Specialized Investment Funds: The Light-Footed and Fiscally Efficient Luxembourg Investment Vehicle
Luxembourg is the world’s second biggest fund center after the United States. In 2014, over 2 trillion net assets were under management in Luxembourg investment funds, and the figures keep growing. In 2003 the number of hedge funds in Luxembourg was 46. In 2013 there were more than 500.
SiF’s (Specialized investment fund) remain one of the most efficient Luxembourg investment funds. This type of fund is only lightly regulated, fiscally attractive, and can be marketed easily. Such a light regime can be explained by the fact that SIF is restricted to well-informed investors, and who therefore do not need the same amount of protection as that which is applicable to retail-distributors fund.
SIF’s were created with the design to cater to investment fund managers and high net worth individuals (HNWI) who wish to place their assets in this type of Luxembourg fund.
Who can invest in a SIF? Well informed investors: professional, institutional, and those investing at least 125,000 and having waived their right to extra investor protection by formal notice and permission given by banks.
How do you create a SIF? SIF’s can be either contractual funds or companies. In the latter case, the SIF will be internally managed. In the former case, the fund must hire a Manager. SIF’s must have at least 1,250,000 € net assets. This minimum capitalisation amount must be reached within a period of twelve months following the authorization of the fund. A SIF organized as a common contractual fund issues units, a SIF organized as Limited company issues shares. Each of which need a minimum of 125,000 € investment – of which 5% must be paid up on subscription.
What is the step by step process to creating a SIF? A SIF must be A) incorporated under Luxembourg Law: SIF’s can closed-ended (Socitété d’investissement à capitable fixe) or open-ended (société d’investissement àcapital variable). B) Authorized by the CSSF (national market authority). Documents required :
– Constitutional documents
– Issuing document
– CSSF questionnaire duly filled in
– Names of the directors/managers of the SIF, who must be experienced and of good repute. (CVs, ID, absence of criminal records)
– Last available audited financial statements and a certificate from the supervisory authority of the initiator, if applicable
– A statement explaining risk management procedures, including the management of conflicts of interest
– The investment advisory agreement and a certificate from the supervisory authority of the investment manager, if applicable, and the last available audited financial statements (3 years) of the investment manager
– Central administration agreement
– Depositary agreement
– Choice of the alternative investment fund manager (if applicable)
– Delegation agreement
– The letter of intent or engagement letter from the auditor
– The draft nominees agreement (if applicable)
What are the main advantages of a SIF? A SIF can invest in any type of asset. There are no restrictions on the type of investments a SIF can make, no regulation. The offering document and the annual financial statements are the only mandatory documents prescribed by the SIF Law. Therefore SIF has no obligation to prepare a simplified prospectus, neither a semi-annual report nor a long-form report as is required for retail-oriented funds. The SIF law provides a very flexible regime in terms of valuation of assets, frequency of NAV calculation and price of the shares/units issued or redeemed. The minimum frequency of NAV calculation is annual. The SIF is not subject to Luxembourg income tax. Dividends and capital gains are not subject to withholding tax. The SIF is only subject to an annual subscription tax “ taxe d’abonnement” of 0,01% calculated based on the net assets of the SIF.
Specific aspects of a SIF: SIFs, which qualify as EU Venture Capital (EuVECA) or EU Social Entrepreneurship (EuSEF)? Funds have the possibility to be subject to the EuVECA and EuSEF regulation respectively, and both of them introduce a passport for the marketing of AIFs to EU-based eligible investors.
Alternative Investment Fund? When a Fund qualifies as an Alternative investment Fund, it is, contrary to SIFs, subject to stricter regulations in terms of investment policies. Given the broad definition of the term “alternative investment”, it is common for investments to fall under this category. Specialized investment funds, once deemed as as such, must comply with the alternative investment fund managers directive (AIFMD), which can be time-consuming. Nevertheless, the AIF will receive the “European Passport”. This passport means the funds’ shares can be sold in any country in the European Union without necessitating the national market authorities approval each time the AIF wishes to sell shares cross-border. AIF shares can be marketed freely across the European Union through a regulator-to-regulator notification regime. Such is the trade-off with remaining within the legal scope of a SIF. Lighter regulation vs. European passport.