Recently, the whole world has witnessed a historic change. BREXIT is about to bring a new set up of the financial world. It’s impact is spreading globally, but it will have a particular impact on one of the EU funding countries, Luxembourg.
In fact, the referendum on membership of the United Kingdom to the European Union held on 23rd of June, commonly called BREXIT, the short form for “the British exit”, has led to a rather disappointing result for the European Union (EU), given that the British majority voted for the exit. Following this event, the analysts mainly focused on the disadvantages that Brexit has caused, but they neglected the numerous opportunities that were created for Luxembourg. Practically, one of the consequence of this referendum is the loss of the European passport for the UK funds and companies, which undoubtedly leads to a reallocation of the City business sector.
Essentially, it is a chance for Luxembourg to host financial activities, as well as to allow the reallocation of various English funds and companies. The High Committee of the financial market (informal department), consisting of representatives of the Ministries of Finance and the most important Luxembourg companies, has already considered this scenario and announced that Luxembourg was able to ensure the reception of the various activities.
In the context of the Luxembourg banking sector, BREXIT impact on Luxembourg which already includes 143 institutions, it is preparing for the arrival of new banks, in particular for those that are not part of the Community area, but whose headquarters were in London. The targeted banks are mainly institutions from America, Australia, Canada, Switzerland, China or Turkey.
However, it must be emphasised that the banking lobby prioritises the establishment in Luxembourg of specialised funds in wealth management and investment funds and companies.
Thus, to better understand the process that concerns the reallocation of English funds and companies, it must firstly be mentioned the benefits of an eventual reallocation to Luxembourg and, secondly, a detailed analysis of the mechanisms and steps to take.
I. Why choose Luxembourg?
Luxembourg has a strong appeal on the world stage of investment funds and companies since the country meets the growing concerns of investors and has demonstrated significant financial stability in recent years. Thus, Luxembourg is the perfect destination for investors for the reasons already mentioned, but also because it has an ideal geographical location, the country being located in the heart of Europe.
Luxembourg has assets of more than 2500 billion value, which makes the Grand Duchy the main European investment center. In addition, the funds and the companies are marketed in over 70 countries worldwide. Financial transparency, stability, sound public finances and the ‘AAA’ made it very attractive for many foreign investors.
Appropriate legal and regulatory mechanisms, qualified lawyers, various audit and tax advisors companies will be put at the disposal of the investor. Increased investor protection will be ensured by the CSSF, an experienced regulator in the financial field. The sum of these rewarding factors ensures a strong worldwide reputation for Luxembourg.
One of Luxembourg’s major advantages is its competitive framework for UCITS (collective investment bodies in transferable securities) through the European passport that facilitates intra-Community distribution. The country is renowned for UCITS, however it is not its exclusive domain, but must be emphasized also that Luxembourg represents a major platform for alternative asset classes with over 20% of its assets entrusted to alternative managers.
It is possible to enumerate as hedge funds:
– The investment capital and risk capital
– Hedge funds
– The SICAR
– The SICAV and SICAF (Investment Company with Variable and Fixed Capital)
– Mutual funds (the Common Investment of Funds).
In addition, Luxembourg offers a favourable tax treatment, the SICAV, SICAF and the funds are exempted from tax on corporate income, municipal business tax and wealth tax, regardless of the applicable regulatory regime. In what concerns the SICAR, it is fully taxable, but it has a significant tax benefit, which consists in a tax exemption on income from disposals, exemption from wealth tax and the withholding tax on dividends, on interest and royalties.
Many companies are already considering plans to cooperate with Luxembourg. Thus, according to the Times, JP Morgan and HSBC already provides for the transfer of certain financial activities to Luxembourg. Bloomberg also announced that Morgan Stanley had transferred 1,000 employees to the European continent. It is therefore reasonable to ask whether the choice of these companies will stop in Luxembourg.
II. The process of reallocation of the English funds and companies to Luxembourg
The process of reallocation of English funds and companies to Luxembourg can be done through three mechanisms that can be clarified.
a) The transfer of the registered office
An effective way to ensure the reallocation would be the transfer of the headquarters to Luxembourg. It should be noted that any type of company or fund, except for the contractual fund, may carry out the transfer of the registered office or central administration in Luxembourg. The legal personality, in the case of an investment company, can be maintained, provided that the laws of the country authorize the transfer without any modification to the legal form. However, the investment company’s balance sheet wishing to transfer the seat will be preserved.
In the event that the board of directors or the partners at the meeting decide to reallocate, a careful analysis of the applicable laws in the home state and the host state is required, as well as the legal advice from a legal counsel. The requirements during the change of the articles of incorporation and constitutive documents with reference to the new headquarters should be followed. A very significant step is the removal of the company leading to the reallocation of the register in the home state.
Ultimately the constitutional documents will be subject to the approval of the CSSF.
b) The ceasing or the transfer of assets to a Luxembourg fund
A second mechanism that could allow the reallocation of funds would be the disposal or transfer of assets to a Luxembourg fund. This mechanism requires a bilateral arrangement. It consists of a transfer of all assets and liabilities of the fund to a Luxembourg entity with consideration to compensating the units or shares of the latter. No reference or restriction as to the structure of the Luxembourg entity is made, and therefore it can take the form of a company or of a contract. The Luxembourg entity can thus be an existing entity or a company created expressly for this purpose.
c) The merger of foreign and Luxembourg funds
Lastly, the third mechanism is the fusion of the foreign funds with a Luxembourg fund. This concerns a decision that must come from the board of directors or shareholders of both entities. This process consists of a universal transfer of assets and liabilities of the funds absorbed by the Luxembourg investment company. This procedure requires no special formality except considerations about property rights and the rights of intellectual property. This mechanism involves modifying the constitutional documents of the two entities, as well as a calculation of the exchange ratio of the shares that would be done under the control of an auditor.
In conclusion, it is clear that Luxembourg enjoys a wide range of mechanisms and practices that attract the attention of investors. We can therefore assume that Luxembourg will be the next destination of investment funds and companies, who are looking for favourable tax and legal environment.