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How to Set up a Luxembourg Hedge Fund

by | Apr 19, 2022 | Investment funds

How to set up a Luxembourg hedge fund

Luxembourg hedge funds receives direct regulation and supervision from the Commission for the Supervision of the Financial Sector (CSSF). Traditionally, hedge funds were established as UCIs (Undertakings for Collective Investment) as well as a specialized investment fund (SIF). The choice of legal form will depend on investors and their preferred investment strategies and target audience. Due to its regulated nature, investors must appoint a hedge fund supervisor for management and supervision responsibilities. Additionally, hedge funds must adhere to the provisions of the Alternative Investment Fund Managers Directive (AIFMD) and prevailing legislation. 

Hedge Fund Investing in Luxembourg 

A hedge fund can be set up as:

  • Public limited liability company
  • Private limited liability company 
  • Limited partnership

Luxembourg hedge funds can be established under the following regimes:

Hedge Fund as a Specialized Investment Fund (SIF)

  • A popular investment vehicle in the formation of hedge funds. 
  • An initiator must have an existing portfolio management to form a specialized investment fund (SIF). 
  • Most seasoned investors use the specialized investment fund (SIF) regime for their hedge fund. 

Features

  • No taxes on capital gains, profits, and incomes. 
  • No restrictions for sponsors involved.
  • No strict requirements in terms of documentation. 
  • Under the specialized investment fund (SIF) regime, an investor can invest on any asset types, without limitations. 
  • Common fund and investment company legal forms are most suited to the needs of a specialized investment fund (SIF). 

Requirements

  • Incorporation will be governed by the Specialized Investment Fund (SIF) Law. 
  • Investors must be well-informed investors. 
  • A hedge fund under the specialized investment fund (SIF) regime must gain approval from the  Commission for the Supervision of the Financial Sector (CSSF) before commencing operation on the local market. 
  • No asset restriction.
  • No investment restriction, however, a hedge fund must invest a maximum of 30% of its assets in securities. 
  • The hedge fund representative in Luxembourg must facilitate appropriate risk management procedures. 
  • Central administration must be in Luxembourg. 
  • No residency restrictions for hedge fund managers and directors. 
  • A hedge fund can be operated as an investment company in variable capital (SICAV). 
  • Under the investment company in variable capital (SICAV), a hedge fund can be operated as a public limited company, private limited company, cooperative, limited partnership, and partnership limited by shares
  • A hedge fund may also take the form of an investment company in fixed capital in Luxembourg, which providers investors a wide selection for legal forms, including public limited company, partnership limited by shares, and many more. 

Hedge Fund as a Undertakings in Collective Investment (UCI)

  • Another common structure for Luxembourg hedge fund is the Undertakings in Collective Investment (UCI).
  • Regulated and supervised by the  Commission for the Supervision of the Financial Sector (CSSF). 
  • Hedge fund under the Undertakings in Collective Investment (UCI) structure can take the form of a common fund, close-ended fund, open-ended fund with fixed capital, and open-ended fund with variable capital
  • Must be controlled by a management company based in Luxembourg. 
  • Minimum share capital is EUR 300,000. 
  • Capital may be raised to EUR 1.25 million to be achieved within six months. 

Requirements

  • Open to large-scale investors, including retail investors, professional investors, and institutional investors. 
  • Regulated and supervised by the  Commission for the Supervision of the Financial Sector (CSSF). 
  • Not restricted with regards to eligible assets. 
  • Specific restrictions may apply on the type of investments under the Commission for the Supervision of the Financial Sector (CSSF) Circular 02/08 and Commission for the Supervision of the Financial Sector (CSSF) Circular 08/356.
  • No statutory legislation, but the Commission for the Supervision of the Financial Sector (CSSF) requires representatives to create risk management strategies. 
  • Under Part II UCI Law (Undertakings for Collective Investment Law), initiator must be approved by local authorities. Approval will depend on the experience of an initiator. 
  • Central administration must be in Luxembourg. 
  • Hedge fund operating under the Part I UCI Law (Undertakings for Collective Investment) must have an initiator located in the European Union or the European Economic Area. 

Hedge Fund as a Soparfi

  • Can be set up a partnership or public limited liability. 
  • Investment activities being the main purpose for structuring Soparfi as a hedge fund. 
  • A hedge fund can facilitate commercial activities. 
  • Subject to 24.94%, however tax exempts may apply, especially with double taxation treaties of Luxembourg with other jurisdictions. 
  • Require Articles of Association and registered before the Trade Register and Companies in Luxembourg. 

Luxembourg Hedge Fund Formation Process

  • Initiator must prepare a draft memorandum and articles of association, which be used to set up a company, deemed to follow the offering documentation. 
  • Drafting of offering document which delineates the terms of the offering of a hedge funds’ shares. 
  • Incorporate a hedge fund set up as a company structure before the Registrar of companies.

Hedge Fund Taxation Regime in Luxembourg 

  • Luxembourg legislation does not impose any corporate income tax on hedge funds. 
  • Hedge funds are not assessed with municipal business and withholding taxes on dividends.
  • Hedge fund will be assessed with withholding tax on dividends if the EU savings directive is applicable. 
  • Minimum share capital at EUR 1.25 million 
  • Hedge fund as specialized investment fund (SIF) must pay capital within 12 months since set up. In case of Luxembourg hedge funds registered under different forms has to pay minimum share capital within six months. 
  • Registration fee of EUR 75 upon hedge fund incorporation. 
  • Assessed with 0.01% subscription tax on net assets under the Specialized Investment fund Law
  • Minimum share capital of EUR 30,000 for hedge funds set up as a public limited company and limited liability partnership.
  • Hedge funds under Part I and Part II UCI Law (Undertakings for Collective Investment)  to pay 0.05% subscription tax on net assets. 
  • Hedge fund set up as a common fund has no minimum share capital requirements. 
  • All hedge funds across all company structures must have one shareholder. 
  • Hedge funds set up an investment company in fixed capital (SICAF) and investment company in variable capital (SICAV) may qualify it for tax exemptions and deductions prescribed under the double tax treaties approved by local authorities. 
  • Direct taxes are not applicable, except in the form of a reserved alternative investment funds (RAIFs) investing risk capital benefitting from a different taxation regime. 
  • Hedge funds in Luxembourg is required to pay value added tax, with exemptions granted in some cases.
  • Hedge funds set up as a reserved alternative investment fund (RAIF) must pay direct taxes, including corporate income tax, municipal business tax, but it can benefit from the payment of net wealth tax. 
  • VAT exemption can be available as per Article 44 (1) d of the VAT Law. 
  • Hedge fund set up as an investment capital in variable capital (SICAV) are exempted from numerous taxation, including corporate tax, withholding tax and net wealth tax. 
  • Hedge funds set up as an investment fund set up as an investment company in risk capital (SICAR) will be assessed with corporate income tax at 24.94%, but exempted from net wealth tax, withholding tax on the distribution of dividends, subscription tax, and value added tax. 

As an independent business consulting firm, Damalion provides turnkey solutions in the formation of hedge funds in Luxembourg. From initial consultation, assistance for authorization, bank account opening to preparation of legal documents, our global service network will help you at every turn. Our Damalion experts will help you navigate the Luxembourg legal framework and connect you to various service providers, including lawyers, accountants, other investment specialists, and more. To learn more about hedge fund formation in Luxembourg, reach out to a Damalion expert today. 

This information is not intended to be a substitute for specific individualized tax or legal advice. We suggest that you discuss your specific situation with a qualified tax or legal advisor.