The Advantages of Creating Compartments in a FundUpdated on Thursday 14th February 2019
Rate this article
based on 5 reviews
based on 5 reviews
Foreign investors interested in establishing a fund in Luxembourg are advised to choose this country as a domiciliation of an investment fund due to the legal and tax framework created by the local authorities. Luxembourg is also the most representative financial market in the European Union, providing very stable investment conditions. Businessmen who want to open a fund in Luxembourg should know that the local legislation states that a fund can contain compartments, which can provide many financial advantages; our team of financial experts can provide you with more details on this matter and can help you open different types of funds.
Compartments in an investment fund in Luxembourg
The local legislation allows the establishment of compartments (or sub-funds) in an investment fund, which can function as independent funds within the same legal entity. Investors are invited to watch the video below, which offers a short presentation on the main advantages of creating compartments in a Luxembourg fund:
The main advantages an investor can have in such situation are related to the investment strategies he/she can apply at the same time. Other advantages refer to taxation or to administrative aspects. At the same time, operating an investment fund through several compartments can provide a better centralization of the operating activities.
According to the legislation applicable in Luxembourg, a compartment can have different assets than the ones of another compartment. A sub-fund can also establish different rights and can create shares that possess different statutory rights; our financial consultants can offer more information on the statutory rights of a compartment structure.
Relevant information concerning the sub-fund market in Luxembourg
Businessmen, both local and foreigners, who are considering opening an investment fund in Luxembourg that is allowed to register multiple compartments should also know that, in the case of vehicles registered under the Undertakings for Collective Investments (UCI) regime, the market is very well developed, being characterized by the following:
- at the level of June 2017, Luxembourg UCIs had 14,647 compartments;
- the total value of the sub-funds accounted for EUR 3.9 trillion;
- when registering a UCI structure in this country, the investors can set up sub-funds for both investment funds and investment companies;
- a UCI can be set up as a single compartment fund, also referred to as a stand-alone fund;
- at the same time, the UCI can be registered with multiple compartments and, in this case, it is necessary to register at least two sub-funds for the vehicle.
What are the regulations for multiple compartments UCIs in Luxembourg?
When opening UCIs in Luxembourg and setting up multiple compartments for the vehicle, it is important to know that the sub-funds can invest in different asset classes. As a general rule, most of those setting up a UCI structure in this country choose to register the funds with multiple compartments, but they are preferred mainly by large investors.
Provided that the investors decide to set up a UCI in Luxembourg with multiple compartments, it will be necessary to keep separate accounting documents for each of the sub-funds; however, investors should be aware of the fact that the registration of multiple compartments can only be done as long as the fund’s statutory documents mention this aspect.
This has to be covered in the fund’s prospectus, which must clearly provide information on the characteristics of each sub-fund, the investment strategy that will be used for each of the compartments and any other relevant information. The main rules of law which regulate the incorporation of a fund in Luxembourg set up as a multiple compartment UCI is given by the Article 181 of the 2010 Law, the Article 71 of the Specialized Investment Fund (SIF) Law and the Article 49 of the Reserved Alternative Investment Fund (RAIF) Law.
What are the main requirements for multiple compartments UCIs in Luxembourg?
Once the investors have decided to open a Luxembourg fund with multiple compartments (for a vehicle that is considered a UCI), it will be necessary to comply with a set of legal requirements. Thus, the founding documents of the vehicle must stipulate that each compartments benefits from its own funding and expenses.
In the situation in which the investors decided to create any new sub-fund, it is legally required to obtain the CSSF’s approval on the matter. The names of the fund and the ones of its compartments have to be different and each sub-fund must be recognized by its own name. Further on, it will be necessary to appoint a custodian bank and an auditor for the fund. Besides these, the following will apply:
- the fund must have a designated management company, which can be the same for all the fund’s compartments;
- it is also necessary to define the management regulations of the fund, which can apply to all the fund’s compartments;
- however, the investors may also establish a set of management rules for each sub-fund;
- when setting up an investment company with multiple compartments, the company has to register its capital in shares;
- the investment company’s capital has to be registered in a single currency, which must also be reflected in the company’s financial documents.
What is the compartment structure in Luxembourg?
Investment funds in Luxembourg can establish compartments within their structure following one of the two options in this sense: the single compartment structure or the multiple compartment structure, which can apply a different investment policy. It is allowed to establish a compartment structure for the investment funds available under the legislation provided for Undertakings for Collective Investments in Transferable Securities, for 2010 Law Part II and for Special Investment Funds.
What are the advantages of creating sub-funds in Luxembourg?
Besides the fact that the investors can run multiple investment strategies under the same structure, the advantage of a sub-fund in Luxembourg refers to the general costs associated with running an investment fund in this country. This is due to the fact that investors can easily relocate the assets of a sub-fund to another compartment with lower costs, as these structures are included in the same vehicle.
What are the characteristics of a Luxembourg SICAV with sub-funds?
One of the legal ways of creating sub-funds is by opening a SICAV in Luxembourg, one of the types of vehicles available for registration in this country. A SICAV in Luxembourg allows the registration of multiple sub-funds with the local authorities, as per the Part 1 of the Luxembourg Law of 17 December 2010 on Undertakings for Collective Investments.
In order to create multiple sub-funds in this type of vehicle, it is necessary to mention this aspect in the fund’s prospectus and while adding new compartments, this document has to include updated information concerning the creation of any additional sub-fund. Investors who want to open a Luxembourg fund with multiple compartments must know that the assets of these sub-funds belong to the fund’s shareholders or to the fund’s creditors.
Not only funds can establish compartments, as the legislation is available for investment companies (other than the ones set up as UCIs) as well, which are allowed to create single or multiple compartments. If you need further information on the advantages of a compartment in an investment fund, please contact our team of financial experts in Luxembourg.