Wildgen s Newsletter September 2012 TABLE OF CONTENTS LUXEMBOURG DRAFT LAW FOR THE TRANSPOSITION OF THE AIFM DIRECTIVE 2 NEW FORM OF LUXEMBOURG LIMITED PARTNERSHIP EXPECTED TAX CONSIDERATIONS 4 TOWARDS A NEW LEGAL AND REGULATORY FRAMEWORK FOR INSURANCE AND REINSURANCE IN LUXEMBOURG 6 MUTUAL ASSISTANCE FOR THE RECOVERY OF TAXES 9 WILDGEN NEWS 10
LUXEMBOURG DRAFT LAW FOR THE TRANSPOSITION OF THE AIFM DIRECTIVE The draft law 6471 (the Bill ) transposing Directive 2011/61/EC of the European Parliament and of the Council of November 11, 2010 on alternative investment fund managers (the AIFM Directive ) has been deposited on Friday August 24, 2012 at the Luxembourg Parliament, the Chambre des Députés. The most important legal impacts on the Luxembourg financial center introduced by the Bill will be the following: Amendments to Luxembourg laws The Bill foresees major amendments to several existing Luxembourg laws; the main amendments in particular are going to have an impact on the Luxembourg financial center and will affect: Law of August 10, 1915 on commercial companies, Law of June 15, 2004 relating to the company in risk capital ( SICAR ), Law of December 17, 2010 concerning undertakings for collective investment ( UCI ), Law of February 13, 2007 on specialized investment funds ( SIF ) which was already amended in March 2012 in order to implement few elements of the AIFM Directive 1, Law of April 5, 1993 on the financial sector ( PSF ), Law of July 13, 2005 on institutions for occupational retirement as pension savings company with variable capital and pension savings associations ( SEPCAV/ASSEP ), Etc. A new regime In principle the Bill follows the main pillars of the AIFM Directive 2. Pursuant to the regime introduced already by the AIFM Directive, all managers managing or acting as management companies ( AIFM ) to full scope funds ( AIFs ) with assets exceeding the specific thresholds introduced by the Bill (and being exactly the ones already provided for by the AIFM Directive) need to be authorized as AIFM. 1 http://www.wildgen.lu/publications/articles/luxembourg-law-sif 2 http://www.wildgen.lu/publications/articles/transposition-aifm-directive-luxembourg-draft-law Copyright 2012 Wildgen, Partners in Law
3 The detailed requirements governing the authorization and supervision as well as ongoing organizational requirements of AIFM have been defined upon by the Bill, including the details relating to the European Passport. Taking into consideration the different Luxembourg laws, which will be amended by the Bill, one may summarize for regulated vehicles that (i) SIFs and SICARs will be divided into funds being either qualified as an AIF or not and (ii) principally any UCIs being considered as AIFs. With regard to SOPARFIs, a qualification as AIF will depend on the structural details of each of such unregulated vehicle. By amending the Luxembourg law of April 5, 1993 on the financial sector, the Bill (laying down the mandatory appointment of an independent depositary by the AIFs) provides for a new professional of the financial sector ( PFS ) category, which will enable non-credit institutions to act as a depository for AIFs whereby these AIFs need (inter alia) to be closed-end (5 years period) and will not (in general) be allowed to invest in financial instruments. By amending the Luxembourg law of August 10, 1915 on commercial companies, the Bill introduces a new company form, the new special limited partnership ( SLP ). Thus Luxembourg will follow countries like for example England, Jersey and Guernsey which already provide for such a kind of tax transparent and tailor made vehicle for the private equity market. 3 Next steps In the same way as for the implementation of the UCITS IV Directive 4, Luxembourg is keen to fulfill the implementation of the AIFM Directive as one of the first Member States. It is indeed planned that the Bill will be adopted in Luxembourg by the end of the year 2012. Meanwhile any concerned market players will need to analyze their current structures in order to be prepared for the new regime. The article is available on our website 3 http://www.wildgen.lu/publications/articles/new-form-luxembourg-limited-partnership-expected-taxconsiderations 4 Directive 2009/65/EC of the European Parliament and of the Council of July 13, 2009 on the coordination of laws, regulations and administrative provisions relating to undertakings for collective investment in transferable securities which has been implemented by the Luxembourg law of December 17, 2010 concerning undertakings for collective investment. http://www.wildgen.lu/publications/articles/new-ucits-iv-law
NEW FORM OF LUXEMBOURG LIMITED PARTNERSHIP EXPECTED TAX CONSIDERATIONS Bill of Law n 6471 regarding, most notably, the implementation of the so-called AIFMD (Directive 2011/61/EU) would largely amend the legal and tax provisions regarding limited partnerships (société en commandite simple or S.C.S.) and would also introduce the new special limited partnership (société en commandite speciale or S.C.Sp.). From a corporate perspective, the S.C.S. and the S.C.Sp. are anticipated to be largely subject to the same regime. This regime would be a modernization of the current regime applicable to S.C.S. in order to make such vehicles more attractive for investors and create a viable alternative to the Anglo-saxon concept of limited partnerships. In a nutshell, the salient common characteristics of these vehicles would include: i. a large freedom granted to the parties as to the organization and functioning of the vehicle through the limited partnership agreement, since most of the draft legal provisions would be of a suppletive nature; ii. iii. a limited responsibility of the limited partners, provided that they do not perform acts of management towards third parties (the bill introduces a white list of acts which would not be considered as acts of management, such as inter alia advice to and supervision of the partnership and its affiliates); an excellent level of discretion, as the identity of the limited partners and the limited partnership agreement must not be fully published in the official gazette. The main differences between the S.C.S. and the S.C.Sp. would derive from the fact that the S.C.S. will continue to enjoy a separate legal personality, while the S.C.Sp. will not have a separate legal personality. This characteristic may also be relevant, notably from a foreign (tax) perspective, when considering the adequate holding structure. Furthermore, the Luxembourg tax provisions implementing the so-called Geprägetheorie would be amended. Under current tax law, the S.C.S. is transparent for corporate income tax purposes, but subject to municipal business tax in certain cases, most especially if at least one unlimited partner is a Luxembourg capital company. This current rule is potentially problematic for the structuring of investments holding using a S.C.S., as the use of a (limited liability) Luxembourg capital company is a convenient way to circumvent the unlimited liability of the unlimited partner. Copyright 2012 Wildgen, Partners in Law
5 Under the bill of law, the S.C.S. (as well as the S.C.Sp.) would be so impacted by the unlimited partner - and subject to municipal business tax - if the unlimited partner has at least a 5% interest in the partnership. It should, therefore, be easy to achieve S.C.S. / S.C.Sp. structures exempt from any Luxembourg income taxes under the proposed provisions. It is worth noting that under the bill of law, the S.C.S. / S.C.Sp. could be used as an AIF, a SIF, a SICAR, and as well as for unregulated structures. Finally, the bill of law also contains provisions in relation to the taxation of carried interest. Although the AIFMD must only be implemented by July 2013, it is expected that the final text will be approved by the Luxembourg Parliament before year s-end. The article is available on our website
TOWARDS A NEW LEGAL AND REGULATORY FRAMEWORK FOR INSURANCE AND REINSURANCE IN LUXEMBOURG On 25 July 2012, two draft bills were filed with the Chamber of Deputies of Luxembourg. Both aim at locally implementing the Solvency II Directive of 2009, as amended, in line with the current target date of 1 January 2014: Draft bill 6456 will lead to the repeal of the existing law of 6 December 1991 on the insurance sector and its replacement by a new legal instrument; Draft bill 6454 will amend the law of 8 December 1994 regarding annual and consolidated accounts of insurance and reinsurance companies and the law of 27 July 1997 regarding insurance contracts. The draft bills translate on a local level all the provisions of the Directive, notably those relating to the three pillars defined herein. First Pillar: Solvency Requirements Moving away from solvency and capitalization requirements applied similarly to all undertakings towards a new individual risk-based approach, the draft bills will result in the existing solvency margin and guarantee fund to be replaced by a Solvency Capital Requirement (SCR) and a Minimum Capital Requirement (MCR). The SCR and MCR will be calculated by using formula that will either be based on a standard to be further defined in a future regulation from the Insurance Supervision Authority (Commissariat aux Assurances, CAA) or defined on a more relevant internal model of the insurance or reinsurance undertaking. The SCR and MCR will have to be covered by eligible own funds, which may be comprised of equity items and certain subordinated liabilities or off-balance sheet items. Rules of assessment of assets and liabilities set forth in the draft bills, such as the evaluation of technical provisions by reference to arm s length conditions that would apply to a transfer of rights and obligations to another undertaking, are specific to solvency requirements and do not impact the rules applied for accounting purposes under IFRS or Luxembourg GAAP. Insurance and reinsurance undertakings shall, therefore, prepare internally to be able to handle the additional work that will result therefrom. Copyright 2012 Wildgen, Partners in Law
7 Second Pillar: Governance and Risk Monitoring Requirements The draft bills will lead to significant changes for insurance and reinsurance undertakings by increasing the level of internal organization that is required, notably with the need of structuring separate functions and procedures for risk management, solvency internal monitoring and assessment (including by way of forecasts), and regulatory compliance. Third Pillar: Periodic Information to the CAA and the Public Insurance and reinsurance undertakings will be required to periodically report to the CAA as to their compliance with solvency requirements via a prudential reporting and disclosure of the conclusions of their solvency internal monitoring and assessment. The CAA will benefit from increased powers to initiate, approve, and supervise recovery plans and perform other corrective actions in case of breach or threatened breach to solvency requirements. In addition, the draft bills will lead to communication to the public of an annual report disclosing primary and relevant information regarding the solvency and financial standing of the insurance or reinsurance undertaking. On an individual basis, the insurance contracts to be entered into will have to include references to such annual reporting in order to enable policyholders to easily access pertinent information. On the occurrence of material events having an impact on the financial standing of the insurance or reinsurance undertaking, a specific notice updating the last annual report and referring to such events will need to be made public. Other Legal Developments Beyond the mere implementation of the Directive, the draft bills also cover other changes to the existing legal framework of the insurance and reinsurance sector, specifically: Any exceptions to the gender equality in insurance terms and conditions will be repealed as of 21 December 2012, in accordance with the ECJ decision of 1 March 2011 (Test-Achats, C-236/09). The draft bill 6456 reiterates the provisions of the pre-existing draft bill 6398 filed on 17 February 2012 that contemplates the creation of regulated Professionals of the Insurance Sector (PSA) providing support services to insurance and reinsurance companies. This new category of PSA, copied from the example of the Professionals of the Financial Sector (PSF), will notably cover reinsurance or insurance captive management companies, run-off management companies, actuarial service providers, insurance portfolio managers, governance service providers, and claim handling companies.
Conclusion and Forecasts Through those two draft bills, together with the pre-existing draft bill on Professionals of the Insurance Sector, Luxembourg has initiated a process of reviewing in full its legal and regulatory framework in order to maintain a level playing field for operators in the sector while preserving the specificities of its market, such as the important role of life-insurance activities and reinsurance and the principles regarding equalization reserves / provision pour fluctuation de sinistralité (PFS). Although the draft bills have been generally prepared following the all the Directive, nothing but the Directive principle, it is already anticipated that such framework remains largely to be further defined due to the European environment (notably, the vote of the forthcoming Omnibus II Directive, now rescheduled for 20 November 2012 and the implementation instruments that will follow under EU Commission regulations and EIOPA technical standards) and due to national considerations. The draft bills indeed include important references to future grand-ducal regulations and CAA regulations as well as to the possibility for the CAA to grant specific exemptions on a case-by-case basis. It is expected that, in this process, the national authorities will adopt an approach of proportionality in order to ensure that the new requirements are adequate for undertakings of small- and medium-size firms, which represent a significant share of the industry, notably in the reinsurance market. Wildgen s Insurance & Reinsurance practice team will be monitoring the developments in these matters. Updates will be published in future editions of our newsletter. The article is available on our website Copyright 2012 Wildgen, Partners in Law
9 MUTUAL ASSISTANCE FOR THE RECOVERY OF TAXES Luxembourg law dated 21 July 2012 (henceforth known as the Law ) implements Directive 2010/24/EU (the Directive ) of 16 March 2010 concerning mutual assistance for the recovery of claims relating to taxes, duties, and other measures. The Law modernizes Luxembourg legislation in this field. The scope of the Law encompasses all taxes and duties (except for social security contributions). The Law first contains an organisational section which determines the competent Luxembourg authorities (i.e. Administration de l enregistrement et des domaines, Administration des contributions directes, and Administration des douanes et accises) for the purpose of mutual assistance. Under the Directive, each Member State must designate its competent authorities. The list of all competent authorities will be published in order to facilitate the communication between Member States administrations. The mutual assistance between Member States, as such, comprises the exchange of information upon request, the automatic exchange of information, the assistance in the notification of documents, and the request for recovery. The Luxembourg tax authorities are authorized to exchange, upon request, with other Member States competent authorities any information which is foreseeably relevant for the recovery of taxes. Luxembourg tax authorities are not obliged to supply information: which they would not be able to obtain for the purpose of recovering similar claims arising in Luxembourg; which would disclose any commercial, industrial, or professional secrets; or, the disclosure of which would be liable to prejudice the security of or be contrary to the public policy. These bear in mind that the mere fact such information may be held by a bank or similar institution does not fulfill the above criteria. These conditions are, thus, very close to those applicable under the Article 26 of the OECD Model Convention. The Luxembourg tax authorities may also inform, without request, other Member States competent authorities as to any refund of Luxembourg taxes (except VAT). In accordance with the Directive, the Law determines the information to be included in a standard form accompanying the request for notification between Member States competent authorities and in the uniform instrument permitting enforcement in the frame of a request for recovery. In effect as of 1 January 2012, the Law replaces and repeals the law of 20 December 2002 which previously governed the matter. The article is available on our website
WILDGEN NEWS B.O.I.P. Re-election We are delighted to announce that Emmanuelle Ragot, head of our IP/TMT department, has been re-elected as member of the Benelux Office for Intellectual Property for the four coming years. Brochures We recently updated or released brochures and would be delighted to send you a copy. September 2012 SPF, PRIVATE ASSET MANAGEMENT VEHICLE September 2012 THE LUXEMBOURG SICAR Brochures can be requested by email or via our website Copyright 2012 Wildgen, Partners in Law
11 Upcoming Event Emmanuelle Ragot, Head of IP/TMT at Wildgen, participates as panelist in the second edition of Luxembourg B2B Online Gaming & Digital Entertainment event. Organised at LuxExpo on November 14th 2012, this unique European event will gather key actors of online gaming sector and ancillary industries, including: Online Gaming companies, Digital entertainment, ISPs & Telco s, Data Centre service suppliers, Hosting providers, Cloud service providers, Online payment companies, and Many others from the crowd and cloud of ICT. If you are interested in this event and look for more information about Emmanuelle Ragot's participation, please feel free to contact us at marketing@wildgen.lu.
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