Asset Management
Luxembourg, your location
of choice
Seizing
opportunities
in Luxembourg
PwC Luxembourg (www.pwc.lu) is the largest professional services firm in Luxembourg with 2,450 people employed from 55 different countries. It provides audit, tax and advisory services including management consulting, transaction, financing and regulatory advice to a wide variety of clients from local and middle market entrepreneurs to large multinational companies operating from Luxembourg and the Greater Region. It helps its clients create the value they are looking for by giving comfort to the capital markets and providing advice through an industry focused approach.
The global PwC network is the largest provider of professional services in audit, tax and advisory. We’re a network of independent firms in 157 countries and employ more than 195,000 people. Tell us what matters to you and find out more by visiting us at www.pwc.com and www.pwc.lu.
This publication is exclusively designed for the general information of readers only and does not constitute professional advice. This publication is (i) not intended to address the specific circumstances of any particular individual or entity, and (ii) not necessarily comprehensive, complete, accurate. PwC Luxembourg does not guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. The reader must be aware that the information to which he/she has access is provided “as is” without any express or implied guarantee by PwC Luxembourg. PwC Luxembourg cannot be held liable for mistakes, omissions, or for the possible effects, results or outcome obtained further to the use of this publication or for any loss which may arise from reliance on materials contained in it, which is issued for informative purposes only. No reader should act on or refrain from acting on the basis of any matter contained in this publication without considering and, if necessary, taking appropriate advice in respect of his/her own
The increase in investable assets amid a wave of post-crisis regulations has created a uniquely favourable environment for asset managers to move centre stage. Because asset growth will be mainly driven by the rising demand of the retirement market, the growing importance of sovereign wealth funds and increasing wealth in emerging markets, asset managers will favour territories that can demonstrate a framework of long-term stability, transparency and a commitment to serving an international fund industry. With a proven focus on providing experience and infrastructure to service the industry, Luxembourg is set to benefit from this period of transformation. More particularly, Luxembourg is well positioned to leverage on the increase in cross-border activity, both in terms of investment and distribution, and to play a central role. The Grand Duchy also has the key attributes necessary to become the leading global AIF platform as it did with UCITS, and to thereby help alternative fund managers and institutional investors turn AIF (Alternative Investment Fund) regulations into an advantage rather than a burden.
The Asset Management sector
stands on the precipice of
fundamental shifts that will
make it significantly different
tomorrow than it is today.
The good news is that we
can look forward to a bright
future: worldwide assets under
management are continuing to
rise, and we predict they will
exceed USD 100 trillion by 2020*.
There is no doubt that 2020 will be a different world for asset managers. Those who intend to succeed have already started to shape their responses to the game-changers that lie ahead. We are confident that many asset managers will rise to the new challenges and will capitalise on them. We, at PwC Luxembourg, are ready to help our clients with the myriad of changes looming on the horizon and see this as a great opportunity for Luxembourg to lead the way into a new era for asset management.
Luxembourg Asset Management in 2020,
a new vision
Steven Libby
Luxembourg Asset Management Leader
Steven Libby
Luxembourg Asset Management Leader
Table of contents
1. Why Luxembourg?
...4
2. Building your strategy
...14
2.1. The right location is part of the right strategy
...16
• Location
• Products
• Distribution channels
• Target investors
2.2. Legal structures of Luxembourg regulated
investment vehicles
...24
• In a nutshell
• Comparative table
• Details per structure
1. Legal framework 2. Legal forms 3. Investors
4. Type of securities that may be issued to investors 5. Ongoing subscription and redemption of shares/units 6. Structuring of capital calls
7. Minimum capital requirement, compartments and classes
8. Management Company and compulsory service providers in Luxembourg - Management Company and “self-managed SICAV” status
- AIFM and the “internally-managed AIF” status - Central administration
- Depositary bank - External auditor
9. Eligible investments and investment restrictions 10. Frequency of NAV calculation and valuation principles 11. Distribution channels
12. Fund taxation 13. Tax Treaties
14. VAT on services provided
15. Applicability of the EU Savings Directive
3. Practical guide
...42
3.1. Set-up
...44
• Drafting constitutional documentation
• Submission of the investment vehicle’s documentation to the CSSF
• Incorporation, CSSF visa and launch of the investment vehicle
• Tax considerations
- Funds
- Management Company
• One-off and ongoing costs at a glance
3.2. Distribution
...48
• UCITS
• AIFs
3.3. Maintenance
...54
• CSSF supervision
• Reporting requirements
• Amendments to an existing investment vehicle
• Tax considerations
- Funds
- Management Company - Investors
- Value Added Tax (VAT) - Challenges
3.4. Restructuring
...60
• Mergers
• Master-feeders
• Re-domiciliation
3.5. Liquidation
...67
• Liquidation of investment vehicles and compartments
- Liquidation of a SICAV - Liquidation of a FCP
- Liquidation of a compartment of an investment vehicle
• Tax considerations
4. An influential player in Luxembourg
...70
Contacts
...70
5. Glossary
...71
• Welcome to the largest investment
fund centre in Europe
• Luxembourg: 30 years of success in
Asset Management
• Your gateway to the world
• Located at the heart of Europe
• Unmatched political and
budgetary stability
• Government access and support
• A stable and rewarding tax
environment
• An international and highly
productive workforce
6
PwC Luxembourg
1. Why Luxembourg?
Welcome to the largest investment fund
centre in Europe
Luxembourg is Europe’s largest investment fund centre and world’s second largest after the US
Cross-border distribution leader
67%
of authorisations of
Luxembourg for
cross-border distribution
worldwide
Luxembourg’s position as a key domicile for internationally distributed funds began in 1988 when the first UCITS Directive was implemented into local law. Since this date, Luxembourg has enjoyed significant and consistent growth in both assets and fund numbers with a notable surge since the turn of the century reflecting the increasing attractiveness of Luxembourg as a hub for mainstream and alternative global fund products.
Historically, Luxembourg’s success has been fuelled by its ability to offer an attractive platform for retail funds distributed in Europe and globally.
At PwC Luxembourg, we are confident that the expertise of the fund community in Luxembourg, together with the business minded environment and the long standing tradition of being a safe fund centre will allow the Grand Duchy to weather the regulatory storm. We are pleased to provide this summary of the Luxembourg business and regulatory environment for your information and stand ready to provide support whatever your needs may be.
Assets under Management
With more than
7
Asset Management: Luxembourg, your location of choice
Cross-border
registrations
18,000 in 2001
83,505 in 2014
55,787 from luxembourgish
funds
Cross-border
funds
3,260 in 2001
10,430 in 2014
5,726 domiciliated in
Luxembourg
Number of
SIFs
227 in 2006
1,590 in 2014
Number of compartments
From
727
in 1990 to13,849
in December 2014
Domicile share of authorisations for cross-border
distribution of ETFs, in March 2014
40%
8
PwC Luxembourg
Luxembourg: 30 years of success in Asset Management
Law of 10 July 1991 on Institutional funds.
1991
The Maastricht Treaty establishes the European Union.
1992
The euro is introduced, replacing the Luxembourg franc. The third UCITS Directive is transposed into national law.
2002
MiFID is transposed into national law.
Law of 13 February 2007 on Specialised Investment Funds (SIF).
2007
UCITS IV is transposed into national law.
2010
The Luxembourg draft law transposing the AIFMD was submitted to parliament.
2012
The AIFMD 2011/61/EU of 8 June 2011 has been implemented in Luxembourg law with the Law of 12 July 2013.
2013
As
se
ts
un
de
r M
an
ag
em
en
t
EUR bn
Luxembourg becomes the first member state to transpose the European Directive for Collective Investments (UCITS). The Association of the Luxembourg Fund Industry (ALFI) is established.
1988
Luxembourg reaches record AuM of over 3 trillion Euros representing an increase of 18,34% since 1 January 2014.
In January 2014, the first ever RQFII UCITS fund, allowing investors to access securities listed in Mainland China, has been launched in Luxembourg (this fund got authorisation from CSSF in November 2013).
9
Asset Management: Luxembourg, your location of choice
The table herewith shows
the top 25 cross-border
groups in Europe classified
by the number of countries
into which they are selling.
Your gateway to the world
• The world’s biggest fund managers have chosen Luxembourg as the base for their global distribution.
• More than 50 fund promoters from over 19 countries have chosen Luxembourg as their international hub.
• The main countries of origin for fund promoters are US, United Kingdom, Switzerland and France. The others originate from countries in Europe, Asia, the Middle East and the Americas.
• Luxembourg funds are distributed to over 70 countries in Europe, Asia, the Middle East and the Americas.
Ranking Management Company Tota
l # o
f c ou nt rie s o f d is tri bu tio
n a
t g ro up le ve l ( incl ud ing d om ici le )
MAIN FUND DOMICILES AND NUMBER OF
COUNTRIES OF DISTRIBUTION
First domicile and # of countries of distribution (cr
oss-bor
der)
Second domicile and # of countries of distribution (cr
oss-bor
der)
Thir
d domicile and # of
countries of distribution (cr
oss-bor
der)
1 FRANKLIN TEMPLETON 49 LU 48 - - -
-2 HSBC 45 LU 40 IE 18 GG 5
3 BLACKROCK 44 LU 36 IE 25 DE 13
4 FIDELITY WORLDWIDE INVESTMENTS 39 LU 38 UK 11 IE 11
5 BNP PARIBAS 35 LU 34 FR 12 -
-6 ALLIANZ GROUP 33 LU 32 IE 12 DE 7
7 GAM (INCLUDING SWISS AND GLOBAL) 32 LU 26 IE 23 UK 4
8 JP MORGAN 31 LU 31 HK 6 -
-8 PIONEER INVESTMENTS 31 LU 30 AT 4 -
-10 SCHRODERS 30 LU 29 UK 13 HK 4
10 UBS 30 LU 29 IE 15 FR 4
12 INVESCO 29 LU 27 IE 25 KY 2
12 AMUNDI GROUP 29 LU 28 FR 13 IE 5
14 ABERDEEN ASSET MANAGEMNT 28 LU 27 UK 6 IE 3
15 ROYAL BANK OF SCOTLAND 27 LU 26 - - -
-16 DEUTSCHE BANK 26 LU 22 IE 16 DE 12
16 HENDERSON GROUP 26 LU 25 UK 12 -
-16 BNY MELLON 26 IE 24 LU 14 UK 11
16 LEGG MASON 26 IE 22 LU 10 -
-16 PIMCO 26 IE 25 - - -
-16 CAPITAL GROUP 26 LU 25 - - -
-22 ALLIANCEBERNSTEIN MANAGEMENT 25 LU 24 - - -
-22 ING INVESTMENT MANAGEMENT 25 LU 24 - - -
-22 PINEBRIDGE 25 IE 24 - - -
-25 CREDIT SUISSE GROUP 24 LU 22 IE 10 LI 3
25 INVESTEC 24 LU 22 GG 7 UK 4
25 PICTET & CIE 24 LU 23 CH 2 -
-Domicile share of authorisations for cross-border distribution
Luxembourg funds
are exported to more
than
70
countries
Ireland
Authorisations in:
United Kingdom 1,880
Germany 1,708
France 1,371
Netherlands 1,343
Switzerland 1,275
Luxembourg
Authorisations in:
Germany 4,704
Switzerland 4,098
Austria 4,067
France 3,470
Netherlands 3,258
Funds Domicile: Luxembourg Ireland France Jersey United Kingdom Other 20% 2% 67%
Most popular markets for cross-border funds from:
Sources: Lipper LIM and PwC analysis, 31 December 2014.
Ranking according to the total number of country registrations for all cross-border funds of each group.
2%
4%
10
PwC Luxembourg
500 km
700 km
70% of the EU wealth 40% of the EU wealth
Located at the heart of Europe
Luxembourg is within driving distance of all major European business centres. Around 40% of the European Union’s wealth is concentrated in a 500km area around Luxembourg. When extended to 700km, this figure rises to around 70%.
Luxembourg in the heart of a
11
Asset Management: Luxembourg, your location of choice
Unmatched political
and budgetary
stability
Luxembourg is famous for its long-standing political stability and one of the lowest debt to GDP ratio of the EU (23.6% vs 85.4% for the EU28). The country credit trustworthiness is rated at AAA by Standard and Poor’s.
Source:
Lux Debt to GDP ratio | 23.6 | Eurostat, as of 2013, Government consolidated gross debt
EU Debt to GDP ratio | 85.4 | Eurostat, as of 2013, Government consolidated gross debt EU 28 Lux rating | AAA
Government access
and support
The Luxembourg government has always had an open and friendly ear for the various business players. The authorities are accessible, officials are easy to contact and open to dialogue. This close relationship between government and business community will allow Luxembourg to continue to strengthen its position as the most attractive fund centre.
A stable and rewarding tax environment
Total Tax Rate
Luxembourg ranks 20 out of 189 economies analysed in the “Paying Taxes 2015” survey led by PwC and the World Bank. Luxembourg’s low percentage is explained by the availability of important tax credits for investments in fixed assets which offset the corporate income tax liability of a company.
Stability
With public finance comfortably within EU stability and Growth Pact requirements, Luxembourg will maintain one of the most attractive tax regimes in Europe.
Personal tax
Personal taxation and social-security regime are very competitive compared to other European countries; there are many allowances, deductions, and exemptions in the Luxembourg income tax regime.
VAT
Luxembourg has always applied the lowest rates in the EU. The difference rates applicable are: 3%, 8%, 14% and 17% according to the goods or services purchased.
Although Luxembourg raised these rates as of January 2015, they remain the lowest throughout Europe.
Double tax treaties
Luxembourg has signed, and still continues to sign, a large number of treaties with EU and non-EU countries to avoid double taxation of individuals and companies resident for tax in another country. So far, Luxembourg has entered into 68 treaties.
Snapshot of business taxes
Tax area Rates
Corporate
Tax 29.22%0.5%
0%-15%
Income tax Net wealth tax Withholding tax Value Added
Tax (VAT) 3%8% 14% 17%
Applies to food, hotels, restaurants, medical, entertainment etc. Applies to domestic services
Applies to the supply of certain items, i.e. solid mineral fuel and mineral oil, custody and management of securities
Standard rate Individual
Tax 0% - 44.1% Individual income tax
Intellectual
Property (IP) 80% Exemption for net income derived from certain IP rights
Luxembourg
Profit Tax Total Tax Rate Labour Tax Total Tax Rate Other Tax Total Tax Rate
EU and EFTA World
Source: PwC Paying Taxes 2015 analysis
500 km
700 km
70% of the EU wealth 40% of the EU wealth
12
PwC Luxembourg
45% of Luxembourg residents are
not from Luxembourg
, and each day, around 166,000 people commute to Luxembourg.A defining characteristic of the Grand Duchy of Luxembourg is the diversity of
its people and the
ease of integration
into the community.
The labour market in Luxembourg offers a pool of highly skilled and multilingual resources from Luxembourg as well as France, Germany and Belgium. The integration of foreigners is very
easy as
Luxembourgish, French
and German are the official
languages
, and as75% of
Luxembourgers can speak
English
. Luxembourg’s quality of living, social security coverage, fine public infrastructure, rewarding packages and ideal gateway to European careers have attracted highly skilled profiles.Luxembourg in a nutshell
Unmatched political
and budgetary
stability
Government access and support
A stable and rewarding tax
environment
European largest fund domicile and world’s
second largest fund centre after the US
Luxembourg’s national debt has been one
of the lowest in Europe over the last three
years (23.6% of GDP in 2013)
Located at the heart
of Europe
An international and highly
productive workforce with a sound
expertise in all aspects of the fund
life cycle
One of the lowest unemployment rates in
Europe (7% in December 2014)
An international and highly productive workforce
Source:
Lux unemployment rate | 7.0 | Eurostat, as of 2014/12
2.1. The right location is part of
the right strategy
• Location
• Products
• Distribution channels
• Target investors
2.2. Legal structures of
Luxembourg regulated investment
vehicles
• In a nutshell
• Comparative table
• Details per structure
1. Legal framework 2. Legal forms 3. Investors
4. Type of securities that may be issued to investors 5. Ongoing subscription and redemption of shares/
units
6. Structuring of capital calls
7. Minimum capital requirement, compartments and classes
8. Management Company and compulsory service providers in Luxembourg
- Management Company and “self-managed SICAV” status
- AIFM and the “internally-managed AIF” status - Central administration
- Depositary bank - External auditor
9. Eligible investments and investment restrictions 10. Frequency of NAV calculation and valuation
principles
11. Distribution channels 12. Fund taxation 13. Tax treaties
14. VAT on services provided
15. Applicability of the EU Savings Directive 16. Possibility to use intermediary vehicles for
16
PwC Luxembourg
2. Building your strategy
2.1. The right location is part of the right
strategy
All good things start with a solid strategy. To design the most efficient strategy to create, maintain and successfully distribute an investment fund that meets your long term business objectives, many different, and often competing factors, need to be identified and evaluated. For example, the type of fund structure that best suits both the investment strategy you wish to offer and local distributors and/or that local target investors feel comfortable with, what target markets provide the
best chances of sales success; what, if any, specific local requirements exist in each of the targeted local markets, what key distribution channels are available, what is the appetite of local investors for your strategy, just to name a few.
A robust and well-designed strategy needs to be comprehensively developed and efficiently executed to maximise your opportunities for long-term success. Such a robust strategy often has the following key elements:
The Fund Strategy Mix
“Nothing
good
happens by
accident”
Ken Blanchard,
“The 1 minute entrepreneur”
Location
(page 17)• Where should my fund be domiciled?
• Which jurisdictions should be targeted?
Target investors
(page 22)Which type of investors should be targeted:
• Pension funds/private banks/Corporates/HNWI’s/ mass retail?
Products
(page 19)What type of fund structure and product should I create and with what sort of features to satisfy local requirements: • UCITS,
• AIFs, • ETFs.
Distribution channels
(page 20)
• What distribution models should be used (i.e. public distribution, private placement, listing)? • What distribution channels
are available and most appropriate?
The Fund
Strategy Mix
92
Belgium
Selecting the most appropriate location in which to create and base your investment fund and then to target foreign markets is the starting point of a robust and efficient long-term distribution strategy. The initial market selection is critical as attempting to change the domicile of an investment fund at a later stage, whilst possible, is very time consuming, administratively difficult and costly.
As it has for more than 30 years,
Luxembourg remains the location of choice for fund domiciliation within Europe and as a centre for funds that are sold cross-border across Europe and the world. Not only is Luxembourg the second largest fund domicile in the world, after the US, and Europe’s leading centre for fund domiciliation, it also remains the world’s number one fund domicile for cross-border
fund distribution1. This long-term leading
position is due to a myriad interconnected factors, including but not limited to:
• Reputation for market oriented
public policy
• Robust regulatory framework of
EU laws
• Economic and political stability
• Tax efficiency and neutrality
• Service provider specialisation
• Full focus on exporting fund
solutions
Another key factor in Luxembourg’s continued success in cross-border funds is its small internal market. Whereas all other large countries shape their fund industry based on their internal market and constraints, Luxembourg’s small domestic market has permitted the government and fund industry to focus its tax, regulatory and business policies almost exclusively on the exportation or cross-border sales of investment funds and thus developing an investment fund environment almost totally focussed on and supportive of cross-border fund distribution. In 1988, Luxembourg was the first country to fully implement the original 1985 UCITS Directive and it has developed a large multi-lingual labour force and ability to service and assist with the distribution of funds from and in different jurisdictions. In addition to this, the country’s fund tax treatment and EU based regulatory environment is malleable enough to allow fund promoters to quickly adapt their fund ranges, thus being able to respond to changing investor demands and market requirements.
Due to its internal market size and strong working commitment of all key stakeholders, Luxembourg is able to react extremely quickly to market developments and asset managers’ requirements and modify policies relating to funds as the need may be. The confidence that the global asset management industry has in Luxembourg is demonstrated by the fact that as of 2013, Luxembourg hosted 49 of the 50 top cross-border fund managers.
1 Cross-border fund distribution: funds distributed in at least 3 countries, including their domicile country.
Ireland 16% France 14% UK 13% Germany 4% Others 16%
UCITS % market share in Europe European fund asset domiciles (UCITS)
Over the years, the Luxembourg based fund has become synonymous of the UCITS brand and of their cross-border distribution.
Source: EFAMA December 2014
Location
17
Asset Management: Luxembourg, your location of choice
1,274 2,643 Luxembourg 1,146 995 336 296
249 226 196 100 84 237
France Ireland UK SwitzerlandGermanySweden Spain Italy DenmarkNorwayAustriaOthers 105
Source: EFAMA (AuM - December 2014 in million euros)
Switzerland 4%
Luxembourg 33%
18
PwC Luxembourg
Evolution of alternative funds domiciled and administered in Luxembourg
At the same time Luxembourg has developed a strong track record in alternative investment products and bespoke investment structures such as hedge funds, funds of hedge funds, private equity vehicles and real estate funds, managing more than EUR 5oo billion in alternative assets.
% of hedge funds by main country of domicile
Source: HFR
0% 5% 10% 15% 20% 25% 30% 35% 40%
Caymans
Delaware
BVI
Ireland
Luxembourg
Others
40,1% 45%
27,7% 27,7%
21,7% 6,9%
3,6% 3,3%
11,9%
1,3%
14%
20,8%
21,1%
19
Asset Management: Luxembourg, your location of choice
The following fund products are mainly used in Luxembourg from a global distribution perspective:
The appetite for financial products often varies considerably from one local jurisdiction to another, due to cultural norms, historical developments over the years, local regulations and often the different tax treatments that favour one type of financial product over another. All of these issues should be analysed in arriving at the most appropriate fund product to create and support your distribution strategy. Another key issue to consider is whether your product will be distributed on a multi-jurisdictional basis, if so, how widely and what specific product features are different investor types in different target markets looking for. For example, products that accumulate income, distribute income, provide hedging, guarantee capital, etc. Getting the right balance of product features to maximise investor appeal in each of the foreign markets you wish to enter, but at the same time not creating overly complex and administrative inefficient products, can be a difficult balance to get right. However, this appropriate balance will have a significant influence on the long-term success of your fund.
The latest available statistics show that towards the end of 2012, the weight of the UCITS funds was considerably higher than the non-UCITS funds. The latter were not originally regulated or subject to the EU passport rules. Post the 2008 financial crisis, regulated funds and managers have become more important. The idea behind introducing the AIFMD is that regulated hedge funds could also have the benefit of an EU passport. Over the past couple of years there have been an increasing number of alternative funds launched as SIF in Luxembourg. It is strongly anticipated that over the next few years the AIFMD will create a brand of its own, as strong as that of UCITS.
Undertakings for Collective Investment in
Transferable Securities (UCITS)
Alternative Investment
Funds (AIFs) Exchange traded funds (“ETFs”)2
Definition
Undertaking the sole object of which is the collective investment in transferable securities and/or in other liquid
financial assets of capital
raised from the public and which operates on the principle of risk-spreading and the units of which are, at the request of holders, re-purchased or redeemed, directly or indirectly,
out of those undertakings’
assets3.
Vehicle (other than UCITS funds) which raises capital
from a number of investors with a view of investing it in
accordance with a defined
investment policy4.
Investment vehicle that is structured to enable investors to track a particular index through a single instrument that can be purchased or sold on a stock exchange.
Main
characteristics
• It targets to reach the widest range of investors possible.
• An AIF can be a
non-UCITS collective
investment fund, but also certain non-regulated entities.
• Easy set-up, as a UCITS
fund, in most cases; • ETFs have both the
characteristics of an investment fund, such as low costs and broad
diversification but also
characteristics more commonly associated with equities, such as access to real time pricing and trading.
Why?
• A wider choice of funds is possible;
• Can be offered to a very extensive range of investors;
• Greater transparency than other products;
• UCITS regulations are
unique and strong; • Enhanced risk controls5;
• Defined level of investor
protection through strict investment limits; • Easy and to a large extent
harmonised distribution.
• Creation of a single market through harmonised rules; • Increased monitoring
of systemic risks and increased transparency; • Ensures enhanced
investor protection for alternative products; • Can be easily sold to
professional investors within the EU Member States due to the marketing passport that has come into force on 22 July 2013.
• High product transparency,
flexibility as a portfolio
management instrument, and low total expense ratio;
• Quick and easy investor access to the capital
market as ETFs can be
purchased on the stock market just like shares, and they can be traded daily during trading hours and more control as investors can place limit or stop-loss orders; • Tax efficient instruments
that require only the market price of one share as capital investment.
Who are the target investors?
Retail and institutional
investors. Sophisticated investors (professional investors, High
Net Worth Individuals).
Retail and institutional
investors, depending
whether the ETF is set up as UCITS fund or AIF.
2 “Being distinctive Exchange Traded Funds”, PwC Luxembourg, 2010.
3 European Directive 85/611/EC on the coordination of laws, regulations and administrative provisions relating to undertakings for collective investment in transferable securities (UCITS). 4 “The AIFMD outside the EU Why non-EU managers should gear up for the AIFMD”, PwC Luxembourg.
5 “UCITS Handbook - How to Set up, Monitor, Manage and Distribute a UCITS Fund”, ISTE Ltd and John Wiley and Sons, Inc, p.236-237.
20
PwC Luxembourg
After having selected the location of choice for your fund as well as the type of products and features you would like to offer, the next step is to contemplate on how to enter a specific target distribution market taking into local and international regulations, such as MiFID II.
Selling your fund can be undertaken through different types of distribution methods, strategies and specific channels of marketing. Generally speaking there are three methods to enter target markets:
Main characteristics Fund distribution through a specific notification process to the Home and Host Regulators.
A private, non-public sale between an investment fund and individual investor, usually outside the regulatory framework governing public distribution or marketing.
Admission and trading of securities on a regulated market.
Degree of harmonisation at European level
• Under UCITS Directive, the notification
procedures are broadly harmonised for EU wide distribution but there are still many differences in the local marketing arrangements in each EU Member State that must be complied with (apart from the various tax reporting requirements in some
jurisdictions). For example, there are still
many EU Member States which require the
appointment of a local paying agent. The
same can apply to AIFs marketed within the EU.
• Outside the EU, UCITS must of course
comply with the local regulations regarding
public distribution of foreign funds. These
local regulations will vary from country to country but it is fair to say that the registration process to be authorised in
order to publicly sell a UCITS outside the EU is usually significantly more complex,
time consuming and ultimately costly, than
the “notification” process governed by the UCITS Directive for EU Member States.
However, in some non-EU jurisdictions,
such is the acceptance of the UCITS brand that in many jurisdictions UCITS funds have a “lighter” authorisation process than the non-UCITS equivalent investment funds.
Private placement rules are not harmonised within the EU, each jurisdiction being able to operate national rules to permit such distribution. Some jurisdictions do not permit any form of private placement at all or at least to retail clients (for example, France and Italy,
also post- AIFMD implementation, Germany). Thus, in three of the largest markets, you will
no longer be able to sell investment funds to investors on an unregulated, private basis. Post 22 July 2013 to 2015, when the AIFM Directive comes into force at the national level, the regime governing marketing to EU investors will depend on where the manager and the AIF are based.
Most countries in the EU are going to change their national regulation to incorporate AIFMD and will most likely close down private
placement after a transitional period. There
is going to be a maze of regulation which managers in the EU or outside will need help in interpreting.
The listing procedure has as pre-requisite
the authorisation for public distribution in the selected jurisdictions.
Products UCITS and AIFs. UCITS and AIFs. ETFs (mainly set-up as UCITS or AIFs).
Target investors All of the local investors normally and without
any restriction. Professional investors rather than mass retail or high net worth individuals, for UCITS
usually a small number of institutional investors because local regulations in many jurisdictions permit such investors to subscribe to shares or units in a foreign
UCITS without registration.
All of the local investors normally and without any restriction.
How? Either directly or through financial intermediaries. The third party fund distribution may be open, closed and guided. The open architecture, how it
is called in practice, implies that the intermediaries offer a large pallet of third party funds that pertain to competing asset management groups. On the opposite side we have the closed architecture, which offers to investors only its own products (for instance, a bank that only promotes its own
fund ranges). The “meeting” point of these two
types of channels is the guided architecture in which the intermediary offers third party funds from a carefully selected platform of management groups.
Direct client interfacing, no local agents, no
financial intermediaries. Once approval for public distribution has been obtained, the issuer must prepare an
authorisation and/or listing application file
(the complexity of which depends on the
targeted country) and submit it to the local
stock exchange for validation.
Both UCITS and AIF funds can be listed on
the Luxembourg Stock Exchange, as well as on other European exchanges like the London Stock Exchange, Frankfurt Börse, Paris Stock Exchange, Amsterdam Stock Exchange and Zürich Stock Exchange.
Public distribution Private placement Listing
21
Asset Management: Luxembourg, your location of choice
UCITS: a worldwide recognised brand
Focus on Europe
Focus on Asia Focus on Americas
Cross border registrations of Luxembourg funds
% Registrations of Luxembourg cross border funds as a percentage of total cross border fund registrations in each market (%) Percentage change in the number of Luxembourg cross border fund registrations between 2013 and 2014
Country Proportion Growth
Andorra 100% 9%
Austria 69% 8%
Belgium 79% 5%
Bulgaria 92% -6%
Cyprus 96% 9%
Czech Republic 78% -1%
Denmark 66% 8%
Estonia 91% -6%
Faroe Islands 100% 200%
Finland 69% 9%
France 63% 4%
Germany 60% 4%
Gibraltar 86% 5%
Greece 93% 1%
Greenland 100% 0%
Guernsey 61% 73%
Hungary 96% 8%
Iceland 96% 8%
Ireland 80% 19%
Isle of Man 43% 3%
Italy 64% 11%
Jersey 76% 52%
Latvia 95% -1%
Liechtenstein 89% 18%
Lithuania 91% 3%
Malta 91% 2%
Monaco 33% 0%
Netherlands 63% 5%
Norway 75% 17%
Poland 94% 4%
Portugal 72% 0%
Romania 83% 0%
Slovakia 77% -8%
Slovenia 57% 0%
Spain 67% 7%
Sweden 67% 16%
Switzerland 65% 8%
United Kingdom 58% 6%
Country Proportion Growth
Australia 19% 300%
Brunei Darussalam 100% inf
Hong Kong 72% 5%
Japan 58% 2%
Korea 95% 10%
Macao 70% -5%
New Zealand 50% inf
Singapore 69% 12%
Taiwan 77% 3%
Bahrain 81% 34%
Jordan 100% 950%
Kuwait 100% 33%
Lebanon 100% 24%
Oman 100% 5750%
Qatar 100% 1983%
Saudi Arabia 100% inf
Turkey 92% 0%
United Arab Emirates 65% 208%
Country Proportion Growth
Bahamas 0% 0%
Canada 66% -4%
Cayman Islands 29% 0%
Chile 63% -6%
Colombia 50% inf
Dominican Republic 0% 0%
El Salvador 100% inf
Mexico 0% 0%
Panama 91% 4000%
Peru 46% 1%
Saint Martin 100% 0%
Trinidad & Tobago 98% -2%
United States 40% 0%
Botswana 100% 33%
Mauritius 100% 67%
South Africa 54% -10%
Worldwide presence of Luxembourg funds
Inter-state arrangement for facilitating the cross-border offering of collective investment schemes. Cooperation Agreement
Sources: Lipper LIM and PwC Luxembourg analysis, 31 December 2014.
60% (+4%) 58% (+6%) 80% (+19%) 63% (+4%) 67% (+7%) 64% (+11%) 0% (~0%) 91% (+4000%) 46% (+1%) 63% (-6%) 66% (-4%) 100% (+24%) 65% (+208%) 100% (+5750%) 69% (+12%) 19% (+300%) 70% (-5%) 72% (+5%) 77% (+3%) 58% (+2%) 95% (+10%)
22
PwC Luxembourg
Generally speaking, investment funds that qualify as UCITS can be offered to all types of investors, main categories being institutional and retail clients.
Institutional clients consist of a broad range of investors as depicted above. Despite the large number of investors fitting into this category, institutional investors are dominated by insurance companies and pension funds. Overall, these two investor types account for 69% of total AuM in Europe in 2013. The retail investor segment tends to be dominated by households, often referred to as “mass retail”, mass affluent and high net worth individuals.
The most appropriate distribution channel to target such investors depends on the type of investor. For example, retail UCITS products are most commonly distributed via large networks of retails banks and private bank offices. The use of fund platforms to facilitate the sale of UCITS has grown considerably over the past 10 years. These “platforms” are, in reality, an intermediate entity connecting the fund to the end investor. Retail clients are more than often accessed indirectly, via the so-called “unit linked funds” which are offered by the insurance industry.
This distribution channel is sustained by the different national tax incentives/tax relief at the UCITS level. Also, one type of channel that has developed over the past five years is that of boutique intermediaries
(targeting professional and institutional investors). This third party distribution channel is formed by experienced industry professionals who, among others, also advise their clients on specific fund structures, sales strategies and targeted fund distribution. They also offer tailored solutions to asset managers.
Total AuM by investor type
Institutional 76%
Retail
24%
32%
42% 23% 3%
Pension funds
Banks Insurance companies Other institutionals*
From EFAMA “Asset Management in Europe” report published in June 2014
* The other institutional investors are usually defined as foundations, charities, governments, central banks, sovereign wealth funds, etc.
Target investors
23
Asset Management: Luxembourg, your location of choice
The figures below show the main distribution channels used in practice for offering UCITS and non-UCITS funds depending on the target markets:
Germany
United Kingdom
Switzerland
France
Hong Kong
Italy
Retail banks
62%
Private banks
95%
Retail banks
27%
Others
4%
IFAs**
4%
Independent Management Companies
11%
Mandatory provident funds*
21%
Private Banks
27%
Online banks
10%
IFAs**
9%
Direct Agents
11%
Insurance companies
4%
Insurance companies
5% Insurance companies10%
IFAs**
56%
Institutions
34%
Banks
80%
Supermarket
2%
Institutions
13% banksRetail
21%
Insurance wrapper
12%
Insurance wrapper
14%
Fund of funds
9%
Fund of funds
11%
IFAs**
10%
Private banks
6%
Private banks
11%
IFAs**
8%
Retail banks
2%
Direct sales
1%
Insurance companies
10%
* Compulsory pension schemes for Hong Kong residents ** Independent Financial Advisers
Source: BVI
Source: European Fund Market data digest Source: European Fund Market data digest
Source: SFA Source: Cerulli Edge
24
PwC Luxembourg
2.2. Legal structures of Luxembourg regulated
investment vehicles
Investment vehicles characteristics Part I UCITS Part II UCI SIF SICAR
An “onshore” investment vehicle subject to the supervision of a recognised financial authority (the “CSSF” –
Commission de Surveillance du Secteur Financier).
x
x
x
x
Allowing investment in any type of asset.
x
x
Opened to all types of investors in Luxembourg(i.e. no competency or minimum investment requirement).
x
x
Benefiting from less stringent regulatory requirements
(as it is dedicated to institutional, professional and other
well-informed investors).
x
x
Allowing investment in any type of private equity asset and
not subject to investment risk diversification requirements.
x
Distributable to the public in any EU country (via the UCITS
passport).
x
Dedicated to professional investors which can be managed by any EU AIFM and which can be marketed in any EU
country (provided that the investment vehicle qualifies as
an AIF and that all the requirements of the AIFM Law shall
be complied with).
x
x
x
Not subject to corporate income tax.
x
x
x
With features close to a fund although it is subject tocorporate income tax.
x
25
Asset Management: Luxembourg, your location of choice
What about the alternative investment funds and the AIFMD?
The Alternative Investment Fund Managers Directive 2011/61/EU of 8 June 2011 (the “AIFMD”) has been implemented in Luxembourg law with the Law of
12 July 2013 on Alternative Fund Managers (the “AIFM Law”) and aims at regulating Alternative Investment Fund Managers (“AIFMs”). According to the AIFM Law, an Alternative Investment Fund (“AIF”) is an undertaking for collective investment, including investment compartments thereof, which:
a. raises capital from a number of investors, with a view to investing it in accordance with a defined investment policy for the benefit of those investors; and
b. does not require authorisation pursuant to the Directive 2009/65/EC (i.e. the UCITS IV Directive);
Therefore a SIF and a SICAR only qualify as AIFs provided that they raise capital from a number of investors, with a view to investing in accordance with a defined investment policy for the benefit of their investors, unless exemptions apply (please refer to page 37).
In case of Part II UCIs, there is no need to demonstrate that the investment vehicle fulfils the definition criteria of an AIF. All Part II UCI qualify as AIFs within the meaning of the AIFM Law and there is no exception to this rule.
The AIFM Law and the European Commission Delegated Regulation n° 231/2013 of 19 December 2012 does not really provide additional requirements for AIFs, but provides a set of stringent requirements for the AIFMs as set out in page 36 (AIFM and the “internally-managed AIF” status) and the flyer “Licensing and reporting of a Luxembourg AIFM” attached to this brochure.
For the purpose of clarity, the case of SIF and SICAR which do not qualify as AIFs will not be set out in this brochure, as well as the case of investment vehicles which are not regulated and which qualify as AIFs.
26
PwC Luxembourg
Comparative table
Comparative table insert
The comparative table enclosed gives an overview of the legal
structures of Luxembourg regulated investment vehicles.
To learn more about a specific topic in the table insert, please
refer to the indicated page of this brochure.
This document is also available online:
http://www.pwc.lu/en/asset-management/docs/comparative-table
Part I UCITS Part II UCI SIF SICAR
1 - Legal framework (details page 27) Part I of the law of 17 December 2010 on UCIs
(the “2010 Law”).
Part II of the 2010 Law. Law of 13 February 2007 on SIFs (the “SIF Law”). Law of 15 June 2004 on investment company in
risk capital (the “SICAR Law”). 2- Legal forms
(details page 28) Corporate form or contractual form. Corporate form or contractual form. Corporate form or contractual form. Corporate form only. 3 – Investors
(details page 30) All types of investors. All types of investors. Well-informed investors. Well-informed investors. 4 - Type of securities
that may be issued to investors (details page 30)
• Shares/Units. • Shares/Units. • Shares/Units. • Beneficiary units. • Debt.
• Shares/Units. • Beneficiary units. • Debt. 5 - Ongoing
subscription and redemption of shares/ units (details page 32)
Yes, principle of “variable
capital”. Yes, principle of “variable capital”. Yes, principle of “variable capital”. Yes, principle of “variable capital”. 6 - Structuring of
capital calls (details page 31)
Not relevant. Capital calls may be organised by way of capital commitments or through the issue of partly paid shares or units (for FCPs and SICAFs only).
Capital calls may be organised either by way of capital commitments or through the issue of partly paid shares or units.
Capital calls may be organised either by way of capital commitments or through the issue of partly paid shares. 7 – Minimum capital
requirement, compartments and classes (details page 32)
• Minimum capital of EUR 1.25 Mio to be reached within 6 months following approval. • Multiple compartments
authorised. • Classes of shares
authorised. • Minimum capital of
EUR 1.25 Mio to be reached within 6 months following approval. • Multiple compartments
authorised. • Classes of shares
authorised. • Minimum capital of
EUR 1.25 Mio to be reached within 12 months following approval. • Multiple compartments
authorised. • Classes of shares
authorised. • Minimum capital of
EUR 1 Mio to be reached within 12 months following approval. • Multiple compartments
authorised. • Classes of shares
authorised. 8 – Management
Company and compulsory service providers in Luxembourg (details page 33)
• Depositary bank. • Central administration. • Chapter 15
Management company (if not self-managed). • External auditor.
• Depositary bank. • Central administration. • Chapter 15 or Chapter 16 Management company (if not self-managed). • External auditor.
• Depositary bank. • Central administration. • Chapter 15 or Chapter 16 Management company (if not self-managed). • External auditor.
• Depositary bank. • Central administration. • Chapter 15 or Chapter 16 Management company (if not self-managed). • External auditor. 9- Eligible
investments and investment restrictions (details page 39)
Transferable securities and/or any other liquid financial assets authorised by the UCITS IV Directive. Maximum 10% of the fund/sub-fund’s gross assets in one issuer as defined by the UCITS Directive.
Any type of assets. Maximum 10% of the fund/sub-fund’s gross assets in one issuer. It is however possible to set up and entirely hold a special purpose vehicle.
Any type of assets. Maximum 30% of the fund/sub-fund’s gross assets in one issuer. It is however possible to set up and entirely hold a special purpose vehicle.
Assets representing risk capital. Investment in risk capital means the direct or indirect contribution of assets to entities in view of their launch, development or listing on a stock exchange. No risk spreading requirements.
27
Asset Management: Luxembourg, your location of choice
1. Legal framework
The main laws governing Asset Management in Luxembourg are:
The Law of 17 December 2010 on undertakings for collective investment (the “2010 Law”), which regulates Part I and Part II funds, the first category of them being more known under the UCITS brand benefiting from a distribution passport across Europe.
For Part II funds:
• CSSF Circular 08/356 on the use of securities lending, “réméré” and repo transactions; • CSSF Circular 02/77 on
the protection of investors in case of NAV calculation error or breach of investment; • IML Circular 91/75
clarifying certain aspects of the UCI legislative framework, as amended by CSSF Circular 05/177.
• CSSF Circular 07/308 on the use of derivatives and management of financial risks; • CSSF Circular 02/77 on the
protection of investors in case of NAV calculation error or breach of investment; • IML Circular 91/75 clarifying
certain aspects of the UCI legislative framework, as amended by CSSF Circular 05/177.
For Part I funds (i.e. UCITS funds):
• CSSF Regulation 10-05 on fund mergers, master-feeder structures and notification procedures;
• CSSF Regulation 10-04 on organisational requirements, conflicts of interests, conduct of business, risk management and content of agreement between a depositary and a Management Company; • CSSF Circular 13/559 on
ESMA guidelines on ETFs and other UCITS issues;
• CSSF Circular 12/546 on the authorisation and organisation of Luxembourg UCITS Management Companies or self-managed UCITS; • CSSF Circular 11/512 on
the presentation of the main regulatory changes in risk management following the publication of CSSF Regulation 10-4 and ESMA clarifications; • CSSF Circular 08/380
regarding CESR guidelines concerning eligible assets for investments by UCITS; • CSSF Circular 08/356 on the use of securities lending, “réméré” and repo transactions;
For SIFs:
• CSSF Regulation 12-01 clarifying risk management and conflicts of interest rules;
• CSSF Circular 08/372 on guidelines for depositaries of SIFs adopting
alternative investment strategies, where those funds use the services of a prime broker;
• CSSF Circular 07/309 on risk diversification requirements applicable to SIFs.
For SICARs:
• CSSF Circular 06/241 on the concept of risk capital under the SICAR Law.
The Law of 13 February 2007 on specialised investment funds (the “SIF Law”).
The Law of 15 June 2004 on the investment company in risk capital (the “SICAR Law”).
The Law of 12 July 2013 on alternative investment fund managers (the “AIFM Law”).
UCITS
SIF
SICAR
AIFM
In addition to Luxembourg laws and regulations, asset management service providers and investment vehicles are subject to regulations and circulars issued by the Luxembourg Commission for the Supervision of the Financial Sector (i.e. the “Commission de Surveillance du Secteur Financier” in French, generally called the “CSSF”).
The main CSSF regulations and circulars to be considered per investment vehicle are the following:
28
PwC Luxembourg
2. Legal forms
Luxembourg regulated investment vehicles can either be created under a contractual or a corporate form depending on the law to which they are subject. This is the case for all types of investment funds (or undertakings for collective investments), category including UCITS and Part II funds as well as the SIF, but not the SICAR, which is not subject to a risk spreading principle and which is always organised under a corporate form. Aside from that, each of these investment vehicles may be structured as a stand-alone vehicle or as an umbrella vehicle with multiple compartments (or sub-funds in the case of investment funds) having segregated assets and liabilities.
The contractual form is represented by the common fund (“Fonds Commun de Placement” in French, or “FCP”) and is only available for UCITS, Part II, and SIF funds, but not for SICARs which are by laws organised under a corporate form. The FCP is an undivided collection of assets, managed by a Management Company on behalf of joint owners called “unitholders”. Legally speaking, it is established by a contract between the Management Company and the depositary bank, which create “management regulations”. Investors, in the form of unitholders, buy units issued by the Management Company which represent a portion of the FCP managed and, by doing so, become a party to the contract. The units so acquired represent their right in the undivided collection of assets. Their liability is limited to the amount contributed by them.
The corporate form is represented by the investment company with variable (the “SICAV”) or fixed capital (the “SICAF”) and is available for all types of vehicles (UCITS, Part II and SIF funds as well as for SICARs). SICAVs are corporate vehicles whose articles of incorporation provide that the amount of capital is at all times equal to the net asset value of the vehicle. The capital increases or decreases automatically as a result of subscriptions or redemptions, without any of the formalities generally imposed under the Law of 10 August 1915 on
commercial companies regarding issuance or reduction of capital. Investors in a SICAV are “shareholders” and as such have a right to vote in shareholders’ meetings in addition to their economic rights. In addition to the SICAV, an investment vehicle may also be structured as a SICAF, being a corporate vehicle with fixed capital. However the SICAF is rarely used as it is has limited flexibility in terms of investors’ in and out.
Corporate
forms UCITSPart I Part II UCI SIF SICAR
Variable capital
S.A. Yes Yes Yes Yes
S.C.A. No No Yes Yes
S.C.S. (simple) No No Yes Yes
Sté Coop. S.A. No No Yes Yes
Sté Coop. No No No No
S.à r.l. No No Yes Yes
S.C.S. (spéciale) No No Yes Yes
Fixed capital
S.A. Yes Yes Yes Yes
S.C.A. No Yes Yes Yes
S.C.S. (simple) No Yes Yes Yes
Sté Coop. S.A. No No Yes No
Sté Coop. No No No No
S.à r.l. No Yes Yes Yes
S.C.S. (spéciale) No Yes Yes Yes
The choice of the corporate form of an investment vehicle relies on the combination of several factors such as the tax transparency of the company, the liability of shareholders, the limited or unlimited number of shareholders, the conditions to transfer shares, the faculty to separate among shareholders those who hold the power in the company (the managers) from those who only hold capital but do not intervene in the management, or the corporate governance rules.
The S.A. is thus particularly convenient to organise clearly the roles, powers and liabilities of managers, directors and shareholders. This is of importance in the context of joint-ventures where all stakeholders may have
S.A.: “société anonyme” in French or public limited company.
S.C.A.: “société en commandite par action” in French or common limited partnership. S.C.S. (simple): “société en commandite simple” in French or limited corporate partnership.
Sté Coop. S.A.: “société coopérative sous forme de société anonyme” in French or cooperative company
organised as a public limited company.
S.à r.l.: “société à responsabilité limitée” in French or private limited company.
29
Asset Management: Luxembourg, your location of choice
created between one or more general
partner(s) and one or more limited partner(s), which is largely governed by contractual freedom with respect to its organisation and functioning. It is particularly suitable for founding shareholders who look for tax transparency at the level of the company itself and who want to keep total control of the management. The S.C.S. (spéciale), on its side, which is a new corporate legal form for a company, has been introduced in Luxembourg law by the AIFM Law. The
main difference with the S.C.S. (simple) is that the S.C.S. (spéciale) has no legal personality distinct from its partners as the usual common law partnership regime. Despite this lack of personality, assets that have been contributed to it are registered in its name and may only satisfy the rights of creditors that have been created in relation to the creation, running or liquidation of the S.C.S. (spéciale).
different interests. As for the S.C.A., this corporate form is particularly interesting for founding shareholders who want to keep total control of the management. Their liability is unlimited, but they cannot be dismissed from the management without their own consent, except if it is provided otherwise by the articles of incorporation. As regards the S.à r.l., the objective is to preserve a significant personal link between shareholders by limiting the transfer of shares to people who were not already shareholders of the company. A last example is the one of the S.C.S. (simple). The S.C.S. (simple) is a form of partnership
Main features of the S.C.S. (spéciale) or special limited partnership:
• Legal personality: no;
• Members: one or several general partner(s) + one or several limited partner(s);
• Management: one or several manager(s), which can be general partner(s) or third parties and can delegate their powers; • Profit allocation: to be determined by the partnership agreement;
• Default rule: in proportion to their interest share (“part d’intérêt”); • Voting rights: possible to issue interest shares without voting rights;
• Decisions of partners: to be freely determined by the partnership agreement; Default rules:
- General meeting or written resolutions;
- Decisions are taken at the majority of votes, except for an amendment of the purposes of the partnership (“objet social”), change of nationality, transformation or liquidation, which requires the approval of members representing 3/4 of interest shares + the approval of all general partners;
• Transfer of interest share:
- Interest share of limited partners: to be freely determined by the partnership agreement; Default rule: requires the approval of all general partners;
- Interest share of general partners: to be freely determined by the partnership agreement; Default rule: subject to the same rules as the amendment of the partnership agreement;
- Enforceable against the partnership/third parties only after notification or approval by the partnership;
• Assets: are registered in the name of the partnership (despite the lack of legal personality) and may only satisfy the rights of creditors that have been created in relation to the creation, running or liquidation of the S.C.S. (spéciale);
• Formalities: the partnership agreement can take the form of a private or public deed. It must be published by extract. The partnership exists as from the signature of the partnership agreement;
