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Investment Fund Tax Regime Improved = Welcome Change


The investment fund tax regime will be improved for master feeder funds and foreign funds managed in Luxembourg. Both fund types are expected to grow after the Directive on Undertakings for Collective Investment in Transferable Securities ("UCITS IV Directive") comes into effect on 1 January 2011. The draft law which implements the UCITS IV Directive introduces some positive tax changes for the Luxembourg investment fund industry. Taxand Luxembourg presents these changes and explains the related opportunities they represent.

Non-resident investors no longer taxable in Luxembourg on capital gains on shares in Undertakings for Collective Investment (UCIs)
Capital gains realised by non-residents on the sale of shares in any of Investment Companies with Variable Capital (SICAVs), Investment Companies with Fixed Capital (SICAFs) or Specialised Investment Funds (SIFs), will no longer be taxable in Luxembourg. Until now taxation could occur in case of a sale of a 10% or greater shareholding within 6 months following the acquisition of the shares when there was no tax treaty to granted the exclusive taxation right to the country of the investor. This had been a concern for a Luxembourg fund with a foreign feeder.

Management Company or central administration in Luxembourg does not create a Luxembourg tax residence of non-resident UCIs
The UCITS IV Directive introduces a full passport for UCITS Management Companies, which allows a UCITS established in one EU Member State to be managed by a management company in another EU Member State.

Having a UCITS established in one country with its management company established in another one could create a tax residence of the UCITS in the country of the management company based on the place of effective management criteria, which is used very often to determine tax residence.

In order to remove this tax barrier to the management company passport, the draft law introduces a new article which provides that non-resident UCIs will not become taxable in Luxembourg even if they have their place of effective management or their central administration in Luxembourg.

Interestingly, this provision will not only apply in a UCITS context but will apply to all foreign UCIs including, for example, foreign Alternative Investment Funds (AIF), which may consider moving their management company to Luxembourg as a consequence of the upcoming Alternative Investment Fund Manager Directive.

Exchange Traded Funds become exempt from subscription tax
Exchange Traded Funds ("ETFs") will be exempt from the 0.05% subscription tax currently levied on their net asset value.

Multi-employer pension pooling vehicles become exempt from subscription tax
Multi-employer pension pooling vehicles will also become exempt from the 0.05% subscription tax. Currently, this exemption applies only to SIFs and does not apply to funds set up under the Law of December 20, 2002 (the exemption applied only to single-employer vehicles).

Taxand's Take

These future changes, which will enter into force on 1 January 2011, are welcome as they both remove some tax obstacles to the EU management company passport and increase the attractiveness of the Luxembourg investment fund centre. Fund complexes should consider the changes in deciding where to site funds and management companies in light of the EU regulatory changes.

Your Taxand contact for further queries is:
Keith O'Donnell
T. +352 26 940 257

Taxand's Take Author