Debt Funds In Luxembourg - 10 Leaves

  • 19-03-2021
A GLOBAL CENTRE FOR INVESTMENT FUNDS:

Luxembourg is a global centre for investment funds, the second largest fund jurisdiction in the world, after the United States. It is the largest centre for funds in Europe, with over Euro 4.5 trillion in cumulative assets under management in supervised funds alone.

Why setup an investment fund in Luxembourg?

The country is:

  • A founding member of the EU.
  • Politically stable.
  • Financially stable.
  • AAA-rated.

It has:

  • Access to over 500 million EU residents.
  • Reliable investment regulations.
  • Over 4,200 supervised investment vehicles with around 14,500 sub-funds.
  • A competitive framework for passporting of funds within the EU.
  • Luxembourg funds are sold in more than 70 countries and is the leading jurisdiction for fund distribution.
  • A responsive and globally recognized financial regulator.

It offers:

  • A wide range of supervised and non-supervised investment funds.
  • UCITS and AIFs.
  • Umbrella funds.
  • Non-supervised funds.

Tax benefits:

  • Depending on the need of investors, Luxembourg offers tax exempt, tax neutral or taxable investment vehicles,
  • Some exemptions for VAT payments;
  • Funds may access Double Taxation Avoidance Treaty benefits or establish SPVs that would have access.

Luxembourg funds and the GCC:

Luxembourg is a jurisdiction of choice for investors based in the GCC. While the Dubai International Financial Centre (DIFC) and the Abu Dhabi Global Market (ADGM) also offer fund structures, Luxembourg funds have more diverse options, including SLPs – that can be unsupervised and allow for greater flexibility for lower AUMs.

Luxembourg is an excellent jurisdiction for startup funds due to lower setup and maintenance costs, in some cases, as low as 35% of the costs in similar onshore jurisdictions in the GCC. They can be established quickly, are more flexible and can easily be upgraded to supervised or passportable funds once higher AUMs are achieved.

Luxembourg funds can also be managed from the DIFC (and ADGM), by setting up a restricted fund manager. This allows for greater comfort to prospective investors, besides opening an option for directly marketing and passporting the fund within the UAE.

Most large banks and investment managers in the UAE and the GCC have Luxembourg fund options. In fact, Luxembourg domiciled investment funds dominate among foreign funds sold in the GCC.

United Arab Emirates – 64% of foreign funds are Luxembourg funds

Saudi Arabia – 50%

Kuwait – 75%

Bahrain – 75%

Oman – 99%

Qatar – 98%

What is a debt fund?

Debt funds invest into debt securities such as bonds, notes or other fixed income products. Banks have been subject to an increasing amount of regulation and compliance, ever since the crisis of 2008, and lending activity has suffered as a consequence. Private credit options have found acceptance with corporates worldwide, and there have been many innovative solutions in this sector.

In many cases, banks work closely with debt funds to find efficient solutions to provide funding to corporates, even on a cross-border basis.

Why set up a debt fund in Luxembourg?

Luxembourg is a leading jurisdiction for investment funds and the second largest investment fund centre in the world after the United States. It is the largest fund jurisdiction in the European Union, with more than Euro five trillion of assets under management.

The country is a politically and financially stable EU country with a AAA-Rating. As a jurisdiction within the European Union, debt funds established in Luxembourg can be more easily distributed within the EU on the basis of existing passporting rights for EU funds.

What are the key advantages of setting up debt funds in Luxembourg?

1. The first big advantage is choice. Fund managers can choose the level of supervision they require, depending on the kind of clients that the fund will market itself to. Accordingly, hedge funds can be unsupervised (such as SLPs), supervised (such as SIFs) or attach themselves with a supervised AIFM (such as RAIFs).

2. A Luxembourg structure also offers comfort to investors, given the good reputation of the jurisdiction, the enhanced protections offered to investors and the existing network of globally-recognised service providers.

3. Distribution options are the next major advantage. A Luxembourg fund could be passported on the basis of the AIFMD framework, once it appoints an AIFM.

(i.)Then there are the tax benefits.

a.There is a choice of tax treatment according to the choice of investment vehicle. Debt funds can be fully taxable and have access to Luxembourg’s double tax avoidance treaties network, or can choose to be tax exempt, but with very limited access to double tax treaties.

b. Debt funds can also be tax neutral with either legal or no legal personality. In this event,  the partners of the fund will become taxable, and not the debt fund itself.

What structures are available for forming debt funds in Luxembourg?

Well, there are a few, as below.

1.Specialised Investment Fund (SIF): These are very flexible fund structures, and available to qualified investors only. SIFs are supervised by the CSSF, require a lower level of diversification, and can be set up as umbrella funds as well.

SIFs can also opt for the EU Passport, after meeting certain conditions.

2. RAIF, or Reserved Alternative Investment Fund. RAIFs were introduced in 2016 and have been very successful:

They are faster to setup, and flexible enough, and they can be transformed into SIF or SICAR, if required.

In fact, they are structurally similar to the Luxembourg SIF and SICAR, but are not directly supervised by the CSSF. Instead, a RAIF has to appoint an AIFM, which in turn is regulated by the CSSF. This allows the RAIF to benefit from the AIFMD passport and be marketed throughout the European Union.

3. Limited Partnerships (LPs): These include CLPs and SLPs, and are highly flexible debt funds.

LPs are not supervised, are similar to partnerships in Common Law jurisdictions, allow for contractual flexibility through Limited Partnership Agreements, and are not restricted to any asset type and not subject to any risk diversification rules.

4. SOPARFI: (Financial holding company or sociéte de participations financières). SOPARFIs offer a flexible financing policy, structural benefits, lack of investment restrictions and access to double tax avoidance treaty benefits. This has led to SOPARFI taking a lead in cross-border structuring of debt transactions worldwide. These structures are used by multinational companies, funds, Sovereigns, and single and multi-family offices to structure debt in the European Union and elsewhere.

5. Securitisation Vehicles (SV): are investment vehicles, that can act as alternatives to the fund structures available in Luxembourg. While they can be used as standalone vehicles, we have seen SVs also being used in conjunction with fund structures, for more complex transactions.

A Luxembourg Securitisation Vehicle is flexible in nature, and can be set up as a corporate entity or a fund. They can also be established as umbrella structures, with multiple compartments that can issue securities based on underlying risks.

SVs are non-supervised, unless they offer securities on a continuous basis to the public.

How fast can a debt fund be set up in Luxembourg?

The time to setup depends on whether the fund or compartment is a supervised or non-supervised fund. A non-supervised fund can be set up within 2 weeks, while a supervised structure can take around two months, depending on the complexity of the structure and the time it takes to get approved by the Luxembourg regulator.

How can we at 10 Leaves help you?

We provide turnkey services for Luxembourg structures:

From initial consulting, to assistance in authorisations, to assistance in preparation of the legal documentation, 10 Leaves helps you navigate the legal framework in Luxembourg and submit an application that is comprehensive, complete and compliant.

Our services include assistance in:

1. Reviewing the business model and advice on the applicable regulatory framework;

2. Preparation of all the required documentation, including Private Placement Memorandums and agreements;

3. Provision of compliance and bookkeeping services; and

4. Finalisation of registered space and bank account opening.

5. In fact, we can do all this without you having to visit Luxembourg!

Get in touch! to know more about debt funds in luxembourg

For More Details, View Our Luxembourg Brochure

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