The development of the Euromarkets in the 1970s saw the emergence of Luxembourg as a successful international financial centre, and the country is now the world's seventh largest such centre. Apart from the Stock Exchange, on which most Eurobonds are listed, there is a well-developed commercial and private banking sector, and Europe's biggest investment fund industry.

Luxembourg Investment Fund Management

There has been a significant volume of investment fund management activity in Luxembourg for twenty years.

Luxembourg's decision in July 2004 to allow the listing of offshore hedge funds has made it possible for the jurisdiction to attract offshore funds and to compete on a level basis with Dublin, removing a barrier that has acted as a handicap to the growth of the hedge fund sector in the Duchy in the past.

One major advantage of this decision is that offshore fund promoters often choose their administrator and service providers in the country where they have their listing for the convenience of having the stock exchange, the administrator and the custodian in the same place. It has become common practice for hedge funds to domicile offshore in places like the Cayman Islands, the British Virgin Islands and Bermuda but be administered in Dublin and listed on the Irish Stock Exchange. However, the emergence of Luxembourg as a hedge fund centre, particularly for funds targeting the continental European market, is beginning to challenge this status quo.

Various legislative regimes were brought together by the law of 30th March 1988 which codified Luxembourg legislation for Undertakings for Collective Investment (UCIs). The legislation provides for three types of fund:

• A mutual fund (unit trust) or fond commun de placement, which does not have separate legal identity, but which has a set of legally-defined relationships between fund, manager and custodian;
  
• SICAV (Societe d'investissement a capital variable), an open-ended vehicle having a variable capital which is always equal to the net asset value of the fund; and
  
• SICAF (Societe d'investissement a capital fixte), which is a closed-end fund normally used for private placements.
  

This legislation includes provision for funds of funds, and for UCITS, ie UCIs under EU legislation which invest in Transferable Securities and can be marketed in EU Member States. About 4,000 UCIs have been formed in Luxembourg, which is the leading European jurisdiction for investment fund management.

Further legislation in the law of 19th July 1991 created 'dedicated' funds, which take advantage of UCI legislation but for the management of institutional assets.

Taxation of UCIs is very low, and no withholding tax is levied on distributions to investors. Funds are supervised by the Luxembourg Monetary Institute which authorises them and looks after investor protection. There is a Luxembourg Investment Fund Association (ALFI).

The EU's Savings Tax Directive, which came into effect in July, 2005, applies to certain Luxembourg UCIs, requiring the imposition of a withholding tax of initially 15%, with an unquantifiable effect on the future of the Luxembourg investment fund management sector.

As regards venture capital and private equity funds, in 2004 the Luxembourg Parliament passed the final text of legislation on SICARs (Sociétés d’Investissement en Capital à Risque), which are intended to offer an alternative to the traditional limited partnership structure which works well for fund managers and investors in countries such as the United Kingdom, but can pose problems for fund managers in continental Europe. The law defines venture capital as direct or indirect investment in an entity to finance the launch, further development or flotation of the entity. This definition covers a wide variety of investment forms in addition to straight equity, such as corporate bonds, mezzanine finance and convertible bonds).

Luxembourg Stock Exchange

The Luxembourg Stock Exchange was founded in 1929 and lists equities, investment fund shares and, especially, Eurobonds. Current issuance and listing procedures were laid down in a Grand-Ducal regulation of 28th December 1990, with some subsequent amendments. Luxembourg listing regulations conform to the EU Listings Directive. Supervision of the Stock Exchange and trading markets is in the hands of the Commission for the Supervision of the Financial Sector under the law of 23rd December 1998. The Exchange lists both Luxembourg and foreign stocks and bonds.

In December, 2003, the Exchange launched a consultation portal with more sophisticated ergonomics and more powerful search and consultation functionalities. Through the consultation portal, both private and professional investors may now access detailed financial data in respect of all the Luxembourg-listed securities.