July 26, 2023

Act Modernizing Luxembourg Fund Product Laws and AIFM Act Has Been Published

Arne Bolch, Olivier Gaston-Braud, Patrick Goebel, Matthias Kerbusch, Philippa List, Christine Renner, Laura Rossi, Marc Seimetz, Marianna Tothova

Dechert LLP

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Dechert LLP

On 11 July 2023, the Luxembourg Parliament adopted bill of law n°8183 which amends five existing Luxembourg laws relating to alternative investment funds (“AIFs”) and alternative investment fund managers (“AIFMs”), namely the UCI Act¹, the SICAR Act², the SIF Act³, the RAIF Act⁴ (the “Fund Product Laws”) and the AIFM Act⁵. For a summary of the bill of law, please refer to our OnPoint by clicking here.

The act of 21 July 2023 (the “Modernization Act”) was published in the Official Journal of the Grand Duchy of Luxembourg on 24 July 2023. Most of the amendments introduced by the Modernization Act will enter into force on 28 July 2023.

The objective of the Modernization Act is to improve the Luxembourg toolbox relating to Luxembourg UCITS and AIFs. This includes introducing measures that aim to increase the appeal of alternative assets classes to retail investors, such as the European long term investment fund (“ELTIF”), particularly given the adoption on 15 March 2023 of Regulation (EU) 2023/606 that amends Regulation (EU) 2015/760 on ELTIFs⁶. The Modernization Act also brings some of the CSSF’s administrative practice into legislation.

The below table summarizes the key changes introduced by the Modernization Act for Luxembourg investment funds:

Key Amendments to Fund Product Laws

	Investor eligibility criteria	Duration to meet the minimum amount of capital	Withdrawal of the depositary	Tax	Additional changes affecting specific Fund Product Laws
UCITS	No change – units are intended to be distributed to the public and any type of investors including retail investors are eligible.	No change – the minimum amount of €1,250,000 must be met within six months from the authorization of the CSSF.	The maximum two months’ notice period to replace the depositary in case of resignation or dismissal of the depositary is removed. The depositary agreement must provide for a notice period that would allow time for the depositary to be replaced. The CSSF’s administrative practice of withdrawing an investment fund from its official list (leading in practice to a judicial liquidation) when no depositary is replaced at the end of the notice period is brought into law.	The definition of money market funds (“MMF”) replaced the previous ad hoc definition – by reference to EU Regulation 2017/1131 on money market funds, MMFs are benefiting from the reduced subscription tax of 0.01 percent or are exempt from the subscription tax if they qualify as short-term MMFs, are only invested by institutional investors, and benefit from the highest possible rating from a credit agency, UCITS exclusively used as Pan-European Pension Product (“PEPP”) are exempt from the subscription tax.	No major changes.
Part II AIF		The minimum amount of €1,250,000 must be met within 12 months (previously six months) from the authorization of the CSSF.		Same as for the UCITS. In addition, a Part II AIF authorized as an ELTIF is exempt from the subscription tax.	Possibility to use a variable capital structure with the legal form of a corporate partnership limited by shares¹ (“SCA”), common limited partnership² (“SCS”), special limited partnership³(“SCSp”), private limited liability company⁴ (“SARL”) or cooperative company taking the form of a limited liability company⁵ (“SCoSA”). Where a Part II AIF takes the form of an SCA, SCS or SCSp, it must appoint an external AIFM authorized in the EEA – as is currently the case with RAIFs. Possible for a closed-ended Part II AIF can freely determine the issuance price in the constitutive document. Like for SIFs and RAIFs, the valuation of assets of a Part II AIF is based on fair value unless otherwise stated in the constitutive documents.
SICAR	Investment threshold in the definition of “well-informed investors” is reduced for non-professional investors from €125,000 to €100,000 (or the equivalent amount in a freely convertible currency). In addition, the evaluation of the expertise of other non-professional investors can also be made by authorized AIFMs (which was previously only possible in case of a RAIF).	The minimum amount of €1,000,000 must be met within 24 months (previously 12 months) from the authorization of the CSSF.		No changes.	Generally, the amendments are aiming to the bring the SICAR closer to the SIF, for instance: The withdrawal of authorization of a compartment does not trigger the withdrawal of authorization of the SICAR. Bringing the CSSF administrative practice into law, directors must be approved by the CSSF. Contributions other than cash in case the SICAR is an SCS or SCSp must be accompanied by a report from an auditor.
SIF		The minimum amount of €1,250,000 must be met within 24 months (previously 12 months).		The definition of short-term MMF has been updated by reference to EU Regulation 2017/1131 and those SIFs are exempt from the subscription tax. In addition, a SIF authorized as an ELTIF is exempt from the subscription tax.	No major changes.
RAIF			No major changes.	Changes only affected RAIFs, which are subject to subscription tax. The definition of short-term MMF has been updated by reference to EU Regulation 2017/1131 and those RAIFs are exempted from the subscription tax. In addition, a RAIF authorized as an ELTIF is exempt from the subscription tax.	Removal of the requirement that a Luxembourg notary acknowledges that the RAIF has been established and that an external AIFM has been appointed within five Luxembourg business days of the establishment of the RAIF if the RAIF has been established under a notarial deed. Clarification that the RAIF can be marketed to non-professional investors in Luxembourg, provided they qualify as “well-informed investors”.

^{1 Société en commandite par actions; SCA.

2 Société en commandite simple; SCS.

3 Société en commandite spéciale; SCSp.

4 Société à responsabilité limitée; SARL.

5 Société cooperative sous forme d’une société anonyme; SCoSA.}

For Luxembourg management companies and AIFMs, chapter 16 of the UCI Act and the AIFM Act will be amended to transpose into legislation some of the Commission de Surveillance du Secteur Financier’s (“CSSF”) current administrative practice.

Where a Luxembourg AIFM enters liquidation voluntarily, the liquidator must be approved by the CSSF before its appointment and the AIFM will continue to be under the supervision of the CSSF until the liquidation process is complete. The liquidation report is subject to review of the statutory auditor of the AIFM. The Modernization Act also introduces rules for judicial liquidation of the AIFM that are based on rules for judicial liquidation of regulated AIFs.

Finally, the Modernization Act enables Luxembourg AIFMs to appoint tied agents. Tied agents are non-regulated persons or companies appointed by credit institutions or investment firms under MiFID⁷ for the purposes of promoting their services, soliciting business, or receiving orders from clients or potential clients and transmitting them, placing financial instruments, and providing advice in respect of such financial instruments and services offered. Where an AIFM appoints a tied agent, the AIFM will be subject to the same obligations as credit institutions and investment firms.

Footnotes

¹The act of 17 December 2010 on undertakings for collective investment, as amended (the “UCI Act”).

²The act of 15 June 2004 on investment companies in risk capital, as amended (the “SICAR Act”).

³The act of 13 February 2007 on specialized investment funds, as amended (the “SIF Act”).

⁴The act of 23 July 2016 on reserved alternative investment funds, as amended (the “RAIF Act”).

⁵The act of 12 July 2013 on alternative investment fund managers, as amended (the “AIFM Act”).

⁶Our OnPoint on ELTIF is available here.

⁷Directive 2014/65/EU of the European Parliament and of the Council of 15 May 2014 on markets in financial instruments.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.