What are Luxembourg funds?

What are investment funds and how do they work?

Before moving on to the characteristics of Luxembourg investment funds, let us discuss what they are, how they work and their function.

Investment fund, what is it?

Investment funds act as financial vehicles in which funds from multiple investors are entrusted to professional managers for investment. The accumulated capital can be invested in a variety of assets but always in accordance with an established investment strategy and policy.

There are a number of types of investment funds on the market, each with specific investment objectives, strategies, level of risk taken, complexity and costs of operation. Through them, investors can access different markets and asset classes, benefit from professional management and diversify their portfolios.

The role of investment funds

Investment funds play an important role in building efficient investment portfolios, supporting the growth of businesses and providing investors with access to a variety of assets and markets.

• Portfolio diversification: Mutual funds allow investors to diversify their portfolios by investing in a variety of assets, such as shares, bonds, real estate or commodities. In this way, they minimise the risks associated with investing in single assets or industries.
• Professional management: investment fund managers typically have a high level of expertise and experience in market analysis and investment decision-making. This enables them to effectively manage an investment portfolio in a targeted manner to achieve specific investment objectives.
• Access to hard-to-reach markets: Investment funds can provide investors with access to markets and assets that are difficult for individual investors to access, such as foreign markets, startup capital markets (e.g. venture capital funds) or commercial real estate markets.
• Source of capital for companies: Investment funds, especially venture capital and private equity, can provide capital to companies in their founding or development phases, enabling them to finance innovation, growth and expansion into new markets.

What are alternative investment funds?

An Alternative Investment Fund (AIF) operating under the Alternative Investment Fund Managers Directive (AIFMD) in Europe is a type of investment fund that does not fall under the UCITS (Undertakings for Collective Investment in Transferable Securities) directive and typically invests in non-traditional or alternative assets such as real estate, private equity, venture capital.

AIFMD is a European Union directive that regulates the management of alternative investment funds and the activities of managers of such funds. The directive introduces standards for registration, operations, supervision and cross-border marketing for alternative investment fund managers in Europe. Operating under the AIFMD, alternative investment funds can conduct their activities within the EU single market, and are subject to certain regulatory and supervisory requirements.

What is a venture capital fund and what does it consist of?

Venture capital (VC) funds are a type of investment funds that invest their money in companies operating in the new technology and innovative ventures sector.

The main goal of VC funds is to support the growth and expansion of startups that show strong growth potential, but need financial support to develop their products, expand their business reach or enter new markets. VC funds typically invest in companies at the founding or early stage of development, when the company is relatively small and the risks involved are high. In exchange for capital, VC funds often acquire a stake in the company and actively participate in management or provide business support to support the long-term success and growth of the company.

Investment funds in Luxembourg

Luxembourg has been an attractive hub for the financial and investment industry for years. So it’s not surprising that many investors looking for new opportunities choose to relocate or open a fund in Luxembourg. However, before taking such steps, it is worthwhile to familiarize yourself with the opportunities or types of funds that are ASI’s counterparts in Luxembourg.

Development and history of Luxembourg funds

The history of the development of Luxembourg funds dates back to the 1960s. A key moment was the introduction of the Law on Investment Funds in 1988, which greatly simplified the registration and operation of these funds. In the 1990s and early 2000s, Luxembourg became one of the world’s major investment fund registration sites, attracting both European and international funds. Liberal legislation, political and economic stability and favorable tax conditions have attracted a significant number of investment companies and investors.

Today, Luxembourg funds enjoy wide recognition and are widely used by investors from various sectors and regions. Their flexibility, reputation and wide range of products offered keep Luxembourg at the forefront of global financial centers.

Advantages of Luxembourg funds

Here are some reasons why Luxembourg funds are a unique and attractive investment option.

• Luxembourg has a reputation as a stable and reliable financial jurisdiction, which gives investors confidence in the safety of their investments.
• Europe’s largest fund headquarters and the world’s second largest fund center. Largest global mutual fund distribution center. An innovative technology hub with multiple accelerator programs for Startups.
• Strong economy and very highly rated public finances of the country (AAA by Standard & Poor’s; AAA by Moody’s).
• Luxembourg, as a founding member of the EU, is a well-established financial center with access to highly qualified investment fund managers and infrastructure to support the financial sector.
• Luxembourg’s investment fund regulations are flexible and allow for a variety of investment structures and strategies, allowing the fund to be tailored to different investors’ goals and preferences.
• Luxembourg offers favorable tax conditions for investment funds, which can help boost returns for investors.
• Reputable brand: Luxembourg-based investment funds are recognized and trusted worldwide, which may attract investors looking for a reputable brand.

The above factors make Luxembourg a very attractive place for alternative fund registration and domiciliation.

Regulations and types of Luxembourg funds

The success of Luxembourg’s investment funds lies in both the flexible regulations and the types of vehicles available that correspond to AIFs. Crucial to the rapid development of the investment fund industry in Luxembourg has been the rapid adaptation of the UCITS and AIFMD directives into national regulations.

The difference between the Open-ended Investment Fund Directive (UCITS) and the Alternative Investment Fund Managers Directive (AIFMD).

UCITS and AIFMD are regulatory frameworks introduced in the European Union to ensure high standards of investor protection, suitable for retail and professional investors, respectively. UCITS are open-ended funds that invest in securities, such as stocks and bonds, which are subject to the EU regulatory regime. UCITS-compliant investment funds benefit from a “passport,” which allows them to market freely throughout the EU.

Investments in real estate, private equity, venture capital, hedge funds and debt funds fall outside the scope of UCITS, but are subject to the AIFMD, which regulates managers of such investment funds that are not UCITS (i.e., alternative investment funds, or AIFs). Authorized AIF managers benefit from a “passport” that allows them to market to professional investors through the EU.

Luxembourg was the first European Union member state to adapt the UCITS Directive into its legal system, and one of the first to introduce the AIFMD. These early steps were crucial to the success of Luxembourg’s investment fund industry, consolidating its position in the European market.

Types of Luxembourg funds

Luxembourg offers a large selection of vehicle types understood as a contractual form for alternative investment funds, including unregulated and regulated funds. Each has its own advantages depending on the type of assets, capital or strategy of the fund in question.

Unregulated funds:

• Limited Partnerships
• RAIF

Regulated funds:

• Part II Undertakings for Collective Investment (Part II UCI)
• Specialized Investment Fund (SIF)
• Investment Company in Risk Capital (SICAR)

These various forms of investment funds allow investors to tailor the fund structure to their specific needs and goals, contributing to Luxembourg’s attractiveness as a financial center.

Taxes, and Luxembourg funds

Luxembourg funds often enjoy favorable tax conditions, both for the fund itself and for its investors. These funds are usually exempt from taxation on capital gains and income generated in Luxembourg.

Capital gains taxes

Capital gains of investors in Luxembourg funds may be subject to capital gains tax in their countries of tax residence according to local tax laws. Luxembourg has a number of double taxation treaties with individual countries, including Poland.

Taxation of dividends

As with capital gains, the taxation of dividends earned by investors in Luxembourg funds may be governed by tax laws in the investor’s country.

Regulation and supervision of Luxembourg funds

The regulation and supervision of Luxembourg funds is carried out by the Commission de Surveillance du Secteur Financier (CSSF), the Luxembourg supervisory authority. The CSSF plays a key role in ensuring the stability of the financial market in Luxembourg, as well as protecting the interests of investors.

Here are the main functions and tasks of the CSSF in regulating and supervising Luxembourg funds:

1. Approval and supervision of funds: The CSSF is responsible for approving new investment funds, supervising the operations of existing funds, and enforcing regulations governing their operation.
2. Maintenance of registers: The CSSF maintains the registers of all registered investment funds in Luxembourg and ensures that this information is available to interested parties.
3. Compliance monitoring: The CSSF tracks whether Luxembourg funds are complying with all applicable laws and regulations, including those relating to fund structure, portfolio management, financial reporting and other aspects of operations.
4. Protection of investors’ interests: The CSSF is committed to protecting the interests of investors by ensuring the transparency and integrity of investment funds’ operations and prosecuting any cases of fraud or irregularities.
5. International cooperation: the CSSF actively cooperates with other financial regulators around the world to exchange information and coordinate activities in the area of investment fund regulation and supervision.

Read more about Alternative investment fund types and structures in Luxembourg

SUMMARY

Luxembourg investment funds offer investors numerous advantages, including flexible regulations, favorable tax conditions and access to diverse markets. Compared to Polish alternative investment companies, Luxembourg funds can be an attractive option due to their stability and reputation. Investors can benefit from professional management and portfolio diversification opportunities.

Could investment funds from Luxembourg be the answer to your investment needs and is it worth considering moving some of your capital to this prestigious jurisdiction? If you are considering setting up or moving your fund to Luxembourg – contact Fundequate.