AGEFI Luxembourg - septembre 2023

AGEFI Luxembourg 18 Septembre 2023 Fonds d’investissement By Luis MUÑOZ, Partner & Matteo POGLIANI, SeniorAssociate, DLAPiper Luxembourg A t the end of July, the law on the modernisation of the fund toolbox was adopted in Luxembourg, increa- sing the competitiveness of the largest investment fund hub in Europe. The market has welco- med the changes and the Luxem- bourg government has shown the desire to maintain the attractive- ness of the country in the invest- ment fund sector. However, no major changes in the do- mestic tax framework have been imple- mented recently to make Luxembourg a more competitive financial centre. On the contrary, the transposition of the most recent EuropeanUnion tax related Directives (e.g. the Anti-Tax Avoidance Directives 1 and 2, or the Mandatory Disclosure Rules Directive) have intro- ducedmore compliance and anti-abuse rules, making the tax environment ex- tremely complex to navigate. The alternative investment fund (AIF) market is growing andLuxembourg of- fers everything players need to dis- tribute their funds across Europe thanks to themarketingpassport introducedby theAlternative Investment Fund Direc- tive. Common AIF structures estab- lished inLuxembourg generally involve settingupaLuxembourgAIFvehicle ac- quiring or investing into illiquid assets through a Luxembourg holding plat- form. Proceeds derived fromthe under- lying investments are repatriatedup the chain to investors in the Luxembourg AIF looking for an appropriated return. At the level of the top Luxembourg holding company, proceeds derived from the underlying investment could potentially be up-streamed to the Lux- embourg AIF through profit distribu- tions. These are in principle subject to withholding tax at 15% levied at the level of the payer entity. But the with- holding tax rate can be reduced – even to zero – if the conditions of the Luxem- bourgdomesticwithholding tax exemp- tion are met or provisions of relevant double tax treaties are applicable. Other European countries also have favourable tax provisions covering profit distributions made to their re- spective local investment funds. For ex- ample, as a general rule and subject to the fulfilment of certain conditions, dis- tributions made by an Italian holding company to an Italian qualifying AIF are exempt from withholding tax. It’s the same in Portugal and France subject to specific conditions being met. For Spanish tax opaque funds qualify- ing as collective investment undertak- ings, profit distributions are in principle subject to 19% withholding tax. But there’s a potential 18%recovery ofwith- holding tax available provided certain conditions being met (leading to an ef- fective rate of 1%). Some of these tax benefits have been extended to compa- rable foreign funds following recent ju- risprudence of theCourt of Justice of the European Union endorsing the free movement of capital. (1) Notwithstanding the relevance of the investment fund industry, Luxem- bourg does not have any provisions for the relief of withholding taxes on dis- tributions to AIFs beyond the afore- mentioned. And these are subject to conditions difficult to achieve in anAIF context considering the plurality of in- vestors involved. This encourages the use of debt funding (against the cur- rent efforts of the EU Commission in the framework of the EU DEBRA Di- rective to achieve a level playing field on debt-equity) and alphabet shares, where buy-backs of a class of shares are, in principle, not subject to with- holding tax. These alternative capital structures are not without drawbacks. In the case of debt funding, appropriate transfer pric- ing documentation should be put in place to support the arm’s length char- acter of the interest rates and indebted- ness, mitigating the risk of requalification.And in the case of alpha- bet shares, their efficiency is not risk- free, considering that their source is administrative practice as opposed to a specific provision in the law. How this mechanism functions has been questioned in recent cases issued by the administrative courts of Luxem- bourg following challenges from the Luxembourg tax authorities. Provisions providing for specific with- holding tax relief on distributions to AIFs have long been requested by the Luxembourg investment fund industry. However, considering i) recent ECJ cases have de facto approved the ade- quacy of favourable tax provisions in other EU Member States, ii) the chal- lenges that come with alternative repa- triation mechanisms and iii) the rise of new competitors on the market for holding structures in the AIF space, such as the UK with its qualified asset holding company (QAHC) regime, now! may very well be the time to take said requests into account. 1) See ECJ Case C-545/19, 17 March 2022 and ECJ, Case C-537/20, 27 April 2023. Withholding tax on profit distributions to alternative investment funds: a necessary evolution T he annual Luxembourg For Family Office event celebrated its 10th anni- versary as part of theGlobal Series focusing on FamilyOffice, considered theRolls Royce of Family&Wealth management. This event introduced New Risks and a NewAwarenessforFamilyOffices:Invest- ing in Tangible Assets; Family Office Cli- mate Change & Uncorrelated Investments ; TheWorldwideRise of FamilyOffices ; The European Family Office Alliance, Swiss Familyconference:ZurichChap- ter ; Philanthropy & Art ; Philan- thropy&Sustainability;Philanthropy & Entrepreneurship ; The Family Of- fice Investment Club; Seizing the Op- portunities For Family Office in Luxembourg; Chinese Families in Lux- embourg; The SForum (The Single Family Office Forum); TwoGoldenDays toNetwork. The event was held the 28 th and 29 th of June at Belen- haff Junglinster inLuxembourg. The President high- lightsthat Luxembourgcontinuestohouseapoolof highly skilled experts across various functions withintheFamilyOffice(SingleandMultiFO)sec- tor ina central financial hubboastingbothpolitical andeconomicstability .Theassociationhasbuiltsince 2010 an international ecosystem by founding a con- sortium through the European FamilyAlliance as a platform for collaboration and sharing knowledge and co-investment opportunities. Through Families forFamilies ,theypromotecollaborationamongFam- ilyOffices and emphasise the importance of families helping eachother and sharing their insights. The Family Office has come a long way from its humblebeginning inthe15 th centurywherewealthy merchantsestablished privateoffices tomanagetheir wealth and ensure its continuity for future genera- tions.OvertimeFamilyOfficeshaveevolvedfroman administrative function to nowadays sophisticated entities not just managing but also addressingmulti- facetedneedsofwealthyfamilies.Asthedynamicsof the family and their wealth evolve the family office will continue to adopt ensuring its relevance for up- coming generations.A Single orMulti FamilyOffice differs from traditional wealth management firms. Theyoffercomprehensivesolutionstomanagethefi- nancial,tax,legalandpersonalaffairsofafamily.The FOoperatesforeachfamilyinauniqueway,inacon- text that respect their values, vision andmission. Theevolutionofservicesofferedishugetoday , from investmentmanagement,assetallocation,riskman- agement, portfolio oversight, alternative invest- ments including private equity and hedge funds, estate planning, ensuring wealth transferacrossgenerations,taxser- vices, tax planning, compliance, mitigation strategies, philan- thropy, managing charitable giving and foundations, real estate management, oversee- ing family properties and in- vestments with real estate funds or portfolios, legal af- fairs coordination, working with legal experts on matters liketrusts,estatesandbusiness ventures, lifestyle manage- ment, concierge services, travel arrangements and personal security. We see trends in the Family Office world like digital transformation with fintech solutions,sustainableinvestingwith agrowingemphasis onenvironmen- tal, social, and corporate governance (ESG) and impactinvesting. Directinvesting isincreasinginpri- vatecompaniesandstartupsasalsoco-investingclub deals where families collaborate together with other ones in larger deals. But overall challenges are the evolvingfinancialregulations,successionplanningto ensure continuity and smooth transitions across NextGen. Cybersecurity , as they have to implement robust measures to protect sensitive data from breaches and cyberattacks. And finally managing theirwealthinanincreasinglycomplexgloballand- scapewithgeopolitical risks today. Last but not least family governance, as research still shows that less than 15% of the wealthy succeed in transmitting theirwealth to theNextGen over 3 gen- erations, is very crucial! An economic global overview was given by Yann Robbiola, CEOof LSAdvisors : he gave hismacroe- conomicviewsandthebestassetallocationtoachieve thehighestdegreeofdiversificationinthecurrenten- vironment. We often hear “ Don’t fight the Fed ” as a mantra in the finance industry. However, this is clearly what investors are currently planning. Con- trary towhat the Fedhas been selling as itsmain sce- nario, markets are pricing what the Fed has done raising rates andwill cut by 2%next year. SamescenarioinEuropewith1%cutbytheEuropean Central Bank. The credit cycledownturnshouldcon- tinue as the cost of capital and stress in the banking segment rises. The recession is still ahead of us and Family Offices should be cognisant of the fact that everyrecessionoverthepast90yearshasledtoamar- ketcrash.FOsshouldnoteliminatetailriskswhichare related to ample central bank liquidity and a resilient labour market which renders policy tightening inef- fective. Diversification is key and the discussion was centredaroundsovereignbondsandstructuredprod- ucts for defensive plays, aswell as the opportunity to investinnewprivatedebt(bridgeloans)ortore-enter the real estatemarket by early 2024. ‘SkyHighExcellencebyFractionedOwnership’ was presented by The North Sea Aviation Centre (Erik Vermeersch) and Luxaviation (Nicolas Kroll and FelixDeWinter) . Families andprivate aviation, par- ticularly private jets, have a unique relationship. Pri- vate jets offer several advantages for families, such as convenience, comfort, and a high level of privacy, al- lowing families to conduct meetings, relax, or spend qualitytimetogether.Buttheyalsocomewithsignifi- cant costs and considerations and have to comply withaviationregulations,includingcustomsandim- migration requirements. That is where NSAC and Luxaviationcomeintothepictureasbusinessaviation and take care of the families.What struck themost in the interactions with Family Offices was the shared pursuit of perfection and the importance of in-depth trustbetweenthemandourselveswithanoperational excellence toprovide the highest comfort and safety. Inaworldwheretimeandtrustareessential,thesyn- ergybetweenFamilyOffices andbusiness aviation is apowerful combination. This event provideda valu- ableopportunitytoexploreandenhancethissynergy. A very bespoken subject is the Bitcoin and LFFO in- vited two speakers andearly investors bespoke , it’s a riskyinvestmentandtheoppositethatit’sveryrisky NOT tobe invested inBitcoin : Some see the 2030price of Bitcoin lower thana single euro, and some see it northof half amillion, this fight drives Bitcoin’s extreme volatility. Yves Choueifaty, TOBAM’sCEO discussed theunreasonablepassion around Bitcoin, an easy parallel with the emergence of the internet. He exposed its investment thesis for Bitcoin,fromfundamentalandempiricalperspectives, andhowandwhyBitcoinhasthepotentialtobecome anewstandardof value. Bitcoin is anextremely risky asset. However, this is never a rational reason not to consider investing in an asset. Risk is only relevant in the context of sizing the investment, not for the investmentcaseitself .Heisthefirstassetmanagerto havelaunchedafundinvestedinBitcoinandexposed his views on the crypto-currency and why it makes sense froma diversificationperspective. Bitcoin, a new hope! presented by Navid Saberin, founderofLiberlandandTheLiberlandNextGen- eration Fund . The pioneering digital monetary net- work, is an immaculate creation, aflawless systemof valuethathasbestoweduponhumanitythefirsttruly decentralized, unchangeable, and incorruptible store of wealth. In a world besieged by inflationary pres- sures and fiscal irresponsibility, Bitcoin stands tall as theultimatehedgeagainstcurrencydevaluation,pro- vidingindividualsandinstitutionsalikewiththerare opportunitytopreserveandgrowtheircapitalacross time. Its elegant design, governed by mathematical certainty, ensures a fixed supply of 21 million coins, shielding it fromthe pitfalls of traditional fiat curren- cies.Asweembracethismonetaryrevolution, Bitcoin holdsthepotentialtorewritethefinancialnarrative, empowering billions around the globe to secure their financial destiny and embark on a new era of prosperity and economic freedom . Conclusion: it’s very riskynot tobe invested inBitcoin! Alternatives: Not being fashionable is rewarding . Frédéric Goblet, partner at Ascot Investments highlighted several crucial points regarding invest- ment opportunities and the limitations of the tradi- tional financial industry in the face of uncertainty, emphasizing that relying on historical data and probability distributions from past events may not be sufficient in today’s rapidly changingworld. The scope andpace of change are unprecedented, ques- tioning the accuracy of such assumptions. Tonavigateuncertainenvironmentswithout a crys- tal ball, he suggested focusing on long-lasting themes with higher probability, such as demogra- phy, aging population. These themes can guide in- vestment decisions effectively.Heunderscored that risk isnot necessarilyhigher innewventures; rather, it signifies theunknown. Byunderstandingvarious risk premiums, including complexity, we can un- lock a plethora of opportunities. This realization opens up abundant opportunities that big financial institutions often overlook. Renaud Graas and Gabriel Amar (Van Campen Liem) were providing an overview of the Luxem- bourg investment vehicles available for FamilyOf- fices (RAIF, SIF, SICAR, SCS & SCSp, SOPARFI or even SPF) with a key focus on regulations and tax. Luxembourg is offeringawide rangeof vehicles able to accommodate any type of project (for example opaque,transparent,regulated,lightlyregulated,un- regulated,subjecttotaxorderogatorytaxregime,GP- LP type vs. “standard” corporate, etc.). Theuseofaspecificvehiclewill,ofcourse,bedictated byseveralcriteriasuchasdeal-by-dealtypevehiclevs. «blindpool»vehicle,AIFvsnon-AIFaswellastaxand corporate governance. The cost component of any of these vehicles will have to be considered beforehand ensuring that theFamilyOfficewill not jeopardize its returns and track record. In a nutshell, Luxembourg iswell-equippedtodealwithanytypeofproject that a family officemay envisage. The event was closedwith a network dining cocktail with the successfulWonder Fair. Diana DIELS President, Luxembourg For Family Office The 10-year celebration of Luxembourg For Family Office TheWorldwide Rise of Family Offices, a succes story