Alternative Funds 2024 Comparisons

Luxembourg is the third-largest alternative funds domicile in the world, behind the Cayman Islands and Delaware. It is the leading European jurisdiction for the domicile, servicing and distribution of both regulated and unregulated alternative investment funds (AIFs) spanning all private market asset classes – eg, private equity, private credit, real estate and infrastructure investments – with a total of almost 13,800 investment fund and sub-fund portfolios. Luxembourg is the largest funds domicile in Europe measured by fund assets and second worldwide only to the US.

Alternative fund businesses in Luxembourg, including the world’s leading financial sponsors, are increasingly using Luxembourg as their EEA funds domicile. Many are not only carrying out their back-office operations in Luxembourg but, also, increasingly, their middle- and front-office functions. Most global financial sponsors have their alternative investment fund manager (or AIFM, under the European Union’s AIFMD legislation) in Luxembourg. The country has an extensive, robust and long-standing ecosystem of service providers, namely alternative fund administrators, custodians, AIFMs, auditors and law firms. The Luxembourg regulator, the CSSF, is recognised as reliable and pragmatic, striking a viable balance between investor protection and acknowledging the appeal of certain financial products.

As of October 2023, Luxembourg was home to private equity and venture capital funds, PE funds of funds and infrastructure investment vehicles totalling EUR690 billion in assets under management and private debt assets of EUR404 billion. Luxembourg’s share of European alternative assets grew from 15.6% in 2010 to 61.8% in 2022, according to Preqin, and from 7.4% to 51.5% for private equity. The country remains the largest domicile for Europe-focused funds, accounting for 26.3% of capital raised in 2022.

European Long-Term Investment Funds (ELTIFs)

Luxembourg sees a strong trend in private wealth products and is a market leader in ELTIFs. It already accounts for around two thirds of all ELTIFs established in Europe, and is set to benefit disproportionately from the ELTIF 2.0 changes to increase flexibility in investment strategies, lower the barriers to access for individual investors, and afford asset managers greater ability to tailor liquidity options for open-ended funds to their investment strategies.

Credit Funds

Luxembourg is also the leading funds domicile for private credit funds. Trends are evolving with current changes in EU legislation. Two examples are the successful revision of the ELTIF regime, which took effect in January 2024, and the amended AIFMD, which must be adopted into national law by April 2026 and will lead to adjustments in the country’s direct lending funds sector.

Sustainable Funds

Given its dominant position in the EU sustainable investment and impact market, the Luxembourg fund industry is also following closely the current discussions around a revised framework for the Sustainable Finance Disclosure Regulation (SFDR) and Taxonomy Regulation.

Crypto

The CSSF is cautiously examining ways to open up crypto-asset investment to institutions and professionals while maintaining safeguards for potential retail investments in the sector through financial products, at least for now.

Secondaries

In the alternative funds sector, continuation and secondaries funds are becoming more common as general partners seek new exit strategies as well as options to avoid having to dispose of existing assets with substantial promise for performance in the future.

Since the entry into application of the EU’s original AIFMD legislation in 2013, Luxembourg has become a leading domicile for both regulated and unregulated AIFs, notably for asset classes including private equity and venture capital, private debt, real estate and infrastructure.

The main types of regulated funds are as follows.

• So-called Part II funds, which are AIFs under the AIFMD that can be sold to retail and professional investors without having a retail passport across Europe (except where the fund has an ELTIF label). Part II funds are subject to regulatory approval and supervision, and have to comply with certain regulatory requirements, such as risk diversification.
• Specialised Investment Funds (SIFs), which are vehicles restricted to professional or “well-informed” private investors and are subject to authorisation and ongoing supervision by the CSSF. They are subject to lower risk diversification requirements than Part II funds.
• Investment Companies in Risk Capital (SICARs), which can be public or private companies that raise funds to invest in risk-bearing assets. They benefit from a simplified status under Luxembourg company law and an advantageous tax regime (see below).

Unregulated alternative investment funds include the following.

• Reserved Alternative Investment Funds (RAIFs), under legislation of July 2016, which can be established without prior approval from the CSSF and are subject to indirect supervision via their management company (AIFM). RAIFs offer greater flexibility than SIFs, but are also subject to risk diversification and can only be marketed to so-called well-informed investors. A key attribute is their rapid time to market, as they can be created without the regulator’s approval.
• Luxembourg AIFs, which are also commonly set up as normal limited partnerships under Luxembourg company law. The revised version of Luxembourg’s limited partnership regime – principally comprising common limited partnerships (SCSs) and special limited partnerships (SCSps) – was introduced in 2013 with the aim of offering fund categories that are comparable with Anglo-Saxon limited-partnership vehicles. The SCSp, which has no legal personality, is primarily designed to be similar to common-law investment partnerships, and has been adopted extensively in Luxembourg, particularly for private equity investments.

AIFs can be structured in various available legal forms. Many AIFs are structured as limited partnerships to provide a high level of flexibility regarding governance arrangements, investors’ rights and duties, distribution requirements and exit rules. Other legal forms available include the public limited liability company (société anonyme, or SA), the private limited liability company (société à responsabilité limitée, or S.à r.l., although subject to certain constraints), and the corporate partnership limited by shares (société en commandite par actions, or SCA).

Some types of AIFs may also be established as a mutual fund (fonds commun de placement, or FCP), which has no legal personality and must be managed by a Luxembourg-domiciled management company.

AIFs may be open-ended or closed-ended, and may be either single-portfolio structures or umbrella funds which can accommodate different share classes of the same strategy or contain different investment strategies in ring-fenced sub-funds whose assets and liabilities are segregated from each other.

SICARs

The SICAR regime was established in 2004 as a dedicated framework for private equity, venture capital, real estate and infrastructure investments that qualify as risk capital investments, in most cases reflecting the restricted liquidity of assets and an active management process to create added value. SICARs are authorised in advance and supervised by the CSSF, and are restricted to professional and well-informed investors (the latter being institutional and professional investors as well as those who self-identify as well-informed and either invest a minimum of EUR100,000 in the fund or whose investment expertise and experience has been certified as such by a bank, investment firm or management company).

SIFs

Under the SIF regime enacted in 2007, SIFs are authorised in advance and supervised by the CSSF. The SIF regime is flexible in terms of investment strategy, subject to a diversification requirement that no asset may represent more than 30% of the portfolio, and benefits from the EU marketing passport for professional investors.

RAIFs

The RAIF regime, introduced in 2016, has been very widely adopted by the market and has become a preferred choice for many alternative fund sponsors in Luxembourg. It offers enhanced speed to market over SIFs by dispensing with the latter’s requirement for double authorisation of both manager and fund. It does not require prior authorisation or ongoing supervision by the CSSF as a result of an authorised external AIFM supervised by the CSSF or another EEA Member State regulator as management company. It benefits from the AIFM’s marketing passport valid for professional (and for many countries also well-informed or “semi-professional”) investors in the EU.

ELTIFs

The revision of the ELTIF Regulation, popularly known as ELTIF 2.0, came into effect in January 2024, while its regulatory technical standards were published by the European Commission in July 2024. ELTIFs qualify as AIFs and are managed by an authorised AIFM, but may be made available to retail investors thanks to a pan-European retail investor marketing passport. The revised legislation incorporates protection for individual investors, including suitability assessments and more flexible liquidity and early exit options.

Under ELTIF 2.0, the range of eligible investments has been expanded to include assets including securitisations, green and sustainable bonds, and target funds that themselves invest in eligible assets. Eligible real assets now include communications, environmental, energy or transport infrastructure, and social infrastructure assets, such as retirement homes, medical facilities and schools, industrial facilities and machinery, and transport equipment. The revised legislation also improves diversification requirements and borrowing limits, and it lifts certain constraints for ELTIFs offered exclusively to professional investors.

Part II Funds

Part II funds are regulated vehicles supervised by the CSSF that offer non-UCITS strategies open to all categories of investors (retail as well as professional).

Regulatory Approval Time

A SIF, SICAR, Part II fund or ELTIF can be established after obtaining the CSSF’s authorisation of its constitutional and issuing documents and the fulfilment of requirements relating to managers and/or fund vehicles. Approval can traditionally take between two and six months, depending on the complexity of the case, but under its new ELTIF application process, the CSSF has massively accelerated its response and approval times, and approval times of eight weeks or less have become common.

Offering Documentation

Regulated funds are subject to the CSSF’s prior authorisation and ongoing oversight, including compliance with the requirements for pre-contractual information available to potential investors. The AIF’s constitutional document and issuing document must contain all information required to allow investors to make an informed investment decision, in accordance with the relevant legislative provisions which vary depending on the applicable regulatory regime (see above).

Any material changes to the documentation or to the management of a regulated fund must be approved in advance by the CSSF, which will also review any amended supporting documentation.

For ELTIFs, specific mandatory disclosure requirements apply under EU laws.

Annual Reports

Depending on the regulatory regime of the AIFs, annual audited accounts and management reports must be made available to investors, filed with the CSSF and published in the Luxembourg Trade and Companies Register (RCS), although many AIFs are contractually bound to provide reporting more frequently – quarterly, or in some cases monthly.

Sustainability Disclosures

SFDR, which came into effect in March 2021, sets standards and requirements for financial market participants and financial advisers to provide transparency and ongoing reporting about the sustainability characteristics of AIFs or other funds they manage or advise, including pre-contractual disclosures and non-financial periodic reporting (at least annually).

SFDR’s regulatory technical standards, which came into effect in January 2023, and other subsidiary legislation set out details of the content and presentation of information relating to the “do no significant harm” principle, sustainability indicators and adverse sustainability impacts, and the promotion of environmental or social impact characteristics (under Article 8 of SFDR) and environmental or social impact objectives (Article 9), along with the categorisation of sustainable assets, as defined by the Taxonomy Regulation.

Pre-contractual and ongoing disclosures under SFDR are provided to investors in the same way as information requirements mandated under the AIFMD, including dedicated disclosure statements, annual reports and website information.

The Luxembourg funds toolbox is flexible and offers a wide variety of choices to sponsors. This stems from the ability to mix and match two layers of regulations, the country’s so-called fund product legislation and its range of legal forms. Therefore, there is no single tax regime that generally applies to alternative funds; instead, each fund should be considered in light of the relevant layers of regulations that would apply to it.

This section provides a summary description of the tax treatment applicable to the most common types of funds, starting from alternative funds with the highest level of regulation to the least regulated ones. Certain aspects of tax treatment that may potentially apply to all alternative funds are described at the end of this summary.

Part II Funds

Income tax and net wealth tax

Part II funds are not subject to corporate income tax, municipal business tax or net worth tax. However, Part II funds established as a tax-transparent vehicle (most commonly as an SCS, an SCSp or an FCP) can, under certain conditions, be subject to corporate income tax by application of reverse hybrid rules, which are described at the end of this summary.

Subscription tax

Part II funds are subject to an annual subscription tax (taxe d'abonnement) calculated and payable quarterly, on the aggregate net assets of the fund at the end of each quarter. The standard subscription tax rate for Part II funds is 0.05%.

The law provides for a wide range of subscription tax reductions or exemptions, which are too numerous to be listed here. The most common exemptions from the subscription tax are:

• Part II funds, or their individual compartments, authorised as ELTIFs;
• Part II funds whose asset value is represented by shares or units held in other Luxembourg funds that have already been subject to the subscription tax; this is relevant for funds of funds, ensuring that no double subscription tax is due on the same underlying assets; and
• Part II funds, or their individual compartments, for which investment is reserved for pension schemes.

Withholding tax

Dividend distributions made by Part II funds and payments upon redemption of investments are not subject to withholding tax in Luxembourg. There is also no withholding tax on the distribution of liquidation proceeds to investors.

SIFs

The tax treatment described for Part II funds under the previous section also applies to SIFs, except that the subscription tax rate is, as a rule, 0.01%.

SICARs

The income tax treatment of a SICAR will depend on whether the SICAR is set up as a tax-transparent vehicle, such as an SCS or an SCSp, or as a tax-opaque vehicle, such as an SCA or an SA.

SICARs set up as a tax-transparent vehicle

If the SICAR is set up as an SCS or an SCSp, it will be flow-through for Luxembourg tax purposes, and taxation of the income of the vehicle will occur at the level of the investors. Like other tax-transparent vehicles, under certain conditions, the SICAR may be subject to corporate income tax by application of the reverse hybrid rules (as described below).

However, in contrast to unregulated SCSs or SCSps, the law provides that the SICAR cannot be considered as a commercial enterprise, and therefore it will never be subject to municipal business tax.

SICARs set up as a tax-opaque vehicle

If the SICAR is set up as a tax-opaque vehicle, the most common form being an SCA, it will, as a rule, be fully subject to Luxembourg corporate income and municipal business tax on its worldwide income, according to standard corporate income tax rules.

However, the law provides for several preferential tax treatments:

• income derived from securities, such as dividends and interest, and capital gains realised on such securities as well as interest on short-term (less than 12 months) money deposits are excluded from the SICAR’s taxable basis;
• the SICAR is exempt from net worth tax on its assets, apart from a minimum level, generally amounting to EUR4,815 per year;
• dividend distributions made by the SICAR and payments upon redemption of shares are not subject to withholding tax. There is also no withholding tax on the distribution of liquidation proceeds to investors.

Subscription tax

SICARs are not subject to subscription tax in Luxembourg.

RAIFs

RAIFs are by default subject to the SIF tax regime (see above).

However, RAIFs can elect to be subject to the SICAR tax regime, provided that the RAIF invests in risk capital assets, in line with the SICAR regulations and administrative guidance.

Limited Partnerships Qualifying as AIFs

If the fund is established as a tax-opaque vehicle, it will be subject to the standard income tax and net worth tax regimes applicable to all Luxembourg corporate taxpayers. In practice, it is therefore uncommon for fund sponsors to set up unregulated AIFs as tax-opaque entities.

The following summary examines the tax treatment of unregulated AIFs set up as tax-transparent entities, the SCS and the SCSp being the most common forms of unregulated funds in the Luxembourg market.

Income tax and net worth tax

Due to their tax-transparent nature, SCS(p) AIFs are, in principle, not subject to corporate income, municipal business or net worth taxes.

There are, however, two notable exceptions:

• income tax can be due by application of the reverse hybrid rules; and
• municipal business tax can be due in cases where the SCS(p) AIF carries out a commercial activity. However, the Luxembourg tax authorities have confirmed in a circular that, due to its nature as an AIF, an SCS(p) AIF is assumed not to carry out any commercial activity, and would therefore not be subject to municipal tax. An SCS(p) AIF may, however, be deemed to carry out a commercial activity, irrespective of its AIF status, if its general partner set up as a tax-resident commercial company (most commonly a Luxembourg S.à r.l.) holds 5% or more of the interests or profit entitlement of the SCS(p) AIF.

Withholding tax

Dividend distributions made by the fund and payments upon redemption of interests are not subject to withholding tax in Luxembourg. There is also no withholding tax on the distribution of liquidation proceeds to investors.

Subscription tax

As a non-regulated fund vehicle, an SCS(p) AIF is not subject to Luxembourg subscription tax.

Tax Considerations Applicable to All Types of Vehicles Described Above

Value-added tax

Luxembourg alternative funds will have to register for value-added tax in Luxembourg if they receive taxable supplies from providers established outside the country, in respect of which Luxembourg VAT should be self-assessed under the reverse charge mechanism.

Management services (including portfolio/asset management, administrative, investment advisory and risk management services) rendered to funds and located in Luxembourg are in principle VAT-exempt. This VAT exemption also applies to outsourced management/advisory services, provided that certain conditions are met.

Funds are generally not expected to have any right of VAT deduction, and therefore any VAT incurred by the fund will, as a rule, be a final cost.

Reverse hybrid rules

These are potentially applicable to funds established as tax-transparent vehicles (eg, SCSp, SCS or FCP), irrespective of their fund regulations.

An entity established as a tax-transparent vehicle can become subject to corporate income tax if 50% or more of its investors are located in jurisdictions that consider the fund to be tax-opaque.

However, collective investment vehicles are excluded from the scope of the reverse hybrid rules. These are defined as vehicles in which investment is widely held, that have a diversified portfolio of securities, and are subject to investor protection regulations.

Luxembourg real estate levy

Luxembourg applies a lump-sum 20% real estate levy on gross rental income and capital gains derived from real estate assets located in Luxembourg to funds established as tax-opaque entities that are Part II funds, SIFs and RAIFs. The rule applies in respect of real estate assets located in Luxembourg, held either directly or indirectly through one or a number of tax-transparent entities, in proportion to the stake held. Reporting formalities and information requirements also apply regardless of whether income from Luxembourg real estate is earned or not.

Over the past decade, Luxembourg has emerged as the primary European domicile for loan-originating funds, drawing on the AIFMD framework which authorises investment in any kind of assets including debt and to originate loans. Very early on, the CSSF provided detailed guidance on loan-originating funds and set clear standards in terms of expected governance and management.

The AIFMD II legislation, which must be adopted into national law by EU Member States by April 2026, introduces a new regime for loan-originating AIFs and for origination activity on their behalf. Certain new constraints will apply under AIFMD II, which will have an impact on the Luxembourg private credit funds sector.

A major development has been the addition of the activity of “loan origination on behalf of AIFs” to the list of permitted activities that an AIFM may perform in the course of the collective management of an AIF. For Luxembourg AIFMs, this constitutes confirmation of existing regulatory practice, whereby loan origination by or on behalf of AIFs was already considered a permitted activity for AIFMs.

To manage AIFs engaging in loan origination, AIFMs must implement policies, procedures and processes for the granting of credit, in particular for assessing credit risk and for administering and monitoring their credit portfolio – rules broadly in line with existing requirements for Luxembourg AIFMs managing loan-originating funds. They will also have to disclose the composition of the originated loans portfolio periodically to investors.

Finally, the new regime establishes rules on diversification, prohibition of loans to some connected parties, risk retention and the allocation of loan proceeds to the AIF, as well as leverage limitations.

These new requirements will be subject to regulatory technical standards yet to be defined by the European Securities and Markets Authority (ESMA).

Funds restricted to professional and well-informed investors, as defined by Luxembourg’s fund legislation, may invest in digital assets subject to certain safeguards, but funds sold to retail investors may not invest in digital assets directly. Investment in consumer credit is not prohibited, but is subject to national rules on lending to the public, with the result that it is rare as an asset class for institutional funds; the CSSF would scrutinise any such application very closely. Some Luxembourg funds invest in credit card receivables, but these are often structured as securitisation vehicles rather than actively managed funds. Funds do invest in loan portfolios and conduct direct lending as part of a broad range of loan portfolio investment vehicles. There is still a prohibition in place on investments in cannabis, differently from Germany where cannabis has now been declared acceptable as an investment. Litigation funding is permissible for funds, subject to adequate governance.

Special purpose vehicles, holding companies and other “plumbing vehicles” are very commonly used for investment purposes for a variety of reasons, including for aggregation and pooling, for instance for a family of international funds domiciled in jurisdictions such as Delaware, the Cayman Islands and Luxembourg to channel the assets through a single aggregator special purpose vehicle, for blocking purposes for tax-transparent and transparent structures and strategies. Use of subsidiaries may be dictated by domestic considerations relating to particular assets – eg, for the purposes of investment in Spanish real estate, one would use a Spanish real estate holding company. This type of downstream structuring is very common and widely accepted; there is a good understanding why this is often required in order to conduct investment activities efficiently.

Whether there is a requirement to have a domestic investment manager as a condition for managing a Luxembourg fund depends on its legal form and the applicable regulatory regime. An AIF can have a designated, fully authorised AIFM from any jurisdiction of the EEA, but whether the fund itself other than the AIFM needs some local management depends. It is highly advisable to have tax substance in Luxembourg for a general partner that will be managing the partnership, otherwise it could represent a tax attachment to another country. Similarly, if there is a corporate type of fund vehicle and all the managers are in another country, there could be a tax substance and “real seat” risk if there are no people on Luxembourg ground.

If there is a Luxembourg AIF, with a fully authorised AIFM in another European country, there is no requirement to maintain business premises or hire local employees in Luxembourg. In order to confirm the administrative seat of a fund in Luxembourg (under the “real seat theory”), a factual assessment will be applied, such as having the shareholder register in Luxembourg, correspondence sent to investors from Luxembourg, and corporate records on Luxembourg ground. Shareholder and management meetings should take place in Luxembourg on a regular basis.

In practice, the large majority of funds have their custodian, and fund administrator in Luxembourg.

Non-local service providers will generally be subject to their home country’s authorisation and ongoing supervision. According to the CSSF’s so-called substance circular, delegation of specific functions is subject to ongoing monitoring and oversight, and, in some cases, regulatory approval. According to that same circular, key roles, such as conducting officers, shall in principle be carried out on Luxembourg ground, and any exceptions require regulatory approval.

The main areas of impending change are AIFMD II and the European Commission’s Retail Investment Strategy. However, the retail investment strategy proposal is still subject to negotiation between the EU Council and the European Parliament. The revised AIFMD entered into force on 14 April 2024, and most of its provisions must be adopted into Member States’ national law by April 2026. However, much of the detailed rules stemming from the directive will take the form of regulatory technical standards to be determined and promulgated through subsidiary legislation over the next two years. Regulatory technical standards for the ELTIF 2.0 legislation were published in July 2024 and are now expected to be in their final form. Funds in Luxembourg will be affected by any changes decided to SFDR, which is currently under debate within EU institutions and market participants.

Luxembourg attracts promoters and sponsors of alternative funds from all over the world. The jurisdictions that dominate originators of Luxembourg funds, both UCITS and AIFs, as measured by net assets as of July 2024, were led by the US, followed by the UK, Germany, Switzerland, France, Italy, Belgium, Luxembourg, the Netherlands and Denmark, but a significant proportion of alternative fund business comes from Asian countries.

AIFMs are mostly structured as limited liability entities, but general partner entities tend to be structured in different ways, with compensation and carried interest arrangements being important drivers for the choice of structures. This is very much dependent on where carry beneficiaries are located and their personal tax status.

Luxembourg AIFMs are subject to the AIFMD. They are not subject to a statutorily defined fiduciary duty as such, but they have a duty to always act in the best interests of the fund’s investors. AIFMs are subject to supervision by the CSSF, which imposes various policies and governance requirements, including its substance circular, which is detailed and spells out other requirements that apply to AIFMs.

The AIFMD applies to managers of alternative investment funds, including hedge funds, private equity funds, real estate funds, and other types of collective investment vehicles that fall outside the scope of the UCITS regime, and focuses on transparency, investor protection and regulatory oversight.

Its key provisions deal with full authorisation of AIFMs managing AIFs whose assets under management exceed certain thresholds (EUR100m with leverage or EUR500m without leverage and where funds offer no redemption rights for five years, otherwise reduced requirements for registration apply), minimum capital levels for AIFMs, liquidity, counterparty and market risk management systems for the funds they manage, leverage monitoring and disclosure, remuneration policies aligned with the long-term interests of investors and funds, and valuation procedures.

The legislation also covers marketing and distribution rights under the AIFMD passport and through national private placement regimes, reporting and disclosure obligations, including annual reports, periodic disclosures and pre-investment transparency, CSSF reporting, independence of the AIFM’s risk management function from its portfolio management, and stress testing of AIFs’ liquidity and market risks.

Luxembourg does not offer any preferential tax regime for AIFMs. They are taxed on their income in accordance with ordinary corporate or individual tax rules.

Management services provided to alternative funds and located in Luxembourg should, in principle, be VAT-exempt. Please refer to 2.4 Tax Regime for Funds for further details.

Alternative funds that are established outside Luxembourg but have their effective centre of management or head office located in Luxembourg are exempt from corporate income tax, municipal business tax and net worth tax. In other words, foreign alternative funds managed from Luxembourg are not deemed to have a permanent establishment in Luxembourg.

Luxembourg generally does not have any specific tax regimes for carried interest holders, except for the following treatments, which, in practice, have a limited impact:

• fund management company employees who established their residence in Luxembourg between 2013 and 2018 and who were not Luxembourg residents during the five years preceding this period (from 2008 to 2012) are taxable at a rate of one quarter of the global tax rate for income earned from a carried interest scheme over the ten years following their arrival; and
• carried interest income received by employees of a fund management company is taxable as a speculative gain, ie, this income does not receive any preferential treatment, but it is fully taxable as ordinary income.

Under Luxembourg tax law, capital gains on shares realised by individuals are exempt from income tax, provided that, in substance, the taxpayer has owned less than 10% of the capital of the entity issuing the shares for more than six months. This general rule can also apply to carry holders upon disposing of their shares in investment funds.

Managers can outsource portfolio management or risk management functions according to the regulatory requirements set out in the AIFMD delegation rules, which specify what aspects they can delegate. The CSSF’s substance circular also sets out detailed rules on upfront and regular ongoing due diligence, as well as boundaries for delegation and managers’ monitoring duties.

Substance requirements are set out in the CSSF’s substance circular, which covers the decision-making centre of an AIFM, as well as Circular CSSF 22/811, which sets out updated requirements on the seat of a fund’s central administration. The central administration must be in Luxembourg, and decision-makers need to either be in Luxembourg or come to Luxembourg to take decisions. The conducting office on the ground should have at least three full-time employees, as set out in the CSSF’s substance circular.

The CSSF requires the AIFM’s head office and registered office to be located in Luxembourg and to meet capital and own funds requirements set out in the legislation. It also has to be notified of the identity of an AIFM’s shareholders or partners and be given the assurance that they are suitable, while the individuals managing the AIFM must be of good reputation and possess all required skills and experience.

Regulatory approval or notification is required for mergers, changes of control or restructurings involving a fund manager. Regulatory notification requirements apply for a change of control, whereas regulatory approval is typically required for a direct change of control of a regulated entity. In case of indirect change of control, the regulator would customarily be informed on a courtesy basis without formal approval being required.

Use of data is subject in Luxembourg to the EU’s General Data Protection Regulation (GDPR). The CSSF is currently examining the use of artificial intelligence in the financial sector and has conducted a survey in the industry, but there are no legal requirements in place.

The most important impending changes will come with the entry into application of the AIFMD II legislation in April 2026, along with regulatory technical standards and other subsidiary legislation that will be drawn up and enacted over the next two years.

Luxembourg is a fund-exporting country for all types of investors – including institutional investors, private wealth clients, retail investors, sovereign wealth funds and pension funds – from all over the world. It is notable that investors from Asia and Latin America are particularly confident in investing in Luxembourg structures, but, equally, money flows into Luxembourg funds from investors in countries such as Australia and Canada in addition to individual and institutional investors from Europe. Retail investment is restricted to UCITS, Part II funds and ELTIFs.

Luxembourg follows AIFMD rules and, where applicable, other European rules on preferential treatment (eg, special rules for ELTIFs). The use of side letters is very common due, for example, to the requirements of investors’ own regulatory regimes or to the need for compliance with the regulations of internal organisations.

Alternative funds can be marketed under the European passport. Alternative funds can be sold to Luxembourg institutional investors. Supervised alternative funds can be offered to private wealth investors in Luxembourg.

The rules applicable to marketing notifications are the requirements set out in the AIFMD and ELTIF legislations.

The use of placement agents is probably less common in Luxembourg than in other jurisdictions. Placement agents must be regulated – any kind of distributor or placement agent acting on Luxembourg ground falls under the domestic financial sector legal and licensing regime.

The remuneration policy for employee sales efforts must be such as to promote sound risk management and avoid encouraging excessive risk-taking. It is subject to broader rules on fixed and variable components of remuneration, including the requirement for a payment deferral of part of the variable over a minimum period of three to five years.

Non-resident Investors

Non-Luxembourg-resident investors in undertakings for collective investment, SIFs, SICARs and RAIFs that are established as tax-opaque entities (eg, an SCA or SA) are not subject to capital gains taxation in Luxembourg upon disposal of their participation in the fund.

Investors in alternative funds established as tax-transparent entities (eg, FCPs, SCSps or SCSs) are subject to tax on a look-through basis. Investors in these funds are generally not liable to any Luxembourg income tax on income received and capital gains realised upon the disposal of the interests, assuming the fund does not invest in real estate located in Luxembourg or have any substantial shareholding in Luxembourg-resident companies, directly or through other tax-transparent entities. In the latter case, investors could potentially be subject to non-resident capital gains taxation in Luxembourg in the event of disposal of shares in the underlying Luxembourg-resident company within six months of its acquisition by the fund, unless an applicable double tax treaty allocates the right to tax the gain to the investor’s jurisdiction of residence.

Non-Luxembourg-resident investors are not deemed to have a permanent establishment in Luxembourg solely as a result of holding shares or interests in a Luxembourg fund.

There is no withholding tax on distributions of dividends or liquidation proceeds by UCIs, SIFs, SICARs and RAIFs, irrespective of whether they are established as tax-transparent or tax-opaque entities.

No stamp duty or similar tax is payable in Luxembourg on the issue or transfer of shares or interests in funds.

Resident Investors

Luxembourg tax resident investors having an interest in a Luxembourg fund may be taxable on income, distribution or redemption deriving from the fund, depending on their individual situation and tax status. Taxation will be levied following the submission of a tax return, rather than through withholding tax.

Alternative funds set up as tax-transparent entities (eg, SCSs, SCSps and FCPs) generally do not qualify for double taxation treaty benefits.

Alternative funds set up as tax-opaque entities (eg, SCAs or SAs) can access some double tax treaties, depending on the jurisdiction of investments and under certain conditions. This requires a case-by-case analysis for each jurisdiction, with the provision that the majority of EU jurisdictions and the US do not grant treaty benefits to Luxembourg investment funds.

Alternative funds set up as tax-opaque SICARs, or RAIFs that have elected to be subject to the SICAR tax regime, are considered by Luxembourg as tax-resident and should benefit from double tax treaties concluded by Luxembourg.

Luxembourg alternative funds will generally qualify as reporting foreign financial institutions (FFIs) for Foreign Account Tax Compliance Act (FATCA) and Common Reporting Standard (CRS). They must therefore register with the IRS for FATCA purposes and identify reportable accounts, and will be subject to reporting requirements.

However, certain investment funds can qualify as non-reporting FFIs for FATCA purposes. The most relevant categories of non-reporting FFIs that could apply to a Luxembourg fund are as follows:

• exempt beneficial owners: these mainly include retirement funds or entities wholly owned by retirement funds, governments, international organisations or central banks; and
• deemed-compliant FFIs, comprising, in particular:
1. restricted funds, which exclude certain US investors, namely Specified US Persons and Passive Non-financial Foreign Entities with one or more substantial US owners;
2. collective investment vehicles, ie, funds that notably have no direct individual investors; and
3. sponsored investment entities, ie, funds for which another entity (the sponsoring entity) agrees to fulfil the FATCA obligations.

Similar categories of non-reporting FFIs also exist under CRS, although this is generally more restrictive than FATCA in that respect. While, for CRS purposes, there is also a collective investment vehicle exemption, this only applies to funds that are subject to a product regulation, which is not the case for a RAIF or unregulated AIF. It is also not possible under CRS to become a non-reporting FFI through the appointment of a sponsor.

Luxembourg’s AML and KYC regime is aligned with EU legislation and other international standards, and aims to prevent money laundering, financing of terrorism and other financial crime, imposing strict obligations on financial institutions, including investment funds and managers.

The AML/KYC framework in Luxembourg is primarily based on domestic legislation of November 2004, as subsequently updated, and incorporates the EU’s fourth and fifth AML directives. This is supplemented by regulations and CSSF circulars clarifying AML/KYC obligations for financial institutions, as well as measures to ensure compliance with the recommendations of the Financial Action Task Force.

The requirements for the fund industry include customer due diligence, identification and verification, checks on the ultimate beneficial owner of legal entities, and ongoing monitoring of customer relationships to detect any suspicious activity, including keeping customer information up to date and continuously assessing risk profiles to facilitate a risk-based approach to monitoring.

Enhanced due diligence, including information in areas such as source of funds, the nature of the business and more detailed identification checks, is required for higher-risk situations, such as where the client or beneficial owner is a politically exposed person, based in a high-risk country or involved in high-risk activities, such as a business prone to elevated money laundering risk, or a transaction is complex, unusually large, or appears suspicious.

Financial institutions must retain all records related to AML/KYC due diligence for at least five years following the termination of the business relationship, including customer identification documents, records of transactions, correspondence and other documents. They are required to report any transaction suspected of being related to money laundering or financing of terrorism to Luxembourg’s Financial Intelligence Unit (FIU), and may also be required to flag up certain types of transactions above specified thresholds if they appear suspicious or unusual.       

Managers and funds are subject to the EU’s GPDR legislation applicable to all entities processing personal data of individuals within the EU, including investment funds and their managers, as well as the National Data Protection Law of August 2018, which complements the GDPR and endows the independent National Commission for Data Protection with the power to enforce data protection compliance in Luxembourg.

The CSSF enforces specific guidelines on cybersecurity and data protection for funds and managers, especially those managing AIFs and UCITS. These include the need for a robust cybersecurity framework and measures including risk assessment, incident response mechanisms and data encryption. Funds and managers using cloud computing services must comply with CSSF Circular 17/654, which provides guidance on outsourcing and data security in cloud computing, while funds are required to adopt appropriate IT risk management strategies to ensure data security and continuity of service in the event of disruption.       

Changes can be expected in the areas of AML and financing of terrorism measures, in particular, along with data security requirements and data protection.

The EU’s upcoming AML package aims to create a more robust and unified approach to combating money laundering and financing of terrorism through greater transparency and stricter and more harmonised enforcement of AML rules, to curb financial crime more effectively, and to ensure consistency in the application of rules across the EU.

Its key elements are as follows.

• Establishment of the EU Anti-Money Laundering Authority (AMLA) to act as a central EU-level authority to co-ordinate and strengthen AML supervision throughout the EU. This will have direct supervisory powers over the riskiest cross-border financial institutions, ensuring consistent monitoring of large entities, and for other institutions, it will ensure harmonisation and co-operation between national authorities, including providing technical assistance and support to national FIUs.
• A single rule book for AML measures across the EU, replacing the current fragmentation between Member States’ interpretation and implementation of regulations. This will include detailed requirements in areas such as customer due diligence, beneficial ownership, reporting obligations and risk assessment, and apply not only to financial institutions but also to non-financial players, such as real estate agents, high-value goods dealers, and other segments vulnerable to money laundering.
• Directly applicable AML regulation with uniform application across all Member States without the need for transposition into national law.
• Revision of the 2015 Transfer of Funds Regulation, extending its scope to cover crypto-assets, including traceability requirements, to prevent the use of cryptocurrencies for illegal purposes. Crypto-asset service providers will be required to collect and report information on senders and receivers in crypto-asset transactions.
• Revision of the sixth AML Directive to further harmonise rules and enhance cooperation between national authorities and the EU’s new AMLA and strengthen risk-based supervision of entities covered by the legislation, particularly in non-financial sectors.
• Improved cooperation and co-ordination between the FIUs of Member States. FIUs will have access to a centralised database that facilitates the sharing of information on activities transactions and other financial intelligence, to facilitate cross-border investigations and prevent criminals from exploiting gaps between jurisdictions. AMLA will provide FIUs with advanced data analytics tools to improve detection and reporting of suspicious activities.
• A EUR10,000 limit on large cash transactions across the EU to reduce the use of cash for money laundering and encourage the use of traceable payment methods. Member States may adopt lower thresholds for cash transactions if they choose to do so.
• Enhanced scrutiny of dealings with jurisdictions classified as high-risk third countries by the European Commission, including enhanced due diligence measures for transactions involving entities or individuals there. The Commission will maintain lists of high-risk third countries based on assessments of their AML regimes.
• Harmonised penalties and sanctions for breaches of AML rules across the EU to ensure that financial institutions face consistent penalties for non-compliance, and the introduction of effective and dissuasive penalties for violations, including criminal sanctions for serious breaches.
• Measures to address the increasing use of crypto-assets in money laundering, with the Markets in Crypto-Assets Regulation introducing requirements for crypto service providers to be registered and adhere to AML rules.
• Assessment of risks posed by new payment technology and digital finance innovations, and stricter oversight of these sectors to prevent their misuse for laundering of funds.
• Enhanced protection for whistle-blowers who report suspicious activities or non-compliance with AML rules from retaliation, such as job dismissal or discrimination.