Mandatory reporting for the real estate income levy for Luxembourg RAIFs, SIFs and Part II UCIs
Following the introduction of a real estate income levy has been introduced as of January 1, 2021, a reporting obligation applies to all reserved alternative investment funds (RAIFs), specialised investment funds (SIFs) and alternative investment funds (AIFs) that have legal personality (see below).
The real estate levy applies to the funds of these types that receive or realise income from real estate (immovable property as defined by the Civil Code) located in Luxembourg. The levy is an exemption from the tax provisions set out in the SIF law of February 13, 2007, the investment fund law of December 17, 2010, in particular Part II funds, and the RAIF law of July 23, 2016.
The Prélèvement immobilier circular from the director of the Direct Taxation Authority (PRE_IMM n°1) was published on January 20, 2022, informing investment vehicles about the levy and the related reporting obligation. The authority is in charge of supervision, assessment and collection of the levy.
Which investment funds are covered by the real estate levy?
The investment funds covered by the levy are those with a legal personality distinct from that of their partners (SA, SCA or Sàrl), covered by Luxembourg’s legislation on Part II funds, SIFs and RAIFs, except for those constituted as a common limited partnership (SCS). Funds in the form of an SCS, SCSp or FCP are outside the scope of the levy.
What is the scope of the levy?
The levy applies to income from real estate located in Luxembourg, as defined below, received or earned by one of these investment vehicles, including when the income is received or realised indirectly by a fund through an FCP or transparent entity in which the investment vehicle holds shares or a stake in the course of the calendar year.
In addition, the receipt or realisation of income by a FCP or a transparent entity is also assessed directly and indirectly, as the income may be received directly or indirectly through one or more tax-transparent entities or FCPs.
What does income from real estate in Luxembourg mean?
Income from real estate is defined as income from the rental of real estate located in Luxembourg, any capital gain resulting from the sale of a property in Luxembourg, or income from the disposal of shares.
What are the reporting and payment obligations?
The rate of the real estate levy is 20%. Investment funds subject to the levy must declare all income from real estate subject to the real estate levy, received or realised during the calendar year, to the interest income withholding tax office by May 31 of the following year. Thus reporting on income for 2021 must be made by May 31, 2022 at the latest and the levy paid by June 10, with no possibility of deduction or offsetting.
What does the notification obligation contain?
RAIFs, SIFs and Part II AIFs with legal personality (except for those constituted as SCS) have an obligation to report to the interest income withholding tax office for the years 2020 and 2021. They must report whether or not, during any time in 2020 or 2021, they owned real estate in Luxembourg, either directly or indirectly, through one or more tax-transparent entities or FCPs. The reporting obligation applies to funds even if they did not invest directly or indirectly in real estate.
The reporting obligation also apply to funds with a legal personality separate from that of their partners and covered by Luxembourg’s Part II fund, SIF or RAIF legislation (except for SCSs) that changed their form during 2020 or 2021 to a fiscally transparent entity or to an FCP while they held at least one property in Luxembourg, either directly or indirectly through fiscally transparent entities or FCPs.
What is the penalty for non-compliance with the information obligation?
A fund that falls within the scope of the reporting obligation but fails to comply may be fined a flat-rate penalty of €10,000.
The Direct Taxation Authority’s Circular PRE_IMM n°1 (in French) can be found at: https://impotsdirects.public.lu/dam-assets/fr/legislation/legi22/2022-01-20-PRE-IMM-1-du-2012022.pdf
CSSF publishes FAQ on international financial sanctions
The CSSF published a FAQ on March 17, 2022 regarding international financial sanctions (FAQ) as it is the authority responsible for the supervision of the professionals falling under its scope for the compliance of the Law of December 19, 2020 on the implementation of restrictive measures in financial matters (2020 Law),
The CSSF reminds that professionals need to comply with the 2020 Law, and with the CSSF Regulation 12-02 on the fight against money laundering and terrorist financing as modified (CSSF Regulation 12-02) as well as consider the UN and European regulatory framework regarding financial restrictive measures which are directly applicable in Luxembourg.
Following Questions 3, 4 and 5, professionals are required to report by email (sanctions@fi.etat.lu) or by post (Ministère des Finances, 3 Rue de la Congrégation, L-1352 Luxembourg) to the Ministry of Finance, with in copy the CSSF (adm_jurcc@cssf.lu), without delay of measures taken by professionals that are formal restrictive measures in financial matters.
“Restrictive measures in financial matters” means (1) the prohibition or restriction of financial activities of any kind, (2) the prohibition or restriction on the provision of financial services, technical assistance, training or advice in relation to a State, natural or legal person, entity or group referred to in the 2020 law or (3) the freezing of funds, assets or other economic resources owned or controlled, directly, indirectly or jointly, with or by a person, entity or group referred to in the 2020 Law or by a person acting on their behalf or at their direction. In respect of the freezing of funds, specific forms can be found on the website of the Ministry of Finance or of the CSSF.
The CSSF also indicates that under the Law of November 12, 2004 on the fight against money laundering and terrorist financing, if in relation with the relationship, to which the professional has to apply financial restrictive measures, the professional also identifies a suspicion of money laundering or terrorism financing or an associated predicate offence, the professional shall also inform without delay the Luxembourg FIU via the platform goAML (https://justice.public.lu/fr/organisation-justice/crf/goaml.html) (Question 9).
The CSSF’s FAQ can be found at : https://www.cssf.lu/wp-content/uploads/FAQ_International_financial_sanctions.pdf
For more information, please get in touch with our investment management team.
ELTIF | Commission proposes revised regulation to boost ELTIF regime
The European Commission has unveiled its proposed amendments to the European Long-Term Investment Fund regime on November 25, following extensive consultation with members of the investment industry. The changes are intended to make the framework more attractive to asset managers and especially retail investors for a fund framework that has hitherto struggled to gain traction.
The ELTIF rules were introduced in December 2015 to encourage private investment in long-term assets such as physical infrastructure, notably from individual as well as institutional and professional investors. As of the beginning of October 2021 just 57 ELTIFs with around €2.4 billion in assets had been established across Europe, with Luxembourg the most popular domicile home to 26 funds, followed by France, Italy and Spain.
Many asset managers have complained that the original regime was overly complex and inflexible, discouraging them from using it to offer alternative strategies to high net worth and mass affluent investors. The revamp of the ELTIF rules is intended to remedy these issues and to boost private investment in real assets, with the added benefit of contributing to economic recovery from the impact of the Covid-19 pandemic.
It is also intended to complement other measures to extend the EU Capital Markets Union to boost access by companies and long-term investment projects to stable, sustainable and diverse sources of funding, and has been put forward as part of a package of measures under the Commission’s updated CMU action plan.
The Commission proposes that projects eligible for investment by ELTIFs need no longer be located within the EU and clarifies that they may pursue a global investment mandate. It provides a definition of ‘real assets’ to include infrastructure, intellectual property, vessels, equipment, machinery, aircraft, rolling stock, immovable property, rights attached to or associated with real assets such as water, forest and minerals, commercial property, education, counselling, research, sports or other facilities, and accommodation including senior residents and social housing. It also sets out a definition of simple, transparent and standardised securitisation under the EU’s 2017 legislation.
The proposed revision seeks to streamline the approval process for ELTIFs and clarifies that its AIFM is not required to have its registered office in the ELTIF’s home member state or to carry out or delegate any activity there. It would lower the minimum investment value of real assets to €1 million, and specify the scope of eligible securitisations of residential property, commercial and corporate loans as well as trade receivables.
The revised regulation would waive or simplify requirements including diversification rules and borrowing limits for ELTIFs marketed exclusively to professional investors. For retail investors, the restrictions remain but have become more flexible. The maximum exposure of a retail ELTIF to securities issued by or loans granted to any single portfolio business rises from 10% to 20%; the 20% threshold also applies to single real assets and eligible securitisations that meet the EU’s Simple, Transparent, and Standardised criteria.
The revised regulation completely removes the previous minimum investment restrictions for retail investors: an initial minimum investment threshold of EUR 10,000 and a maximum 10% exposure threshold for retail investors with financial portfolios of less than €500,000. It also clarifies that employees of an ELTIF manager should not be considered as retail investors for the purposes of a fund the firm manages.
The proposals meet a key demand of industry members by authorising ELTIFs to operate as funds of funds that may invest in EU alternative investment funds investing in assets eligible under the regulation, as well as master-feeder structures, subject to additional reporting and other requirements. They also provide that management groups, affiliated entities and their staff may co-invest in ELTIFs run by the manager, subject to compliance with conflict of interest rules.
Once the draft amending regulation has been adopted by the European Parliament and EU Council – which could happen in the first half of 2022 – the changes will come into effect six months after its publication in the EU’s Official Journal.
The Commission’s proposal for revision of the ELTIF regulation is available at https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=COM:2021:722:FIN&qid=1536654936443&from=EN.
Feel free to get in touch with our investment funds team for more information.
CSSF publishes white paper on risks and opportunities of blockchain and DLT
The CSSF has published a white paper setting out technological risks and recommendations for the financial sector regarding blockchain and distributed ledger technology (DLT).
The regulator says use cases can include, in KYC data management, to confirm identity claims through cryptographic proof. It can also be used for improving the speed and security of payments and fund transfers, and for distribution platforms involving tokenization of investment funds that enable investors to subscribe and redeem fund shares or units through a web or mobile application.
However, the CSSF points out that risks can include governance issues, regulatory requirements, the ability to comply with judicial decisions, and legal certainty over blockchain technology and smart contracts.
The CSSF white paper on blockchain and DLT is available here.
CSSF issues circular 21/788 on AML/CFT external reporting
On December 22, 2021, the CSSF issued guidelines for the fund industry regarding the new external report on anti-money laundering and financing of terrorism measures that must be drawn up by an external expert.
To whom does the circular apply, and who is exempt?
According to the circular, all Luxembourg investment fund managers, including registered alternative fund managers and Luxembourg funds supervised by the CSSF for AML/CFT purposes, must provide the external report. It is not required from Luxembourg funds that have appointed a fund manager, whether established in Luxembourg or abroad. In these cases, the external auditor of the funds must nevertheless perform an AML assessment as prescribed by Article 49 (1) of CSSF Regulation No 12-02 of December 12, 2012 on combating money laundering and the financing of terrorist financing.
Who should draft the report?
All investment fund managers required to appoint an approved statutory auditor (réviseur d’entreprises agrée / REA) to audit their annual accounts shall designate the same REA to prepare the external report.
The registered AIFMs, which do not have the legal requirement to appoint a REA for the audit of their annual accounts, must appoint an REA for the specific purpose of preparing the AML/CFT external report.
What should the report contain?
The report is divided into two sections. The first concern the corroboration of answers given by the AIFMs as part of the CSSF annual AML/CFT online survey. The second deals with sample testing or specific work to be performed by the external expert.
Who should submit the report to the CSSF, when and how?
The report must be submitted to the CSSF via the eDesk platform within six months of the closing of the annual accounts. This should be carried out by the Responsable du Contrôle du respect des obligations professionnelles en matière de lutte contre le blanchiment et contre le financement du terrorisme (compliance officer, or RC); the Responsable du Respect des obligations professionnelles en matière de lutte contre le blanchiment d’argent et contre le financement du terrorisme (RR); or a member of the board of directors, or equivalent.
When does the circular come into force?
Luxembourg funds and managers must comply with the provisions of the circular for the financial years ending on or after December 31, 2021. For the financial year ending on December 31, 2021, an extension of three extra months is granted for the submission, up to the end of September 2022.
CSSF circular 21/788 is available here.
For more information, please get in touch with our investment management team.
Sustainable Finance - implementation of SFDR level 2 deferred until January 1, 2023
Implementation of the SFDR regulatory technical standards will be deferred by a further six months to January 1, 2023. The European Commission has confirmed this in a letter to the EU Council on November 25, citing the length and technical detail of the legislation. The delay is attributed to the Commission’s desire to ensure the smooth implementation of the rules by fund managers, financial advisers and regulators. The SFDR level 2 provisions were originally due to be implemented at the beginning of 2022, but in July the Commission pushed back the deadline until July 2022 because of hold-ups that delayed agreement on the RTS and the decision to bundle the 13 standards into a single delegated act.
Feel free to get in touch with our investment management team for more information.
Who's Who Legal (WWL) Private Funds 2022 - Olivier Sciales
We are pleased to announce that our investment funds practice partner Olivier Sciales has been recommended in the Who’s Who Legal Private Funds – Formation 2022 research report released on October 28, 2021. According to WWL, the report identifies leading private funds lawyers worldwide who have outstanding skills and ehttps://whoswholegal.com/olivier-scialesxperience in advising clients on international fund formation and regulatory issues regarding alternative asset classes such as private equity, real estate, venture capital, private credit and hedge funds.
Sustainable Finance - CSSF launches fast-track procedure for compliance with the Taxonomy Regulation
The Financial Sector Supervisory Authority (CSSF) has announced on December 2 the introduction of a fast-track procedure to facilitate submission of updated prospectuses or issuing documents update for UCITS and alternative investment funds under the EU’s Taxonomy Regulation, ahead of a deadline of January 1.
The beginning of next year is the deadline for updates of pre-contractual documents for UCITS and AIFs to incorporate information on environmentally sustainable investments in pre-contractual disclosures relating to climate change mitigation and adaptation goals and the use of templates under the draft regulatory technical standards for the Sustainable Finance Disclosure Regulation.
The Taxonomy Regulation of June 18, 2020 (“TR”), including amendments to the SFDR of November 27, 2019, requires financial market participants to provide transparency for funds subject to SFDR articles 8 and 9 in their pre-contractual disclosures by January 1, in accordance with articles 5, 6 and 7 of the Taxonomy Regulation.
The TR FastTrack procedure is restricted to updates required under articles 5, 6 and 7. Each updated UCITS prospectus submitted for a certified electronic ‘visa stamp’ must be accompanied by a confirmation letter, for which the CSSF has provided a template for UCITS here. The CSSF says that for complete and compliant submissions under the fast-track procedure received by December 17, it will endeavour to provide visa stamps before December 31.
Luxembourg-based authorised AIFMs should submit to the CSSF for each AIF managed the information required under the SFDR and the Taxonomy Regulation to be disclosed to investors under SFDR Article 6(3), sent to the e-mail address opc@cssf.lu. The AIFMs should also indicate where the information has been disclosed to investors, and future updates should be communicated to the CSSF in a timely manner.
The same procedure applies to Luxembourg-based managers registered by the CSSF under the EU venture capital funds (EuVECA) and social entrepreneurship funds (EuSEF) regulations, and to AIFs managed by a Luxembourg registered AIFM, while the regulator says updates to the prospectuses of existing Luxembourg ELTIFs will be handled swiftly on a case-by-case basis. All Luxembourg-based AIFs managed by an AIFM not authorised or registered by the CSSF should apply the requirements imposed by the AIFM’s home regulator.
The CSSF notes that while the SFDR Level 1 requirements regarding pre-contractual disclosures came into force on March 10 this year, the Level 2 requirements have been delayed. The European Commission wrote to the EU Council on November 25 announcing that the implementation of the SFDR regulatory technical standards will now be delayed until January 1, 2023.
However, the CSSF encourages financial market participants already to use for disclosure purposes the pre-contractual and periodic product templates provided in the draft RTS published on October 22. It says the various sections of the templates should be completed as far as possible on a best-efforts basis during the transition period.
Feel free to get in touch with our investment management team for more information.
Crypto funds - CSSF clarifies that Luxembourg AIFs can invest in virtual assets
The Financial Sector Supervisory Authority (CSSF) has issued guidance on the rules governing investment in digital assets by Luxembourg funds, clarifying that alternative investment funds may invest in them, and while UCITS funds may not, the shares of companies active in the digital currency and related ecosystem could qualify as eligible assets.
The regulator notes that it embraces the challenges raised by financial innovation such as virtual assets and is committed to promote an open, technology-neutral and prudent risk-based regulatory approach, while the exponential growth of virtual assets in recent years has generated strong interest as a potential new asset class for both professionals and private investors.
However, the CSSF points out that the emergence of the sector has raised questions from the financial industry in areas such as investments in virtual assets by investment funds, direct investments as opposed to investment through derivatives, and the implications for depository responsibilities.
Wide variety of digital assets
It has now published guidance including a frequently-asked questions document for investment funds on practical issues for financial professionals, reflecting the appeal of virtual assets for portfolio diversification, pointing out that they range from digital representations of traditional assets with a straightforward risk-return basic to more complex representations of digital rights that may be harder to assess. A similar FAQs document for banks will be issued later in December.
The CSSF says that while digital tokens may use the same digital ledger – blockchain – technology and cryptography, they may different or multiple purposes, such as payment, investment or utility, reflect one or more baskets of assets, in some cases fall under the definition of financial instruments subject to existing regulation, be non-fungible and non-interchangeable, such as non-fungible tokens, or be used to finance specific projects such as the creation of a new crypto-currency or the tokenisation of real estate. The specific characteristics of a particular asset will determine the risks and opportunities they present.
The CSSF says any regulated entity considering an activity involving digital assets must conduct thorough due diligence regarding risks relating to volatility, liquidity, technology, counterparties, custody and reputation to assess the risks and benefits affecting its existing business model and risk appetite. This requires the management body to ensure a formal and well-defined risk appetite assessment in all business areas and rigorous decision-making processes are in place.
The regulator also says businesses should be prepared to adapt their business and operational activities to future regulatory developments, notably under the forthcoming European Markets in Crypto-asset Regulation, which will regulate certain types of virtual assets that are outside of the scope of existing legislation, and should proactively engage with the CSSF when planning any activity involving virtual assets.
Implications for UCITS, AIFs, managers and AML/CFT
The FAQs for the fund industry notably says that:
- Investing in virtual assets as defined in the AML/CTF law of November 12, 2004 is not suitable for all types of investors or investment objectives, so UCITS or other funds targeting non-professional customers and pension funds may not invest directly or indirectly in virtual assets. However, assets that qualify as financial instruments, including shares of companies active in the virtual asset ecosystem, are not subject to this restriction and may be eligible investments for UCITS.
- Investment in virtual assets as defined by the AML/CTF legislation may be compatible with funds aimed at professional investors, as long as such investment does not prevent application of and compliance with existing regulatory requirements. Thus an alternative investment fund with an authorised AIFM may invest directly or indirectly in virtual assets as long as the fund’s shares or units are marketed only to professional investors, and the AIFM obtains an extension of authorisation from the CSSF for the new investment strategy. The regulator draws attention to the importance of integration of virtual assets into the investment policy and of adequate internal control functions. Investment managers should make a case-by-case assessment of the impact of virtual asset investments on the risk profile of the fund, and ensure investors are informed in a transparent and timely manner and fund documentation is updated.
- Authorised Investment Fund Managers of regulated or unregulated alternative funds seeking to invest in virtual assets must obtain prior authorisation from the CSSF and provide information or documents including a description of the project and of the services providers or delegates involved, whether the investment is direct or indirect, updated risk management and valuation policies, description of the experience of the portfolio manager and other entities involved in the investment management process, description of the depositary’s role, information about targeted investors and distribution channels, and AML/CTF analysis of the assets. Initiators of funds planning to invest in virtual assets should present its project to the CSSF, in advance, detailing how the investment manager or other participants control the virtual assets through access to or control over cryptographic keys, and an analysis of the services to be provided must be conducted for activities listed under Article 1 (20c) of the AML/CTF law. The investment manager or other entities providing these services must apply to the CSSF for registration as a virtual asset service provider before launching.
- Since investment in virtual assets is liable to increase a supervised entity’s money laundering, financing of terrorism or proliferation financing risk, the CSSF says it must take appropriate mitigation measures. It expects the AML/CFT compliance officer (responsable du contrôle) and compliance supervisor (responsable du respect) to demonstrate adequate understanding of the new risks posed by virtual assets and the necessary mitigation measures, with reference to the national vertical AML/CFT risk assessment relating to virtual asset service providers as well as the FATF guidelines and notably its Guidance for a Risk-Based Approach to Virtual Assets and Virtual Asset Service Providers
The CSSF’s guidance document can be found at: https://www.cssf.lu/en/2021/11/cssf-guidance-on-virtual-assets/
Feel free to get in touch with our investment management team should you wish to receive more information or should you want to establish a crypto fund.
CSSF clarifications on the holding of ancillary liquid assets by UCITS
Further to its press release on 3 November 2021, the Luxembourg Regulator (Commission de Surveillance du Secteur Financier, CSSF) published an updated version of its Frequently Asked Questions (the FAQ) concerning the Luxembourg Law of 17 December 2010 relating to undertakings for collective investment (the 2010 Law) whereby it provides the following clarification regarding the holding of ancillary liquid assets by UCITS foreseen under article 41 (2) b) of the 2010 Law:
- Ancillary liquid assets should be limited to bank deposits at sight, such as cash held in current accounts with a bank accessible at any time, in order to cover current or exceptional payments, or for the time necessary to reinvest in eligible assets provided under article 41(1) of the 2010 Law or for a period of time strictly necessary in case of unfavourable market conditions.
- The 20% limit in deposits made with a same body under article 43(1) of the 2010 Law applies to ancillary liquid assets, as ancillary liquid assets are limited to deposits at sight with banks.
- The holding of such ancillary liquid assets is limited to 20% of the net assets of a UCITS. The 20% limit shall only be temporarily breached for a period of time strictly necessary when, because of exceptionally unfavourable market conditions, circumstances so require and where such breach is justified having regard to the interests of the investors.
- Bank deposits, money market instruments or money market funds should not be included in the ancillary liquid assets under article 41(2) b) of the 2010 Law. Additionally, a UCITS cannot invest in bank deposits, money market instruments or money market funds if it is not indicated in its investment policy and it should specify the purposes, i.e. for investment purpose, cash management or in case of unfavourable market conditions.
- Margin accounts do not qualify as bank deposits nor as ancillary liquid assets. Initial and variation margins relating to financial derivatives shall be considered as collateral received or posted. Regarding margin accounts, the CSSF considers that the 20% limit in deposits made with a same body under article 43(1) of the 2010 Law does not apply. However, in order to avoid undue exposure to a single body, margin accounts shall be taken into consideration in the 20% global limit applicable to an issuer under article 43(2) of the 2010 Law.
The CSSF expects UCITS to comply with the above-mentioned conditions as described in the FAQ as soon as possible and by 31 December 2022 at the latest, considering the best interests of investors.
You may access the FAQ here.
For more information, please get in touch with our investment management team.
