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CHEVALIER & SCIALES
guide to the migration or relocation of offshore funds to luxembourg
client memorandum 2011 investment management
This publication has been prepared
by the law firm Chevalier & Sciales
and is for general guidance only. The
contents hereof are not intended to
constitute legal advice and should
not be treated as a substitute for
the consultation with legal counsel
necessary before concluding any
transaction or undertaking.
guide to the migration or relocation of offshore funds to luxembourg
3
© 2011 chevalier & sciales
contents
1 | overview
▪ The EU Directive on Alternative Investment Fund Managers
2 | key advantages of luxembourg
▪ Europe’s leading fund domicile
▪ Comprehensive regulatory framework
▪ Legal structures available in Luxembourg
▪ Luxembourg’s regulatory authority
3 | relocating funds to luxembourg
▪ Contribution in kind by an offshore fund to a Luxembourg fund
– Eligible Luxembourg investment vehicles
– Main steps
▪ Transfer of an offshore fund’s registered office to Luxembourg
– Eligible Luxembourg investment vehicles
– Main steps
▪ Cross-border merger
– Eligible Luxembourg investment vehicles
– Main steps
4 | impact on investors
5 | conclusion
guide to the migration or relocation of offshore funds to luxembourg
© 2011 chevalier & sciales
4
range of requirements applicable to non-EU
funds seeking to access European investors.
These include agreements between the fund
domicile’s regulator and each EU country
where the fund is to be marketed on regulatory
co-operation and exchange of tax information,
as well as the jurisdiction’s compliance with
international anti-money laundering standards.
Establishing a fund or redomiciling an existing
vehicle in Luxembourg would also make it likely
that the grand duchy would be designated as
the “member state of reference” for a non-
EU manager, which determines where the
manager will be regulated for the purposes of
the directive.
The AIFMD, which will come into force in early
2011 and must be transposed into the national
law of EU member states within two years, will
create a marketing ‘passport’ allowing funds to
be marketed freely to sophisticated investors
throughout the EU without a requirement to
obtain separate authorisation in each country.
The passport will be available to EU-based
managers of EU domiciled funds from 2013
and to non-EU managers and managers of
non-EU funds that accept the terms of the
directive two years later.
The directive will make a Luxembourg fund
particularly attractive to fund promoters
based outside the EU because it will avoid a
overview
The financial crisis and its contribution to the collapse of confidence in alternative investments,
along with international regulatory pressures on offshore centres, have dramatically changed
the fund industry landscape. In this new environment, the ability to relocate offshore funds to
Luxembourg has opened up new horizons to offshore fund promoters and their investors.
The global economic downturn and the impending implementation of the European Union’s Directive
on Alternative Investment Fund Managers (AIFMD) are additional factors that are encouraging
promoters rethink their use of offshore jurisdictions and to consider migrating their funds to
Luxembourg. This reinforces a trend that has already seen Luxembourg become a major centre for
the administration of offshore funds.
Having a fund domiciled in Luxembourg offers numerous advantages, and migrating offshore funds
to the grand duchy allows them to be operated in various dif ferent ways. This guide aims to
provide an outline of the key practical steps involved when redomiciling a fund to Luxembourg.
the eu directive on alternative investment fund managers
guide to the migration or relocation of offshore funds to luxembourg
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© 2011 chevalier & sciales
legal structures available in luxembourg
Luxembourg was the first EU member state
to implement the original 1985 EU Directive
on Undertakings for Collective Investment
in Transferable Securities. Today it leads the
European fund industry due to its ability to
offer a variety of structures to meet the needs
of investors and promoters.
Luxembourg’s investment funds can be divided
into three categories. The law of December
20, 2002 implementing the EU’s Ucits III
directives (which has been replaced by the law
of December 17, 2010) dif ferentiates between
Ucits funds, which are covered by Part I of the
legislation, and Undertakings for Collective
Investment authorised under Part II of the law.
Part II funds are more lightly regulated, but
both types of vehicle may be used for funds
marketed to either retail or sophisticated
investors.
Following the enactment in February 2007
of the law on Specialised Investment Funds
(SIFs), which are designed for sophisticated
investors, Luxembourg offers a broader choice
of legal structures for alternative investment
funds.
europe’s leading fund domicile
In the five decades since its first fund was
established in 1959, Luxembourg has become
one of the leading domiciles for investment
funds, ranked first in Europe and second
worldwide after the United States.
At the end of November 2010, the assets
under management of Luxembourg-domiciled
investment funds totalled EUR 2,160.8bn,
having risen by more than 17 per cent over
the previous 12 months. Today Luxembourg
is home to more than 75 per cent of funds
authorised under the Undertakings for
Collective Investment in Transferable Securities
(Ucits) regime for cross-border distribution in
the EU.
comprehensive regulatory framework
Luxembourg enjoys a practical and flexible
legal and regulatory framework for funds that
supports innovation.
key advantages of luxembourg
The characteristics of Luxembourg’s regulatory regime as well as its liberal legislative environment
have made it the most important fund centre in Europe.
guide to the migration or relocation of offshore funds to luxembourg
© 2011 chevalier & sciales
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the Ucits rules on investment diversification
and leverage limits as well as other restrictions
set out in the Luxembourg regulations. The
SIF is a lightly regulated tax-efficient fund
regime aimed at sophisticated investors that
offers fund promoters an onshore alternative
to traditional offshore jurisdictions such
as the Cayman Islands and British Virgin
Islands when deciding on a fund domicile and
regulatory regime.
Promoters can choose between two types
of legal structure for a Ucits, Part II or SIF
fund, an open-ended (Sicav) or closed-ended
(Sicaf ) investment company or a common
contractual fund (FCP). Both types of vehicle
can create fully segregated sub-funds with
dif ferent investment policies. The choice of
whether to create a fund as a contractual
fund or an investment company is based on
considerations including but not limited to tax,
since the FCP is tax-transparent.
luxembourg’s regulatory authority
The Financial Sector Supervisory Authority
(CSSF), which authorises and oversees
all Luxembourg-registered funds, is an
experienced and pragmatic regulator. It
combines the rigorous level of prudential
supervision that is considered essential by
investors today with flexibility that allows
promoters to develop innovative strategies and
funds. Particularly in the wake of the recent
financial turbulence, these characteristics
make Luxembourg a highly attractive and
pragmatic choice for the relocation of offshore
At the end of September 2010, Luxembourg
had 1,858 Part I Ucits funds with EUR 1,667.8bn
in assets, 631 Part II funds with EUR 220.8bn
in assets and 1,144 SIFs with EUR 195.1bn in
assets.
Ucits funds benefit from a European passport,
which enables their shares or units to be
distributed freely within the EU, a market of
more than 500 million people, as long as they
respect the compliance and distribution rules
of target member states. The Ucits IV Directive,
which will replace the existing regime in July
2011, should ease cross-border distribution
within the EU by reducing the period for
regulatory review of cross-border marketing
notifications from up to two months to a
maximum of 10 days. This offers significant
benefits over offshore funds, which can only
access investors within the EU by seeking
authorisation on a country-by-country basis.
By contrast, Part II funds may only market their
units in other EU countries after complying with
the conditions stipulated by the authorities
in each country, which makes them a less
attractive choice as a migration option.
Ucits were traditionally limited to long-only
investment in shares, bonds and money market
instruments. Their scope was extended by the
Ucits III directive and the 2007 Eligible Assets
Directive, which authorise Ucits to invest
in derivatives, including OTC instruments
such as total return swaps and contracts
for dif ference. They became able to adopt
synthetic shorting strategies that mirror the
investment techniques of hedge funds, as
long as the manager acts in accordance with
guide to the migration or relocation of offshore funds to luxembourg
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© 2011 chevalier & sciales
main steps
The contribution process is only possible if the
legal documentation of the Luxembourg vehicle
authorises (or does not forbid) subscription
by contribution in kind, and if the contributed
assets are considered eligible assets under
Luxembourg law. Luxembourg open-ended
entities can approve the contribution by a
resolution of the management body, while
closed-ended entities must hold a meeting
of shareholders to seek approval for a capital
increase. In either case, a valuation report on
the contributed assets must be issued by an
independent Luxembourg auditor.
eligible luxembourg investment vehicles
An offshore fund may contribute all its assets
and liabilities to a new or existing Sicav,
Sicaf or FCP. The offshore fund becomes
a shareholder in the Luxembourg fund.
Thereafter, the offshore fund will be liquidated
and the proceeds in kind – shares or units in
the Luxembourg investment vehicle – will be
distributed to its investors. Contribution of this
kind does not result in an automatic universal
transfer. The assignment of all the fund’s
assets and, if applicable, liabilities is made on
a case-by-case basis according to applicable
laws.
relocating funds to luxembourg
Generally speaking, a fund may be relocated to Luxembourg through one of the three following
methods:
• Contribution in kind of all the assets and, if applicable, liabilities of the offshore fund to a
Luxembourg Ucits, Part II or SIF fund in the form of a Sicav, Sicaf or FCP.
• Redomiciliation of the offshore fund to Luxembourg as a Ucits, Part II or SIF fund, limited to
the Sicav and Sicaf structures.
• Merger of the offshore fund into a Luxembourg Ucits, Part II or SIF fund, which again may only
be a Sicav or Sicaf.
The choice of relocation method will depend mainly on the preferred legal structure rather than the
investment strategy or asset classes involved. The length of the process may vary according to the
nature of the Luxembourg vehicle and the relocation method.
contribution in kind by an offshore fund to a luxembourg fund
guide to the migration or relocation of offshore funds to luxembourg
© 2011 chevalier & sciales
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main steps
Before the transfer, the fund’s investors must
be informed of the planned redomiciliation and
they will probably need to approve the migration
(or withdraw from the fund), depending on the
law of the originating jurisdiction.
The shareholders must hold an extraordinary
general meeting in Luxembourg approving the
restatement of the articles of incorporation
of the corporate fund before a Luxembourg
notary. A legal opinion is required confirming
the ability to maintain the legal personality of
the fund from the standpoint of the originating
jurisdiction. The fund’s service providers may
need to change, although this could benefit
investors if it results in lower costs.
The procedure begins with a general meeting
of shareholders called by the fund’s board
of directors in the original jurisdiction to
approve a motion to redomicile. Relevant tax
authorities and the fund’s creditors should be
notified of the motion by letter. The second
stage of the transfer involves a general
meeting in Luxembourg, before a Luxembourg
notary. During this meeting, new articles
of incorporation are approved, the board
of directors is appointed, as are the auditor
and the custodian bank, and an application
for registration is submitted to the CSSF. To
complete the transfer, the regulator in the
original jurisdiction is provided with a copy of
the new registration.
eligible luxembourg investment vehicles
Redomiciliation of an offshore fund can only be
considered for open-ended or closed-ended
investment companies (Sicavs or Sicafs), not
for FCPs. It is the easiest way to relocate
since the offshore fund does not cease to
exist but is transferred to Luxembourg without
discontinuation of its legal personality.
According to a commonly accepted
interpretation of Luxembourg’s August 10,
1915 legislation on commercial companies,
even if a company has been incorporated
abroad, if it has its central administration
in the grand duchy, it shall be considered a
Luxembourg company.
The migration process requires the amendment
of the by-laws and prospectus of the fund to
ensure compliance with Luxembourg law. The
offshore fund will need the approval of the
CSSF, which will review its documentation for
compliance.
transfer of an offshore fund’s registered office to luxembourg
guide to the migration or relocation of offshore funds to luxembourg
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© 2011 chevalier & sciales
main steps
The process usually begins with the approval
of the management bodies of both the
merging companies and the adoption of a
common merger proposal. This proposal
must then be published according to local
laws and will normally require the approval of
the shareholders of each vehicle. A report will
then be drawn up by an independent auditor to
value the share exchange ratio. The merger will
become effective once the general meetings
of shareholders of the merging vehicles have
given their approval.
cross-border merger
eligible luxembourg investment vehicles
A cross-border merger occurs when an
offshore fund is absorbed into a Luxembourg
Ucits, Part II or SIF fund and its assets and
liabilities are transferred to the Luxembourg
investment vehicle in exchange for the issue
of new shares in the Luxembourg vehicle to
investors in the absorbed offshore fund, which
is then dissolved.
At present Luxembourg law provides a
regulatory framework only for mergers
involving open- or closed-ended investment
companies.
The Ucits IV Directive (implemented in
Luxembourg through the law of December
17, 2010 on undertakings for collective
investment), which will come into force in all
EU members states in July 2011, will permit all
types of Ucits vehicles, including contractual
funds, to be merged into another fund
structure, as long as this is also a Ucits. The
directive will enable both a merger of Ucits
established in dif ferent EU member states and
of Ucits established in the same member state
into a newly-constituted Ucits in a dif ferent
country.
guide to the migration or relocation of offshore funds to luxembourg
© 2011 chevalier & sciales
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impact on investors
Relocation to Luxembourg may, in certain circumstances, offer tax advantages to investors. A
Luxembourg investment company, regardless of whether it is a Ucits, Part II or SIF fund, can
currently benefit from 36 double taxation treaties between Luxembourg and other jurisdictions.
The relocation of a fund to Luxembourg usually does not trigger a capital realisation event for
existing investors of the offshore fund. In addition, it usually has minimal impact on investors’
existing holdings. Investors may either continue to hold the same number of units or shares of the
same class within the same sub-fund or receive equivalent units or shares in the new Luxembourg
fund.
The investment objective can remain identical, subject to compliance with Luxembourg law. The
management of the relocated fund can be expected to ensure that the fund remains registered for
sale in the territories where it was previously authorised.
conclusion
The changing regulatory environment for the cross-border distribution of funds will make life more
complicated in the coming years for promoters and managers of investment vehicles domiciled in
traditional offshore centres.
With its open-minded attitude toward innovation, firm but flexible regulator and depth of fund
servicing expertise, Luxembourg already welcomes a broad range of fund promoters from around
the world. The range of options available to redomicile existing funds to the grand duchy offers an
invaluable tool for members of the offshore fund industry as they deal with the complexities of the
future global marketplace.
for further information please contact:
olivier sciales, partner
oliviersciales@cs-avocats.lu
rémi chevalier, partner
remichevalier@cs-avocats.lu
www.cs-avocats.lu
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