The Luxembourg authorities are introducing changes to the regime for institutional investors in funds located in the Grand Duchy, widening the definition of investors who qualify for the lower fund tax rate payable on investments in funds restricted to institutional investors. They are also proposing that funds generally will be able to offer these investors institutional share classes and that umbrella funds can have sub-funds dedicated to institutional investors.
This means they can benefit from the lower 0.01% taxe abonnement granted to institutions investing in funds set up under the law of July 19 1991, which are often referred to as special funds because of their institutional orientation.
Under new guidelines understood to have the force of law, the financial supervisory authority CSSF has amended the 1991 law which required investors to be companies or organisations managing substantial funds. Now this is being eased, so that insurance companies offering life or capitalisation products linked to an investment fund now qualify as institutions, as do investment funds themselves.
Banks or “other professionals” in the financial sector acting in their own name as discretionary managers for others also qualify. The authorities say that the third parties for whom the account is being managed do not need to be institutional investors, but they must in a “discretionary management relationship” with the bank or professional. Similarly, local authorities investing their own assets now also qualify as institutions.
The CSSF says that holding companies do not necessarily qualify, but will be considered as institutional investors where all the partners are institutional investors, or where the holding company has “real substance”, in that it has a structure and real activity and which holds “important financial interests”. Also potentially eligible are investments by a ‘family’ holding company, which also must hold similarly important financial interests.
One group that will not be considered is vehicles to manage savings from salaried employees of a company unless these qualify as institutions. But the CSSF points out that they may be created under the law of March 30 1988, with the 0.06% tax rate.
Even though institutional fund shares are not to be placed with the public, the CSSF and the Luxembourg stock exchange will decide on a case by case basis whether listing is possible, which is likely to depend on the extent to which the share is distributed.
Among amendments proposed to the March 30 1988 funds law intend that the 0.01% tax will apply to both the individual sub-funds created in umbrella vehicles for institutional investors as well as individual share classes are restricted to “one of several institutional investors”. Other changes sought will bring the Luxembourg law into line with other jurisdictions, such as the proposal to restrict a sub-fund’s liabilities only to those of that particular sub-fund, unless a fund's documents stipulate otherwise.
Welcoming the changes, one commentator said that they clarified the position in relation to institutional investors as well as making sure that Luxembourg was more competitive vis a vis other jurisdictions. “From an operational point of view it could cut down the administrative costs of rebates back to institutional investors, as it means you can just create another share class or set up a new sub fund in an umbrella for instiutions.”
He adds: “By defining institutional investors more precisely, it means |you no longer have to go to the tax office for clarification.” The concepts of having holding companies and family holdings regarded as institutional investors is “really interesting, particularly from a tax planning point of view... It will make it easier to run instiutional funds from Luxembourg.”