Luxembourg funds: Luxembourg mutual funds
Luxembourg boasts the largest number of foreign-owned companies and investment funds. Not only tax concessions but also efficient and effective vehicles created ad hoc for managing the assets attract investment in the country.
Luxembourg funds represent a sort of mutual unit trusts, namely investment vehicles managed by asset management companies, which provide for putting together individual savers' invested sums (divided into shares, subscribed by savers, who are entitled to equal rights) in one single asset, and then invest them in different financial activities (as securities or bonds) or properties.
Luxembourg funds: taxation
There are mainly three types of mutual funds:
- mutual funds domiciled in Italy;
- mutual funds domiciled abroad but similar in taxation to the Italian ones (for instance the historic Luxembourg funds) and finally;
- foreign mutual funds domiciled abroad, for instance the harmonised Luxembourg funds.
The difference among these three types of fund is in the applied taxation:
- those historic Italian and Luxembourg funds are asset managed (funds incorporate withholding tax at source). Taxation does not affect quotas owned by clients on a day-to-day basis, that is because levying of tax (withholding 12.5%) is applied only at time of divestiture;
- those foreign funds are asset administered.
The harmonised Luxembourg funds continue to be taxed on the generated income.
Luxembourg funds: Sif and Sicav
The law on SICAV SIF in relation to the Luxembourg funds was promulgated in 2007.
The SIF represent new types of financial investment facility, which is intended for expert investors.
They are specialised investment funds that constitute actual collective investment schemes aimed at spreading investment risks and providing investors with the benefit of the results of their asset management.
The SIF or FIS are fiscally flexible and efficient instruments.
In order to fulfil its activities, an SIF shall be subject to prior authorisation by the CSSF (Commission de Surveillance du Secteur Financier) and shall appoint a Luxembourg custodian, namely a credit institution by Luxembourg Law of 5 April 1993.
The investment typology suitable for SIF is wide: shares, funds, derivatives, properties, bonds, rights in rem, Forex, precious metals etc. The Specialised Investment Fund may also invest on a variety of tangible and intangible assets, either exclusively or in combination, and either publicly or privately.
An SIF may take the form of open-ended type legal entity (namely an open-ended collective investment scheme also called “SICAV”), of a contractual investment fund, which shall have a management company (FCP), or of a close-ended type legal entity (that is an investment fund with a fixed capital also called “SICAF”).
The SIF or FIS are provided with a specific tax scheme:
- exempt from corporate income tax, trade tax and property tax;
- distribution of dividends, outside SIF, is not subject to withholding taxes in Luxembourg;
- capital gains resulting from the sale of the equity investment in an SIF by a non-resident are exempt from income tax;
- subject to a registration tax with annual growth rate of 0.01%, charged on the basis of the quarterly net asset value.
Finally, it should be said that SIF are adequate instruments to develop alternative investment products (hedge fund, real estate, private equity, Forex), whereas no specific limitation shall be imposed by law to investment and risk policies, and costs of establishing and maintaining are low.
Luxembourg funds: the new financial instrument FIAR or RAIF
In 2016 the Grand Duchy of Luxemburg created a new financial instrument called FIAR (Fonds d’investissement alternatif réservé).
The FIAR structure is similar to an SIF, especially for what concerns its variety of functions and the applicable preferential taxation.
The fundamental discretionary feature is the absence of authorisation procedure of the Supervisory Board.
Indeed, an FIAR is not subject to the CSSF supervision, thus avoiding time-consuming procedures related to its structuring and its launch on the market (even 1 year on average).
However, the Luxembourg Law compensates this advantage by imposing on the FIAR investors that the fund management is entrusted to specialised Management Companies (ManCo), which in turn are previously authorised by the CSSF.
Timespan of establishing and launch of an FIAR is substantially short (3 months on average), and more particularly, investors keep on being ensured of a CSSF preventive supervision by issuing of a relevant authorisation to the ManCo, and subsequent supervision during the fund lifespan until its extinction, as the management companies are obliged to account to the CSSF for their activity.
Finally, an FIAR benefits from European passport for product marketing, unlike an SIF, which may only market on the Grand Duchy of Luxembourg soil or in other Member States, however, in this latter case, relevant authorisation shall be requested.
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