Coming after the US, Luxembourg is the world’s second-biggest investment center. Its assets are higher than 3 trillion euros which makes Luxembourg the most attractive center for investment funds in Europe.
It has been noticed that during the last two years the number of incorporated PEFs in Luxembourg grew significantly. In fact, it almost doubled. Luxembourg was chosen by some of the largest DI companies in the world as a location to register their funds. Are you planning to follow their example? Then the following post about registering a PEF in Luxembourg might be useful for you.
Luxembourg was actually the first country in Europe that introduced legislation to regulate investment fund activities. Today, it is a secure and full-fledged financial center. In addition, Luxembourg was the first among EU member states to implement the EC UCITS Directive. UCITS is an open-ended kind of funds investing in shares and bonds. They are governed within a harmonized regulatory regime.
Luxembourg has a sufficient infrastructure necessary for investment activities meaning specialists who are crucial for this industry: lawyers, accountants, bankers, tax and administrative authorities. Private equity houses are the key players in this market.
When it comes to corporate law in Luxembourg, it is in fact based on Belgian law. The law is based on the principle “everything that is not prohibited is allowed” which leads to the quiet liberal approach to business activities in Luxembourg. The legislative framework is known for defining certain rules very clearly: the appointment and removal of managers from office, provisions on arbitration, and execution of shareholder agreements.
In addition, the Luxembourg courts are recognized as fair and reliable. Moreover, the decisions of foreign courts are allowed to be enforced there.
Jurisdiction belongs to several factors that support the DI industry growth. More importantly, Luxembourg introduced a zero or very low corporate tax intending to attract FDI into the economy. Also, the country has adopted the AIFMD, the BEPS Action Plan, and other pan-European rules to guarantee a high level of protection for investors.
The local legislation of Luxembourg is flexible enough for developing attractive conditions to create different types of companies and partnerships such as JSCs, LLCs, and other types. For example, the société en commandité spéciale is a legal form similar to LP in English law. For this type, the registration process is rather fast. UK or US sponsors can establish funds based in Luxembourg that would be similar to their PEFs at home. A Luxembourg LP can then be registered with only small adjustments.
An interesting fact to take into account: it is popular among Luxembourg PEF managers to establish two separate funds at the same time. One of them located in Luxembourg would be aimed at European investors, and the second one, located for example in the US, would be targeting investors in a foreign jurisdiction.
In general, the key characteristic of reserved alternative investment funds is sharing the risk. The purpose of the Luxembourg RAIF is to invest in risky capital. This approach gives a decent solution to the managers who wish to take advantage of the platform that used to be preferred by regulated platforms but simultaneously do not want to get the double tier of regulation. Importantly, preferential taxation may be granted to Luxembourg RAIFs.
Although the beginning of 2020 showed a reduction in transaction volumes due to the pandemic outbreak, the investment fund industry in Luxembourg is still popular among investors. Moreover, there are other signs that high investment activity levels will be resumed.
Registering an investment fund in Luxembourg is a great way of entering the European market. This jurisdiction can be beneficial for cross-border investment arrangements. For a better understanding of the regulation on investment funds in Luxembourg, contact us to arrange a personal consultation with specialists from COREDO.