SPECIALIZED INVESTMENT FUNDS
“SPECIALIZED INVESTMENT FUNDS”
SIF ACCESSIBLE IN LUXEMBOURG FOR PROFESSIONALS AND
WELL INFORMED INVESTORS
Due to strong growth in investment schemes in Luxembourg, a law to introduce Specialised Investment Funds (SIF), which replaces the 1991 law on UCI’s (“Undertaking for collective investment”) dedicated to institutional investors, was brought into force on 13 February 2007. It provides a number of new features, including a broader definition of "eligible investors" to include both professional and "sophisticated" investors.
This latter category includes private individuals who are deemed able to understand the risks associated to investing in the SIF and can invest a minimum of 125,000 euros in the SIF. The minimum investment amount may be waived if they receive a positive assessment from a credit institution, an investment firm or a management company confirming their ability to adequately appraise an investment in the SIF.
The provisions of the 1991 law are also contained in the new law, such that the legal base of existing institutional investment funds is maintained, but the SIF law offers a number of new features:
- Facility to launch SIF activities without prior approval from the “Commission de Surveillance du Secteur Financier” (CSSF) - an application has to be filed within a month of forming the SIF;
- No requirement for a promoter - the investment manager will not be subject to CSSF scrutiny and the depositary bank, while required in Luxembourg, has fewer responsibilities;
- No requirement for publication of a net asset value (NAV), to subscribe and redeem at NAV or to have fully paid shares in SIF’s set up in the form of SICAV’s;
- No semi-annual report or long form report required - only an annual audited report covering the relevant financial year is required - and the portfolio of investments no longer needs to be fully detailed;
- The principle of risk spreading has been maintained, but there are no quantitative investment restrictions.
This SIF is more regulated than non-resident private fund established in foreign jurisdictions SICAR, or Holding 1929, SPF but it is more flexible than common UCI or SICAV.
The SIF can issue shares only to institutional and well-informed investors. The SIF can invest in any type of securities, hedge fund, real estate, funds, shares, buyout,...
ISSUANCE OF SHARES TO:
- Institutional investors
- Well informed investors (investment of 125.000 Euro or confirmation of their expertise in financial placement by a bank or a management company)
It can therefore be used by Private funds, family offices, HNWI, families, pension pooling or hedge funds.
The SIF can invest in asset or any type of financial values: in real estate, hedge fund, Private equity, buyout, infrastructure project, cash, money, Forex, funds,...
The CSSF supervises the SIF, its activities and legal documents within a month after having launched the SIF. No approval of a promoter is required. Only a Luxembourg Depositary Bank is required for supervision of assets and safe keeping (but not in charge of NAV verification, management report,...).
The director of a SIF-SICAV (established as a company) or the director of a SIF-fund (established as a fund) does not need to meet specific conditions to be approved by CSSF. They must justify their sufficient good reputation and have sufficient professional experience.
The Central Administration must be situated in Luxembourg. There is no specific requirement in the law for approval of the administrator. One NAV per year is required and one annual report 6 month after closing. The "substance need" is not required by the law like for UCITS.
MINIMUM SHARE CAPITAL
The minimum capital is 1.250.000 Euro to be reached within a year. Contributions in kind are possible. Capital duty is 1250 Euro flat. “Taxe d'abonnement” is due at 1bp / year.
The SIF-FUND is fiscally transparent and held in trust by a management company established in Luxembourg.
The SIF-SICAV is fiscally non transparent, tax exempt and could enjoy treaty benefit. It can be incorporated as a “Société anonyme”, “Société en Commandite par Actions”, “Société à Responsabilité Limitée” and cooperative company set like an S.A.. It is possible to have a single member company.
Investors are able to invest in the SIF via equity or debt and the range of eligible assets is unlimited. Existing 1991 funds automatically became SIF’s on 13 February 2007 and their constitutional documents may be updated to embrace the new provisions.
DIRECT INCOME TAX
Regarding the Direct Income Tax, the article 66, paragraph 2 of the said law stipulates that: «without harming the terms of the law dated 21 June 2005 transposing the directive 2003/48/CE in the Luxembourg law concerning the taxation on the saving income paid as interests, no withholding tax is due on the amounts distributed by such specialized investment funds. These amounts are tax-exempt for the non-resident taxpayer». Regarding the taxation on the saving income, the circular RIUE Nr 1 of 29 June 2005 of the tax agent is applicable.
BENEFICIAL TAX REGIME
SIF’s are not subject to Luxembourg capital gains or income tax. They are, however, subject to capital duties, but this will be at a fixed rate not to exceed €1,250. The SIF is also subject to a subscription tax of 0.01%, levied based on the quarterly net asset value of the fund (subject to limited exceptions).
Given the fact that Luxembourg has concluded numerous double taxation treaties, it should be possible for the fund to benefit from them.
The SIF Law offers flexibility on several fronts to a broader class of investors, with less intrusive CSSF regulation than under the 1991 Law that it replaces, which can only lead to the further proliferation of investment funds in Luxembourg.
OTHER INVESTMENT UNITS IN LUXEMBOURG
THE RISK CAPITAL INVESTMENT COMPANY - SICAR
The law of 15th June 2004 defines this type of company as any company:
- whose status is either SCS, SCA, SC (establ. as an SA), Sàrl or SA, and
- whose activity is the investment of its funds in risk or venture capital, and
- whose shareholders are (well-) informed investors.
Venture or risk capital can be defined as: indirect or direct contributions to entities, with the aim of supplying funds to finance their development, investments, IPO, etc.
The registered headquarters and administrative centre must be located in Luxembourg.
The SICAR must meet other conditions such as minimum capital (1Mio Euro), etc.
The SICAR is monitored by the CSSF and their directors must meet certain conditions. The SICAR must have an external “Réviseur d'Entreprises” and a depositary bank.
By “Investisseur averti”, the law understands that not every person can invest into a SICAR. The persons who are allowed to are:
- the investments funds
- professional investors
- pension funds
- other commercial companies
- people for which a bank has certified that they are aware of the risk they have undertaken
- people who invest more than 125.000 €.
By “Placement à Risque”, the law includes any funds that are directly or indirectly invested in entities in the aim of an IPO. The law do not limit the type of investments; it can take the form of shares, warrants, debts,... issued by non quoted companies.
All the capital subscribed by investor into a SICAR is not submitted to the 1% of capital duty. However, a 1.250 Euro fixed tax is applicable when the SICAR is set up.
The SICAR which are set up under a form of a company are fully tax exempt on Fortune tax.
The SICAR is a fully taxable company which is completely tax-exempt on profit resulting from the management of funds invested in the above-mentioned participations, and also the funds waiting to be invested - during 12 months.
Dividends: No withholding taxes charged on the payment of dividends to its shareholders (no matter who they are and where they are located: private/public, company, resident in EU or double tax treaty country or not,...).
The SICAR can enjoy the advantages of the various EC Directive (parent -subsidiary and royalties - interests). Directive 2003/49/CE and the various double tax treaties.
No withholding tax is due on the payment of interests or royalties to non resident
SICAV (OR SICAF)
The SICAV (or SICAF) is a company limited by shares, separate from its shareholders and whose main activity is to invest in financial assets. Its management policy is strictly monitored by the CSSF. The funds must be placed in a custodian bank and their management must be entrusted to a regulated body. The minimum capital required is 1 Million Euros. Its registered headquarters must be in Luxembourg, where the company can enjoy an attractive fiscal status, as it is not subject to corporate taxation but only to an annual registration tax on its capital (0.5%).
For a long time, the Grand Duchy of Luxembourg has been recognized throughout the world for expertise in funds management.
The most popular funds for private investors and institutions over the past few years have been mutual funds and “Sociétés d'Investissement à Capital Variable” (Variable Capital Investment Companies).
Investors can invest either in a SICAV belonging to them, in an existing SICAV, or in unit of a SICAV where they can decide in advance on the portfolio allocation.
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