Choosing Luxembourg to setup your next microfinance investment fund.

Microfinance investment funds (MIF) are investment funds that make direct or indirect investments in the microfinance industry. It refers to financial services that give micro-loans to individuals in developing nations who are not as bankable by larger banks due to their inability to provide collateral.

Why would you establish a microfinance fund in Luxembourg?

Luxembourg has a long history as the domicile of choice for microfinance funds and investment vehicles. Luxembourg has been at the forefront of microfinance development.

The most important multinational investment vehicle (MIV) domicile is Luxembourg (MIVs). In 1998, Luxembourg was chosen as the domicile for the first MIF to be registered. In October 2012, over 40 MIVs were registered in Luxembourg, representing over 61 percent of all MIV assets under management worldwide. Today, seven of the ten largest MIVs globally are headquartered in Luxembourg.

The RAIF law was passed on July 23, 2016, ushering in a new flexible and tax-efficient regime for the Luxembourg fund platform. The RAIF product has proved to be a popular option, comprising more than fifty percent of Luxembourg PE funds. It combines the SICAR-regime (investment company in risk capital) as well as the SIF-regime (respectively 2004 and 2007 law) within a particular regulatory framework that is aimed toward licensed AIFMs (different investment fund managers) that are functioning in Luxembourg or any other EU country that has such a passport for fund organization.

1.     Leveraging Luxembourg’s expertise in asset management & alternative funds:

Luxembourg is a leading global domicile for investment funds, the 2nd biggest investment fund hub globally after the United States, and the largest fund domicile in Europe, with more than EUR 5 trillion in assets currently under administration. The nation holds a total market share of 31% for responsible investment funds in Europe and over 60% for European impact funds.

• Microfinance marking:

A joint initiative taken by the government of Luxembourg, the Luxembourg stock exchange, and the European Investment Bank resulted in the formation of the independent association known as LuxFlag to mark financial assets.

LuxFlag aims to encourage capital formation and reassure investors that applicants invest in microfinance.

3.     EU passport:

On the base of an EU passport, the MIF can be distributed. There are a variety of alternatives for obtaining an EU passport, including the European Social Entrepreneurship Funds (EuSEF). It is an EU-wide label for investment funds that adhere to a particular investment policy and profit from the EuSEF label and EuSEF passport.

Which funds are most frequently utilized by microfinance funds?

Luxembourg has a variety of investment fund kinds for MIF. The following fund kinds are the most popular:

1.     Reserved Alternative Investment Fund (RAIF):

The RAIF fund type was created in 2016, a tremendous success. In terms of its organizational makeup is analogous to the SIF & SICAR regimes. However, it is not subject to the CSSF’s direct oversight. The RAIF can also be established as an umbrella organization. However, the RAIF must select an AIFM (Alternative Investment Manager) in Luxembourg, which is regulated by the CSSF and is eligible for the AIFMD passport. The RAIF enables the creation of an umbrella fund with many sub-funds, allowing investors to diversify their portfolios and invest in various assets.

The RAIF is a popular, lightly regulated fund. However, certain regulated providers, such as the AIFM and the Depository, are required.

2.     Special Limited Partnership (SLP or SCSp) & Common Limited Partnership (CLP or SCS):

The SLP & the CLP are unsupervised, with very flexible fund arrangements. The Limited Partnership Agreement serves to manage the activities of the Fund and provides it with the contractual freedom necessary to construct its structure. This fund type isn’t limited by asset class or risk diversification restrictions. This Fund is tax-friendly.

The primary benefits of the SLP and CLP are:

• Speed: They can be established rapidly by private deed, as neither the SLP nor the CLP must be formed before a notary. Therefore, the formation of the funds is contingent upon the approval and signature of the LPA via all LPs and the General Partners (GP).
• Confidential: The LPA is not required to be published. Only certain information, such as the identity of the general partner, the essence of the Fund’s management, and its corporate purpose, must be published in the public record. The uniqueness of the LPs can be kept secret.
• Contractual freedom: the provisions stipulated in the LPA regulate the operation of the Fund. The issuing of partnership interests, the division of earnings, and the existence of distinct share classes & voting rights can be freely agreed upon without disclosing.

(iv) No Minimum Capital Criteria: The absence of capital contribution requirements makes the Fund a relatively inexpensive structure to start with. The partners’ contributions can be made in cash or kind.

(b.) Tax Transparency:  The Fund is tax transparent concerning Luxembourg income tax & net wealth tax.

1. Securitisation Vehicles (SV) are investment vehicles that can be established as alternatives to the previously described fund vehicles. Due to its adaptability, the SV can be structured as either a company or a securitization fund. The SV must issue securities (bonds, notes, etc.) about an underlying art portfolio and can be organized as an umbrella structure with many compartments. In principle, the SV is not supervised if it is not continuously issued to the public.

2. The primary advantages of the SV are that it is possible to securitize a source of income, that it can provide transferable securities that can be sold to investors, and that it can permit the development of liquidity, the eradication of debts, as well as funding from investors. All of these advantages come as a direct result of the SV.

1. Liquidity: non-saleable assets that provide a regular income stream can be organized as SVs to provide liquidity.
2. Access to capital markets: An SV may also provide an efficient means of accessing capital markets for the originator. The SV’s obligations could be posted on a stock exchange.

What are the main RAIF, SLP, and SV characteristics?

RAIF: Reserved Alternative Investment Fund

• Establishment in four to six weeks.
• There is no requirement for regulatory authorization.
• Unregulated Fund (indirect supervision by the appointment of the AIFM).
• AIFM is responsible for facilitating EU passporting rights.
• Can invest in any form of asset.

Securitization Vehicle – SV: 

• The minimum share capital of 12,000 euros or 30,000 euros.
• The beginning of the process is between 2-3 weeks.
• Very adaptable.
• No regulatory authorization.
• Unsubstantiated.
• Subfunds for art portfolios.
• Tax neutral.

Special Limited Partnership – SLP:

• No minimum necessary capital.
• Within 2-3 weeks, the business will take place.
• There is no requirement for authorization from the government to proceed with the deployment.
• No Guardian is essential.
• Tax precision.
• Can invest in any form of asset.
• Unsupervised.
• Extremely malleable terms of the contract.

How much time does it take to get a business started in Luxembourg?

The SV and SLP are unregulated investment vehicles that do not require regulatory clearance Unless they engage in commercial or financially supervised activities.

SV can be incorporated after a bank account for depositing share capital is accessible. If not previously established, the SLP must include its GP. Thus, incorporation can be completed in 2–3 days. The entity acquires legal identity upon incorporation before a notary and can instantly enter legally binding contracts.

The RAIF is an unsupervised fund that may be established at any time and does not require prior permission; nevertheless, the procedure takes longer as the associated service providers must review the Fund’s certification.