Law; Article 41(1) of the 2010 Law: 1. Transferable securities and money market instruments admitted to or dealt in on a regulated market; 2. Transferable securities and money market instruments dealt in on another market in a Member State of the EU which is regulated, operates regularly and is recognised and open to the public; Part II (UCIs) Part II of the 2010 Law does not contain a defined list of eligible assets and there are no restrictions with respect to investment strategies that may be used by UCIs; Thus, there is a larger flexibility regarding the investments which may be undertaken by UCIs; Circular 91/75 sets out general rules applicable to all UCIs and specific investment rules applicable to UCIs investing in options and futures, venture capital UCIs and real estate UCIs; 3 Circular 03/88 highlights the classification of investment funds subject to either Part I or Part II of the 2002 Law, which equally applies to the 2010 Law 7

8 Part I (UCITS) Part II (UCIs) 3. Transferable securities and money market instruments admitted to official listing on a stock exchange in a non-member state of the EU or dealt in on another market in a non-member state of the EU which is regulated, operates regularly and is recognised and open to the public, provided that the choice of the stock exchange or market has been provided for in the constitutional documents of the UCITS; 4. Recently issued transferable securities and money market instruments, provided that: The terms of issue include an undertaking that application will be made for admission to official listing on a stock exchange or on another regulated market as described under (1)-(3) above; Such admission is secured within one year of issue. 5. Units of UCITS and/or other UCIs within the meaning of the first and second indents of article 1(2) of the UCITS IV Directive, whether or not established in an EU member state, provided that: Such other UCIs are authorised under laws which provide that they are subject to supervision considered by the CSSF to be equivalent to that laid down in Community law, and that cooperation between authorities is sufficiently ensured; The level of protection for unitholders in such other UCIs is equivalent to that provided for unitholders in a UCITS, and in particular that the rules on assets segregation, borrowing, lending, and uncovered sales of transferable securities and money market instruments are equivalent to the requirements of the UCITS IV Directive; The business of the other UCIs is reported in half-yearly and annual reports to enable an assessment of the assets and liabilities, income and operations over the reporting period; No more than 10% of the assets of the UCITS or of the other UCIs, the acquisition of which is contemplated, can, according to their constitutional documents be invested in aggregate in units of other UCITS or other UCIs. 6. Deposits with credit institutions which are repayable on demand or have the right to be withdrawn, and which mature in no more than 12 months, provided that the credit institution has its registered office in a member state of the EU or, if the registered office of the credit institution is situated in a non-member state, provided that it is subject to prudential rules considered by the CSSF to be equivalent to those laid down in Community law; Investment limits applicable to UCIs investing in transferable securities which do not represent investments in real estate or venture capital are the following: No more than 10% of the net assets may be invested in securities not listed on a stock exchange or dealt in on another regulated market which operates regularly and is recognised and open to the public; No more than 10% of the securities of the same kind issued by the same issuing body may be acquired; and No more than 10% of the net assets may be invested in securities issued by the same issuing body. These restrictions are not applicable to securities issued or guaranteed by a member state of the OECD or their local authorities or a public international body with an EU, regional or worldwide scope. Units/shares of closed-ended investment funds are treated in the same way as other transferable securities and are therefore subject to the general rules applicable to transferable securities. UCIs may borrow up to 25% of their net assets (except leveraged UCIs where the investment policy provides for a permanent borrowing for investment purposes of at least 25% of their net assets); Derogations to Circular 91/75 may be granted on a case-by-case basis; 8

9 Part I (UCITS) Part II (UCIs) 7. Financial derivative instruments, including equivalent cash-settled instruments, dealt in on a regulated market referred to in (1), (2) and (3) above, and / or financial derivative instruments dealt in over the counter ( OTC derivatives ), provided that: The underlying consists of instruments covered by article 41(1) of the 2010 Law, financial indices, interest rates, foreign exchange rates or currencies, in which the UCITS may invest according to its investment objectives; The counterparties to OTC derivative transactions are institutions subject to prudential supervision, and belonging to the categories approved by the CSSF; and The OTC derivatives are subject to reliable and verifiable valuation on a daily basis and can be sold, liquidated or closed by an offsetting transaction at any time at their fair value at the UCITS initiative. 8. Money market instruments other than those dealt in on a regulated market, to the extent that the issue or the issuer of such instruments is itself regulated for the purpose of protecting investors and savings, and provided that such instruments are: Issued or guaranteed by a central, regional or local authority or by a central bank of an EU member state, the European Central Bank, the EU or the European Investment Bank, a non-member state of the EU or, in case of a federal state, by one of the members making up the federation, or by a public international body to which one or more EU member states belong, or Issued by an undertaking any securities of which are dealt in on regulated markets referred to in (1), (2) or (3) above, or Issued or guaranteed by an establishment subject to prudential supervision, in accordance with criteria defined by Community law, or by an establishment which is subject to and complies with prudential rules considered by the CSSF to be at least as stringent as those laid down by Community law; or Issued by other bodies belonging to the categories approved by the CSSF provided that investments in such instruments are subject to investor protection equivalent to that laid down in the first, second or third indent and provided that the issuer is a company whose capital and reserves amount to at least EUR 10 million and Specific rules regarding UCIs pursuing alternative investment strategies (hedge funds and funds of hedge funds) are set out in Circular 02/80 and consist, in particular, of: Risk-diversification rules regarding short sales; Restrictions applicable to target UCIs; Restrictions relating to financial derivative instruments; Provisions applicable to securities lending transactions; and Provisions applicable to sale with right of repurchase transactions and repurchase transactions. 9

10 Part I (UCITS) Part II (UCIs) which presents and publishes its annual accounts in accordance with directive 78/660/EEC, is an entity which, within a group of companies which includes one or several listed companies, is dedicated to the financing of the group or is an entity which is dedicated to the financing of securitisation vehicles which benefit from a banking liquidity line. Article 41(2) of the 2010 Law: Transferable securities and money market instruments not fulfilling the requirements of (1) (8) above also constitute eligible assets, provided that they do not in the aggregate exceed 10% of the assets of the UCITS. UCITS shall not acquire precious metals or certificates representing them but may hold ancillary liquid assets. Article 41(3) of the 2010 Law: Movable and unmovable property can be acquired by investment companies if it is essential for the direct pursuit of their business. Circular 08/356 clarifies the rules applicable to UCIs when they employ certain techniques and instruments relating to transferable securities and money market instruments: UCI can choose to apply globally either the provisions of the Circular 02/80 as mentioned above or Circular 08/356 as regards securities lending, sales with right of repurchase and repurchase transactions. In the latter case, Circular 08/356 clarifies the rules applicable to UCIs when they employ certain techniques and instruments relating to transferable securities and money market instruments: Securities lending transactions - UCITS may lend directly to a borrower or through a standardised lending system (organised by a recognised clearing institution or organised by a financial institution subject to equivalent prudential supervision rules); - The counterparty must be subject to equivalent prudential supervision; - The UCITS must receive a guarantee the value of which is at least equivalent to 90% of the global valuation of the securities lent; - The volume of securities lending transactions must be kept at an appropriate level; - Disclosure of the global valuation of the securities lent must be made in the financial reports; Securities lending transactions - UCIs may lend directly to a borrower or through a standardised lending system (organised by a recognised clearing institution or organised by a financial institution subject to equivalent prudential supervision rules); - The counterparty must be subject to equivalent prudential supervision; - The UCIs must receive a guarantee the value of which is at least equivalent to 90% of the global valuation of the securities lent; - The volume of securities lending transactions must be kept at an appropriate level; - Disclosure of the global valuation of the securities lent must be made in the financial reports; 10

11 Part I (UCITS) Part II (UCIs) Sale with right of repurchase transactions The purchase or sale of securities with a repurchase option is allowed (i) if the counterparties are subject to equivalent prudential supervision, (ii) if disclosure of the total amount of the open transactions is made in the financial reports and (iii) subject to the limits set out in Circular 08/356. Sale with right of repurchase transactions The purchase or sale of securities with a repurchase option is allowed (i) if the counterparties are subject to equivalent prudential supervision, (ii) if disclosure of the total amount of the open transactions is made in the financial reports and (iii) subject to the limits set out in Circular 08/356. Reverse repurchase and repurchase agreement transactions Reverse repurchase agreement transactions or repurchase agreement transactions are allowed (i) if the counterparties are subject to equivalent prudential supervision, (ii) if disclosure of the total amount of the open transactions is made in the financial reports and (iii) subject to the limits set out in Circular 08/356. Limitation of the counterparty risk associated with efficient portfolio management transactions According to Circular 11/512, the net exposures (i.e. the exposures of the UCITS less the collateral received by the UCITS) to a counterparty arising from securities lending transactions or reverse repurchase/repurchase agreement transactions shall be taken into account in the 20% limit provided for in Article 43(2) of the 2010 Law. Consequently, the previous specific limits of 5%/10%, as indicated in Circular 08/356 are no longer applicable. The cash provided as a guarantee may be reinvested, under the conditions set out in Circular 08/356. Reverse repurchase and repurchase agreement transactions Reverse repurchase agreement transactions or repurchase agreement transactions are allowed (i) if the counterparties are subject to equivalent prudential supervision, (ii) if disclosure of the total amount of the open transactions is made in the financial reports and (iii) subject to the limits set out in Circular 08/356. Limitation of the counterparty risk associated with efficient portfolio management transactions According to Circular 11/512, the net exposures (i.e. the exposures of the UCITS less the collateral received by the UCITS) to a counterparty arising from securities lending transactions or reverse repurchase/ repurchase agreement transactions shall be taken into account in the 20% limit provided for in Article 43(2) of the 2010 Law. Consequently, the previous specific limits of 5%/10%, as indicated in Circular 08/356 are no longer applicable. The cash provided as a guarantee may be reinvested, under the conditions set out in Circular 08/

12 III. specialised investment funds (SIFs) The regime implemented by the 2007 Law is a stand-alone regime providing an appropriate statutory regime for sophisticated investors, who do not need the same level of protection as retail investors. The 2007 Law is largely based on the 2002 Law, which has been amended and will be replaced by the 2010 Law, but provides (i) a more flexible framework to accommodate various types of funds, in particular hedge funds, real estate funds and private equity funds, and (ii) a lighter prudential regime than the one applicable to funds dedicated to retail investors. Key features of the 2007 Law Large eligible investor base No limitation regarding eligible assets and low risk diversification SIFs are reserved to well-informed investors. A well-informed investor is an institutional investor 4, professional investor 5 or any other investor who meets the following conditions: He has confirmed in writing that he adheres to the status of well-informed investor; and He invests a minimum of EUR 125,000 in the SIF; or He has been the subject of an assessment made by a credit institution within the meaning of directive 2006/48/EC, by an investment firm within the meaning of MiFID Directive or by a management company within the meaning of UCITS IV Directive certifying his expertise, his experience and his knowledge in adequately appraising an investment in the SIF. In practice, this means that sophisticated retail or private investors may invest in a SIF. SIF must have the necessary means to ensure compliance with the conditions of eligibility of the investors. The 2007 Law does not contain any provisions regarding eligible assets; thus, a SIF may invest in a very broad range of eligible assets. Although risk spreading must be ensured, the 2007 Law does not foresee any risk diversification rules. As a general principle, lower risk diversification is possible, since SIFs are reserved to sophisticated investors. Circular 07/309 provides that as a general rule, a SIF may not invest more than 30% of its assets or commitments in securities of the same type, issued by the same issuer. However, derogations may be granted in this respect. No promoter 6 requirement There is no requirement with respect to the necessity to have an institutional promoter with significant financial resources approved by the CSSF. 4 There does not exist any legal definition of the term institutional investor. According to CSSF interpretation and parliamentary documents relating to laws using this concept, the main characteristic any institutional investor must exhibit is to have a business purpose that requires the management of substantial assets. Insurance companies, social security institutions, credit institutions, UCIs, local authorities, unregulated investment companies (such as, for example, holding companies) under certain conditions, commercial companies with substantial assets under management, pension funds or other professionals of the financial sector are considered to be institutional investors. Credit institutions and other professionals of the financial sector investing in institutional funds in their own name but on behalf of another party on the basis of a discretionary management relationship are also considered as institutional investors, even if the third party on behalf of which the investment is undertaken is not itself an institutional investor. 5 According to Annex II of MiFID Directive, a professional client is a client who possesses the experience, knowledge and expertise to make its own investment decisions and properly assess the risks that it incurs. 6 The term promoter does not appear in Luxembourg law, but is used by the CSSF as an administrative practice. As a general rule, any UCI (except SIFs) must be promoted by a well known institution which commits its name and reputation to the proper functioning of the UCI. The promoter designates the entity under the initiative of which a UCI is created. The promoter s responsibility is i.a. to make good all damage caused by managerial and administrative faults, negligence, irregularities or shortcomings in the management and administration of the UCI. 12

13 Key features of the 2007 Law Investment manager Regulatory approval Capital requirement Issue of units/shares Light reporting requirements Issuing document No consolidation requirements The investment manager is subject to CSSF prior approval. It does not need to be located in Luxembourg, but must be subject to regulatory supervision. For investment managers located in third countries, there must be a cooperation between the CSSF and the supervisory authority of the investment manager. 7 The SIF may not start its activities before having received regulatory approval. The minimum capitalisation amounts to EUR 1,250,000 and must be achieved only within a 12-month period after approval of the SIF. There is the possibility to issue partly paid units or shares both in an FCP and a SICAV or SICAF. The issue and redemption prices of units or shares do not have to be based on the net asset value. Only an annual report must be produced. There is no requirement to publish neither a semi-annual report nor a long form report. There is no requirement regarding the minimum content of the issuing document or other offering documents. The issuing document must include the information necessary for investors to be able to make an informed judgment of the investment proposed to them and in particular of the risks attached thereto. When investments are made through a subsidiary, there are no consolidation requirements with respect to the accounts. 7 SIFs existing as of 1 April 2012 must be compliant with this requirement by 30 June

14 IV. available structures The 2010 Law and the 2007 Law permit the creation of FCPs and investment companies. The latter may be established either as SICAVs or as SICAFs. Both the 2010 Law and the 2007 Law permit the creation of funds as stand-alone funds or as umbrella funds with different sub-funds (see section Umbrella Funds hereafter). 1. FCP - SICAV - SICAF FCP SICAV SICAF Legal form of vehicle Contractual vehicle. Corporate vehicle. Corporate vehicle. Key features Undivided co-ownership of assets; Has no legal personality; Very flexible vehicle, because it is not subject to any specific corporate law requirements. Variable share capital equal to the net assets; Has a legal personality; No need to formally increase or reduce the share capital. Fixed share capital; Has a legal personality; Formal decision to increase or reduce the share capital is necessary; such decision is subject to specific corporate law requirements. Management Managed by a management company either subject to Chapter 15 or Chapter 16 of the 2010 Law. Depending on legal form, managed by a board of directors, manager(s), general partner(s) or a board of managers. Depending on legal form, managed by a board of directors, manager(s), general partner(s) or a board of managers. Shareholders/ One or several Unitholders unitholders; Liability of unitholders limited to the amount committed to the FCP; Possibility to be protected from hostile takeovers, since investors usually do not have voting rights; Voting rights may however be granted in respect of certain matters or a committee of investors can be established One or several shareholders; Liability of shareholders in principle limited to the amount committed to the SICAV; Shares entitle shareholders to voting rights. One or several shareholders; Liability of shareholders in principle limited to the amount committed to the SICAF; Shares entitle shareholders to voting rights. Paid-in capital Partly paid units may be issued Law: Shares must be fully paid Law: Partly paid shares may be issued Law and 2007 Law: Partly paid shares may be issued. 14

15 FCP SICAV SICAF Preferred company forms N/A 2010 Law (Part I and Part II): Public limited company (Société anonyme, S.A.) Law (Part I): Public limited company (Société anonyme, S.A.); Corporate partnership limited by shares (Société en commandite par actions, S.C.A.) Law: 2010 Law (Part II) and 2007 Law: Public limited company Public limited company (Société anonyme, S.A.); (Société anonyme, S.A.); Private limited company (Société à Corporate partnership limited by responsabilité limitée, S.à r.l.); shares (Société en commandite par Corporate partnership limited by actions, S.C.A.); shares (Société en commandite Private limited company (Société à par actions, S.C.A.). responsabilité limitée, S.à r.l.); Limited partnership (Société en commandite simple, S.C.S.). 2. Umbrella funds/ share classes The 2010 Law and the 2007 Law permit the creation of funds as stand-alone funds or as umbrella funds with different sub-funds, where each sub-fund corresponds to a distinct portfolio of assets and liabilities of the fund. Applicable provisions Objectives One single entity Ring fencing Conversion Crossinvestment Permitted under Article 181 of the 2010 Law (constitutional documents must provide for the possibility); Permitted under Article 71 of the 2007 Law (constitutional documents must provide for the possibility). For funds subject to the 2010 Law, Chapter J of Circular 91/75 sets out the conditions applicable to FCPs and investment companies in the form of umbrella funds. For SIFs, article 71 of the 2007 Law sets out the conditions applicable to umbrella funds. May accommodate various needs, such as for example: Different investment policies; Different reference currencies; Different categories of investors; Different distribution channels. A UCITS may not comprise simultaneously sub-funds governed by Part I of the 2010 Law and Part II of the 2010 Law (in such case, the entire umbrella fund is subject to Part II). Each sub-fund is only responsible for its own debts, commitments and other obligations, unless the constitutional documents of the fund provide otherwise. In principle, possibility to convert shares/units from one sub-fund to another. Under the 2010 Law and the 2007 Law cross-investments between sub-funds are allowed. 15

16 One or more classes of shares or units that match various characteristics may be created in a stand-alone fund or in each sub-fund of an umbrella fund. The classes of shares or units may for example have the following distinguishing features: Distribution policy (distribution or capitalisation shares/units); Currency (different currencies for the shares/ units may be accommodated, e.g. USD, EUR, JPY, etc); Investors targeted (either retail, professional or institutional investors, investors of a different nationality, etc); Structure of fees (different fee structures may be accommodated, such as e.g. in relation to the subscription fee, redemption fee, conversion fee, deferred sales charge, distribution fee, management fee, etc); Currency hedging (hedged classes or not); Minimum subscription and holding requirements. 3. Main features of the different company forms The table below details the most common corporate forms used for setting up an investment fund subject to the 2010 Law or the 2007 Law. S.A. S.à r.l. S.C.A. S.C.S. Key features Most commonly used Originally created for share- Particularly convenient for Particularly convenient for corporate form. holders with a significant fund initiators who want to fund vehicles where (i) tax personal relationship with one retain total control of the transparency is required at another (intuitu personae), as management. the level of the company itself evidenced by specific rules still and (ii) fund initiators want to in place (see Transfers of retain total control of the shares, Listing of shares, management. Amendment to articles of Partnership formed by written incorporation below) although agreement of its partners. practice shows that this form No need for a notarial deed. is now used despite a lack of any sort of link among the shareholders. Shareholders / Partners One or more limited shareholders (no upper limit). One or more limited shareholders (no more than 40). One or more unlimited shareholders and several limited shareholders One or more unlimited partners and one or more limited partners (no upper limit). (no upper limit). Liability Shareholders are only liable Shareholders are only liable Unlimited shareholders are Unlimited partners are up to the amount committed. up to the amount committed. indefinitely, jointly and indefinitely, jointly and severally liable (but may be severally liable (but may be incorporated as limited liability incorporated as limited liability companies or partnerships). companies or partnerships). Limited shareholders are only Limited partners are only liable up to the amount liable up to the amount committed. committed. 16

17 S.A. S.à r.l. S.C.A. S.C.S. Contributions In cash or in kind: contributions In cash or in kind: In cash or in kind: contributions In cash or in kind: in kind are in principle subject contributions in kind are not in kind are in principle subject contributions in kind are not to a valuation report from an subject to a valuation report to a valuation report from an subject to a valuation report independent auditor. from an independent auditor. 8 independent auditor. from an independent auditor. 8 Form of shares Bearer or registered form. Registered form only. Bearer or registered form. Registered form only. Transfers of shares No statutory restriction on transfers. Transfers to non-shareholders are subject to the prior No statutory restriction on transfers. Transfers not allowed unless authorised by the partnership approval of the shareholders agreement or approved by all representing three-quarters of the partners. the share capital. Listing of shares Listing possible. Listing not allowed. Listing possible. Listing not allowed. Management One-tier SA: by a board of By one or several managers. By the general partner. By the general partner. directors of three directors at Unlimited shareholder(s) Unlimited partner(s) act(s) least, if several shareholders. act(s) as general partner(s). as general partner(s). Two-tier SA: by a management board of two members at least, supervised by a supervisory board of three members at least, if several shareholders. Amendment to articles of incorporation By a quorum representing at least half of the share capital 9 and a two-third majority of By (i) a majority in number of the shareholders and (ii) such majority representing at least By a quorum representing at least half of the share capital 9 and a two-third majority of By all the partners, unless otherwise specified in the partnership agreement. shareholders, in the presence three-quarters of the share shareholders, including the of a Luxembourg notary. capital, in the presence of a general partner, in the Luxembourg notary. presence of a Luxembourg notary. 8 The 2007 Law requires a valuation report from an aproved statutory auditor, notwithstanding the legal from adopted by the SIF in question. 9 This quorum requirement is not applicable to the second shareholders meeting which may be convened if the required quorum has not been met at the first meeting. 17

18 V. main players 1. The management company FCPs subject to the 2010 Law and the 2007 Law are necessarily managed by a management company. SICAVs may also appoint a management company, in particular in order to comply with the substance requirements of Part I of the 2010 Law. Management companies may either be subject to the provisions of Chapter 15 or Chapter 16 of the 2010 Law, depending on the status of the investment fund they manage. Chapter 15 of the 2010 Law Chapter 16 of the 2010 Law Scope of application Applies to management companies managing at least one UCITS; Benefits from the European passport. Applies to management companies managing at least one UCI; Does not benefit from the European passport. Available company forms Public limited company (S.A.); Private limited company (S.à r.l.); Cooperative company; Cooperative company set up as a public limited company; Corporate partnership limited by shares (S.C.A). Public limited company (S.A.); Private limited company (S.à r.l.); Cooperative company; Cooperative company set up as a public limited company; Corporate partnership limited by shares (S.C.A). Permitted activities Core services: provision of collective portfolio management services to UCITS, UCIs and SIFs (including asset management, administration and marketing); Additional services: Management of individual portfolios on a discretionary and individual basis; Investment advice; Safekeeping and administration of shares/units of UCITS, UCIs and SIFs. Possibility to delegate activities to third parties. Activity limited to the management of UCIs and SIFs, the management of own assets being only an ancillary activity; Possibility to delegate activities to third parties. Requirements to be fulfilled Minimum capital requirements: initial capital of at least EUR 125,000; if the value of the portfolios managed by a management company exceeds EUR 250 million, the capital must be increased by an amount equal to 0.02% of the amount by which the value of the managed portfolios exceeds EUR 250 million, provided that a management company is not required to have a capital of more than EUR 10 million; Directors and persons who conduct the business must be of sufficiently good repute and have the necessary professional experience also in relation to the type of UCITS managed. Identity of directors and of persons succeeding them in office must be communicated to the CSSF. Identity of shareholders or members having a qualified holding must be communicated to the CSSF. Any change in the persons having a qualified holding must be notified to the CSSF. The organisational structure of the management company must be in compliance with Regulation 10-4 and must be described to the CSSF; Must have sufficient financial resources (minimum paid-up capital of EUR 125,000). Directors and persons who conduct the business must be of good repute and have the necessary professional experience. Identity of directors and of persons succeeding them in office must be communicated to the CSSF. Identity of shareholders or members must be communicated to the CSSF. Any change in the shareholders or members should be notified to the CSSF. The organisational structure of the management company must be described to the CSSF; 18

19 Chapter 15 of the 2010 Law Chapter 16 of the 2010 Law Requirements to be fulfilled Technical and human means necessary for the good performance of its duties: Head office in Luxembourg; Permanent staff, which is suitable for the contemplated activities; Senior management carried out by at least two persons (who may not be employees of the custodian bank) of good repute and having the necessary professional experience, one of which must in principle be on site in Luxembourg; Adequate technical infrastructure. 2. The custodian bank Common conditions applicable to UCITS, UCIs and SIFs Specific conditions applicable to UCITS and SIFs Specific conditions applicable to UCIs Duties of the custodian bank under Part I and Part II of the 2010 Law UCITS, UCIs and SIFs must appoint a custodian bank; The choice of the custodian bank must be approved by the CSSF; The custodian bank must be a credit institution within the meaning of the 1993 Law. The custodian bank must have its registered office in Luxembourg or be established in Luxembourg, if its registered office is in another member state of the EU. The custodian bank must have its registered office in Luxembourg or be established in Luxembourg, if its registered office is in another member state of the EU or in a state which is a non-member state. SICAV/SICAF Safekeeping of assets; Ensure that the issues and redemptions of shares are made in accordance with applicable law and the articles of incorporation; Ensure that settlements are executed in a timely manner; Ensure that income is applied in accordance with the articles of incorporation. FCP Safekeeping of assets; Day-to-day administration of the fund; Ensure that the issues and redemptions of units are made in accordance with applicable law and the management regulations; Ensure that settlements are executed in a timely manner; Ensure that income is applied in accordance with the management regulations; Ensure that the net asset value is calculated in accordance with the law and the management regulations (not applicable to Part II FCPs); Compliance monitoring of instructions from the management company. Duties of the custodian bank under the 2007 Law SICAV/SICAF Safekeeping of assets. FCP Safekeeping of assets; Day-to-day administration of the fund. 19

20 3. The central administration agent Under the 2010 Law and the 2007 Law, a number of administrative duties (duties of the central administration ) must be carried out in Luxembourg. These duties are: Calculation of the net asset value. Keeping of the accounts and making them available. Processing of issue and redemption of units/ shares. Keeping the register of units or shares. Establishing the prospectus and financial reports. Dispatching notices and reports from Luxembourg. 4. The auditor Status Independent auditor, designated by the fund with CSSF approval; Remunerated out of the assets of the fund. Duties Reporting on the annual accounts; Reporting on the activities of the investment fund (financial and organisational aspects); so-called long form report (not applicable to SIFs); Reporting to the CSSF. 20

21 VI. regulatory supervision 2010 Law 2007 Law Entity in charge of the supervision CSSF (its main function is the supervision of the Luxembourg financial sector, in particular of the investment fund sector). Approval procedure A fund may only be launched upon CSSF approval. A written application for fund approval must be filed with the CSSF (if applicable, a specific application for approval of the management company must also be filed). The CSSF approval also encompasses the approval of the fund s promoter; SIFs may only be launched upon CSSF approval. A written application for fund approval must be filed with the CSSF. The CSSF does not need to approve the promoter; The documents requested for fund approval may be filed in French, English or German; The documents requested for fund approval may be filed in French, English or German; Approval of the following fund documents: Constitutional documents (i.e. management regulations of an FCP and articles of incorporation of an investment company); Full prospectus (which must contain at least the information provided for in Schedule A of Annex I of the 2010 Law, in so far as such information does not already appear in the constitutional documents); Key investor information document (required only for UCITS, and which must contain at least the information provided for in article 159 (3) of the 2010 Law); For UCITS and some UCIs (e.g. hedge funds), the description of the risk management process; Agreements to be entered into between the fund and its service providers (e.g. agreement between fund and management company, if applicable, and agreements with custodian, central administration agent, investment manager, investment adviser, paying agent, distributor, etc). Approval of the following fund documents: Constitutional documents (i.e. management regulations of an FCP and articles of incorporation of an investment company); Prospectus: the content of the issuing document is not legally defined, but must include at least the information that enables investors to make an informed judgment on the investment proposed to them; The description of the risk management process and the conflict of interest policy; Agreements to be entered into between the fund and its service providers (e.g. agreements with custodian, central administration agent, investment manager, investment adviser, paying agent, distributor, etc). Approval process generally takes 2-3 months, depending on the complexity of the project; Approval process generally takes 2-3 months, depending on the complexity of the project; Approval of the fund is announced by inscription on the official list of Luxembourg UCITS/UCIs (published in the Mémorial). Approval of SIF is announced by inscription on the official list of Luxembourg SIFs (published in the Mémorial) 21

22 VII. taxation 2010 Law 2007 Law Subscription tax (levied on a quarterly basis on the net assets) Generally rate of 0.05% per annum calculated on the net asset value (valued on the last day of each quarter); Exemptions: Portion of assets represented by shares/units in other funds already subject to subscription tax; Funds or individual compartments investing in certain money market instruments or mainly in microfinance; Exchange-traded funds; Pension pooling vehicles. Generally rate of 0.01% per annum calculated on the net asset value (valued on the last day of each quarter); Exemptions: Portion of assets represented by shares/units in other funds already subject to subscription tax; Funds or individual compartments investing in certain money market instruments or mainly in microfinance; Pension pooling vehicles. Reduced rate of 0.01% per annum: Certain money market and cash funds; Individual compartments or classes of shares designed for institutional investors. Corporate income tax and municipal business tax No. No. Registration tax Contributions in cash against shares to a corporate investment fund structure (SICAV/SICAF) or to a management company of an FCP are subject to a fixed registration duty of EUR 75. This amount is also due in case of any amendment to the articles of incorporation. Double tax treaty benefits FCP: the FCP is transparent for taxation purposes and is thus not entitled to double tax treaty benefits; SICAV or SICAF: in principle yes, unless excluded under a double tax treaty (the double tax treaties concluded with the following countries should be applicable to SICAVs or SICAFs : Austria, China, Denmark, Finland, Germany, Indonesia, Ireland, Israel, Malaysia, Malta, Mongolia, Morocco, Poland, Portugal, Romania, San Marino, Singapore, Slovakia, Slovenia, Spain, Thailand, Trinidad and Tobago, Tunisia, Turkey, Uzbekistan and Vietnam). Taxation of investors Investors are not subject to capital gains or income tax in Luxembourg, except for those residing or having a permanent establishment/permanent representative in Luxembourg. 22

23 2010 Law 2007 Law Withholding tax on distributions None (except in limited cases regarding i) interest payments falling within the scope of the EU Savings Directive where the beneficiary of the income has not opted for an exchange of information and ii) interest payments made to Luxembourg resident individuals). VAT VAT taxable persons: UCITS, UCIs and SIFs are considered as taxable persons; they are deemed to carry out economic activities in the sense of the VAT Law; FCPs together with their management companies, in principle, qualify as taxable persons. The Luxembourg VAT authorities consider the activities performed by UCITS, UCIs or SIFs as VAT exempt with no right of input VAT deduction; Management services: in Luxembourg, management services rendered to Luxembourg UCITS, UCIs or SIFs under the supervision of the CSSF are VAT exempt (article 44, paragraph 1, under d) of the Luxembourg VAT law); Management services comprise: portfolio management and administration services, i.e. legal and fund management accounting services, investor inquiries, valuation and pricing, regulatory compliance monitoring, maintenance of the shareholders/unitholders register, distribution of income, unit issues and redemptions, contracts settlements, record keeping. In case part of these management services are sub-contracted, VAT exemption applies if, viewed broadly, the services performed by a third party form a distinct whole and are specific to and essential for the management of the investment funds. Control and supervision services supplied by a depositary are excluded from the exemption and are therefore subject to VAT. VAT registration: UCITS, UCIs or SIFs are not required to register for VAT purposes, except upon receipt of taxable intangible / intellectual services from outside Luxembourg (e.g. legal or tax advice, consulting services, set up costs ). 23

24 VIII. once-off and ongoing costs at a glance Registration duty (only for UCITS, UCIs, SIFs and management companies of FCPs in corporate form) Notary fees for incorporation of UCITS, UCIs or SIFs in corporate form and management companies Publication fees in the Mémorial of articles of incorporation of UCITS, UCIs or SIFs in corporate form and management companies Registration costs in the Companies Registrar of UCITS, UCIs or SIFs in corporate form and management companies Registration costs with the CSSF for a UCITS/UCI/SIF EUR 75. Approximately between EUR 2,000 and EUR 5,000. Approximately EUR 1,200, varying in particular if the articles are drawn up in one language or are followed by a translation. (For SIFs, French or German translation required if articles are drawn up in English; not requested in case of UCITS and UCIs). Approximately EUR Law Single UCITS/UCI (other than self-managed): EUR 2,650 (upon filing and on an annual basis); Part I self-managed SICAV/SICAF: EUR 5,000 (on an annual basis); Umbrella fund: EUR 5,000 (upon filing and on annual basis) 2007 Law Single SIF: EUR 2,650 (upon filing and on an annual basis); Umbrella SIF: EUR5,000 (upon filing and on an annual basis). Registration costs with the CSSF for a Chapter 15 management company Registration costs with the CSSF for a Chapter 16 management company 2010 Law Activity limited to collective portfolio management services: EUR 2,650 (upon filing) and EUR 5,000 (on an annual basis); Activity encompassing discretionary portfolio management services: EUR 3,250 (upon filing) and EUR 12,000 (on an annual basis); For each branch established abroad by a management company: EUR 2,000 (on an annual basis) Law Activity limited to collective portfolio management services: EUR 2,650 (upon filing ) and EUR 5,000 (on an annual basis) Arendt & Medernach,