Professional Interpretation

Abstract

Luxembourg attracts 65% of the world's multinational funds gathered here, as the center of international investment funds. Thanks to the mature and pluralistic characteristics such as sound fund ecosystem, sable social environment and abundant legal framework, which are fully meet the needs of investors, Luxembourg became the first choice place for China’s assets managers to develop overseas fund business. They extend fund business to overseas market through Luxembourg as a door, and investment, and contrarily, introduce foreign funds by using Luxembourg funds as platform. International business team of Beijing DOCVIT Law firm will analyze and interpret the legal foundation of Luxembourg funds and the requirement of fund management companies and fund investors and carding the main tax categories to provide reference to China’s fund for marching into overseas.

I. Legal foundation of Luxembourg funds

1. Investment fund set under the first part of 2010 UCI （“UCITS”）

Undertakings for Collective Investment in Transferable Securities (UCITS), first be seen in the European Union decree enacted in 1985. Investment funds conforming to the statute of that decree can freely marketing on EU with European passport. That is to say, once the fund set in one EU country, it can be sold in all EU member states. On the one hand, cost can be deduced, time- to –market can be shorten; on the other hand, the marketing capabilities of assets management companies in Continental Europe can be greatly enhanced. At present, 67% UCITS funds distributed in worldwide are came from Luxembourg.

2. Alternative Investment Fund, AIF, basically covers all funds other than UCITS funds:

(1) Investment funds set according to PART II UCI （“PART II UCI”）

PART II UCI govern the ineligible funds to UCIs including close-ended funds that aren't available to public or not compliant with the UCIs, which couldn’t benefited from European passport, hence even though were approved by Commission de Surveillance du Secteur Financier(CSSF), they can’t freely sell their shares or units, specific conditions provided by supervision agencies of countries to sell needs to be satisfied.

(2)Investment funds set according to SIF law

The Specialised Investment Fund, SIF, is a attracted tool to senior investors. Funds are allowed to be quickly invested into all markets of assets in hand with flexible limitation of risks separation. Hence, SIF only applies to “investors who fully get the information.”

(3) RAIF

Luxembourg Reserved Alternative Investment Fund, RAIF, combined the characteristics with structure flexibility of Luxembourg funds under supervision of SIF and SICAR, which applies to AIF, managed by competent Alternative Investment Fund Manager, AIFM and with no demand of being approved by CSSF before issuing except RAIF. That assure the time-to-market as much as possible for the new fund sales.

(4) SICAR

Société d’investissement en capital à risque, SICAR , is an agency under supervision with high fiscal efficiency set specially for private equity and venture capital investment, which has no diversification of investment regulations, loan restrictions or leverage restrictions.

4. Other type of investment agency-- SOPARFI

Société de Participation Financière, SOPARFI, is a fully taxable company capable to carry on various activities, with the aim to private equity acquisition and financing. The most obvious difference between SOPARFI with UCITS/SIF/SICAR is SOPARFI can be operated without legal regulations. The main superiority of it is the utilization of Luxembourg’s large agreement network on avoidance of double taxation. Nearly 60 countries sign such agreements with Luxembourg. That company with special purpose can be used with other fund structure or be used separately as a tool for holding share and financing.  

Ⅱ. The requirements to fund management company

Optional legal framework

Optional basic structure

FCP: a type of fund must managed by management company.

SICAV： Variable capital investment company ; or SICAF: fixed capital investment company

(1) UCITS management company

Activities of UCITS management company include Collective Portfolio management (CPM) of UCITS funds which includes assets management, administrative management and sale and so on; management of other type of Luxembourg UCI, such as PART II UCI and SIF; and management of personal investment portfolio, as appropriate, for individual clients or old-age pension.

Only the entity supervised officially and obtaining the permission of operating assets management can management the assets. The trustee bank couldn’t manage asset or perform risk management function for funds.

In addition, UCITS management companies can use a passport, and implement cross-border CPM activities, even can set and manage funds in other member states of the European Union. Management companies can set branch department in that member state or using “freely provide service （FPS）”, that is they can take actions in that country without permanent residence. Both the two approaches need to get prior authorization from CSSF, and CSSF will keep close contact with supervision agencies of the member country for which the management companies intend to implement/set/manage UCITS fund.

Management companies also can subcontract its part or all functions, as long as not becoming shell companies.

(2) AIFM

AIFM manage AIF directly. If the assets it manages exceed a given threshold, AIFM license plate shall be required. Not only AIFM could be the external management entity, but also could be internal self-management of ALF, both of which shall comply with the almost same requirement.

(3) Non-UCITS Management company

The reason why Non-UCITS management company manage PART II UCI or SIF, commonly is FCP, the establishment form of these funds. Those management companies are acquired to obtain the authorization from CSSF.

If the AIF assets managed by management company are below the minimum threshold specified by the AIFM law, they could be managed by non-UCITS management company without the demand of applying for AIFM license plate. However, if the assets are higher than a given threshold, the management company must obtain AIFM license plate, or appoint other management entity as AIFM.   

Ⅲ. Requirements for fund investors

There are two types of Luxembourg funds: UCITS and AIF. The former is mainly for public funding, the later for qualified investors.

Investors who fully get information are: (1) agency investor, namely, the regulated institutions which are active in assets management industry for clients or themselves; (2) the specialized investor conforming to the definition of financial tools market (especially include big enterprise and even the non-object of supervision) in Annex II of the instruction 2004/39, and (3) any investor under the following conditions:

Confirm in writing to maintain the identity of identity of investor who fully gets information.

Invest a minimum of 125,000 Euros, or has been evaluated by credit institutions, investment company or UCITS management company to testify its advantage, experience and knowledge in full assessment of SIF/SICAR investment.    

Ⅳ. Major taxes of Luxembourg funds

Basically, Luxembourg funds are duty-free (except for asset tax and subscription tax). Because those funds belong to company type, the fund transparency depends on the demands of fund supplier/investor. The main types are as follows:

u Withholding tax of income

The withholding taxes of Luxembourg funds income commonly neither be reimbursed nor credited. Investment company under UCI (SICAV and SICAF) could apply certain provisions for avoidance of double taxation, but FCP couldn’t. However, theoretically speaking, the unit holders could acquire to deduce tax rate according to the treaty for avoidance of double taxation signed between the country of investor source and country of residence, which shall be under the conditions that FCP is confirmed as transparent tax subject by the country of investor source and country of residence at same time.

u Added-value tax ( VAT)

Ø In Luxembourg, the management of investment fund under supervision by CSSF exempts from VAT, which is also applicable for foreign fund management under the prudential supervision of domestic country. Value added tax exemption is also applicable for investment management functions and administrative functions including investment consultation and transfer and register agent.

Ø Under certain situation, the management service outsourced to the third management companies could enjoy VAT exemption. It is peculiar and necessary for fund management to form an orderly entirety of service management. In this respect, only one single service outsourced to third party couldn’t enjoy VAT exemption.  

Ø Sales of investment fund could enjoy VAT exemption.

Ø Other service, such as legal service and audit service provided to investment fund couldn’t enjoy VAT exemption, and a standard VAT shall be paid at rate of 15%.  

Ø Custodian bank service partly exempts from VAT, the monitoring function of it shall pay VAT at rate of 12%.

Ø Investment funds of company type are taxable bodies of VAT. Relevant procedures may need be registered to pay Luxembourg VATs when receiving goods or services from abroad(with duty to pay Luxembourg VATs based on reverse charge. For FCP, regarded as the same legal person of management company, shall pay VATs at the same rate.

u Subscription tax

Ø Annual subscription tax rate are 0.05% of net assets, shall be calculated and paid at per end of quarter according to net asset value of UCI. As for UCI, which only invests to money market instruments and bank deposits, the annual tax rate can be reduced to 0.01%.

Ø The tax payers enjoying the annual tax rate reduced to 0.01% also include UCI net asset value governed by SIF, institutional sub-fund and net asset value of classified shares, even the sub-fund and classified shares provided by certain fund under the Fund Law.   

Ø On the purpose of tax payment assessment, exempts the tax for assess part of a certain UCI invested to other Luxembourg UCI, and that part has paid subscription tax.  

u Registration tax

After the registration of legal entity, 75 Euros shall be paid as registration tax.

Ⅴ. Conclusions

With the aim of promoting the cooperation of assets management between China and Luxembourg, memorandum of understanding was signed between Association of Luxembourg Fund Industry (ALFI) and Asset Management Association of China (AMAC). Luxembourg has became the first choice of fund manager of China to march into overseas market for its simple procedure in fund registration which could be sold in EU countries and all places around the world.

Attachment Three: General contrast of Luxembourg funds under three applicable laws