Update of the SIF Law. Brief update on AIFMD - 07/11/2011


Welcome to the 6th edition of our RE-PE News Digest

The summer months are historically quiet months in Europe, at least as far as news and legislation activity is concerned. This was not the case for 2011, with major progress made in terms of the Alterative Investment Fund Managers Directive, the proposal of a new Venture Capital Regime and an update of the SIF Law.

Hence Deloitte hosted an AIMFD conference on 11 October 2011 which boasted a very distinguished line-up of speakers and panellists. The conference was also the platform for the release of the results of the Deloitte survey on AIFMD.

You will find a concise summary of all of the above and more in this edition of RealTime.


Update of the SIF Law

Draft Law 6318 amending the Law of 13 February 2007 on Specialised Investment Funds (“SIF Law”) has been written in order to align the Luxembourg Specialised Investment Funds (“SIFs”) with the Directive 2011/61/EU on Alternative Investment Fund Managers (AIFMD) and to integrate within the SIF Law new developments introduced for UCITs by the law of 17 December 2010 on Undertakings for Collective Investments.

Proposed new features of the Draft Law mainly relates to:

  • Delegation - Introduction of provisions defining the conditions for delegation of specific tasks and functions to third parties;
  • Risk management and conflict of interest - Implementation of risk management methods and application of detailed provisions regarding the management of potential conflicts of interest;
  • Authorisation - Procurement of an authorisation which shall be preliminary to the start of the activities, and the authorisation of the persons in charge of the effective management of the specialised investment funds ;
  • Cross investment - Access to some opportunities which are currently offered to UCI ruled by the Law of 17 December 2010, for example the possibility to invest under certain conditions in other sub-funds of the same entity.

Key dates

Existing SIFs would have until the dates mentioned below to comply with the Draft Law’s new requirements if passed into Law:

  • Until 30 June 2012 to comply with the risk management and conflicts of interest
  • Until 30 June 2013 to comply with the delegation requirements

For more information, please view our brochure on Updates of SIF LAW - What are the main changes?


The Alternative Investment Fund Managers Directive (AIFMD) – a brief update

On the 1 July 2011, the final version AIFMD was published in the Official Journal of the European Union. The Directive entered into force at the EU level on 21 July 2011 (20 days after publication). All the member states have 24 months to transpose the Directive into their respective National Laws.

Many implementing measures must be drafted by the European Commission (EC) and the European Securities and Markets Authority (ESMA). To respond to the EC’s request for advice, ESMA published a consultation paper in July 2011 on Level 2 measures relating to general provisions, the depository, transparency and requirements/leverage (see link here) to which comments had been accepted until 13 September 2011. ESMA has until 16 November 2011 to submit its final advice to the EC.

A second consultation paper was published in August 2011, which addressed supervision and third country passports, to which comments had been accepted until 23 September 2011 (see link here). ESMA also has until 16 November to submit its final advice to the EC.

Over 100 comments have been received by ESMA on the Level 2 consultation paper from the various industry players (ALFI, EVCA, etc).

Following ESMA’s draft advice, some key questions facing those affected by the AIFMD in Luxembourg remain:

Which funds are in scope ?

Under the Directive, these include hedge funds, private equity funds, real estate funds, infrastructure funds, mutual funds domiciled and registered in the US, if they are managed in the EU or marketed in the EU, and all other types of collective investment undertakings that are not in compliance with the EU UCITS Directive. It is also likely that Luxembourg unregulated SOPARFIs that operate like funds will be covered.

Who will be the AIFM?

Luxembourg Management companies can certainly be the AIFM, provided they have the structure and substance required by the Directive. It could be highly beneficial to leverage off the existing UCITS management company structures to limit the Capital Requirements impact, effectively forming a ‘Super Manco’ that manages UCITS and AIFs. An AIF can designate itself as AIFM, or it can appoint an external AIFM. To be an authorised AIFM, capital adequacy requirements must be met and these vary depending on whether the AIF is its own AIFM, or if the AIFM is an external entity.

Can the responsibilities of the AIFM be delegated?

The Directive has put in place procedures to be followed concerning the delegation of the responsibilities of the AIFM. The delegation (or sub-delegation) has to be justified by the AIFM and the competent authorities should be notified as there specific guidance on whom these functions can be delegated to. However, the ultimate responsibility for portfolio management and risk management still rests on the AIFM.

How will the Directive impact existing processes?

The Directive will impose detailed risk and liquidity management requirements, the details of which will be set out in the Level II Directive. Managing conflicts of interest is also a main concern, in which the AIFM should have procedures in place designed to “identify, prevent, manage, monitor and disclose conflicts of interest.” There will also be a focus on independent valuation of the portfolio, as well as additional reporting requirements.

For smaller Private Equity and Real Estate (PE/RE) players it may be difficult to properly segregate duties and implement additional controls to avoid conflict of interest as it would mean additional costs.

What is the extent of the liability of the Depositary?

The Directive imposes liability on the depositary for the loss of assets and financial instruments within the depositary’s control. The impact on the PE/RE players is difficult to determine as they traditionally have assets not held in custody. A point that ESMA will still clarify in its advice to the EU Commission is exactly what should be submitted to the depositary for PE/RE investments, as well as more detail around who can act as depositary for PE/RE investments.

What about third countries?

The Directive has specific rules for third countries (non-EU Member States. One of the main topics currently being debated relating to Third Country rules is who will negotiate co-operation agreements on systemic risk oversight between third country and Member States. Will ESMA negotiate these agreements on behalf of member states, or is each member state expected to approach respective Third Countries and negotiate the agreements individually?

How detailed will the Remuneration disclosure be?

The annual report to the shareholders should include disclosures of the amounts paid to Managers, with a split to the proportion of which is fixed and variable. An issue remains for AIFM who manage multiple funds. Will the disclosure in the AIF be the total remuneration of the AIFM or just the remuneration that is proportionate to the Fund’s share or percentage or ownership? In both cases, some difficulty may exist in the validation of these amounts in the annual accounts.

AIFMD Survey of Luxembourg industry participants

In a recent survey conducted by Deloitte Luxembourg aimed at the industry participants in Luxembourg composed of Asset Managers, Management Companies, Administrators and Third-Party Administrators.

  • almost 50% of the respondents have as their greatest concern: Changes in depositary function, risk management and governance structures.
  • 58% anticipate that the changes in depositary function will cause additional costs, as with changes to the risk management (46%) and additional reporting requirements (42%).
  • 70% of the respondents said that they will be looking to recover these additional costs from the funds.
  • 65% of the respondents are confident that they will be able to source locally the expertise to satisfy the additional requirements of the AIFMD, and 57% of the respondents have already organised an AIFMD project, mostly on a group-wide basis.
  • 70% of the respondents consider that insufficient benefits for the effort required to comply will be brought about by the AIFMD, however they do believe that the AIFMD will bring investor confidence (53%) and better distribution opportunities (47%).

The respondents are split as to their anticipation whether the AIFMD will impact their business (significant or limited impact) and their marketing strategy (change in strategy or limited or no change). 8% of respondents even considered that the AIFMD could prove transformational for their business.


Court seeks preliminary ECJ ruling on net worth tax reserve rule

The Administrative Court of Luxembourg has requested a preliminary ruling from the European Court of Justice as to whether Luxembourg’s net worth tax reserve rule is compatible with the freedom of establishment principle in article 49 of the Treaty on the Functioning of the European Union (TFEU). The ruling request was made on 13 July 2011.

Luxembourg levies an annual net worth tax of 0.5 percent on the adjusted value of all resident companies. However, the net worth tax due can be reduced in whole or in part if the taxpayer creates and maintains a special five-year reserve in its commercial accounts. The tax reduction amounts to one-fifth of the reserve and may not exceed the amount of corporate income tax liability before the imputation of the tax credit.

The case involves a private limited liability company (SARL) that had established a blocked reserve and benefited from the above reduction for 2004. In 2006 the company transferred its seat to Italy and then merged with an Italian company. The funds remained allocated to the special reserve. Following the migration, the Luxembourg tax authorities determined that the taxpayer no longer met the requirements to benefit from the net worth tax reduction because the company was not a Luxembourg resident and thus not subject to net worth tax. The previously granted relief was recaptured, and the tax authorities denied the tax reduction for 2005 and 2006.

The taxpayer appealed the determination of the tax authorities. However, the Administrative Court referred the case to the ECJ for a preliminary ruling as to whether the freedom of establishment principle in the TFEU prohibits a rule that makes the right to a tax reduction dependent on the company remaining subject to Luxembourg tax for five tax years.

Recent changes in tax laws in Austria, Estonia, Germany, Hungary, Italy, Poland, The Netherlands and the United Kingdom impacting the real estate industry.

The European tax bulletin for Real Estate Funds is a monthly publication by our colleagues at Deloitte UK that aims to highlight key tax issues which may be of importance to real estate funds and investors.

The latest edition includes news on:

  • Austria : Administrative Supreme Court rules on Real Estate Transfer Tax planning
  • Estonia : European Commission requests Estonia to equalise taxation of foreign investment funds
  • Germany: Federal Ministry of Finance issues Decree on rental income derived from German real property
  • Hungary : New Regulated Investment Company tax regime proposed for real estate investment companies
  • Poland: European Commission requests Poland to amend discriminatory tax legislation for foreign investment funds
  • The Netherlands: Changes to corporate income tax and dividend withholding tax

Read more here.

Read more concerning updates on issues impacting Europe, taxation updates and  the IFRS news in the attached PDF.