Taxation of SIF in Luxembourg

Taxation of SIF in Luxembourg

Updated on Wednesday 14th October 2020

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Foreign investors who want to open an investment fund in Luxembourg are allowed to start a specialized investment fund (SIF) in this jurisdiction. A SIF in Luxembourg is addressed to institutional and qualified investors, who can run various investment strategies through this type of vehicle.
 
However, when registering a SIF in Luxembourg, investors should also take into consideration the initial investment required in this case, as well as taxation matters imposed by the applicable law. Our team of financial representatives can provide an in-depth presentation on the taxation system applicable to SIFs structures in Luxembourg
 

SIFs in Luxembourg  

 
Those who want to register a SIF in Luxembourg can set up two main structures: SIFs registered as SICAV vehicles and SIFs incorporated as SICAF fundsOur team of financial representatives can present the main differences between the two structures and may also advise on the advantages of each type of investment fund.
 
 
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What are the main types of SIFs in Luxembourg? 

 
The Luxembourg SIF can take several legal forms such as the common fund (FCP – fonds commun de placement) and investment company (SICAV – société d’investissement à capital variable or SICAFsociété d’investissement à capital fixe). SICAV and SICAF companies may also take other forms, such as:
 
  • public limited company (SA) – the company is fully liable for the debts it has, while the company’s representatives are liable only to the amount of the capital they have brought in the company;
  • private limited liability company (Sàrl) – this is one of the main business forms chosen for starting a SIF in Luxembourg, as it can be set up by both natural persons and legal entities;
  • partnership limited by shares (SCA) – the legal entity is formed by two shareholders who will have the quality of limited partners and unlimited partners;
  • cooperative in the form of a public limited company (SCoSA) – this business form can also be used for registering securitisation vehicles in Luxembourg
 
The Luxembourg FCP has no legal personality and must be managed by a management company which will act on behalf of the investors. The FCP is considered a Luxembourg SIF if its place of management is located in the country and our team of financial agents may offer more details on this subject.
 

Taxation of SIFs structures in Luxembourg 

 
When opening a SIF in this country, the investors should know that the SICAV in Luxembourg is not imposed with a tax on the fund’s profits. A SIF in Luxembourg is required to pay the capital duty which is imposed on the capital contributions. However, the regulation is applicable to SIFs established as corporations and non-trading companies. 
 
Further on, the SIF is also imposed with a subscription tax paid annually at the rate of 0.01% of the net assets (calculated at a quarterly basis). It is important to know that the SIFs which invest in other funds, that are required to pay the subscription tax, are exempted from paying this tax, on which our team of financial agents can offer more details.  
 
SIFs which undertake management services are also exempted from paying the value added tax and it is necessary to mention that certain SIF structures (registered as investment companies) can benefit from the provisions of the double taxation treaties signed by Luxembourg
 

What are other taxes that must be paid by Luxembourg SIFs? 

 
The taxation of a Luxembourg fund established as a SIF is determined based on the regulations on which it was founded. Thus, a SIF registered as a SICAV is not required to pay the capital gains tax, nor it is liable to paying the withholding taxes that are imposed on the distribution of shares. With regards to the taxation system applicable to a SIF, the following apply:
 
  • the SIF in Luxembourg can benefit from the provisions of the double tax treaties signed here (more than 50 tax agreements), as long as it operates as a SICAV;
  • the fund is charged with the payment of the value added tax at a rate of 17%, applied to technical services;
  • a reduced valued added tax - 14% - is applicable to depositary bank services;
  • the registration of a SICAV - SIF in Luxembourg is charged with a fixed fee of EUR 1,250;
  • the minimum capital required for each investor opening a SIF in Luxembourg is EUR 125,000. 

 

What are the tax exemptions for SIFs in Luxembourg? 

 
Foreign and local businessmen who want to open an investment fund in Luxembourg that operates as a SIF are qualified for a set of tax exemptions. The income taxes are not applicable for this structure, nor is the wealth tax. As we presented earlier, the fund is generally charged with the annual subscription tax, but there are several situations in which the tax does not apply
 
Besides the case mentioned above, investors should also know that the exemption also refers to the compartments of a fund which are reserved for pension schemes. Exemptions from the payment of VAT are also available, but more information concerning this subject can be offered by our team of financial representatives
 

What are the main types of funds registered in Luxembourg? 

 
Luxembourg is the home of one of the most developed financial markets. It stands out as a reputable investment destination and the local legislation created over the years offers multiple types of funds, that are addressed to a wide category of investors. Luxembourg provides a wide range of alternative investment funds (SIF included) and, in 2016, it created a new type of fund, the reserved alternative investment fund (RAIF). Most of the funds in Luxembourg operate as SIFs, the following data being available on this topic:
 
  • in February 2018, Luxembourg had a total of 1,560 SIFs;
  • 284 funds in Luxembourg were registered as SICARs;
  • although the RAIF is a newer structure, available starting with 2016, in 2018 the country already had 314 such funds;
  • at that time, Luxembourg also had 242 alternative investment fund managers;
  • in 2018, funds registered under the Part II Law accounted for a total of 316 investment vehicles. 

 

What should an investor do in order to open a SIF in Luxembourg?

 
The development of financial activities in Luxembourg through a SIF is bound by the authorization of the fund, which has to be conducted through the country’s main financial regulator, the Commission de Surveillance du Secteur Financier (CSSF). Thus, any investor who wants to open a SIF in Luxembourg must submit an application for approval with the institution. Provided that the fund will set up sub-funds (or compartments), each compartment must also apply for approval. 
 
The procedure starts by completing a questionnaire, which is used by the CSSF in order to gain basic information on the types of activities developed by the fund. Along with the questionnaire, businessmen have to submit specific documents and this procedure can be done via e-mail. After this, the applicants should receive an answer via e-mail, in which the institution will announce the name of the CSSF officer that will handle the application. 
 
In a period of 10 days since this step is concluded, the CSSF representative will contact one of the applicants and will request any additional information or other documents that may be needed. There is a time frame of maximum three months in which the investors should provide all the necessary data; if the applicants did not submit the documents in the required period of time, the CSSF can consider that the application was withdrawn (even so, the CSSF officer will contact the applicants to clarify this issue). 
 
If the application procedure runs without any problems, the investors must submit the fund’s prospectus, the fund’s regulations, the articles of incorporation and other statutory documents, which are compulsory documents when opening an investment fund in Luxembourg. All the documents have to be submitted in the final format and signed by the founders. 
 

Exemption from dividend tax for Luxembourg SIFs 

 
An investment fund in Luxembourg registered as a SIF is exempted from paying the withholding tax on dividends. The regulation is applicable for non-resident investors and it refers to the following situations: dividends paid by a FCP – SIF structure for the distribution of units or dividends paid by a SICAV – SIF in terms of the company’s shares.
 

The important features of a SIF in Luxembourg

 
A Specialized Investment Fund needs to have an active portfolio management and one of its most significant aspects is that you can invest in any category of assets.
 
Because a SIF delivers a low level of security for investors, these kinds of funds are usually suggested for institutional and specialised investors, also known as sophisticated investors.
 
Other characteristics of a Specialized Investment Fund are:
 
no restrictions for the author or sponsor;
particular fund or umbrella structure;
no taxes on capital gains, income and profits;
limited requests for detailed documentation.
 
 
The video below provides a short presentation on the tax system applicable to a Luxembourg specialized investment fund
 

 

Accessible categories of SIFs in Luxembourg

 
The Luxembourg Special Investment Fund can take numerous legal forms like the common fund, FCP – fonds commun de placement, and the investment company, SICAV – Société d’investissement à capital variable, or SICAF – Société d’investissement à capital fixe. 
 
 
SICAV and SICAF businesses may also take other forms, like:
 
private limited liability company (Sàrl)
cooperative in the form of a public limited company (SCoSA)
public limited company (SA)
partnership limited by shares (SCA)
 
With respect to registration requirements, the Luxembourg SIF Law does not necessitate a minimum or a maximum number of investors
 
On the other hand, the shareholders are mandatory to subscribe a minimum share capital of EUR1,250,000. Only 5% of the capital must be deposited upon the listing of the Luxembourg SIF.
 

Why set up a SIF in Luxembourg?

Luxembourg is the most appealing investment fund destination in Europe and the European Union because of the legislation which favors the creation of such entities, but also thanks to its banking and taxation system with respect to investment funds.

SIFs are preferred by investors because they offer the following advantages:

  • - there are no duties imposed on the registration of a SIF under a corporate business form;
  • - SIFs are not subject to the wealth tax or value added tax on their management services in Luxembourg;
  • - investment funds represent a market which had a total value of 4.3 trillion euros (at the level of 2018);
  • - 98 of 100 fund managers in the world are domiciled in Luxembourg, according to statistics issued by PwC in 2018;
  • - most of the investment funds registered in Luxembourg activate in more than 70 countries all over the world;
  • - Luxembourg is the 2nd largest investment fund center in the world in 2019, according to Luxembourg for Finance.
 
We invite investors to contact our team of financial experts for more details on the tax requirements imposed for SIF vehicles in Luxembourg