A Globally leading fund centre:
Luxembourg is the globally leading fund centre in the world for cross-border funds, Luxembourg is the second largest investment fund centre in the world after the United States and the largest fund domicile in Europe with currently more than EUR 4,7 trillion of assets under management.
The country is a politically and financially stable EU country with a AAA-Rating. As an EU domicile, investment funds established in Luxembourg can be more easily distributed within the EU and have gained furthermore global recognition for the ease of cross-border distribution.
The key advantages of Luxembourg as a fund domicile are:
1. Stability:
Luxembourg is a stable and recognized fund centre in the heart of Europe, ideally positioned to use the EU passporting rights to distribute an investment fund across the EU and to global markets.
2. Global Leadership:
Luxembourg is the global leader for cross-border fund distribution. All relevant service providers in the asset management industry have a presence and offer services in Luxembourg. The country is known around the world for its capabilities in asset management and its funds are distributed and known around the world.
3. One Stop Solution:
Setting up a fund with an EU passport, using leading service providers, listing it on a recognized stock exchange, setting up SPVs to benefit from double tax treaties and outsourcing certain functions back to other countries. Luxembourg has the flexibility to offer a one stop solution for operating and distributing investment funds, as well as deploying the funds in an efficient and structured manner.
Why set up an investment fund?
Investment funds are collective investment vehicles, which invest in assets and may operate according to the principle of risk spreading. Investment funds may raise capital from the public, when capital is raised from a group of investors that go beyond a small circle of persons or may raise capital in a private placement from a selected group of investors. Issuing vehicles, holding companies or special purpose vehicles (SPVs) are often not considered investment funds, although they might fulfill the above criteria.
Setting up an investment fund may have a variety of advantages:
1. Access different pools of investors
2. More advantageous tax treatment: depending on the fund type, funds may be treated as tax exempt, taxable or tax neutral entities
3. Additional comfort to investors: fund is established in a leading fund jurisdiction with reputable service providers
4. Ease of distribution, the limited partnership could be distributed in the EU on the basis of the alternative investment manager (AIFM) passport
What is a limited partnership?
Limited partnerships are fund structures that are popular in the alternative space, having illiquid strategies investing into real estate, private equity or the debt market. They have had a particular success in fund jurisdictions that are based on Common Law, such as Cayman Islands or Delaware.
Luxembourg took the advantage of the introduction of the Alternative Investment Fund Managers Directive (AIFMD) in 2013 to fundamentally modernize its partnership regime and to improve its standing as a fund domicile for alternative investment funds.
Luxembourg aligned and modernized its partnership regime, giving the asset management industry the choice between three highly flexible fund structures, thus giving asset managers new structuring possibilities whilst using a framework that is familiar to them from other fund jurisdictions.
The limited partnership agreement (LPA) is a main document organizing the functioning of the partnership, which gives the fund the contractual flexibility to organize the structure of the fund. The limited partnership is not restricted to any asset type and not subject to any risk diversification rules.
The partnership would appoint a general partner (GP), typically a private limited liability company (Société à responsabilité limitée or S.àr.l.) established in Luxembourg, to manage the fund on behalf of the limited partners.
Which limited partnerships exist in Luxembourg?
1. Partnership Limited by Shares (Société en commandite par actions: SCA) is a partnership subject to the requirements set out in Corporate Law and is structurally closer to a public limited company (Société anonyme or S.A.).
2. Common Limited Partnership (Société en commandite simple: SCS or CLP)
3. Special Limited Partnership (Société en commandite spéciale: SCSp or SLP)
What are the main differences between SLP, CLP and SCA?
All three are considered partnerships in Luxembourg, however the SCA is a corporate legal entity, governed by the rules of the Luxembourg Company Law of 1915 (the Company Law), whilst the CLP and the SLP can be compared to partnerships in Common Law jurisdictions.
The main differentiating factors are:
1. SCA and CLP have legal personality, whilst the SLP has no legal personality.
2. The SCA needs to be incorporated in front of a notary, whilst the CLP and SLP can be formed in front of a notary or alternatively by private deed.
3. The Company Law sets out mandatory rules for the governance of the SCA, whilst the functioning of the SLP and CLP is governed by the terms agreed in the LPA.
4. The SCA is a fully taxable entity with access to double tax treaties, whilst the SLP and CLP are tax transparent.
How long does it take to set up a limited partnership in Luxembourg?
The timeframe for the constitution of the partnership depends on whether the limited partnership is a supervised or non-supervised entity.
Partnerships not subject to supervision can be established quickly within a few days. The timeframe for the drafting of the documentation, in particular the LPA, will depend on the complexity and the input of the parties.
What are the regulatory options?
There are several options to achieve different levels of regulation:
1. The limited partnerships can be supervised by the Luxembourg Financial Supervisory Authority (Commission de Surveillance du Secteur Financier or CSSF), if they are established as a Specialized Investment Fund (SIF) or an investment company in risk capital (SICAR). In this case the fund itself would be regulated. If the fund falls within the scope of the AIFMD, then it would also need to appoint an AIFM.
2. The fund itself remains unregulated, but appoints an AIFM, who is regulated by the CSSF.
3. The fund remains unregulated and remains outside of the scope of the AIFMD and is therefore not required to appoint and AIFM.
Does a limited partnership have access to the EU passport for distribution of the fund?
The fund may have the benefit of the EU passport, if it has appointed an AIFM, allowing the fund to be passported to professional investors within the European Union.
How much does it cost to establish a fund?
As Luxembourg offers toolbox of different solutions, this greatly varies between the solution chosen and the service providers used to service the fund. Setting up a fund in the form of a limited partnership, which is not supervised, is less costly than a supervised fund.
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