The Undertakings for Collective Investment in Transferable Securities Directive2009/65/EC is a consolidated EU Directive, that allows collective investment schemes to operate freely throughout the EU on the basis of a single authorisation from one member state. EU member states are entitled to have additional regulatory requirements for the benefit of investors.
The objective of the original UCITS Directive 85/611/EEC, adopted in 1985, was to allow for open-ended funds investing in transferable securities to be subject to the same regulation in every Member State. It was hoped that once such legislative uniformity was established throughout Europe, funds authorised in one Member State could be sold to the public in each Member State without further authorisation, thereby furthering the EU’s goal of a single market for financial services in Europe.
The reality differed somewhat from the expectation due primarily to individual marketing rules in each Member State that created obstacles to cross-border marketing of UCITS. In addition, the limited definition of permitted investments for UCITS weakened the marketing possibilities of a UCITS. Accordingly, in the early 1990s proposals were developed to amend the 1985 Directive and more successfully harmonise laws throughout Europe. These discussions, although leading to a draft UCITS II directive, were subsequently abandoned as being too ambitious when the Council of Ministers could not reach a common position.
In July 1998 the EU Commission published a new proposal which was drafted in two parts (a product proposal and a service provider proposal), which sought to amend the 1985 Directive. These proposals were finally adopted in December 2001, and are known as "UCITS III", which are now in force. Interestingly, LuxAlpha, an alleged "feeder fund" to Bernard Madoff's firm, was a UCITS-regulated fund.
The Management Directive 2001/107/EC, seeks to give management companies a “European passport” to operate throughout the EU, and widens the activities which they are allowed to undertake. It also introduces the concept of a simplified prospectus, which is intended to provide more accessible and comprehensive information in a simplified format to assist the cross-border marketing of UCITS throughout Europe.
The primary aim of the Product Directive 2001/108/EC is to remove barriers to the cross-border marketing of units of collective investment funds by allowing funds to invest in a wider range of financial instruments (including derivatives), which subject the same regulation in every Member state. All UCITS funds must comply with the same investment limits.
A collective investment fund may apply for UCITS status in order to allow EU-wide marketing. The concept is to create a single funds market across the EU. The aim is that with a larger market the economies of scale will reduce costs for investment managers which can be passed on to consumers.
Throughout Europe approximately €6.8 trillion are invested in collective investments. Of these funds about 76% are UCITS.
The proposal of UCITS IV Directive  was approved by the European Parliament on 13 January 2009 and also by the Council of the European Union as the Directive 2009/65/EC, to be implemented on 1 July 2011. This updated the UCITS III Directives by introducing the following changes,
- Notification Procedure
- Key Investor Information Document
- Adapted Framework for Mergers
- Master-feeder Structures
- Cooperation between Member State Supervisory Authorities
- Management Company Passport
On 23 July 2014 the European Union adopted directive 2014/91/EU ("UCITS V") on the coordination of laws, regulations and administrative provisions relating to undertakings for collective investment in transferable securities as regards depositary functions, remuneration policies and sanctions.
UCITS V can be compared with the Alternative Investment Fund Managers Directive ("AIFMD") (European Union Directive 2011/61/EU), which is a parallel regulation for hedge funds and alternative investments.
UCITS V introduces new rules on UCITS depositaries, such as the entities eligible to assume this role, their tasks, delegation arrangements and the depositaries’ liability as well as general remuneration principles that apply to fund managers.
The depositary as a specific function under UCITS legislation (rather as it does under AIFMD). The depositary may delegate its safekeeping functions (but not other depositary functions to a third party custodian.
UCITS V directive requires a Key Investor Information Document or KIID is produced for investors - see example (autokiid.com)
Luxembourg transposed the UCITS V directive with the law of 10 May 2016 applied since 1 June 2016. This law of 10 May 2016 amended the Luxembourg law of December 17, 2010 on undertakings for collective investment, as amended (the "2010 Law"), in particular, Parts I, IV and V of the 2010 Law.
The proposals concern areas other than those addressed by UCITS V. In summary, these are the topics raised: 1. eligible assets and the use of derivatives – whether it is necessary to limit the scope of eligible derivatives of those traded on multilateral platforms and cleared by a central counterparty; 2. efficient portfolio management techniques – whether the current criteria (on eligibility, liquidity and diversification for example) requires amendment; 3. over-the-counter derivatives ('OTC') – how OTC derivative transactions should be dealt with when assessing UCITS limits on counterparty 4. extraordinary liquidity management rules – whether there is a need for a common framework for dealing with liquidity bottlenecks in exceptional cases or otherwise; 5. depositary passport – whether a depositary passport should be introduced and how this would work in practice; 6. money market funds1 – whether they present a source of systemic risk and/or do they need harmonised regulation at EU level; 7. long-term investments – (a) how access can be afforded to retail investors and how this could be implemented and regulated; (b) what proportion of a fund's portfolio should be dedicated to such assets; and (c) whether diversification rules are necessary to secure adequate liquidity; 8. improvements to the UCITS IV framework – for example Article 64(1) of the UCITS Directive requires UCITS to provide information to investors in the following two cases: (i) where an ordinary UCITS converts into a feeder UCITS; and (ii) where a master UCITS changes. As it stands, this does not cover a third possible scenario, namely where a feeder UCITS converts into an ordinary UCITS. Such conversions may lead to a significant change in the investment strategy.
- Ch I, Subject matter, scope and definitions
- Ch II, Authorisation of UCITS
- Ch III, Obligations regarding management companies
- Sect 1, Conditions for taking up business; Sect 2, Relations with third countries; Sect 3, Operating conditions; Sect 4, Freedom of establishment and freedom to provide services
- Ch IV, Obligations regarding the depositary
- Ch V, Obligations regarding investment companies
- Sect 1, Conditions for taking up business; Sect 2, Operating conditions; Sect 3, Obligations regarding the depositary
- Ch VI, Mergers of UCITS
- Sect 1, Principle, authorisation and approval; Sect 2, Third party control, information of unit-holders and other rights of unit-holders; Sect 3, Costs and entry into effect
- Ch VII, Obligations concerning the investment policies of UCITS
- Ch VIII, Master-Feeder Structures
- Sect 1, Scope and approval; Sect 2, Common provisions for feeder UCITS and master UCITS; Sect 3 Depositaries and auditors; Sect 4, Compulsory information and marketing communications by the feeder UCITS; Sect 5, Conversion of existing UCITS into feeder UCITS and change of master UCITS; Sect 6, Obligations and competent authorities
- Ch IX, Obligations concerning information to be provided to investors
- Sect 1, Publication of a prospectus and periodical reports; Sect 2, Publication of other information; Sect 3, Key investor information
- Ch X, General obligations of UCITS
- Ch XI Special provisions applicable to UCITS which market their units in other member states
- Ch XII, Provisions concerning the authorities responsible for authorisation and supervision
- Ch XIII, Delegated acts and powers of execution
- Ch XI, Derogations, transitional and final provisions
Year in Review – Luxembourg Law in 2016
* Solvency II: Solvency II, establishing a new EEA-wide capital adequacy and risk management regime for insurers and reinsurers, came into force on 1 January. It was implemented by the law of 7 December 2015 which repealed the law of 6 December 1991 on the insurance sector.
*Securities Financing Transactions Regulation: In January, EU Regulation 2015/2365 aiming to increase the transparency of shadow banking activities came into force. Read more here and here…
A more robust Luxembourg framework for financial services: In February, the Parliament adopted an omnibus law which among others (i) designates competent authorities under EU Regulation 648/2012 (EMIR) and EU Regulation 260/2012 (SEPA), (ii) introduces TARGET2 – Securities rules into Luxembourg law, and (iii) implements the general principle against over reliance on credit ratings provided for in Directive 2013/14/EU. Read more…
New transparency measures: In April, the law on transparency requirements for issuers was amended. Read more…
UCITS V: In May, the law implementing the UCITS Directive 2014/91/EU on depositary functions, remuneration policies and sanctions was adopted. The law also aligns the depositary regime of Part II funds which are managed by an alternative investment fund manager under the UCITS regime. Read more here and here…
Reform of the Luxembourg Register of Commerce and Companies: On 1 June, the law relating to the reform of the legal publication regime came into force. Read more…
*EMIR: The phase-in of mandatory clearing for certain classes of OTC derivatives between relevant counterparties commenced in June.
Equal treatment: In June, the legislator expanded the principle of non-discrimination by providing that any discrimination based on gender reassignment qualifies as sex discrimination. Read more…
*Benchmark Regulation: In response to the LIBOR and EURIBOR scandal, the EU Benchmark Regulation was adopted in June. The Regulation establishes a uniform EU control framework for determining benchmarks.
Criminal records: In July, the Luxembourg legislator brought major changes to the existing legal provisions relating to the criminal records impacting employers.
New audit law: In July, the law on the audit profession was replaced by the law of 23 July 2016 implementing Directive 2014/56/EU and adopting certain national measures in connection with EU Regulation 537/2014.
*New EU Market Abuse Regulation: In July, MAR introduced new rules on market abuse, market soundings, investment recommendations, disclosure of inside information, insider lists and dealings by senior managers and many procedural requirements. Read more here and here…
RAIF: In July, the long-awaited Reserved Alternative Investment Fund was added to the Luxembourg toolbox. The RAIF is a new flexible investment fund vehicle similar to a Specialised Investment Fund (“SIF”) but not supervised by the financial regulator (“CSSF”) which offers new tax structuring opportunities for private equity investments. It is taxable like a SIF unless it develops the activities of a SICAR (société d’investissement en capital à risque), in which case it is taxable as a SICAR. Read more…
Reform of company law: Effective as of 23 August, the reform intended to create a more flexible company law (by implementing changes to the existing types of companies, and creating a new legal form, the SAS) and confirm rules regarding previously generally accepted practices of the Luxembourg market. Read more…
*Legal Entity Identifier (LEI): In September, Commission Delegated Regulation (EU) 2016/1437 came into force. Issuers of securities subject to Directive 2004/109/EC on transparency requirements need to apply to obtain a LEI code by 1 January 2017. Read more...
Out-of-court resolution of complaints: In November, CSSF Regulation 16-07 was published. It replaced CSSF Regulation 13-02 and details (i) the out-of-court resolution procedure against entities supervised by the CSSF (banks, regulated funds, professionals of the financial sector) and (ii) new disclosure requirements.
Parental leave: In November, the law amending the parental leave regime was adopted. It provides for more flexibility and aims to improve work and family life balance.
*Recovery and resolution of central counterparties: In November, the European Commission published a proposal for a Regulation on the recovery and resolution of central counterparties.
*Banking Union Reform Package: On 23 November, the European Commission published the Banking Union Reform Package, amending the Capital Requirements Directive, the Capital Requirements Regulation, the Bank Recovery and Resolution Directive and the Single Resolution Mechanism Regulation. The proposals aim to address any remaining post-crisis challenges to financial stability, including the implementation of agreed global standards. The proposals will come into force in 2019 at the earliest.
Social impact company: Adopted on 23 November, the law on the “société d’impact sociétal” intends to support and facilitate entrepreneurs with a social objective who wish to engage in commercial activities. The bill does not, however, introduce a new form of company.
Credit agreement relating to residential immovable property: The law of 23 December implements Directive 2014/17/EU and aims to provide high level protection to consumers. Furthermore, the CSSF has been appointed to ensure the supervision of credit intermediaries which are now subject to professional requirements. The new provisions will be incorporated in the Consumer Code. Read more…
*PRIIPs: In December, the application date of Regulation 1286/2014 on key information documents for packaged retail and insurance-based investment products was postponed by 12 months. The new pre-contractual disclosure in relation to PRIIPs will now apply from 1 January 2018.
Working time: On 23 December, the law on the organisation of working time amending the Labour Code was adopted.
AEOI - CRS: Luxembourg has started to apply the Common Reporting Standard (“CRS”) to automatically exchange financial information with EU Member States and jurisdictions which have signed the Multilateral Competent Authority Agreement (“MCAA”). Luxembourg financial institutions are required to set up due diligence procedures and report on an annual basis certain financial information to the Luxembourg tax administration.
AEOI - Tax rulings: Throughout 2016, the Luxembourg tax administration has collected information on advance pricing agreements and cross-border tax rulings (“Rulings”) issued, modified or renewed as from 2012 and still in force as in 2014, so as to automatically exchange that information with EU Member States as well as countries that have signed the MCAA. Standard information will be exchanged based on a summary table, but foreign tax administrations may request a copy of the actual Ruling.
Minimum tax: The minimum corporate income tax was replaced by a minimum net wealth tax as from 2016.
*New Trade Secrets Directive: 2016 saw the entry into force of the new EU Trade Secrets Directive, designed to harmonise the treatment of confidential information across the EU. The implementation deadline for all EU Member States is June 2018. Read more…
Participation exemption regime: From 2016, Luxembourg introduced provisions dealing with hybrid instrument mismatches into its participation exemption regime in order to tax otherwise exempt income, to the extent the latter was deductible at the level of the subsidiary. Luxembourg also introduced a minimal General Anti-Abuse Rule (GAAR). Whereas both provisions currently only apply in an EU context, it is contemplated to extend its scope to non-EU countries.
*Proposed Directive on preventative restructuring frameworks: The proposed Directive would place greater emphasis on corporate rescue and reduce the ability of shareholders and creditors to obstruct the adoption of restructuring plans of a viable business.
The Luxembourg Green Exchange (“LGX”): The Luxembourg Stock Exchange launched a new platform dedicated to green securities. The LGX is not a new market however, a security must be listed on either the regulated market Bourse de Luxembourg or the EuroMTF to join it. Read more…
Year to come – Luxembourg Law in 2017
* AIFMD Review: In 2017, there are plans to review the EU Alternative Investment Funds Managers Directive.
Amendments to Part II fund, SIF and SICAR laws: Draft law 6936 mainly aims to (i) allow the CSSF to issue a regulation that would restrict the eligible assets of a SIF which offers its units/shares to investors which do not qualify as professionals under MiFID II (ii) allow Part II funds, under certain conditions, to issue units/shares at a different price than their net asset value, and (iii) update the SICAR law to align its provisions with the SIF law.
*Anti-Money Laundering IV: Directive (EU) 2015/849 must be implemented in all Member States by 26 June 2017. The main provisions relate to (i) consumer due diligence measures with exemptions applicable to electronic money products, (ii) storage of information on beneficial ownership in a central register accessible to any person that can demonstrate a legitimate interest, (iii) a requirement to establish Financial Intelligence Units, (iv) risk assessment reports at the Union level and at the national level and policy applicable to high risks third countries, (v) new obligations applicable to gambling services, and (vi) sanctions.
CbCR: Multinational groups of companies realising a turnover exceeding €750m must, on a yearly basis, report certain financial and operative information (turnover, EBITDA, tax paid and owed, number of employees, amount of share capital, retained earnings, tangible assets, type of activities performed) to the tax administration of the jurisdictions where the group performs activities. Read more...
2017 corporate tax reform: Aside from a decrease of the aggregate income tax rate for corporations to 27.08% (in 2017) and thereafter to 26.01% (in 2018), and an increase of the flat minimum net wealth tax for Soparfis to EUR 4,815, the bill introduces a limitation on the ability to carry forward tax losses to 17 years. Read more...
*Data transfers under scrutiny: The EU-U.S. Privacy Shield has been adopted to replace the U.S. Safe Habor scheme, but is already being challenged in the CJEU. The Irish High Court is also expected to refer a challenge in relation to the use of Model Contracts to the CJEU in early 2017. Both decisions could have serious implications for cross-border data transfers.
*EAPO Regulation: On 18 January 2017, the European Account Preservation Order Regulation will come into force, establishing a new, alternative remedy for a creditor to prevent the transfer or withdrawal of his debtor's assets in any bank account located in the European Union. Read more…
*EMIR: EMIR will continue to be phased in during 2017, particularly as to margin requirements and mandatory clearing. The European Commission is expected to review EMIR in 2017. Changes are likely on streamlining of reporting, ensuring the regulatory burden imposed by EMIR is proportionate for different types of entities and to address difficulties in accessing clearing for non-financial counterparties and small financial counterparties. It may also make permanent the temporary exemption from mandatory clearing for pensions funds. Reforms are also expected on the recovery and resolution of central counterparties.
Equal pay for men and women: Draft law 6611 intends to introduce equal pay for men and women.
*European data protection reform: The General Data Protection Regulation will apply in all Member States from May 2018. This is the biggest reform of European data protection laws in 20 years with fines of up to 4% of annual worldwide turnover. Read more here and here.
*EU Member States’ changing political landscape: In 2017, further changes to the political landscape in Europe are expected, including parliamentary elections in the Netherlands, Germany, Italy (possibly), as well as presidential elections in France. These developments will impact not only the adoption of concrete EU legislative proposals, but also the negotiations on the UK’s exit from the EU.
*EU Shareholder Rights Directive: The Shareholder Rights Directive is expected to be adopted in the first quarter of 2017.
Finance Bill - Transfer pricing: As from 1 January, the Luxembourg transfer pricing legislation has been modernised by adopting a new article 56bis, in line with recent OECD BEPS guidelines emphasising the importance of the comparability analysis. Read more...
Increase of the minimum wage and new salary index: Read more…
*Insolvency regulation: The new Insolvency Regulation will apply from 26 June. It will apply to pre-insolvency rescue proceedings to ensure their recognition across the EU and avoid unnecessary liquidations. It also provides for a new group co-ordination proceeding. The provisions on national insolvency registers and a decentralised system for their interconnection will however not apply before 2018 and 2019. Read more…
Law on non-financial reporting: Implementing Directive 2014/95/EU, the law of 23 July 2016 will impact reporting for accounting years starting as of 1 January 2017. It applies to large undertakings qualifying as public-interest companies (PIEs) which must include in their annual report a non-financial statement containing information relating to, among others, environmental, social, employee, respect for human rights, and anti-bribery matters.
*MMF Regulation: In the first quarter of 2017, the EU regulation establishing a new framework for Money Market Funds should be adopted.
*MiFID II: The remaining delegated acts and technical standards for MiFID II and MiFIR are to be published in the Official Journal. In addition, final guidelines and questions and answers are expected from ESMA.
Non-profit associations and foundations: Draft law 6054 on non-profit associations and foundations aims to modernise the current legal framework, which dates back to 1928.
Omnibus law on the financial sector: Draft law 7024 introduces national measures in relation to EU Regulation 2015/751 on interchange fees for card-based payment transactions and amends (i) article 41 of the law on the financial sector to (a) expand the professional secrecy in the context of resolution, reorganisation and winding up measures and (b) exempt from the professional secrecy obligation, communications of confidential information in the context of intra-group outsourcing; (ii) the law on financial collateral arrangements to clarify the priority of resolution or write down measures taken in compliance with the law of 18 December 2015 or, as the case may be similar laws implementing Directive 2014/59/EU (BRRD) over financial collateral arrangements; (iii) article 83(3) of the law on Undertaking for Collective Investments to clarify the depositary regime of Part II funds.
Parental leaves: Draft law 7060 intends to modernise existing parental leaves by amending provisions on leave for personal reasons, postnatal leave and leave for family reasons.
Patrimonial foundations: Draft law 6595 intends to introduce a new wealth management vehicle in the form of a private foundation with an attractive tax regime.
Posting of workers: Draft law 6989 aims to update provisions on posted workers in the framework of the provisions of services and strengthen the cooperation with the competent authorities.
Pre-retirement: Draft law 6844 aims to propose pre-retirement benefits until the age of 60.
Protection of employee’s rights: Draft law 7086 aims to provide better protection of employee’s rights and improve reemployment measures through financial incentives.
Protection of enterprises and modernisation of bankruptcy law: Draft law 6539 aims to reform the current legal framework by (i) providing conservatory measures and legal instruments to prevent financially distressed companies from being declared bankrupt should their financial problems be detected at an early stage and (ii) favouring turnaround options rather than liquidation of distressed companies.
Redundancy on economic grounds: Draft law 6086 aims to introduce various provisions to prevent wrongful dismissal on economic grounds.
Relibi tax: The 10% withholding tax on interest paid by Luxembourg paying agents to Luxembourg resident individual beneficial owners will increase to 20%.
Simplified private limited liability company: On 16 January 2017, the law of 23 July 2016 creating the société à responsabilité limitée simplifiée (“SARL-S”) will come into force. This law intends to stimulate entrepreneurship particularly by reducing the costs and process linked to incorporation.
VAT on directors’ fees: From 2017, the provision of directors’ services will be considered an economic activity for Luxembourg VAT purposes, conferring directors the status of taxable persons. Directors’ services rendered in Luxembourg trigger a 17% VAT (unless exemptions apply). Discussions are currently pending with respect to the application of the circular.