Luxembourg legislation modernizes subscription tax regime

• The Law of 21 July 2023 significantly enhances Luxembourg's investment fund toolbox and adapts the existing subscription tax regime.
• As of 29 July 2023, a modernized subscription tax regime provides for an exemption for European Long-Term Investment Funds (ELTIFs) and Pan-European Personal Pension Products (PEPPs) and aligns the subscription tax regime applicable to money market funds with Regulation (EU) 2017/1131 of the European Parliament and of the Council of 14 June 2017 on money market funds (Regulation).

Executive summary

Luxembourg recently enacted legislation that significantly enhances and modernizes the existing investment fund toolbox and thus strengthens the attractiveness and competitiveness of its financial sector. The Law of 21 July 2023 (Law) brings important changes to five specific laws of the investment fund industry, namely the 2004 law on Investment Companies in Risk Capital (SICARs), the 2007 law on Specialized Investment Funds (SIFs), the 2010 law on Undertakings for Collective Investment (UCIs), the 2016 law on Reserved Alternative Investment Funds (RAIFs) and the 2013 law on Alternative Investment Fund Managers (AIFMs).

In addition to amendments that lower the minimum investment threshold for "well-informed investors" and extend the time limit to reach the minimum capital requirements, the Law also modernizes the subscription tax regime. The amendments to the existing regime aim to support the emergence of new European products such as ELTIFs and PEPPs through an exemption from subscription tax and to align the subscription tax regime applicable to money market funds with the Regulation. The new provisions entered into effect on 29 July 2023.

This Tax Alert summarizes the main changes made to the subscription tax regime.

Detailed description

Exemption of ELTIFs and PEPPs

With the entry into effect of the Law on 29 July 2023, UCIs, RAIFs and SIFs as well as individual compartments of said funds that are authorized as ELTIFs in accordance with Regulation (EU) 2015/760,¹ as well as UCIs reserved for investors in the framework of a PEPP established under Regulation (EU) 2019/1238² are exempt from subscription tax.

Subscription tax applicable to money market funds

As the framework for money market funds is now set by the Regulation, the Law amends the current exemptions from subscription tax for short-term money market funds to now refer to funds (more specifically SIFs, UCIs and RAIFs) and their individual compartments that are (i) authorized as short-term money market funds in accordance with the Regulation and (ii) have obtained the highest possible rating from a recognized rating agency. The subscription tax exemption that applied to SIFs, UCIs and RAIFs before the entry into effect of the Law³ is grandfathered — i.e., it continues to apply to those funds that benefitted from the exemption as of the day immediately preceding the effective date of the Law.

Until the effective date of the Law, UCIs that were not covered by the exemption were subject to a reduced subscription tax rate of 0.01% if their sole object is the collective investment in money market instruments and placing deposits with credit institutions, or the collective investment in deposits with credit institutions. To ensure consistency between the Luxembourg UCI Law and the Regulation, the Law aligns the terminology used in the UCI Law regarding the conditions for the reduced subscription tax with the terminology used in the Regulation. As a result, the Law foresees that the reduced subscription tax rate of 0.01% applies to UCIs and their individual compartments authorized as money market funds in accordance with the Regulation. Again, the Law foresees a grandfathering provision under which the reduced subscription tax remains applicable to funds that benefitted from the reduced 0.01% rate at the date of entry into force of the Law.

Further amendments

The Law now specifies that the value of net eligible assets must be declared separately in the periodical returns to benefit from any exemption from or reduction of the subscription tax foreseen by the various laws.

In its former version, the legislation foresaw an exemption from subscription tax for UCIs whose securities are reserved for (i) institutions for occupational retirement pension or similar investment vehicles, set up on the initiative of one or more employers for the benefit of their employees and (ii) companies of one or more employers that invest funds they hold to provide retirement benefits to their employees. In addition to extending this exemption to UCIs reserved for PEPP investors established in accordance with Regulation (EU) 2019/1238, the Law clarifies that the exemption also applies to individual compartments of such UCIs. In addition, the Law states that if there are several classes of securities within the UCI or the compartment, the exemption only applies to classes that are reserved to the aforementioned investors. For the exemption to apply, a Circular of the Tax Administration in charge of the subscription tax⁴ underlines that a provision must be included in the prospectus of the UCI or compartment stating unequivocally that only determined categories of investors may invest in the UCI, compartment or class of securities concerned.

Finally, the Law foresees that the Commission du Secteur Financier (CSSF), the Luxembourg public institution supervising professionals and products of the Luxembourg financial sector, draws up a list of the UCIs and compartments that fulfill the conditions to benefit from the reduced rate or from the exemption from subscription tax.

Entry into effect and first return of the new subscription tax regime

The Law entered into effect on 29 July 2023. Given the quarterly basis of the subscription tax, the new exemptions, reductions in rate and new requirements will apply for the first time when determining the tax base for the subscription tax for the third quarter of 2023 (i.e., on 30 September 2023), except for the SIFs, UCIs and RAIFs that benefit from the grandfathering rules foreseen by the Law. Subscription tax returns must be filed electronically on the MyGuichet.lu platform before 20 October 2023.

The Tax Administration in charge of the subscription tax announced that before 30 September 2023 it will publish on the www.pfi.public.lu website some useful information for the first subscription tax returns to be filed after the entry into effect of the Law, and in particular concerning the dedicated filing space for ELTIF-type funds.

¹ Regulation (EU) 2015/760 of the European Parliament and of the Council of 29 April 2015 on European long-term investment funds.

² Regulation (EU) 2019/1238 of the European Parliament and of the Council of 20 June 2019 on a pan-European Personal Pension Product (PEPP).

³ SIFs, UCIs and RAIFs whose exclusive object is the collective investment in money market instruments and the placing of deposits with credit institutions, the weighted residual portfolio maturity of which does not exceed 90 days and that have obtained the highest possible rating from a recognized rating agency.

⁴ Circular No. 818, 26 July 2023, Direction de l'Enregistrement, des Domaines et de la TVA.