Co-published section: Investment funds

Taste success funds. In practice this will mean the

implementation of the Ucits IV Directive
which aims to liberalise the regime for cross-
border retail funds.

UCIs
Rémi Chevalier and Olivier Sciales of Chevalier & Sciales In contrast, UCIs (Part II) can only market
their units in other EU countries after
explain why Luxembourg is world leader in the formation complying with the specific conditions
and operation of investment funds stipulated by the authorities in the country
concerned. The criterion defining whether a

L
uxembourg is, behind the US,
the world’s second ranking
financial centre for the domicile
and servicing of investment
funds. Since 1959, when the first fund was
established, the investment fund industry
has expanded to 3,395 funds in April 2009.
This success originated with the
authorities’ encouraging attitude to foreign
capital and investment, and has been
considerably strengthened by
Luxembourg’s prime location in the heart
of Europe. It is close to the main markets
targeted by investment funds, it has a
highly qualified, multilingual workforce,
and is politically, economically and socially
stable. This unique business-friendly
environment is crucial to mitigate the
effects of the financial turmoil the
investment funds world is experiencing
and, indeed, Luxembourg seems to be
doing better than most major financial
centres.
As of March 31 2009, total assets of
undertakings for collective investment and
specialised investment funds reached
€1,526.56 billion compared to €1,530.29
billion on February 28 2009 (a 0.24%
decline). The Luxembourg government has
implemented innovative fiscal measures and
further reforms are due at the European level
(such as the implementation of the Ucits IV
Directive). Moreover, the events of the past
months have encouraged the Luxembourg
Fund statistics
Number of funds as of March 31 2009:
FCP Sicav
government to take the security of investors
into consideration.
Legal framework
The December 20 2002 law relating to
undertakings for collective investments (2002
Law) shaped the Luxembourg investment
fund market by differentiating between
Undertakings for Collective Investment in
Transferable Securities (Ucits, Part I of the
law) and Undertakings for Collective
Investment (UCIs, Part II of the law). Further
to the February 13 2007 law relating to
Specialised Investment Funds (Sif) (Sif Law),
the Luxembourg investment funds are now
divided into three categories: UCIs, or which
there were 698 in March 2009; Ucits of which
there were 1,840 in March 2009; and Sif of
which 858 existed in March 2009.
Ucits
Ucits are designed for retail investors and
benefit from a European Passport, enabling
them to be freely marketed throughout the
EU with a minimum of formalities. These
funds are open-ended and must comply with
stringent requirements set by the EU legislator
in terms of eligibility of assets, risk-spreading
requirements and, more generally, in terms of
substance and supervision.
Major changes in this area of the law are due
following the approval on January 13 2009 of
the European Commission’s proposal to
improve the EU framework governing Ucits
Others Total
UCI is subject to Part I or Part II of the 2002
Law is the intended investment objective, as
Part I applies only to UCI whose sole objective
is to invest in transferable securities and/or
other liquid financial assets (such as money
market instruments or cash deposits), whereas
a UCI may also invest in activities such as
alternative investments (such as hedge funds),
venture capital, and real estate.
Sif
The Sif Law provides a separate statutory
regime specifically designed for investment
funds dedicated to sophisticated investors.
The Sif is a lightly regulated and tax efficient
fund which gives an onshore alternative to
consider (as compared to traditional offshore
jurisdictions such as the Cayman Islands or
the British Virgin Islands) when deciding on
the jurisdiction for setting up a fund and the
type of fund vehicle to use. Sif are subject to
each country’s distribution rules.
The regulatory body is the Commission for
the Supervision of the Financial Sector,
(CSSF). If it is subject to a continuous control
by the CSSF, a fund set up under the Sif Law
does not need prior approval to incorporate,
but it is still a condition for funds set up under
the 2002 Law. Directors of a Sif are still
subject to CSSF approval.
To help compliance with setting-up
requirements, investors benefit from the
financial facilities offered by the high-profile
Luxembourg economic environment,
including 152 banks (as registered on the
official list on February 28 2009), a broad
range of international and local law firms
exceedingly qualified in this field, as well as
audit firms and tax advisers.

Part I (2002 Law) 1,199 641 0 1,840 Constitution of a fund

Part II (2002 Law) 304 386 8 698 Investment funds may take the form of an
Sif 423 425 10 858 open-ended legal entity (such as an
TOTAL 1,926 1,452 18 3,396 investment company with variable capital,
known as a Sicav, of which there were1,452 in
Capitalisation of funds as of March 31 2009: March 2009), of a closed-ended legal entity
(in billion euros) FCP Sicav Others Total (such as an investment company with fixed
capital, known as a Sicaf, of which there were
Part I (2002 law) 390.867 764.024 0.000 1,154.891 18 in March 2009), or of a common
Part II (2002 law) 78.686 160.490 1,053 240.229 contractual fund which has a management
Sif 73.551 57.036 0,856 131.443 company (such as an FCP of which there
TOTAL 543.104 981.550 1,909 1,526.563 were 1,926 in March 2009). All these

www.iflr.com IFLR/May 2009 65

Co-published section: Investment funds
different entities can create sub-funds, each
with a different investment policy. In this
context, each compartment will be deemed to
be a separate entity; the assets of a
compartment are exclusively available to
satisfy the rights of investors in relation to
that compartment.
Sicav/Sicaf
A Sicav is a limited-liability company whose
capital is at any time equal to its net assets.
Its capital increases and decreases
automatically as a result of subscriptions or
redemptions, without any formalities
required. Sicavs may take different legal
forms, depending on the law to which they
are subject. In contrast, a Sicaf is a limited-
liability company with fixed capital,
open-ended only if the investors can buy
and sell shares at their request and at a price
equal to the net asset value per share.
However, due to its limited flexibility, the
Sicaf is rarely the choice of investors.
FCP
An FCP is a co-proprietorship whose joint
owners are only liable up to the amount they
have contributed. An FCP is deprived of a
legal personality and must therefore be
managed by a Luxembourg management
company on behalf of its joint owners. Ucits
are managed by management companies
under the conditions laid down in Chapter
13 of the 2002 Law, whereas Chapter 14 of
the 2002 Law lays down the conditions under
which management companies rule UCIs
and Sif.
Choosing a legal structure
The choice of whether to create a fund as an
FCP or as an investment company is mainly
based on tax considerations, as an FCP is tax
transparent. Marketing and operational
considerations are also relevant when
choosing the legal structure.
The formation expenses will consist for all
funds of a fixed registration duty of €75,
notary fees, legal fees, and a CSSF filing duty
(fixed, for 2002 Law UCIs, at €2,650 for a
single market UCI and at €5,000 for a
multiple compartment UCI). In contrast, the
CSSF filing duty has been fixed, for Sif Law
UCIs, at €1,500 for a single compartment
UCI and € 2,650 for a multiple
compartment UCI. The formation expenses
may also include (if a listing on the stock
exchange is contemplated), its admission fee,
fixed at €1,250.
The minimum capitalisation
(€1,250,000) required under both laws
must, in case of a Sif, be reached within 12
months of approval from the CSSF, and six
months in the case of other investment funds.
66 IFLR/May 2009
Author biographies
Rémi Chevalier
Chevalier & Sciales
Rémi Chevalier is a partner with the law firm Chevalier & Sciales.
He specialises in the area of investment funds and banking and
finance. He regularly advises private equity and investment
firms.
Olivier Sciales
Chevalier & Sciales
Olivier Sciales is a partner at Chevalier & Sciales. He specialises
in investment funds focusing mainly on their structuring and
implementation (Ucits, UCIs and Sifs).. Olivier Sciales has been
recommended and recognised by various publications in the
field of investment funds such as the Guide to the Worlds’
Leading Investment Fund Lawyers and Practical Law Company.
Investment funds set up under the 2002 able to make significant use of derivative
Law can be distributed to the public. financial instruments. Non-sophisticated
Hence, no restriction applies upon eligible Ucits funds, with much less-developed risk
investors, whereas the Sif Law introduces a management units, can only use derivative
qualified investor scheme. In this context, financial instruments for hedging purposes.
Sifs are reserved for well-informed investors This Circular also specifies some valuation
who are able to understand and assess the rules stating that overall risk exposure
risks associated with investment in such a related to financial derivative instruments
fund (well-informed investor meaning should not exceed the total net asset value.
either an institutional investor, a - The February 8 2008 Grand-Ducal
professional investor, or any other investor regulation clarifies the notion of Ucits as
who has declared in writing that he is an provided in the 2002 Law, in light of the
informed investor and either invests a Commission Directive 2007/16/EC.
minimum of €125,000 or has an appraisal - The Circular CSSF 08/339 displays the
from a bank, an investment firm or a guidelines given by Cesr (The Committee
management company certifying that he of European Securities Regulators) in
has the appropriate expertise, experience relation to eligible assets for investment by
and knowledge to adequately understand Ucits, and in this context provides
the investment in the fund). additional clarification relating to eligible
assets for investment by Ucits covered by
Investment restrictions Directive 85/611/EEC, as amended.
Under the broad principle of risk spreading, - CSSF Circular 08/356 describes in
all funds are subject to different rules detail the techniques and instruments Ucits
restricting the scope of their investment may use, including securities lending
policy. Those rules are quite restrictive transactions. The main innovation to be
towards Ucits, somewhat lighter concerning noted refers to permitted collateral and
UCIs, and much lighter when it comes to Sif. permitted assets in which cash collateral
can be reinvested. In this respect, this
Ucits Circular specifies how collateral and assets
The 2002 Law provides for numerous acquired upon reinvestment of cash
restrictions upon investments by Ucits, collateral must be kept safe in order to
which have been clarified in recent avoid counterparty risk for the Ucits fund
regulatory developments: exceeding its legal limits.
- Circular CSSF 07/308 lays down rules
for the implementation of a risk Non-Ucits – Part II Funds
management framework. These rules mean The investment and borrowing rules are
that a Ucits fund must self-assess itself as subject to CSSF approval, and specific rules
either sophisticated or non-sophisticated. A are laid down in Circular IML 91/75 (as
sophisticated Ucits fund is obliged to create amended by Circular CSSF 05/177), while
a developed risk management unit and is others are specifically applicable to UCIs
www.iflr.com

pursuing alternative investment strategies.
Those rules are laid down in Circular CSSF
02/80 state that:
- Aggregate commitment in terms of
short selling may not exceed 50% of assets,
and no more than 10% of the same type
issued by the same issuer may be sold short;
- Borrowings must not exceed 200% of
the net assets; and
- Counterparty risk, defined as the
difference between the value of assets given
as a guarantee and the amount borrowed,
cannot represent more than 20% of the
UCI’s assets per lender.
Sif
Sif are not required to comply with any
detailed investment restrictions or leverage
rules; the Sif Law merely stating that a Sif
should apply the principle of risk
diversification. This principle provides that
the collective investment of funds must be
made in assets “in order to spread the
investment risks”. The CSSF clarified in its
Circular 07/309 that:
- A Sif may not invest more than 30% of
its assets or commitments to subscribe
securities of the same type issued by the
same issuer;
- Short sales may not result in the Sif
holding a short position in securities of the
same type issued by the same issuer
representing more than 30% of its assets;
and
- When using financial derivative
instruments, the Sif must ensure, via
appropriate diversification of the
underlying assets, a similar level of risk-
spreading.
However, the CSSF may, upon
appropriate justification, grant exemptions
to these rules on a case-by-case basis.
Reporting and audit
requirements
Prospectus
Funds are obliged to issue a prospectus
containing information concerning the fund
and its management company. The July 10
2005 law on prospectuses for securities
specified that the obligation to publish a full
prospectus does not apply to units issued by
UCI, other than the closed-end funds. Such
funds shall publish a simplified prospectus.
Public security offers representing units
issued by UCI other than the closed-end
type shall be subject to the sole provisions of
the laws on UCI. According to the 2002
Law, both the simplified and full prospectus
must include the information necessary for
investors to make an informed judgment of
the investment proposed to them, and
especially of the risks attached to it.
www.iflr.com
Co-published section: Investment funds
Investors should note that when the Ucits
IV Directive comes into force, the simplified
prospectus is expected to be replaced by a
key investor information document.
Issuing document
Funds subject to the Sif law are only
required to produce an issuing document,
displaying, with no minimum content, the
information necessary for investors to be
able to make an informed judgment about
the investment proposed to them. The
issuing documents and any modifications to
them must be communicated to the CSSF.
Financial statement
One difference between the 2002 Law and
the Sif Law is that the obligation to publish
a financial statement is only annual in the
case of a SIF, whereas an investment fund
subject to the 2002 Law must publish an
audited financial statement annually and
semi-annually.
Such financial statements must be
audited by an authorised independent
auditor, namely a member of the
Luxembourg Institute of Auditors. This
auditor is obliged, if any information
provided to investors does not truly describe
the financial situation of the fund, to report
this promptly to the CSSF. The same
obligation applies if the auditor becomes
aware during the audit that any fact or
decision is liable to constitute a material
breach of the law or regulations, or to affect
the continuous functioning of the UCI.
Taxation of funds
Luxembourg funds are essentially tax-
exempt vehicles, and indeed Luxembourg
Ucits, UCIs and Sif do not pay Luxembourg
income or capital gains tax, nor is a stamp
duty on share issues or transfers to be paid.
The Luxembourg authorities are currently
working on a wide range of fiscal reforms.
The first main change, from January 1 2009,
is the abolition of fixed capital duty and of
the withholding tax on dividends paid to
recipients resident in countries that have
concluded a tax treaty with Luxembourg.
Under the Sif Law, an annual
subscription tax has been fixed at 0.01% of
net assets, compared to 0.05 % for funds
under the 2002 Law. It is however only
0.01% for UCIs whose exclusive policy is
the investment in money market
instruments or deposits with credit
institutions. Other funds, such as certain
institutional cash funds and pension
pooling funds, are exempt from this
subscription tax, no matter which Law they
are set up under. It should be noted that
investors may invest in a Sif by means of
equity or debt, hence benefiting from
effective tax optimisation, and that there is
no debt to equity ratio to be respected in
the case of a Sif.
In order to avoid double taxation,
Luxembourg has signed double taxation
treaties with 52 countries, and 21 others are
under negotiation or awaiting the approval
of the Luxembourg Parliament or the
foreign country. However, it has to be
emphasised that only 27 of these treaties
are applicable to Sicavs and Sicafs.
Stock exchange listing
A fund may be listed on the Luxembourg
Stock Exchange (LSE). A few conditions
have been imposed for a foreign fund to list
on the LSE, mainly that the fund promoter
must be of good repute, have adequate
professional experience, and that the
functions of investment manager,
management company, custodian and
transfer agent be carried out by a separate
entity.
The Stock Exchange maintenance fee has
been fixed at €1,875 for the first line of
quotation, €1,250 for a second one, €875
for a third one, and €500 for the fourth
and the following lines of quotation.
The Luxembourg investment fund
industry, largely benefiting from its
location in a strong financial centre, is now
an internationally recognised onshore label
for investment funds. The greatest asset of
Luxembourg is undoubtedly political
voluntarism, demonstrated by a constant
anticipation of the need of investors –
either in the transposing of European
legislation or in the shaping of national
legislation – in order to create a stable,
protective and favourable environment
according to the expected development of
the market.
This pragmatism on the part of the
Luxembourg authorities, exemplified by
the recent fiscal exemptions and by the way
the CSSF dealt with the global financial
turmoil, is invaluable when shepherding
investors in days of global uncertainty.
Lastly, the increasingly important issue of
transparency is covered by national and
European regulations and provides new
investors with an especially protective
framework as compared to traditional
offshore jurisdictions such as the Cayman
Islands or the British Virgin Islands. For
instance, the European Commission has
proposed a Directive on Alternative
Investment Fund Managers (AIFMs) with
the objective to create a comprehensive and
effective regulatory and supervisory
framework for AIFMs at the European
level.
IFLR/May 2009 67