Artemis Papatheodorou & Associates

Regardless of the type of investment fund one elects to establish all Luxembourg investment funds share the common characteristic that they are structures investing their assets on a collective basis in accordance with the principle of risk diversification.

More specifically a UCI is a collective investment of funds raised from the public for the purpose of investing these funds in accordance with the principle of risk spreading. UCITS, which stand for Undertakings for Collective Investment in Transferable Securities, are a category of funds which comply with the requirements set out by European Union regulations thus benefiting from what is called the “European Passport.” This means that UCITS, which benefit from a European passport, once authorized by the regulatory authority in Luxembourg, can be sold to the public in all other EU Member States.

UCITS may take various legal forms, they can be established as a Contractual Fund (FCP – Fond Commun de Placement), an Investment Company with Variable Capital (SICAV – Société d’Investissement à Capital Variable) or an Investment Company with Fixed Capital (SICAF – Société d’Investissement à Capital Fixe).

Moreover, in order for investors to redeem their holdings at any time UCITS are required to be open ended. They are subject to specific rules concerning the assets they can invest in and the diversification and concentration rules with which they have to comply with, in order to ensure the necessary liquidity of the investment portfolio, thereby enabling investors to redeem their units.

It is also noteworthy that UCITS can be set up as a single fund or as an umbrella fund consisting of numerous compartments, each with a different investment policy. With regard to taxation they are exempt from income tax, net wealth tax and municipal business tax and there is no withholding tax on dividends paid, except in the case where the EU Savings Directive applies. However, they are subject to an annual subscription tax of 0.05%.

Alternative Investment Funds are funds which do not fall within the scope of the European Directive on Undertakings for Collective Investment in Transferable Securities and which generally include Hedge, Real Estate, Private Equity and Thematic Funds.

Such funds are set up either as Part II Funds which means that they are governed by Part II of the 2010 Law or as Specialized Investment Funds (SIFs).

Their basic characteristics are that there are no constraints pertaining to the kind of assets in which they can invest, providing the fund is approved by the regulatory authority for the financial sector (CSSF). Furthermore, the rules pertaining to risk diversification are less stringent in comparison to UCITS.

With regard to their establishment the available forms for Alternative Investment Funds are the same as those applicable to UCITS, this means that they can be incorporated as a Contractual Fund (FCP – Fond Commun de Placement), an Investment Company with Variable Capital (SICAV – Société d’Investissement à Capital Variable) or an Investment Company with Fixed Capital (SICAF – Société d’Investissement à Capital Fixe).

With regard to Specialized Investment Funds these are reserved to “well-informed investors”, and for this reason they benefit from an elastic regime. In either case, both Part II Funds as well as SIF’s, may under certain circumstances, benefit from the AIFMD (Alternative Investment Fund Managers Directive) passport, meaning that they can be sold in Europe.

Securitization is defined as the transaction by which a securitization vehicle acquires or assumes risks relating to claims, other assets, or obligations assumed by third parties and issues securities, the value or yield of which depends on such risks.

Even though a common paradigm is the securitization of a portfolio of loans from a financial institution, the scope of such vehicles are much wider as under Luxembourg law the securitization of many types of assets, risks and revenues is an option. Furthermore, as securitization is available to both institutional and individual investors this means that securitization may also facilitate the financing of a company or the management of personal or family wealth.

The SV can be established either as a company or a fund. In the case of the former it can be incorporated either as a Private Limited Company (Sàrl – Société à Responsabilité Limitée), a Public Limited Company (SA – Société Anonyme), a Partnership Limited by Shares (SCA – Société en Commandite Par Actions) or a Cooperative in the Form of a Public Limited Company (SCoSA – Société Cooperative Organisée sous Forme de Société Anonyme).

Alternatively, in the case of the securitization fund this has no legal personality in that it is governed by the legal regime of fiduciary contract or co-ownership. This however means that it must be managed by a management company.

The Investment Company in Risk Capital (SICAR – Société d’Investissement en Capital à Risqué) established by the Law of 15 June 2004 (as amended) is a structure created for the purpose of investing in securities which represent risk capital thereby providing investors with a potential high return.

Under Luxembourg law investing in risk capital means “direct or indirect contribution of funds to entities in view of their launch, development or listing on a stock exchange.” As such the SICAR is a suitable vehicle for Private Equity and Venture Capital Investment.

Further, characteristics of a SICAR are that it is a regulated vehicle, which must be approved and supervised by the regulatory authority for the financial sector in Luxembourg namely the CSSF, and that investors must be “well-informed.”

A SICAR can be established under various legal forms and specifically under the following,

1. Private Limited Company (Sàrl – Société à Responsabilité Limitée),
2. Public Limited Company (SA – Société Anonyme),
3. Limited Partnership (SCA – Société en Commandite Simple),
4. Partnership Limited by Shares (SCA – Société en Commandite Par Actions),
5. Cooperative in the Form of a Public Limited Company (SCoSA – Société Cooperative Organisée sous Forme de Société Anonyme)

A SOPARFI does not refer to a precise legal concept but rather to an ordinary commercial company subject to Luxembourg law with regard to both its legal regime and tax status. A SOPARFI can be incorporated under the form of a Private Limited Company (Sàrl – Société à Responsabilité Limitée) or a Public Limited Company (SA – Société Anonyme).

This being said the SOPARFI benefits from the Luxembourg participation exemption regime, double tax treaties concluded by Luxembourg and the parent-subsidiary directive.

This means that by limiting its activities to holding investments and by structuring these appropriately the SOPARFI can benefit from the above mentioned regimes thus constituting the SOPARFI an ideal vehicle for the holding of participations and related activities.

Alternatively, where the purpose of the SOPARFI is not limited to the holding of investments and the company has commercial activity it is treated as an ordinary commercial entity.