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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.


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© 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


– Main steps

▪ Cross-border merger


– Main steps

4 | impact on investors

5 | conclusion



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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


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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.



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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


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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



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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.


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


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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


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.



10

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

[email protected]

rémi chevalier, partner

[email protected]

www.cs-avocats.lu

CHEVALIER & SCIALES

LUXEMBOURG

51, route de Thionville

L-2611 Luxembourg

Luxembourg

Tel : +352 26 25 90 30

Fax : +352 26 25 83 88

DUBAI

Level 41 Emirates Towers

P.O. Box 31303 Dubai

United Arab Emirates

Tel: +971 4 319 7903

Fax: +971 4 319 7904

www.cs-avocats.lu

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