The Law of February 13, 2007 (“the Law”) creates the Specialised Investment Fund and replaces the law on institutional investor funds to introduce more flexibility and extend the concept of eligible investors to professional investors and well-informed investors.

The Specialised Investment Fund Law in brief

The Law on specialised investment funds (hereafter referred to as the “SIFs”) entered into force on February 13, 2007.

The Law:

• replaces the law of July 19, 1991 (the “1991 law”) on undertakings for collective investment (“UCIs”) the securities of which are not intended to be placed with the public and
  
• amends the law of December 20, 2002 (“2002 law”) on UCIs and the law of February 12, 1979 on VAT.
  

The Law replicates to a large extent the provisions of the 2002 law, as amended:

• SIFs can be implemented in contractual form (as a Fonds Commun de Placement, “FCP”) or in corporate form (as a Société d'Investissement à Capital variable, “SICAV” or as a Société d'Investissement à Capital Fixe, “SICAF”);
  
• SIFs may be umbrella funds;
  
• SIFs must have their depositary and central administration located in Luxembourg;
  
• SIFs must have their accounts audited by an independent auditor;
  
• SIFs are subject to the supervision of the CSSF.
  

SIFs benefit from the same attractive tax regime as funds subject to the 1991 law.

SIFs being however reserved to sophisticated investors, less investor protection is necessary and SIFs enjoy more flexibility compared to other regulated funds in respect of the rules applicable to investment restrictions, company law, reporting rules, etc.

Legal framework

The 1991 law contained a lot of references to the applicable provisions of the law of March 30, 1988 on UCIs, as the 1991 law was drafted for the purpose of completing the 1988 law.

The 1988 was amended several times since 1991 and the reading of the 1991 law became difficult. Consequently, the intention of the Law is to have all these provisions included in one single law on SIFs. In addition, the 1988 law was due to expire on February 13, 2007.

Eligible investors

The Law enlarges the scope of eligible investors, compared to the 1991 law: based on the Law, the following investors may also invest in SIFs:

• professional investors within the meaning of Directive 2004/39 on markets in financial instruments (mainly banks, Investment Companies with the European Passport, Management Companies of UCITs) and;
  
• other well-informed investors who either:
  - invest a minimum of 125.000 EUR or
  - have an assessment of a credit institution or another professional of the financial sector certifying their capability to appraise the contemplated investment and the risk thereof. This means that sophisticated retail or private investors will also be allowed to invest into these funds and therefore benefit from their attractive tax regime. This concept of well-informed investors is inspired by the SICAR legislation.

No restrictions regarding eligible assets

SIFs may invest in any type of assets and may therefore be used for any type of funds, such as transferable securities funds, real estate funds, private equity funds, hedge funds, funds investing in claims, money market funds, funds of funds, etc…

Risk spreading rules

As with any other UCIs, SIFs are required to diversify their investments. Diversification is set as a principle however no quantative limits are set, unlike in the 2002 law. Thus it is up to the founders of the SIF to set appropriate diversification limits, which will be approved by the CSSF.

Flexible equity structure

Under the new rules, the EUR 1.25 Mio minimum share capital does not need to be reached within 6 months but within 12 months instead. For determining this amount, reference is made to the subscribed share capital and also to the share premium (except for FCPs, where reference is made to the net assets).

Legal form

SIFs can be incorporated as SICAV and have the legal form of a public limited liability company (“société anonyme”), a partnership limited by shares (société en commandite par actions”), a private limited liability company (“société à responsabilité limitée”) or a cooperative organized under the form of a public limited liability company (“société coopérative organisée sous la forme d'une société anonyme”). SIFs may also be implemented as a SICAF or in contractual form, as an FCP (“Fonds Commun de Placement”).

More flexibility in terms of share acquisition/redemption

Rules governing the issue and redemption of shares are relaxed compared to the ones applicable under the 1991 law. In this respect, the management regulations/bylaws of the SIF determine which rules do apply. In particular, issue and repurchase at value other than NAV (Net Asset Value) are allowed.

No need to appoint a promoter

SIFs are not required to be set up by an institutional promoter.

Flexible valuation rules

SIFs have to value their assets at fair value. The management regulations or bylaws determine how this value is computed. The SIFs documents can for example also make reference to the recommendations made professional associations (EVCA, RICS, etc).

Lighter reporting requirements

Under the new Law, rules governing publication are lighter: there is no requirement to publish a semi-annual financial report. Audited annual reports will need to be prepared within 6 months following the end of the respective financial period (4 months for other funds). There is no requirement to prepare consolidated accounts. Finally, SIFs will not automatically be required to draw a long form report.

Flexible approval process

The new rules say that SIFs are able to start their activity without CSSF approval, provided the request for authorization is filed in the month following the set up of the fund. This makes Luxembourg very attractive compared to other jurisdictions, the long approval process being often an obstacle for investors to invest via a regulated fund. Launching a fund, prior to approval being obtained, needs to be done in the knowledge that the CSSF could require changes to the constitutional documents or could, conceivably, refuse to approve the fund. Thus the launch process needs to be carefully handled.

Tax

SIFs are subject to the same tax regime as 1991 funds, in particular:

They are subject to a 0,01% subscription tax on their Net Asset Value except for:

• investments in other Luxembourg UCIs which have already been subject to subscription tax;
  
• institutional cash UCIs;
  
• pension pooling funds (in this respect, it is interesting to note that the Law does not require as in the 2002 law that the participating pension schemes be of the same group and the Law does also permit individual sub-funds and classes reserved to pension schemes to benefit from the exemption);
  

They are exempt from income taxes on income and gains.
They are subject to a fixed amount of capital duty limited to 1.250 EUR on contributions.
They are exempt from taxes on distributions.

The fact that a larger category of investors qualifies may lead some funds to convert from the 2002 law to a SIF in order to achieve more flexibility (from a regulatory point of view) and benefit from a more favourable tax treatment (0,01% subscription tax instead of 0,05%). For 2002 funds, the possibility already exists to create classes reserved to institutional investors and benefit from the 0,01% subscription tax. Thus the interest in converting may be more limited than might first appear.

The scope of a specific VAT exemption, which applies to the management of investment funds subject to the supervision of the CSSF, is extended to the management of SIFs. Under the current practice, management services rendered directly to investment funds are VAT exempt. Under certain conditions, services outsourced by management companies are also VAT exempt.

As a consequence of a recent circular of the VAT Authorities, certain depositary services rendered by custodian banks to investment funds will however be subject to VAT at the rate of 12% as from April 1, 2007 (cf. our newsletter of January 5, 2007). The impact of this change may be lower for SIFs than for other investment funds as the role of the depositary towards SIFs is legally lighter as compared to other investment funds.