CSSF issues updated FAQ on SICAR
The CSSF has published on 10 June 2022 an updated version of its Frequently Asked-Questions (“FAQ”) regarding the société d’investissement en capital à risque, i.e. SICAR, an investment company whose purpose is to invest in risk capital.
The list of questions indicated in such FAQ are set out below:
1. What steps are to be taken to submit an authorisation request for a new SICAR?
2. What criteria shall the directors of a SICAR fulfil?
3. What are the CSSF’s requirements regarding the prospectus of SICARs?
4. What does the CSSF require for the central administration of SICARs?
5. What does the CSSF require for the depositary bank of SICARs?
6. What is the procedure in case of replacement of a director or service provider?
7. Which requirements regarding prudential reporting does the SICAR have to comply with?
8. What are the obligations for SICARs as regards information to be submitted to the investors and the dissemination method?
9. Which requirements are the SICARs subject to as regards the drawing-up, approval, statutory audit and publication of annual accounts?
10. To which particular requirements as regards the drawing-up, approval, audit and publication of the annual accounts are SICARs with multiple compartments subject?
11. Which general characteristics shall investment policies of SICARs present?
12. Under which conditions may SICARs carry out real estate investments?
13. Can SICARs invest in infrastructure projects?
14. Can a SICAR have an accessory investment policy which does not comply with the criteria of risk capital?
15. Can SICARs make indirect investments through intermediary investment vehicles or special purpose vehicles?
16. Can SICARs act as feeder fund in a master-feeder structure?
17. Under what conditions may a SICAR invest in securities listed on a stock exchange?
18. Under which conditions can a SICAR invest in derivative financial instruments?
19. In which manner can a SICAR invest its liquidity awaiting investment and reinvestment in risk capital as well as funds awaiting distribution?
20. Can SICARs make investments in commodities?
21. Can a SICAR invest in ABS and CDOs?
22. Under which conditions can a SICAR invest in Distressed Debt securities?
23. What are the SICARs’ obligations with respect to risk management?
24. What requirements are SICARs subject to regarding due diligence in relation to their investments?
25. What requirements are the SICARs subject to regarding management of conflicts of interest?
26. What are the conditions to comply with in case of data transfer by a central administration or a depositary to another service provider?
27. Who to contact for further information?
The updated FAQ is available in English and can be found here.
New reporting obligations for RAIFs and unregulated AIFs - Update of the CRS FAQ by the Luxembourg tax administration
Key takeaway
RAIFs and unregulated AIFs (e.g. SCSp and SCS) are now considered reportable financial institutions since they can no longer benefit from the exempt CIV status. They must file a (nil) report by 30 June 2022 to avoid penalties.
Introduction
On 4 April 2022, the Luxembourg direct tax administration (“ACD”) updated its frequently asked questions (“FAQ”) on the common reporting standard (“CRS”). Such FAQ now includes two new questions, providing a list of Investment Entities (I) and a clarification relating to the scope of the exempt Collective Investment Vehicle (“exempt CIV”) status (II). They are important, in particular, for reserved alternative investment funds (“RAIFs”) and unregulated alternative investment funds (“AIFs”). As a reminder, CRS is an automatic exchange of information relating to financial accounts in tax matters with the Member States of the European Union and the other partner jurisdictions of Luxembourg as implemented by the amended law of 18 December 2015 relating to the automatic exchange of information in tax matters (“CRS Law”). The CRS Law requires Reporting Financial Institutions (“RFIs”) to declare some information in relation to certain accounts and the holders of such accounts. The RFIs are defined as all financial institutions which are not non-reporting financial institutions (“NRFIs”). One element of the definition of the NRFIs is the exempt CIV status. Therefore, such exempt CIVs do not have to report to the ACD concerning CRS matters. The updated FAQ narrows the scope of the exempt CIV status, which was interpreted as including RAIFs and other unregulated AIFs until now.
Please find below the two Q&A of the ACD in the updated FAQ on CRS.
I) A non-exhaustive list of Investment Entities (Q 2.3)
Except in special circumstances, the following entities are, in principle, considered Investment Entities:
– any undertaking for collective investment subject to Part I or II of the amended law of 17 December 2010 relating to undertakings for collective investment;
– any specialized investment fund subject to the amended law of 13 February 2007 relating to specialized investment funds;
– any venture capital company governed by the amended law of 15 June 2004 relating to venture capital companies (SICAR);
– any securitisation undertaking subject to the authorisation and supervision of the Commission de Surveillance du Secteur Financier (the “CSSF”) in accordance with the amended law of 22 March 2004 relating to securitisation;
– any RAIF falling within the scope of the amended law of 23 July 2016 relating to reserved alternative investment funds;
– any AIF whose management falls within the scope of the amended law of 12 July 2013 relating to alternative investment fund managers;
– any pension fund governed by the amended law of 13 July 2005 relating to institutions for occupational retirement provision in the form of SEPCAV and ASSEP;
– any pension fund governed by the amended Grand-Ducal Regulation of 31 August 2000 implementing Article 26, paragraph 3, of the amended law of 6 December 1991 on the insurance sector and relating to pension funds subject to the prudential supervision of the Commissariat aux assurances;
– any management company subject to part IV of the amended law of 17 December 2010 relating to undertakings for collective investment;
– any manager of alternative investment funds governed by the amended law of 12 July 2013 relating to managers of alternative investment funds; and
– any investment firm governed by the amended law of 5 April 1993 relating to the financial sector which carries out any of the following activities: (i) execution of orders on behalf of clients, (ii) portfolio management.
II) Unregulated entities such as RAIFs and other unregulated AIFs and the exempt CIV status (Q 2.4)
The ACD indicates in the FAQ that unregulated entities can no longer benefit from the exempt CIV status, as only entities directly supervised by the CSSF may opt for this status if the other applicable conditions are fulfilled.
As a result of the answers mentioned above, the RAIFs and the unregulated AIFs should now submit every year a nil report to the ACD if there is no CRS reportable account. Indeed, RAIFs and unregulated AIFs may not qualify as NRFI anymore. Therefore, RAIFs and unregulated AIFs qualifying as RFI must respect the reporting and due diligence CRS obligations. They should review their CRS qualifications and applicable CRS reporting obligations.
Based on the fact that neither the CRS law nor the ACD refer to the legal form of the entities, the same reasoning applies to unregulated AIFs under the form of a common limited partnership (société en commandite simple – SCS) or a special limited partnership (société en commandite spéciale – SCSp). RAIFs and unregulated AIFs should, in principle, have no CRS reportable accounts. If so, a nil report should be filed by 30 June 2022 for the two fiscal years 2020 and 2021 in order to avoid any penalties.
There are two types of penalties:
– a Luxembourg RFI omitting to comply with due diligence rules or to introduce procedures in view of reporting is liable to a penalty up to EUR 250,000; and
– a Luxembourg RFI omitting to file the required report or if it files a late, incomplete or inaccurate report, it may be liable to a penalty of 0,5% of the amounts that should have been reported, with a minimum of EUR 1,500.
CSSF Circular 22/811 on UCI administrators
On May 16, 2022, the CSSF issued a new circular 22/811 regarding the authorisation and organisation of entities acting as UCI administrator (the “Circular“) replacing Chapter D of Circular IML 91/75. The Circular clarifies the activity of UCI administrators by specifying the principles of sound governance, the CSSF requirements on internal organisation, and good practices applicable to them.
What are the activities covered by the Circular?
The UCI administration activity may be split into three main functions:
(i) The registrar function
The registrar function encompasses all tasks necessary to maintain the UCI’s unit-/shareholder register. The reception and execution of orders relating to units/shares subscriptions, redemptions, and income distribution (including the liquidation proceeds) are part of the registrar function.
(ii) The NAV calculation and accounting function
The NAV calculation and accounting function covers legal and fund management accounting services, valuation, and pricing (including tax returns).
(iii) The client communication function.
The client communication function is comprised of the production and delivery of the confidential documents intended for investors.
To whom does the Circular apply?
The Circular applies to all entities carrying out the activity, or part of the activity, of UCI administration as listed above.
It should be noted that the following UCIs (undertaking for collective investment) and IFMs (investment fund managers) are eligible to act as UCI administrator :
– Management companies incorporated under Luxembourg law and subject to Chapter 15 of the Law of 17 December 2010 relating to undertakings for
collective investment, as amended (the 2010 Law);
– Management companies incorporated under Luxembourg law and subject to Chapter 16 of the 2010 Law;
– Alternative investment fund managers authorised under Chapter 2 of the Law of 12 July 2013 on alternative investment fund managers, as amended (the 2013 Law);
– Foreign IFMs pursuing the activity of UCI administrator for UCIs established in Luxembourg;
– Regulated Luxembourg UCIs, for themselves but not to other UCIs.
Luxembourg reserved alternative investment funds (RAIFs) and non-regulated alternative investment funds (AIFs) are not within the scope of the Circular if they have internalised the UCI administration unless they use an external UCI administrator which is subject to the Circular.
The UCI administration activity may further also be performed by the following external service providers established under the Law of 5 April 1993 on the financial sector, as amended (the 1993 Law):
– Credit institutions authorised under Part I, Chapter 1 of the 1993 Law;
– Luxembourg branches of credit institutions governed by foreign laws and authorised under Part I, Chapter 3 of the 1993 Law;
– Registrar agents authorised under Part I, Chapter 2 of the 1993 Law;
– Client communication agents authorised under Part I, Chapter 2 of the 1993 Law, but only for the client communication function as described in section 2.2.5 of the Circular; and
– Administrative agents authorised under Part I, Chapter 2 of the 1993 Law, only for the NAV calculation and accounting function and client communication function as described, respectively, in sections 2.2.4 and 2.2.5 of the Circular.
Before acting as an administrator for a given UCI, the preceding entities and service providers must assess whether the carrying out this activity by them is permitted, taking into account applicable legal provisions.
What are the requirements in terms of organisation?
The UCI administrator must have an adequate internal organisation (including an adequate and appropriate environment of control) and sufficient resources (e.g. human resources, technical infrastructure and IT means). The UCI administrator must act independently and be functionally and hierarchically separated from the depositary. Its name shall be disclosed in the offering documents of any UCI for which the UCI administrator acts in such capacity.
The UCI administrator’s premises must be of sufficient size, adequate and secure. Access must be restricted to its staff and approved persons such as clients or visitors. To that effect, physical documents and records must be kept secure to warrant data confidentiality and protection. It is the responsibility of the UCI administrator to keep and safeguard physical records for the UCIs it services.
The data necessary to keep adequate records of the UCI’s activity and encompassing the core UCI documentation shall be retained on a medium that allows for the storage of information in a way for it to be accessible for future reference by the UCI, the IFM when applicable, the statutory auditor of the UCI and the CSSF or any other national competent authority of the UCI. The UCI administrator must keep all accounting and other documents that constitute the core UCI documentation and are necessary to properly perform its obligations. The documents mentioned above of the UCI may be kept electronically by the UCI administrator. A UCI administrator must establish, implement and maintain systems and procedures that are adequate to safeguard the security (confidentiality, integrity and availability) of information, taking into account the nature of the information in question.
The UCI administrator must be organised so as to minimise potential or actual conflicts of interest. Where such conflicts of interest cannot be avoided, they must be disclosed to the management body of the UCI, its IFM, when applicable, and where appropriate and relevant, to investors in order to prevent them from adversely affecting the interests of those parties.
The UCI administrator may delegate to third parties (i.e. delegates) the performance of one or more of its UCI administration tasks (but is shall not create additional or increased risks for the UCIs, in particular legal or operational risks or be detrimental to it notably in terms of quality and/or costs). The delegation of tasks must be detailed in a dedicated written contract. The delegation of tasks does not relieve the UCI administrator of its responsibilities. In particular, with respect to the delegation in the area of the NAV calculation and accounting function, any final NAV, respectively its publication, must be controlled and validated by the UCI administrator.
A written contract must be concluded between the UCI administrator and the UCI and/or the IFM, when applicable. The agreement must clearly state each party’s roles, responsibilities, rights and obligations. Such contract must not prevent the UCI or its IFM, when applicable, from giving instructions at all times to the entity to which UCI administration functions have been delegated or from withdrawing the mandate with immediate effect when this is in the best interest of investors. The UCI administrator must grant a right of access for the UCI and, when applicable, the IFM, the statutory auditor of the UCI, the liquidator, the CSSF or any other national competent authority of a UCI, where applicable, to the documents and data relating to its administration upon simple request. Moreover, the UCI administrator must allow the UCI or its IFM, when applicable, to conduct on-site visits at a frequency and under the terms to be laid down in the contract for exercising its due diligence and ongoing monitoring activities. The UCI administrator must communicate proactively the information, documents and data necessary to perform its duties to the UCI or its IFM, when applicable.
When does the Circular come into force?
The Circular entered into force with immediate effect on May 16, 2022. However, the requirement of authorisation set in section 2.2.1 of the Circular does not apply to entities already acting as UCI administrator at the date of entry in force of the Circular.
Additionally, a grandfathering period until June 30, 2023 has been granted to entities already acting as UCI administrators at the date of entry in force of the Circular to comply with the remaining provisions of the Circular. Starting from June 30, 2023, the UCI administrators must also file their annual reporting regarding their business activities and resources at the latest five months after their financial year-end.
The Circular is available by clicking on the following link: https://www.cssf.lu/wp-content/uploads/cssf22_811eng.pdf
Don’t hesitate to contact our investment management team if you need our assistance to verify that your central administration set-up and your central administration agreement comply with the requirements of the Circular.
AED guide on the AML/CFT professional obligations for RAIFs
In order to prevent and raise awareness among reserved alternative investment funds (“RAIFs”) which are all subject to the law on the fight against money laundering and terrorist financing of 12 November 2004, as amended from time to time (the “AML/CFT law”), the Administration de l’enregistrement, des domaines et de la TVA (“AED”), in its capacity as supervisory and control authority, has just published a guide, in order to better assist RAIFs in the implementation of their AML/CFT professional obligations (the “Guide”). The Guide has an indicative nature describing the minimum requirements for RAIFs. The purpose of the Guide is first and foremost to raise awareness among FIARs of the risks of money laundering and terrorist financing, but also to provide guidance to RAIFs to avoid transactions linked to risk of money laundering and terrorist financing, which could result in liability.
Access to the Guide (in French): https://pfi.public.lu/content/dam/pfi/pdf/blanchiment/prevention-et-sensibilation/guides/pour-en-savoir-plus/guide-version-2022-fonds-dinvestissement-alternatif-reserve.pdf
Should you need our assistance in respect of AML_CFT requirements for RAIF including RR and RC requirements, please contact our investment management team.
Security tokens now admitted on Luxembourg exchange’s Securities Official List
What are security tokens?
The Luxembourg Stock Exchange defines security tokens as “financial instruments that are issued and exist on a distributed ledger, allowing for a fully digital issuance and servicing process. Financial instruments issued as security tokens offer investors similar investment characteristics to financial instruments issued in a more conventional way”.
Issuance of financial instruments using distributed ledger technology – popularly known as blockchain – is intended to make transactions more secure and resilient. It offers the potential to improve efficiency and transparency in capital markets significantly as a growing number of market participants adopt the technology (see our article on the CSSF’s white paper on risks and opportunities of blockchain at https://www.cs-avocats.lu/investment_management/cssf-publishes-white-paper-on-risks-and-opportunities-of-blockchain-technology/).
What is the benefit of registering a security token on the official list?
Registering a security token on the exchange’s Securities Official List provides issuers with enhanced visibility. The security tokens and investors benefit from the dissemination of indicative prices and guaranteed access to the token’s information notice.
What kind of security tokens can be admitted?
Only crypto-assets qualifying as debt financial instruments can be admitted on the official list for the time being. Security tokens cannot be traded on the regulated Bourse de Luxembourg market nor on the exchange-regulated Euro MTF market.
What conditions apply to the admission of security tokens on the official list?
Security tokens that qualify as debt instruments must be priced in fiat currency and offers must be limited to qualified investors as defined by the EU’s Prospectus Regulation of June 14, 2017 and/or issued in wholesale denominations (i.e. €100,000). Only experienced issuers or applicants with a proven track record can use the new service. All security tokens must respect the Securities Official List rulebook and the exchange’s guidelines for the registration of blockchain instruments on the Securities Official List.
What information should be disclosed when issuing distributed ledger technology securities?
The information notice should contain the following additional information:
• The processes.
• The distributed ledger technology used.
• Confirmation that a contingency procedure exists in the event of a failure in the distributed ledger technology that allows identification of securities holders, as well as a responsibility and liability statement.
• Reasoned confirmation that the financial instruments qualify as bonds or other debt securities issued by a company, a state or its regional or local authorities, or by an international public body, under the governing law of the instruments.
• Description of the parties involved in issuance, recording, safekeeping, transfer and verification of the financial instruments.
• Description of the payment process if such process encompasses the transfer of settlement tokens.
• Description of the risk factors linked specifically to the financial instruments, the settlement process and the underlying technology.
• Environmental considerations regarding the technology used.
What information on environmental considerations should be disclosed by the issuers of security tokens?
As a minimum, the information notice should state distributed ledger technology used, the consensus mechanism used by this blockchain, and how it is used, whether it provides specific environmental benefits or disadvantages, and/or reasons why this may not need to be considered. This information will be examined by LuxSE.
What are the next steps?
The exchange plans to adapt and improve its services to meet the needs of customers and the emergence of new technological opportunities. For example, the guidelines already cover the use of central bank money in tokenised forms as settlement tokens, although this is not yet available for the time being.
Guidance for consumers on investing in virtual assets by CSSF
Many exchange platforms promote virtual assets investments to consumers through various digital communication channels. While such investments may provide high returns, they are also associated with high risks and are not suitable for all types of investors. The CSSF warns consumers interested in investing in virtual assets to read the warning on virtual assets and/or initial coin offerings (ICOs) and tokens, as well as the European Supervisory Authorities’ (EBA, ESMA and EIOPA) consumer warning.
Despite the risks associated with virtual asset investments, the demand for such investments is increasing. The legislator has recognised the need to regulate some of the risks associated with virtual asset investments, including the AML/CTF risk, by developing new legislation, such as the Markets in Crypto-assets Regulation (MiCA).
To assist consumers who are willing to invest in virtual assets, the present guidance outlines some minimum steps to perform before investing. However, the guidance does not constitute an investment recommendation or investor protection measure. Consumers should educate themselves about virtual assets, which lack a detailed legal framework and consumer protection regime, before making any investment decisions.
New CSSF FAQ on AML/CFT RC reports for Luxembourg investment funds and managers
The CSSF published on March 18 a new frequently-asked questions document on the completion and transmission of the AML/CFT compliance officer’s summary report, as defined in articles 42 (6) and 42 (7) of the amended CSSF Regulation 12-02 of December 14, 2012 on measures to curb money laundering and financing of terrorism.
Who is required to prepare and submit the report?
The compliance officer (in French, responsable du contrôle) of Luxembourg AIFMs, Luxembourg-domiciled investment funds that have appointed a foreign AIFM and self-managed funds are required to prepare the report and present it to the entity’s management board, and submit it to the CSSF. The report must be dated and signed by the compliance officer (RC). It must be prepared even if the inquiries and due diligence carried out by the RC revealed no shortcomings.
When and how should the report be submitted?
The AML/CFT RC report must be submitted within five months following the end of the entity’s financial year either via e-file or Sofie for entities subject to CSSF Circular 19/708, or via the edesk module for registered AIFMs.
What should the report contain?
The AML/CFT report should be a consistent and accurate description of the work performed by the RC and of related findings.
For entities subject to CSSF Circular 18/698, the report must at least:
- Results of the identification and assessment of money laundering and financing of terrorism risks and measures taken to mitigate them, as well as the AIFM’s risk level tolerance.
- Results of due diligence conducted on clients, fund initiators, portfolio managers to whom management is delegated and investment advisers, including ongoing due diligence.
- Results of enhanced due diligence conducted on intermediaries acting on behalf of their clients in accordance with the provisions of article 3 of CSSF Regulation 12-02, including ongoing due diligence.
- Results of enhanced due diligence on individuals identified as politically exposed persons in according to article 3-2(4)(d) of the amended law of November 12, 2004 on money laundering and financing of terrorism.
- Results of due diligence conducted on fund assets, including ongoing due diligence.
- Monitoring any positions blocked due to AML/CFT concerns in the registers of fund unit-holders and/or intermediaries involved in the marketing of funds.
- Periodic review of all business relationships according to their risk level.
- In cases of delegation of tasks relating to professional obligations to third parties, results of monitoring carried out on the compliance of services provided by the third parties, not only with legal and regulatory provisions but also the contractual provisions; and where relevant, reasons why the fund manager has chosen new third parties during the year.
- Statistical history concerning transactions identified as suspicious that inform the number of suspicious transaction cases reported to the Financial Intelligence Unit by the fund manager, as well as the total volume of funds involved.
- Statistical history concerning transactions reported due to financial sanctions relating to financing of terrorism and those relating to implementation of United Nations Security Council resolutions and acts adopted by the European Union as well as the volume of funds involved.
- The number of identified breaches of AML/CFT professional obligations, even if the number is zero.
- The number of AML/CFT actions carried out notably as a result of Circular CSSF 18/698, from the work of the RC, the internal audit, external audit or CSSF’s inspections., with a description of the main actions, and the deadline for their implementation, under article 7(2) of the Grand-Ducal Regulation of February 1, 2010 and article 42(5) of CSSF regulation 12-02. If the number is zero, this must be clearly stated.
The report must be accompanied by documentation on the identification, assessment and mitigation of money laundering and financing of terrorism risks.
For entities not subject to CSSF Circular 18/698, the AML/CFT RC report should cover at least cover the following:
- Overall residual money laundering and financing of terrorism risk assessment, including risk appetite, identified risks and mitigation measures put in place, emerging risks and their severity in terms of impact.
- Results of AML/CFT due diligence on investors.
- Results of AML/CFT due diligence on high-risk clients such as politically exposed persons, if any.
- Results of AML/CFT due diligence on fund initiators, including group initiators.
- Results of AML/CFT due diligence on investment advisors, if any.
- Results of AML/CFT due diligence on distributors, if any.
- Results of AML/CFT due diligence on delegates and service providers such as registrars and transfer agents or external portfolio managers, if any.
- Results of AML/CFT due diligence on cross-border intermediaries, if any.
- Results of AML/CFT due diligence on assets.
- Results of AML/CFT due diligence on blocked accounts, if any.
- Results of targeted financial sanctions screening.
- Outcome of verification by the RC that all appropriate staff have been trained on AML/CFT issues.
- List of co-operation with Luxembourg authorities on AML/CFT issues.
- Dedicated money laundering and financing of terrorism shortcomings section, including remediation plan, if any.
What is the RC’s liability in the event of failure to submit the report?
A professional who fails to provide the AML/CFT report may be subject to sanctions as detailed in article 8-4 of the amended AML law of November 12, 2004.
If a recently appointed RC identifies that the outgoing RC failed to file the annual AML/CFT report, the CSSF expects the incoming RC to ensure that the report is submitted. Additionally, if the new RC finds that the exiting RC has performed no AML/CFT due diligence, the CSSF expects the entity’s board to submit a letter to explain the situation and the oversight performed by the board or compliance manager (RR) on the work of the outgoing RC.
What about entities being dissolved and placed in non-judicial liquidation?
Entities being dissolved and placed in non-judicial liquidation must submit the AML/CFT report to the CSSF until the effective start date of liquidation. AML/CFT reports are no longer required after the start of liquidation. However, since money laundering and financing of terrorism risks remain present during the liquidation, the liquidator is responsible for the entity’s AML/CFT controls, notably regarding co-operation with the authorities.
The CSSF’s FAQ can be found at: https://www.cssf.lu/wp-content/uploads/FAQ_RC_Report.pdf
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.
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