ATOZ Insights and Taxand Intelligence April 2014

Spring is a time of renewal. In April 2014, Prime Minister, Mr Xavier Bettel, gave the traditional and much awaited state of the nation speech. He stated that renewal is necessary to maintain sound budgetary positions. Significant loss in revenue is expected in 2015 with the change in the VAT e-commerce regime. As a reaction, the standard VAT rate will be increased as of January 1st 2015 from 15% to 17%, still the lowest rate within the European Union. The Prime Minister announced a renewal of the global Luxembourg tax system towards more simplicity and efficiency as from 2017. He confirmed that Luxembourg will continue to renew its financial centre, with a view to expand its opening to Islamic investment funds and Renminbi businesses. Renewal does not only imply agreeing with new international standards but ensuring that they are, in practice, effectively applied. The Prime Minister will ensure that Luxembourg pursues its efforts in regards to exchange of information, be it automatic or upon request. Unimpeachable reputation is the best marketing tool, said the Prime Minister.

Renewal also occurs at the international level. The global tax environment is changing substantially. This change is reflected in the actions of the OECD against treaty abuse and hybrid mismatches. The European Union passes on these new international norms, with the recent amendment to the EU Parent Subsidiary Directive neutralizing the effects of hybrid instruments.

Finally, the Luxembourg supervisory authority of the financial sector (CSSF) keeps on showing awareness in the specific issues encountered by the financial centre and released once again an updated FAQ on AIFMs to clarify reporting rules, while adding some obligations to the authorization application.

We hope you will enjoy this issue and that our insights will help you get your bearings in this atmosphere of renewal.

The Atoz Insights Editorial Team 

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SUMMARY

TAX NEWS

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EU Parent-Subsidiary Directive amended to stop the use of hybrid instruments

As reported previously, the European Commission has proposed to amend the EU Parent-Subsidiary Directive (2011/96/EU) by the end of November 2013 so as, according to the European Commission, to significantly reduce tax avoidance in the EU. The Proposal which aims at updating the anti-abuse provisions of the Directive and making sure that hybrid loan arrangements will no longer benefit from tax exemptions in future has now been signed by the EU Member States and the amended Directive has to be implemented by the EU Member States by the end of 2014 at the latest.

Dividend exemption no longer applicable in case of hybrid instrument

The first amendment deals with so-called hybrid instruments. Hybrid instruments are instruments which are given a different tax qualification by 2 different jurisdictions: the jurisdiction of source (jurisdiction of the subsidiary) qualifies for example the instrument as a debt instrument and therefore treats the payment made under this instrument as a tax deductible interest payment. The jurisdiction of the Parent Company qualifies the instrument as equity investment and therefore treats the payment received by the Parent Company as a dividend which can benefit from a tax exemption under certain conditions. There is therefore a mismatch in the tax treatment, which can create a situation of so-called double non-taxation, i.e. no taxation in either of the 2 jurisdictions involved.

To avoid this situation of so-called double non-taxation, the EU Parent-Subsidiary Directive has been amended in such a way that if a payment made is tax deductible in the EU Member State of the subsidiary, i.e. in the country of source, it will have to be taxed by the EU Member State of the Parent Company. In other words, the EU Parent Company will only be able to obtain a dividend exemption under the participation exemption regime of the EU Directive if the payment made by its EU subsidiary is not tax deductible in the jurisdiction of the subsidiary.

Adoption of a common anti-abuse rule

The second amendment to the Directive updates the anti-abuse provision in the Parent Subsidiary Directive i.e. the safeguard against abusive tax practices. In line with the Commission’s Recommendation on Aggressive Tax Planning, the Directive now requires the EU Member States to adopt a common anti-abuse rule which will allow them to ignore artificial arrangements used for tax avoidance purposes and ensure that taxation takes place on the basis of real economic substance.

Next steps

The measures taken by the EU are in line with the on-going developments at OECD level, aiming at reducing at maximum the possibilities of multinationals to structure their investments in such a way that they can achieve situations where the returns on their investments are not taxed at any level (so-called double non-taxation). These developments are the consequence of a global environment of slow recovery from economic downturn and austere budgets, in which Governments around the globe need to increase their tax revenues. These changes at global level will require multinationals to review carefully their investment structures and to remain particularly prudent when structuring new investments for which they should seek the advice of their tax adviser.

For further information, please contact Samantha Merle at samantha [dot] merle [at] atoz [dot] lu

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Proposed remedies for aggressive tax planning: OECD releases discussion drafts on treaty abuse and hybrid mismatches

It is no longer a topic of debate that treaty abuse and hybrid mismatches have negative effects and should be neutralized. The OECD identified treaty abuse and hybrid mismatches among the most important sources of BEPS concerns. The debate is over how these negative effects can be neutralized. The OECD released two discussion drafts for comments in March 2014 that reflect potential significant changes in the global and domestic tax environment.

Preventing the granting of treaty benefits in inappropriate circumstances

The OECD recommends significant changes to the OECD Model tax convention and double tax treaties to address treaty abuse issues. In addition to the introduction of a general statement in the title and preamble that tax avoidance should be prevented, the OECD also recommends the introduction of a “limitation of benefits” clause and of a “motive test”.

Introducing a LOB clause in the OECD Model Tax Convention would imply significant changes in/to international tax practices. In the current tax environment, the benefits of tax treaties are offered to persons that qualify as residents. To prevent treaty shopping situations (residents from third party jurisdictions trying to obtain the benefits of a treaty), a LOB clause adds further limitations. Residents that would otherwise benefit from the provisions of these treaties need to become qualified residents and to satisfy some additional tests, such as an “ownership/base erosion” test or an “active business” test. A derivative benefits provision would ensure that under certain conditions the benefits of the treaties are available but only with regard to a particular item of income. The US introduced LOB provisions in most of its treaties. However, the definition of these tests at a global level is an intricate issue. The definition of these tests has to be precise enough to prevent any discretionary behaviour from the involved jurisdictions. Furthermore, these tests must not be so harsh as to exclude persons who are not treaty shopping from being granted treaty benefits. The issue is of particular importance for collective investment vehicles that would, in many situations, fail to meet the relevant tests, based on the current draft.

The OECD further recommends the introduction of a general anti avoidance rule via the inclusion of a “motive test”. Treaty benefits could be denied if one of the main purposes of a given transaction is to obtain treaty benefits in circumstances that are not in accordance with the object and purpose of the tax treaty. The broad terms of such a provision would create major uncertainty.

Neutralise the effects of hybrid mismatch arrangements

The OECD also released 2 discussion drafts on hybrid mismatches. Hybrid mismatches involve a different characterization of a payment, instrument or entity under the laws of different jurisdictions. Profit participating loans are typical examples of hybrid instruments and “check the box” entities are typical examples of hybrid entities. The OECD hybrid discussion draft mainly calls on domestic laws to put an end to hybrid mismatches. To achieve this, no global harmonization in the characterization of the transaction or entity is required or advised. Instead, the OECD recommends that domestic laws deny the benefit of the tax outcome produced by the mismatch, by linking the tax treatment in one jurisdiction to the tax treatment in the other jurisdiction. In other terms, domestic laws should ensure that payments deductible in the jurisdiction of the payer are included in the income of the recipient. They also should deny deduction for a payment that is also deductible in another jurisdiction. The aim here is to remove situations of so-called double non taxation.

According to the OECD, the elimination of mismatches should apply automatically, without the involved jurisdiction having to evidence a loss in tax revenues or without the taxpayer having to demonstrate that he was pursuing an acceptable objective while using these hybrid instruments.

A complementary discussion draft on hybrid mismatches also addresses changes to be made to the OECD Model Tax Convention in order to ensure the proper interaction between domestic laws and treaties.

Even if the OECD recommendations are not legally binding, there is a clear orientation and consensus towards the neutralization of hybrid instruments and entities globally. The effort of neutralization will have to come from domestic legislations, i.e. from jurisdictions individually. Structures involving hybrid instruments and entities will therefore have to be reviewed on an on-going basis in light of upcoming changes in domestic legislation. Specific attention will also have to be paid to the efforts made at EU level (as illustrated by the recent amendments of the Parent Subsidiary Directive).

Implications

Changes to the OECD Model Tax Convention and Commentaries require a certain degree of consensus and the outcome of action 15 of the BEPS action plan (aiming at developing a multilateral instrument to enable jurisdictions that wish to do so to implement measures developed in the course of the work on BEPS and amend bilateral tax treaties) will be decisive. If OECD members do agree unanimously on the need to fight against treaty shopping, they certainly do not want their tax residents to be unduly denied treaty benefits. This is, however, what may happen based on some of the current provisions of the recently released discussion draft on treaty abuse and one may hope that the final paper, to be released following and based on the comments received from interest parties, will reflect this and will make sure that the OECD does not go beyond its objectives. The fight against treaty shopping and situations of double non taxation should be the goals of the on-going OECD work, but the outcome should definitively not be to bring tax payers back to situations of double taxation. The introduction of a LOB provision and of a motive test in the OECD Model Tax Convention will most probably still take some time. The perspective is however different in regard to the neutralization of hybrid mismatches. Such neutralization depends on legislative changes made at domestic levels. At the EU level where concrete measures have already been taken with the amendment of the EU Parent Subsidiary Directive, changes are easier to implement and should occur even sooner.

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Luxembourg moves to automatic exchange of information regarding savings income

The Luxembourg Government has recently presented to Parliament a draft law aiming at moving from a withholding tax system to an automatic exchange of information system regarding the taxation of savings income (within the meaning of the EU Savings Directive EC 2003/48) in the EU as of January 1st 2015.

The draft law follows the announcement made by the Luxembourg Government one year ago, according to which mandatory and automatic exchange of information will apply as of January 1st 2015 to interest payments that Luxembourg paying agents, mainly banks, make to individuals resident in either a EU Member State or one of the territories which have concluded a reciprocal agreement regarding the taxation of savings income.

The draft law amends the provisions of the Luxembourg law implementing the EU Savings Directive so as to remove the provisions dealing with the levying of a withholding tax and replaces these with provisions on automatic exchange of information.

So far, in Luxembourg, paying agents have been levying a withholding tax of currently 35% on savings income realised by individuals who are resident in another EU country or in territories which have concluded a reciprocal agreement. Luxembourg was one of the few countries which opted, as the possibility was given under the Savings Directive, for a withholding tax system instead of an exchange of information system, namely due to Luxembourg banking secrecy rules.

As of January 1st 2015, information in respect to savings income of individuals resident in another EU Member State or in territories which have concluded a reciprocal agreement, will be communicated by the Luxembourg paying agents to the Luxembourg tax authorities, which will in turn communicate the information to the tax authorities of the country in which the individual beneficial owner of the income is a resident.

The draft law furthermore clarifies the information which will be communicated, how it will be communicated and how often this will have to be done.

Implications

This change in the exchange of information system regarding savings income is for sure not surprising, as the announcement was already made one year ago and since mandatory and automatic exchange of information is getting the new standard worldwide to increase efficiency in the fight against tax evasion and also reduce domestic budget deficits by increasing tax collection after the financial crisis. Still Luxembourg paying agents and the Luxembourg tax authorities will have to react quickly in order to put in place adequate systems in order to get ready by January 1st, 2015.

For further information, please contact Samantha Merle at samantha [dot] merle [at] atoz [dot] lu

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EU Member States reach agreement on widening of the scope of exchange of information under the Savings Directive

On 24 March 2014, the European Council adopted a Directive amending the EU Savings Directive EC 2003/48. The aim of the amendments is to broaden the scope of income qualifying as savings income under the Directive, in order to close the loopholes which were identified during the review process of the Savings Directive since its implementation in the EU.

Firstly, it has been noticed that individuals could circumvent the Directive by interposing a legal person or arrangement situated in a non-EU country with no effective taxation. To solve the issue, a look-through approach will be applied and EU paying agents will have to use the information on beneficial owners which is at their disposal based on the anti-money laundering provisions. In addition, a list of entities and arrangements established or managed in jurisdictions outside the EU which do not apply effective taxation has been annexed to the amended Savings Directive.

It has been further noticed that individuals could circumvent the Directive by using an interposed legal person or arrangement situated within the EU. To solve this issue, structures (including trusts, transparent entities…) which have to act as “paying agent upon receipt” of the income under the Savings Directive in cases where upstream economic operators cannot identify the beneficial owners, have been defined more clearly: an indicative list of entities and arrangements that may be concerned has been annexed to the amended Directive.

As far as the scope of the Directive itself (i.e. the income covered) is concerned, it has been noticed that that the Directive could be circumvented by using financial products that have characteristics which are similar to debt claims, but are not legally classified as such and thus do not currently fall within the scope of the Directive. To solve this issue, the scope of income within the meaning of the Savings Directive is extended to the following products:

  • Securities considered as equivalent to debt claims, because the investor will receive at least 95% of the capital invested at the end of the term or because the conditions of return on capital, as defined at the issuing date, provide for a link of at least 95% to income covered by the Savings Directive;
  • Life insurance contracts including a guarantee of income return or the performance of which is for more than 25% linked to income from debt claims or equivalent income covered by the Savings Directive (unless they are long-term pension-like products).

Finally, it has been identified that given that the Savings Directive so far has only covered relevant income obtained through undertakings for collective investment in transferable securities within the meaning of the UCITS Directive 85/611/EEC, income through other EU investment funds (“non-UCITS”) is mostly not taken into account. To solve this issue, income distributed/capitalised by all CIVs, regardless of their legal form and technical qualification will now fall within the scope of the Savings Directive and the relevant income from all non-EU investment funds will also be covered.

Next steps

The intention to widen the scope of the Savings Directive has already been under discussion at the level of the EU Member States since 2008 but so far, no political agreement could be reached. The adoption of the amendments to the Savings Directive follows the adoption at OECD level of a new global standard of automatic exchange of information and also follows the mandate granted by the European Council to the European Commission to negotiate agreements with 5 third countries (Switzerland, Liechtenstein, Monaco, Andorra, San Marino) on the basis of the text of the amended EU Savings Directive. It is anticipated that agreements will be reached with these 5 countries before year-end. The amended Savings Directive will have to be implemented into national law by the EU member States by January 1st 2016 and Member States will have to apply the new rules as of January 1st 2017.

For further information, please contact Samantha Merle at samantha [dot] merle [at] atoz [dot] lu

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Luxembourg signs FATCA agreement with the US

After having agreed on its content by the end of February, on 28 March, Luxembourg and the US signed an intergovernmental agreement (IGA) implementing the Foreign Account Tax Compliance Act (FATCA). Luxembourg and the US negotiated a Model 1 IGA, requiring the Luxembourg tax authorities and the US Internal Revenue Service (IRS) to exchange information automatically on accounts held by US citizens and by persons resident in the US in financial institutions resident in Luxembourg. The IGA is reciprocal, which means that the US will also have to report account information about Luxembourg individuals and entities in the U.S. to the Luxembourg tax authorities.

The IGA will enter into force either on the date of Luxembourg’s written notification to the US that Luxembourg has completed its necessary internal procedures for the entry into force of the IGA, or on the date of the US written notification to Luxembourg that its applicable procedures for ratification of the amending protocol to the 1996 income tax treaty, signed on 20 May 2009, have been satisfied, whichever date comes last.

To date, most of the agreements concluded by the US are Model 1 IGAs. In the Model 1 IGA, the information transits from the foreign financial institution to the IRS via its domestic authorities whereas the Model 2 IGA provides for a direct communication of the information from the foreign financial institution IRS and implies the adoption into domestic law of the extensive and complex Final Regulations. In May, 2013 Luxembourg announced that a Model 1 would be chosen for the adoption of an IGA.

Following the signature of the IGA, the Luxembourg tax authorities have released a newsletter which announces the practical modalities of information exchange under FATCA. The tax authorities have put in place two working groups including different actors from the public and private sectors who will work together on the implementation of automatic exchange of information under the IGA. While the first working group will have to deal with general implementation issues, the second working group will address more practical & technical issues regarding electronic communication of information between the reporting financial institutions and the tax authorities.

For further information, please contact Samantha Merle at samantha [dot] merle [at] atoz [dot] lu

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Luxembourg implements Administrative Cooperation Directive

As reported in our Atoz Insights in December, Luxembourg recently presented a draft law aiming at implementing the provisions of the Administrative Cooperation Directive dealing with mandatory automatic exchange of information to Parliament. The draft law has now become law. The new rules on automatic exchange of information within the EU will become effective as of 1 January 2015 and will apply to information related to tax years 2014 and following. Under these rules, the Luxembourg tax authorities will be required to communicate automatically to the tax authorities of any other EU member state information regarding specific categories of income, which is available and concerns residents of that other member state. To learn more about the type of information that Luxembourg will have to communicate and how the new rules will apply as of 2015, please read our dedicated article in the December edition of our Atoz Insights. 

For further information, please contact Samantha Merle at samantha [dot] merle [at] atoz [dot] lu

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Luxembourg amends rules regarding exchange of information upon request

We highlighted in our previous Atoz Insights how strongly determined Luxembourg was to bring standards of exchange of information upon request up to OECD standards. As a reaction to criticism by the OECD and the Global Forum on transparency and Exchange of information, the Luxembourg government has just submitted to the Parliament a draft law that - if enacted in its current form - will drastically reduce the powers of Luxembourg tax authorities and Luxembourg courts.

As reflected in our several previous newsletters on this topic, the concept of foreseeable relevance is a key issue in matters of exchange of information upon request. Luxembourg courts tend to declare null procedures of exchange of information implemented by the Luxembourg tax authorities on request of their foreign counterparts, arguing in most cases that the condition of foreseeable relevance is not met.

Back in December 2013, Luxembourg received criticism from the Global Forum on Transparency and Exchange of Information. The report highlighted that “the interpretation of the foreseeably relevant standard in Luxembourg is unduly restrictive and prevents it from engaging in effective exchange of information in line with the international standards in certain cases”.

The draft law aims to answer this criticism. As a main substantial change, it makes clear that Luxembourg tax authorities will not be allowed to assess the pertinence of the information requested. In other terms (upon enactment of the law), tax inspectors will not be allowed to decline a request on the grounds that the requested information lacks relevance. They will only be allowed to control if the request satisfies the formal conditions. Further, taxpayers or holders of information will only be allowed to initiate proceedings on the grounds that formal conditions are complied with. The draft law indicates that it is up to the requesting authority to assess the foreseeable relevance, not the requested authority. This seems to mean that that the draft law does not allow for the assessment of the foreseeable relevance by Luxembourg courts. This should - if enacted as such -substantially reduce the number of cases brought before Luxembourg courts, to the extent most of current cases focus on the criterion of foreseeable relevance, while other formal requirements are generally met.

Other changes would also be introduced by the draft law. Based on the draft law, holders of information will be required to provide information without altering the requested documents. In practice, they would not be allowed to hide names of persons not covered by the request. Further, this new draft law is aimed at governing every exchange of information request, regardless of whether the invoked treaty does or does not provide for a clause compliant with the OECD standards. Professional and judicial institutions are part of the adoption process of draft law. They may express concerns as regards to any potential breach of secrecy laws and the significant reduction in the right of recourse of taxpayers/holders of information.

Implications

Being blamed for an unduly restrictive interpretation of the concept of foreseeable relevance, Luxembourg reacts and proposes a draft law that should guarantee an efficient mechanism of exchange of information. Rights of recourse being limited, the number of cases brought before Luxembourg courts should be drastically reduced in the future, should the draft law be passed in its current form. There is no doubt that other parties to the elaboration of the law will ensure that sufficient guarantees are offered to taxpayers /holders of information and that Luxembourg will not allow fishing expeditions to be satisfied.

For further information, please contact Samantha Merle at samantha [dot] merle [at] atoz [dot] lu

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VAT Update

Increase of the Luxembourg VAT rates

The increase of Luxembourg VAT rates had been announced for some months. The date of entry into force of these new VAT rates has now been confirmed: as of 1 January 2015, Luxembourg VAT rates of 6 %, 12 % and 15 % will increase by 2 points (respectively to 8 %, 14 % and 17 %). The 3 % super-reduced VAT rate applicable, amongst others, to basic necessity products will not be modified.

However, according to a recent Government Statement (dated 9 April 2014), the scope of this super-reduced VAT rate within the framework of the real estate sector would be limited to dwellings/immovable works in relation to the principal residences of the owners. Consequently and following the legal modifications to be implemented (no information in this respect), this 3 % VAT rate would no longer be applicable to dwellings/immovable works in relation to buildings to be rented by the owner or to secondary residences.

Prime Minister Bettel explained this increase, focusing particularly on the upcoming decrease of VAT revenues following the entry into force of the new rules applicable to e-services (see hereunder).

Nevertheless and despite this increase, the Luxembourg standard VAT rate will remain the lowest within the EU countries.

Publication of Explanatory Notes on the new VAT rules applicable to e-services

As you know, in January 2015, telecom, broadcasting and electronic-services will be located and taxable for VAT purposes at the place of the recipient of these services, regardless the location of the supplier (UE or non-EU) or the quality of the customer (B2B or B2C relation).

In this framework, on 4 April 2014 the European Commission published Explanatory Notes to help businesses prepare for these new VAT rules. The aim of these Notes is to comment the new rules in greater detail and to provide guidance to businesses on their application.

For further information, please contact Christophe Plainchamp christophe [dot] plainchamp [at] atoz [dot] lu

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AIFM: CSSF brings further clarifications on reporting rules, while adding obligations to the authorization application

AIFMs, whether Luxembourg-based or not, whether Registered or Authorized, or in process of being regulated under one regime or the other, had a number of questions about the reporting obligations pertaining to them from the moment they are subject to the Law of 12 July 2013. The CSSF has brought further clarification concerning the reporting obligations they are subjected to in its FAQ released mid-March. Concurrently, the regulator has increased applicant obligations for the fully licenced AIFM regime by imposing additional reporting and filing obligations at their request, in terms of programme of activity, capital, financial and business information or organizational requirements.

CSSF clarifies reporting timeline and obligations

The CSSF updated its AIFM related FAQ on 17 March 2014, in order to clarify certain aspects relating to the reporting obligations of the AIFMs.

One of the key points referred to the start date of the initial reporting period for AIFMs. This start date was set depending on the date when the AIFM was authorized or registered as well as on the reporting frequency applicable to it:

  • a chosen date during the year 2013 can be designated as the start date for the annual reporting period, by AIFMs having received confirmation of their registration prior to October 1, 2013; however this is an option and not an obligation for the Registered AIFMs, and in case they opt for it, they must apply the reporting rules set forth in the ESMA Reporting Guidelines;
  • 1 January 2014 is the start date for the annual reporting period applicable to Registered AIFMs, having received confirmation of their registration during the year 2013;
  • 1 April 2014 is the start date for the annual reporting period applicable to Registered AIFMs having received confirmation of their registration during the first quarter of this year;
  • 1 July 2014 is the start date for the reporting period for Authorized AIFMs having received authorization between 22 July 2013 and those still waiting to receive authorization before 30 June 30 2014, irrespective of the reporting frequency applicable to them (quarterly, half-yearly or annually); if an Authorized AIFM opts to report from an earlier date, it must follow the reporting rules set out in the ESMA Reporting Guidelines; 1 July 2014 is also the start date for the first annual reporting period for Registered AIFMs having received confirmation during the second quarter of this year;
  • 1 October 2014 is the start date of the reporting period for Authorized AIFMs having received authorization between 1 July 2014 and 22 July 2014, irrespective of the reporting frequency applicable to them (quarterly, half-yearly or annually); it is equally the start period for the annual reporting period for Registered AIFMs having received confirmation during the second quarter of this year.

The end date for the reporting periods and the deadline for transmission will depend on the reporting frequency and the type of AIFs (i.e. managers of funds of funds will have an extra 15 days compared to other fund managers, who will need to submit reporting within a month from the reporting period end date).

After having received reporting identifiers from the CSSF in advance and upon written request, reporting should be performed through the e-file or SOFIE systems. English is the only accepted language for the reporting.

The CSSF has added more clarifications on the reporting obligations of the non-EU AIFMs.

Non-EU AIFMs are not fully exempt from reporting obligations, neither under the current applicable regime nor under the transition regime. As a matter of fact, until mid-2015 (when the introduction of a passport for non-EU AIFMs will be decided upon), the AIFMs exercising an alternative investment fund management or a marketing activity in Luxembourg will have to report to the CSSF information on the acquisition by the AIFs of the control of non-listed companies and issuers and on asset stripping restrictions. Therefore the non-EU AIFM will have to report the information with regards to any Luxembourg AIF that it manages, whether the units or shares of that AIF are marketed in the EU or outside the EU territory. Similarly, a non-EU AIFM will have to report the relevant information with respect to all the AIFs that are marketed in Luxembourg (whether the AIFs are established in the EU or outside the EU) to the CSSF, for the period starting from the date the non-EU AIFM is permitted to market in Luxembourg by the CSSF.

As a reminder, the non-EU AIFMs that were in existence prior to 22 July 2013 and that marketed non-Luxembourg AIFs in Luxembourg under the private placement regime until that date are currently not required to comply with the reporting requirements relating to the acquisition of control and asset stripping referred to above. The private placement regime will, however, end as from 23 July 2014, date as of which the non-EU AIFMs should consider their reporting compliance.

Finally, the CSSF confirms that only an Authorized AIFM (as opposed to a Registered AIFM) must produce an annual report for each EU AIF it manages or for each AIF it markets in the European Union, within the guidelines set out by article 20(2) of the Law of 22 July 2013 on AIFMs (including a balance sheet, an income and expenditure account, a report on the activities of the relevant financial year, any material changes that has come up during the financial year in the information that must be disclosed to investors, as well as information on the remuneration of the AIFM). The CSSF highlights that the annual report is independent from any other reporting rules that would be imposed on the AIFs under the various product laws, but validates that the scheme B under the Law of 2010 (for part II funds) or the annex to the Law of 2007 on SIFs are satisfactory for the presentation of the annual report for the respective AIFs.

CSSF has upgraded the application questionnaire for the set-up of a fully licensed AIFM – additional requirements introduced on 20 March 2014

On 20 March 2014 the CSSF notified potential applicants wishing to require authorization as fully licenced Luxembourg AIFMs that they will need to use the updated “Application questionnaire for the setup of a fully licensed AIFM”. It has not clarified, however, whether the current applications filed with the regulator and pending authorization should be updated or not. We believe that a formal inquiry should be made to the regulator in order to clarify the application process.

The first new appendix is a table allowing for easy comparison between a company’s remuneration policy and the requirements outlined in Annex II of the AIFM Law and ESMA’s Guidelines on sound remuneration. For each requirement, the reference table should include an extract of the corresponding part of the remuneration policy, the status of compliance as well as justifications for partial or non-compliance

If your portfolio or risk management activities are delegated, you need to explain how you are ensuring that third party providers also respect the remuneration requirements laid out in Annex II of the AIFM Law. This should include information about any other regulatory standards that they comply with, such as MiFID or the CRD package.

The application questionnaire has been modified with respect to three main categories: the Programme of activity, the Capital, financial and business information and the Organisational requirements and internal governance.

Programme of activity

The section relating to the Programme of activity of the applicant has been changed to request further information on:

  • the extent to which the activities are delegated,
  • the benefit of a licence for discretionary portfolio management,
  • different investment strategies at the level of sub-funds of the same AIF,
  • the reasons for the exclusion of AIFs (or non-AIFs, such as non-qualifying SIFs) from the application,
  • the depositary – requesting the attachment of the draft depository agreement and the confirmation letter from the depositary, whereby the later describes how the assets are segregated at its level and at the level of sub-delegates depositaries, if any are appointed.

Capital, financial and business information

This updated section requires the applicants to:

  • disclose the total assets under management or the amount of general expenses for previous years in Euro only;
  • disclose the methodologies used by the applicant for the calculation of portfolio values, and to illustrate that these methodologies comply with the computation methods set out in the Delegated Regulation, when referring to the coverage for professional liabilities;
  • regarding the professional indemnity insurance, to disclose the amount of deductibles within insurance contracts, rather than to disclose the assets under management covered by the policies.

Organisational requirements and internal governance

Applicants wishing to be simultaneously regulated as UCITS management companies and AIFMs need to provide a single combined Risk Management Policy (RMP) covering both UCITS and AIFs and clearly indicating the difference between the processes relating to AIFs and UCITS.

When the AIFM invests or intends to invest in securitization positions, it must confirm that it is fully compliant with Articles 51 to 54 of the Delegated Regulation (referring to the requirements for the retained interest, to the qualitative requirements regarding the sponsors, the originators or the AIFMs themselves, and the corrective actions to be taken) or it must justify the partial or the non-compliance.

Finally, there are two additional sub-points relating to the remuneration, whereby the applicant AIFM is required to provide:

  • a comparison table between the requirements of the AIFM Law and the equivalent provisions in the AIFM’s actual remuneration policy, with a justification of the reasons for partial or non-compliance;
  • an illustration of how the compliance with the AIFM Law will be ensured by the delegates and indication of any other regulatory standards – MiFID or CRD - they comply with, if the applicant AIFM intends to delegate the investment management functions.

Whether you need further information on an AIFMD related topic or need assistance in the preparation of your application file, please contact any of the AIFMD team members at aifmd [at] atoz [dot] lu (.)

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