Latest legal changes to Luxembourg business environment

Luxembourg just modified its business environment before the Summer by adopting the 2 following laws :

 – The Law of 10 August 2016 modernizing Luxembourg Company Law (The “New Company Law”) and

- The Law of 23 July 2016 introducing the Reserved Alternative Investment Fund (the “Law on RAIF”)

1)  The Law of 10 August 2016 modernizing Luxembourg Company Law

 The New Company Law provides for a complete modernisation of the Company Law. It followed a pragmatic approach for to the contractual freedom of the parties, while ensuring a high degree of legal certainty for all of the players involved.

 Besides the changes for the already existing rules, a new corporate form, the SAS (société par actions simplifiée), was added to the existing corporate vehicle toolbox.

 The New Company Law shall ensure that Luxembourg continues to offer flexible structuring options for foreign as well as domestic investors.

 Some of the Key changes to the Luxembourg Company Law of 10 August 1915 include the following:

I.  Financing instruments and shareholders’ financial rights

 Possibility for the company to issue tracking shares,

  • The possibility for the board of directors to allocate free shares to employees and corporate officers of related companies, subject to certain requirements,
  • Possibility to issue shares below par value in SA (under specific conditions),
  • Possibility for capital increases by the management of a SARL (under specific conditions).
  • Possibility for share redemptions in SARLs,
  • Possibility to issue beneficiary units in SARL to a determined person (if foreseen in the articles of association),
  • Ability to distribute interim dividends in the SARL.

 II. Voting rights

 Abolishment of the requirement that all shares are of equal value,

  • Introduction of a new regime for non-voting shares in SA,
  • Voting agreements / ability of a shareholder to waive in full or in part its voting rights,
  • Suspension of voting rights of a shareholder defaulting on a financial or non-financial undertaking or obligation.

 III. Share transfers

  • Share transfers in SARL: reduction of the ¾ consent threshold  to ½ of the shares to non-shareholders (if provided by the articles),
  • Transfers of shares made in breach of the articles of association are null and void,
  • Possibility for Lock-up provisions.

IV. Management

  • Introduction of executive committee or chief executive officer as a new corporate body,
  • Introduction of the possibility for the management body to establish committees with specific duties,
  • general directors in SA are recognized as statutory corporate bodies (to which management and representation powers may be delegated within specific limits),
  • Introduction of new Conflict of interest rules

V. General meeting of shareholders

  • Right of action against the management introduced for minority shareholders (10%),
  • Attendance list for all types of general meetings becomes mandatory,
  • Rules regarding convening, holding and attendance at board meetings and shareholders’ general meetings are simplified,
  • Possibility to provide that voting rights are proportional to the share capital represented by the share,
  • Maximum number of shareholders in the SARL is increased from 40 to 100,
  • Prorogation of general meeting by shareholders representing 10 % of the share capital,
  • General meetings held via videoconference or other telecommunications means are deemed to be held at the registered office of the company.

VI. Changes to all form of companies

  • The possibility to issue public bonds and convertible instruments,
  • The creation of an usufruct regime,
  • The enhancement of the conversion possibilities between the various form of companies,
  • The implementation of a nullity regime regarding certain shareholders resolutions,
  • Introduction of a new regime on nullity of decisions taken by general meetings
  • Simplified liquidation (i.e. dissolution without liquidation) for companies with a sole shareholder.

VII.  Introduction of the simplified stock company (société par actions simplifiée or SAS)

Inspired by French law and is defined as a company whose capital is divided into shares, incorporated by one or several persons contributing a specific amount

  • Rules applicable to the SA are generally applicable to the SAS, except for the provisions concerning management and general meetings which shall be set out in the articles of association and may thus be more flexible
  • Shares may not be issued to the public and the management of an SAS is entrusted to a president or several directors
  • Transfers of shares made in breach of the articles of association are null and void

  The new regime will be immediately applicable to all companies incorporated after its entry into force and existing companies will have 24 months to adapt their articles of association as of the day the New Company Law becomes effective.

2) The Law of 23 July 2016 introducing the Reserved Alternative Investment Fund (the “Law on RAIF”)

I. Removal of the double layer of supervision

The main difference with the existing investment fund vehicles lies in the fact that the RAIF will not be subject to supervision by the Luxembourg supervisory authority (the CSSF) or any other Luxembourg authority for that matter. Once the RAIF Law enters into force, it will be possible to launch an alternative investment vehicle without the need to obtain any prior  regulatory approval, hence substantially accelerating the launching process.

The rationale behind this partial deregulation is, according to the Bill, the fact that the RAIF shall be managed by an alternative investment fund manager (“AIFM”), who is already underlying the supervisory obligation and which shall be underlying increased liability to compensate the absence of regulatory supervision.

Indeed, directive 2011/61/EU of the European Parliament and the Council of 8 June 2011 on Alternative Investment Fund Managers (the “AIFMD”) introduced an adequate supervision of funds managers (“Management supervision”) rather than the investment vehicles themselves (“Product supervision”). AIFMD was introduced in the Luxembourg system by Law of 12 July 2013 (the “AIFM Law”). The continuous success of the recently modernized common limited partnership (société en commandite simple (the “SCS”) and the introduction of the special limited partnership (société en commandite spéciale (the “SCSp”) into Luxembourg Law showed that the industry preferred speed to market and structuring flexibility over Product Supervision.

Considering the Investment fund Managers are already supervised and considering the investors that will be targeted by this new product, the obligation to supervise the RAIF “on top” seemed unnecessary.

II. Eligible investors

The RAIF targets sophisticated investors, namely:

  • Institutional investors
  • Professional investors
  • Qualified investors (self-certification obligation or recommendation from a credit institution or any other professional of the financial sector or a management company and minimum investment of EUR 125,000)

III. Appointment of a duly authorized alternative investment fund manager

The RAIF shall be restricted for the structuring of funds that appoint a duly authorised (Luxembourg or EU Member State and, in certain cases, outside the EU) AIFM. The RAIF will be managed and monitored by AIFM’s subject to the supervision of their competent national authority.

The AIFM shall:

  • be authorised to act as AIFM of funds pursuing the relevant investment strategy ; and
  • if the AIFM is established in another EU Member State: have complied with its obligations to provide management services in Luxembourg.

IV. Other required service providers

The RAIF will be required to:

  • - deposit its assets with a Luxembourg based depositary
  • - appoint an independent approved Luxembourg auditor with appropriate professional experience
  • - have its registered office and central administration in Luxembourg

Although the RAIF may undertake administrative functions itself, often these functions are entrusted to a specialized Luxembourg service provider (a central administration agent).

 V. Type of structure of the RAIF

Just like the SIF and the SICAR, the RAIF may be established, among others, as:

-a common fund (fonds commun de placement, FCP); or

- an investment company with variable capital (SICAV) in various forms (public limited liability company (SA), private limited liability company (SARL), cooperative organized as a public limited company (SCOSA), a corporate partnership limited by shares (SCA) a SCS or an SCSP.

- any other form, including but not limited to corporate entities as foreseen by the Law of 10 August 1915 on commercial companies.

The corporate minimum requirements depend on the legal form which has been chosen, however the minimum net assets shall be of EUR 1,250,000 within 12 months as of the launch.

The RAIF, depending on the type of structure, benefits of different forms of contribution to the capital (contribution in cash, contribution in find, to a certain extent, capital commitments).

VI. Umbrella structures

 Among the other major changes, the RAIF will introduce the possibility for umbrella structures to non-regulated funds.

This shall enable the RAIF to launch from time to time ring-fenced compartments, each compartment corresponding to a distinct part of the assets and liabilities of the RAIF.

Each compartment can display specific features set out in the RAIF’s issue document.

VII. Tax regime

The RAIF does not introduce a new tax regime but gives the option for two tested and well-functioning tax regimes.

RAIFs will either be subject to:

  1. i) General tax regime (exemption from corporate income or other taxes in Luxembourg, except for a subscription tax (taxe d’abonnement) on their net assets at a rate of 0.01% p.a. (with various exemptions). This subscription tax will also apply to RAIFs established as an SCS or an SCSp (unless they opt for the special tax regime referred to under ii) below).
  2. ii) Optional tax regime applicable to the SICAR (fully subject to tax except for qualifying risk capital income and gains). This option also allows access to the benefit of double tax treaties).

RAIFs opting for this tax regime will further be exempt from net wealth tax, except for a minimum net wealth (in general, the amount of the minimum net wealth tax would be EUR 3,210 p.a. for RAIFs holding 90% or more fixed financial assets, transferable securities and cash).

In order to benefit from this optional tax regime, among others, the constitutive documents of a RAIF will have to foresee that its exclusive object consists of the investment in “risk capital” (the Bill refers to CSSF Circular 07/309 as regards diversification requirements).

The auditors of a RAIF that has opted for regime ii) will have to establish a report at the end of each financial year certifying that the RAIF has effectively invested in risk capital over the relevant period. This report will be communicated to the Luxembourg direct tax administration (Administration des Contributions Directes).