Financial Services Quarterly Report - Third Quarter 2017: Luxembourg Developments

by Dechert LLP

Dechert LLP

Luxembourg recently has taken a number of actions in connection with the transposition or implementation of various EU directives and regulations, respectively, into national law. The Luxembourg government deposited a bill of law with Parliament that would transpose MiFID II and implement MiFIR in Luxembourg. Also, the Luxembourg financial regulator CSSF published FAQs to provide interpretative guidance on the upcoming effectiveness of the PRIIPs Regulation. In another area, the Luxembourg government deposited a bill of law with Parliament to introduce a new BEPS-compliant regime of taxation of certain intellectual property rights. These developments are discussed below.

Luxembourg Publishes Bill to Implement MiFID II

By Patrick Goebel and Christine Renner

The Luxembourg government deposited a bill of law1 with Parliament on 3 July 2017 (Bill),2 which will transpose MiFID II3 (Directive) and implement MiFIR4 in Luxembourg. For further information regarding MiFID II, please refer to Dechert OnPoint, MiFID II: Key Considerations for Asset Managers.

Among other provisions, the Bill introduces three new financial sector professionals to implement the newly regulated approved reporting mechanisms: providers for approved publication arrangement (APA); providers for approved reporting mechanism (ARM); and consolidated tape providers (CTP). The Bill also contains stricter rules on product governance and higher organizational requirements for the management of investment firms, with an aim to enhance investor protection and strengthen the market against systematic risks. The sanction authority of the Commission de Surveillance du Secteur Financier, the Luxembourg supervisory authority for financial services (CSSF), has also been strengthened.

The main part of the implementation will be achieved by amending the Luxembourg Financial Sector Law5 and introducing other amendments through lower-level legislation and regulation6.

As of the date of this publication, neither the Finance and Budget Commission (Commission des Finances et du Budget) (Commission), which considered the Bill, nor the State Council (Conseil d'Etat) has provided an opinion on the Bill.

The timeline for the implementation – with a deadline of 3 January 2018 – seems extremely tight, bearing in mind that: (i) the implementation for MiFID I took more than eight months; (ii) the Directive is even more complex; and (iii) implementation includes delegated national acts that will depend on the final law.

Luxembourg's Stance on Provisions where Discretion is Left to Member States

The following are examples of areas in which Luxembourg has exercised its discretion where matters have been left to member states.

Third Country Regime

The Directive introduces a third country regime, which – depending on the circumstances – provides “equivalence” to investment firms from third countries when such firms provide investment services and conduct activities in the EU. The impact of this regime on such firms depends on: (i) the type of client (eligible counterparties and clients known as “per se professional clients” in the context of MiFID on the one hand, and clients known as “opt-up professional clients” in the context of MiFID and retail clients on the other); (ii) how services are provided (through a branch or the freedom of services within the EU framework); (iii) whether an equivalence decision has been made by the Commission (in which case, the equivalence decision will take precedence over the national regimes); and (iv) whether a member state has exercised its discretion to allow activities by third country firms.

The Directive provides that certain conditions must be met if a member state requires that services be provided through a branch. Luxembourg exercised the option to require third country firms to establish a branch when providing services to retail clients and opt-up professional clients, pursuant to the Project Law7, which in turn requires the existence of a cooperation agreement between Luxembourg and the home member state of the investment firm. However, Luxembourg has been less strict with respect to eligible counterparties and per se professional clients – services to these clients may be provided through a branch or via cross-border services, provided the Commission has not made a decision on equivalence.

Tied Agent

An investment firm may appoint an entity or natural person known as a “tied agent”, which acts on behalf of the investment firm within the context of that firm’s authorization and under its full responsibility. The Directive changes, or provides the option to change, points in the regime to which the tied agent is subject. Much is left to the member states’ discretion.

The Bill expressly states that Luxembourg does not intend to opt to allow investment firms to register tied agents in a self-regulation mechanism, but that the tied agent must instead (as previously) be registered with the CSSF. Luxembourg has been less strict on the other points – for example, it has not proposed legislation covering whether tied agents registered in Luxembourg may be authorised under the Project Law to hold money and financial instruments of clients.


1) Bill of law n° 7157 dated 30 June 2017.

2) A minor implementation in relation to the outsourcing of important operational functions was introduced with an amendment of the Financial Sector Law this year with bill n° 7024 deposited in July last year.

3) Directive 2014/65/EU of the European Parliament and of the Council of 15 May 2014 on markets in financial instruments and amending Directive 2002/92/EC and Directive 2011/61/EU.

4) Regulation (EU) No 600/2014 of the European Parliament and of the Council of 15 May 2014 on markets in financial instruments and amending Regulation (EU) No 648/2012.

5) Law of 5 April 1993 on the financial sector, as amended.

6) Other implementing acts will be introduced through amendments to various laws and a re-setting of the law of 13 July 2007 on markets in financial instruments, as amended, as well as lower-level legislation such as governmental regulations (règlements grand-ducaux) and regulations by the CSSF.

7) Article 32-1(2) of the Financial Sector Law, as amended by the Bill.

CSSF Publishes FAQs on PRIIPs

By Patrick Goebel and Christine Renner

The PRIIPs Regulation1 will enter into effect on 1 January 2018. Asset managers and funds, if they have not already done so, should promptly undertake an assessment of potential compliance measures that will need to be implemented. For further information on the PRIIPs Regulation, please refer to Dechert OnPoint, the Regulation on Key Investor Documents for Packaged Retail and Insurance-Based Investment Products – Key Points for EU and Non-EU Asset Managers.

At this point, Luxembourg has not yet published a law on implementing measures (including, for example, provisions as to competent national authorities and sanctions). However, in light of the pending effectiveness of the PRIIPs Regulation, the CSSF amended its FAQs on the 2013 Law2 (which transposed the AIFMD into Luxembourg law), in order to provide guidance to entities under its supervision3.

The PRIIPs Regulation requires that a key information document be provided to investors who qualify as a “retail investor” under the PRIIPs Regulation (Retail Investors) by entities that: (i) offer a packaged retail investment product (e.g., an investment fund); or (ii) enter into an agreement regarding PRIIPs with a Retail Investor.

Retail Investors, in this context, are investors who do not qualify as per se or opt-up professional investors under annex II of the Directive. Credit institutions, collective investment schemes and certain large undertakings4 will generally qualify as professional investors. Client funds managed under a discretionary mandate by a professional (i.e., an investment firm under MiFID) are in principle not considered as investments by a retail client.

RAIFs, SIFs and SICARs may be invested in by “well-informed investors” as defined in the RAIF Law5, the SIF Law6, and the SICAR Law7, respectively. As the definition of well-informed investor is broader than the definition of professional investor, some well-informed investors might not qualify as professional investors – these investors consequently will qualify as Retail Investors within the meaning of the PRIIPs Regulation, and a key information document will need to be delivered to them commencing in 2018.

The CSSF’s FAQs provide helpful guidance with respect to provisions of the PRIIPs Regulation that are unclear. For example, the FAQs clarify that the PRIIPs Regulation does not apply to non-EU investors, and that existing investors do not need to be provided with a key investor document.


1) Article 32-1(2) of the Financial Sector Law, as amended by the Bill.

2) Law of 12 July 2013 on alternative investment fund managers, as amended.

3) Such undertakings must have: (i) a EUR 20,000,000 balance sheet and EUR 40,000,000 net turnover; or (ii) EUR 2,000,000 of their own funds.

4) Reserved alternative investment funds under the Luxembourg law of 23 July 2016 on RAIFs.

5) Specialised investment funds under the Luxembourg law of 13 July 2007 on SIFs, as amended.

6) Investment companies in risk capital under the Luxembourg law of 15 June 2004 on SICARs, as amended.

New Tax Incentives for Intellectual Property Rights to be Introduced in Luxembourg in 2018

By Florent Trouiller

The Luxembourg Government submitted a bill of law to the Parliament on 4 August 2017, to introduce a new Base Erosion and Profit Shifting Action (BEPS)-compliant regime of taxation of certain intellectual property rights (IP). This regime would provide for an 80 percent exemption on certain income derived from qualifying IP rights, as well as a full exemption of these rights from net wealth tax. The legislation is expected to be applicable with effect from the 2018 fiscal year.


The bill is inspired mainly by the modified nexus approach adopted by the Organization for Economic Cooperation and Development (OECD) in its report on BEPS Action 5 on Harmful Tax Practices. The new regime would apply in parallel with the initial Luxembourg IP regime that was terminated on 30 June 2016, but with a grandfathering period expiring on 30 June 2021. Under the nexus approach, the benefit of the new regime will be linked to the level of research and development activities carried out by the taxpayer.

Eligible IP Rights

The scope of eligible IP rights has been narrowed and would encompass the following two main groups of IP rights that are created, developed or improved after 31 December 2007:

  • Patents and functionally equivalent IP rights that are legally protected by utility models, extensions of patent protection for certain drugs and phytopharmaceutical products, plant breeder’s rights, and orphan drug designations; and
  • Software protected by copyright.

Marketing-related IP rights (such as trademarks, designs and domain names) are not included in the new regime.

Eligible Income and Expenses

The income qualifying for the new regime would be determined on the basis of the nexus ratio. Indeed, only a certain proportion of the net income derived from a qualifying IP right would be able to benefit from the new regime. This nexus ratio corresponds to the ratio between (i) the expenses that the taxpayer incurs for the creation, development or improvement of a qualifying IP right, and (ii) the total expenses relating to that IP right.

Eligible income would include:

  • Income derived from the use or the granting of the right to use qualifying IP rights;
  • IP income embedded in the sales price of products or services directly related to the eligible IP asset;
  • Capital gains realized upon the disposal of an eligible IP right; and
  • Indemnities obtained in the context of on an arbitral or judicial decision directly linked to a breach of a qualifying IP right.

Qualifying expenses for the new regime would include the expenses necessary to conduct research and development activities of the taxpayer, and which relate directly to the creation, development or improvement of an eligible IP right.

It should be noted that outsourced research and development costs would be eligible, provided such activities are carried out by non-related parties. All costs not directly related to an eligible IP right, as well as certain expenses (e.g., costs of real estate, interest and other financing, and acquisition of IP rights) are not qualifying.

Finally, when computing the amount of eligible expenses, taxpayers are allowed to increase such expenses by up to 30% (but they cannot exceed the amount of total expenses). Therefore, the amount of IP income benefiting from the new regime may be increased.


Taxpayers should be able to track and document their qualifying total expenses to evidence the connection between such expenses and the eligible IP income.

More generally, in light of the constraints triggered by the BEPS Action 5 on Harmful Tax Practices, it may be anticipated that a certain alignment of the IP tax regimes within the OECD countries will occur within the next months. The key criteria to assess the appropriate jurisdiction to carry out research and development activities will be closely linked to the nexus approach. Therefore, it will be important to take this into account when determining where to locate global research and development headquarters, especially where research and development activities are carried out by multiple entities located in different jurisdictions within the same group.


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