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Luxembourg’s answer to PE regulatory reform

By Alain Kinsch & Axelle Ferey – Porter formalised it in the 90’s: innovation is key to competitiveness. Luxembourg’s private equity industry, with the support of Luxembourg authorities, explored this path over the past ten years to establish the Grand Duchy as a European hub for private equity, not only from an international private equity transaction structuring perspective but also from the perspective of a fund structuring and domiciliation hub.

The same approach centered on the concept of innovation was adopted to transpose the Alternative Investment Funds Manager Directive (AIFMD) into Luxembourg law this summer

Indeed, the Law of 15 July 2013 not only transposed the European Directive in a copy out mode, but also introduced major innovations to further enhance the framework available to those willing to set up private equity vehicles in Luxembourg, thereby potentially benefiting from the AIFMD passport for fundraising from July 2013, provided that the manager of such Luxembourg Alternative Investment Funds (AIF) is established in the European Economic Area.
The first innovation is the introduction of the Special Limited Partnership (SCSp). Leveraging upon the well-established Anglo-Saxon LP regime, the new regime allows for a full flexibility in terms of corporate governance arrangement and management via a tailored Limited Partnership Agreement, tax efficiency (tax transparency), schemes with and without legal personality. In addition, the new regime is available to regulated or non-regulated entities, such as traditional private equity fund-type vehicles (SICAR, SIF) or structuring entities (SOPARFI).
The second relates to tax efficiency, an area not addressed by AIFMD. Two sub-sets of measures shall be mentioned: those related to the introduction of a Luxembourg carried interest regime, which permits the taxation of carried interest earned by Private Equity professionals that work for an AIF or their management company and are Luxembourg tax residents at an effective tax rate of maximum 10.9% under certain conditions, on the one hand; and those related to VAT treatment of the management services provided to AIFs, which are VAT exempt, on the other hand.
The third innovation looks less striking at first sight; however, its impact for Luxembourg may be significant in the mid-term: it consists of the flexibility offered to private equity houses to choose the operating model which best suits their needs when structuring their AIFM; under the new law, existing management companies and GPs may get authorised as AIFMs or, alternatively, continue acting as GPs – often dedicated to a single AIF – without being authorised as AIFM provided that they appoint an authorised AIFM.
Private equity players are already responding and Luxembourg is experiencing two interesting trends: First, enhancing existing operational capabilities in Luxembourg for those private equity houses that are already present locally.
Second, players are setting up new AIFMs with full range operational substance to meet regulatory requirements for their new funds.
Limited Partners’ needs are also driving this trend by enabling private equity houses to offer to their clients a full range of regulated and non-regulated products, at different prices.
By introducing AIFMD in a pragmatic way and being among the first Member States to transpose it into law, Luxembourg sent a clear message to the international private equity community: Luxembourg is ready to be your preferred entry point into Europe, both from a fund and manager’s perspective. 

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