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Crypto Fund in Luxembourg : Set-Up your Alternative Investment

by | May 17, 2022 | Investment funds

Setting Up a Crypto Fund in Luxembourg

In 2021, crypto asset fund is available to be set-up and registered in Luxembourg. Foreign investors looking to open a crypto fund in the Grand Duchy can choose from a limited set of investment vehicles. They later issued a guide in 2022 pertaining to virtual currency investments and the different types of investments considered as crypto assets. 

Applicable Laws to Luxembourg Crypto Fund Investments

Individual and institutional investors looking to open a crypto fund in Luxembourg as an investment vehicle must remember that there are certain applicable laws, regardless of citizenship of its founders or shareholders. Here are a few fundamental riles when investing in crypto funds in the Grand Duchy:

Ideal Investment Vehicles for Crypto Funds in Luxembourg

Luxembourg is an ideal domicile for investment vehicles worldwide. Depending on the type of investment activity, some types of structures are more recommended than others. 

Based on documents issued by the Commission for the Supervision of the Financial Sector (CSSF)  in January 2022, investors can use alternative investment fund vehicles for investments in crypto activities. Alternative investment funds are used for direct and indirect cypto fund investments. 

Crypto fund investors also have an alternative investment fund manager appointed to represent the fund, in adherence to prevailing laws. An alternative investment fund manager must gain approval from the Commission for the Supervision of the Financial Sector (CSSF) before starting any investment fund activities. 

Foreign investors need to keep in mind that crypto funds in Luxembourg operate as Undertakings for Collective Investments for Transferrable Securities (UCITS) or Undertakings for Collective Investments (UCI), under Article (1) 20b of the Law of 12 November 2004. Direct or indirect investments in crypto assets have decided that these funds are not allowed. 

Taxation Regime for Virtual Currencies in Luxembourg

Whether you want to open an Collective Investments for Transferrable Securities (UCITS) or another type of investment vehicle in Luxembourg, you will be assessed with taxes in Luxembourg. The same happens if you open a crypto fund investment in the country. 

Activities and income obtained from crypto currency operations are assessed with tax in Luxembourg. The taxation system may differ based on the nature of crypto users, whether it is a private investor or institutional investor. For instance, corporate entities will be assessed for income obtained from crypto operations, including corporate income tax and municipal business tax resulting in overall tax assessment of 24.94%. 

For fund investors gaining income from crypto operations, the Luxembourg personal income taxation regime is applicable and will lead to a progressive taxation based on income ranging between 0% and 42%. Investors must also take note of value added tax exemption, following rules under Circular No. 787 issued in June 2018. Exemptions are applicable if the cryptocurrency is utilized as a means of payment. 

Luxembourg Cryptocurrency Exchange Regulations 

All cryptocurrency exchanges and virtual currency platforms in Luxembourg are regulated and supervised by the Commission for the Supervision of the Financial Sector (CSSF) and brand-new crypto businesses, including service providers or intermediaries processing transactions. These entities must obtain a payments institutions license if they wish to begin trading in Luxembourg. 

It is important to remember that licenses impose anti-money laundering and combating the financing of terrorism reporting rules under Luxembourg’s electronic money statutes.

In 2016, the first crypto license was granted in 2016 to Bitstamp, which is involved in trading a wide range of currencies, from US, EUR, Bitcoin, and Ethereum for EU passport holders. 

In 2018, following Bitstamp, the Japanese virtual currency exchange platform bitFlyer was granted license to trade in Luxembourg. Two years after, changes were made to Luxembourg’s anti-money laundering and combating the financing of terrorism laws. It introduces new registration and governance requirements for virtual assets service providers and cryptocurrency providers. Changes were amended by legal definition of cryptocurrencies, virtual assets service providers, virtual assets, safeguarding, administration of service providers, and custodian wallet providers for regulatory reasons. 

The Future of Cryptocurrency Regulations in Luxembourg

While there are no specific legislative steps established as of yet, Luxembourg is expected to create more solid crypto legislations to be forthcoming, especially given the launch of the European Union’s 5 Anti-Money Laundering and 6 combating the financing of terrorism provisions that were in forced in December 2020. This displays the government’s desire to align with Essential Services Maintenance Act (ESMA) while driving its token and blockchain agendas. 

Digital assets such as crypto funds are here to stay. While there are no hard and fast rules for digital assets today, firms are slowly establishing a comprehensive approach that lets them stand out from other companies. Damalion being a premier business consulting firm helps our clients forge a path forward, create goals, and develop a tailored strategy in establishing a crypto asset investment fund vehicle in Luxembourg. From the investment fund formation process, bak account opening, management, accounting, to taxation regime consulting, our global service network xwill assist you every step of the way. Reach out to a Damalion expert to learn more. 

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.