The impact of Luxembourg’s new law on alternative investment funds

Bill 8183, approved by Luxembourg’s parliament and set to be published in the Official Journal in the coming weeks, amends various existing fund laws covering SICARs, SIFs, UCIs, AIFMs and RAIFs. Among other things, it will give asset managers more time to meet minimum capital requirements, provide structuring opportunities that offer potential commercial and tax advantages, and facilitate the distribution of alternative investment funds (AIFs) originating from third countries.

Additional changes have been made to the rules around liquidation, tweaks to the establishment formalities for certain RAIFs, and harmonisation of distribution of foreign funds in Luxembourg. The wide-ranging changes were necessary to make Luxembourg’s legal framework better suited for European long-term investment funds (ELTIFs), following the improvements made to the ELTIF regime at EU level, known as ELTIF 2.0, but the legislature also took the opportunity to make changes to harmonise more general product rules and make other incremental changes.

Here, we consider the practical impacts of some of the more significant changes.

Extending the period that funds have to meet their minimum capital requirements

The period within which SIFs, RAIFs and SICARs must meet their minimum regulatory capital has been increased from 12 months to 24 months. For Part II funds, this period has increased from six months to 12 months.

This is one of the more interesting and useful developments given that we are in a challenging environment for capital raising. Doubling the time required to reach minimum assets may be the difference to a fund promoter between launching in Luxembourg or not.

Lowering minimum investment thresholds for classification as a well-informed investor

This applies to SIFs, RAIFs and SICARs and brings the minimum investment down from €125k to €100k, to bring them in line with EuVECAs and EuSEFs, which also brings them into line with other EU jurisdictions that set similar thresholds.

While the harmonisation of the minimum investment thresholds to pass the well-informed investor test is a positive, it is something of a red herring. In practice, a 20% reduction in minimum investment is unlikely to influence many investors. In addition, the well-informed investor test can also be met if the AIFM, credit institution or MiFID firm certifies the investor’s “expertise, his [sic] experience and his [sic] knowledge to adequately appraise an investment in the reserved alternative investment fund”. This would allow the fund to accept a lower subscription from the investor in question.

Widening the scope of corporate forms that Part II funds are able to take

Previously, Part II funds could only be established as an SA (société anonyme), but this has now been broadened to include the SCA (société en commandite par actions), SCS (société en commandite simple), SCSp (société en commandite spéciale), Sàrl (société à responsabilité limitée), or a CoopSA (société coopérative organisée sous forme de société anonyme), which brings them in line with other categories of AIF.

This is important because most ELTIF 2.0s would be expected to take the form of Part II funds – Luxembourg’s domestic form for a retail AIF. This opens up structuring opportunities from both a tax and commercial perspective.

Allowing AIFMs to use tied agents

This change brings AIFMs into line with Chapter 15 and 16 management companies, cleaning up a previous discrepancy, though the AIFM is also required to have MiFID top-up permissions.

This is a positive change and will facilitate the distribution of AIFs that originate from a third country, but the requirement for the AIFM to have MiFID top-up permissions to avail itself of this is a significant caveat.

Tweaks to the subscription tax regime

There is now an exemption from the subscription tax for funds authorised as ELTIFs, or if they are reserved to individual investors acting through a pan-European Personal Pension Product (PEPP).

While subscription tax is relatively low, in a cost-sensitive environment, any reduction on drag on returns is a positive. The PEPP relieve may also apply on a compartment-by-compartment basis.

Replacement of a depositary

SICARs, SIFs, UCITS and Part II funds no longer have an automatic two-month replacement period to replace a depositary that has resigned or been terminated before they are automatically de-listed. The new rules require that the depositary agreement must contain prior notice provisions and that a replacement depositary must be appointed prior to the expiry of such notice period. Outgoing depositaries must continue to safeguard the interests of the investors, including maintaining bank accounts; and subscriptions and redemptions are prohibited while there is no depositary.

This is a sensible change and mitigates the risk of automatic de-listing, taking into account the time it takes to perform due diligence and onboarding of a new provider. However, given the actual time taken to perform due diligence and onboarding of depositaries, one might question how sufficient the market standard of three months’ notice is for such purposes.