CHEVALIER & SCIALES guide to the migr ation 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.
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 3 4 impact on investors 5 conclusion
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 different ways. This guide aims to provide an outline of the key practical steps involved when redomiciling a fund to Luxembourg. 4 the eu directive on alternative investment fund managers 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 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.
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. europe s leading fund domicile legal structures available in luxembourg 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. 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) differentiates 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. 5
6 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 difference. 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 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 different 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 authorit y 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
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. 7 contribution in kind by an offshore fund to a luxembourg fund eligible luxembourg investment vehicles main steps 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. 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.
transfer of an offshore fund s registered office to luxembourg eligible luxembourg investment vehicles main steps 8 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. 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.
cross-border merger eligible luxembourg investment vehicles main steps 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 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. 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 different EU member states and of Ucits established in the same member state into a newly-constituted Ucits in a different country. 9
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. 10 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
CHEVALIER & SCIALES LUXEMBOURG 51, route de Thionville L-2611 Luxembourg Luxembourg DUBAI Level 41 Emirates Towers P.O. Box 31303 Dubai United Arab Emirates Tel : +352 26 25 90 30 Fax : +352 26 25 83 88 Tel: +971 4 319 7903 Fax: +971 4 319 7904 www.cs-avocats.lu