Luxembourg is home to a vibrant and innovative financial center with fund assets under management exceeding €3 trillion and more than 44,000 employees at supervised financial firms. In 2014 gross domestic product (GDP) increased by 2.9%.
According to a report published by the Association of the Luxembourg Fund Industry (ALFI) and carried out by Oliver Wyman, the introduction of the Alternative Investment Fund Manager Directive (AIFMD) has fuelled strong growth in European Union (EU) fund domiciles. Luxembourg is the largest EU domicile corresponding to 60% of the EU alternative funds located in Luxembourg, Ireland and Malta and analyzed in the report.
The strongest growth comes from private equity and real estate funds, with approximately 30-35% growth in funds and assets under management.
Data from Luxembourg shows that a greater part of the growth in EU fund raising is attributable to offshore fund managers who co-domicile funds in the EU. Co-domiciliation allows fund managers the option to keep the original fund domiciled in an offshore jurisdiction and operate a regulated parallel fund in the EU at the same time.
Domiciles offering one-stop-shop solutions attract funds, often leaving domiciles with less developed fund infrastructure behind. With the introduction of AIFMD, the quality of fund administration services has become a crucial element for firms, together with the need for an independent depository. Luxembourg clearly benefits from the diversity and scale of the financial service providers active in the country.
Growth in private equity and real estate funds is further boosted by the very flexible Luxembourg limited partnerships known as SCS (Société en Commandite Simple or common limited partnership, with legal personality) and SCSp (Société en Commandite Spéciale or special limited partnership, without legal personality).
On 9 January 2015, the Luxembourg tax authorities issued Circular Letter no. 14/4 (the Circular) which provides guidance on their tax treatment. The Circular expressly provides that Alternative Investment Funds (AIFs) set up as SCS and SCSp are not considered as carrying out a commercial activity. They are therefore fully tax transparent and neutral in Luxembourg.
Today, in a post-AIFMD landscape – thanks to the competitive legal and tax regime offered by its limited partnerships – Luxembourg is a growing hub for AIFs. Tomorrow, in a post-Base Erosion and Profit Shifting (BEPS) world, it will be crucial to concentrate substance (i.e. key staff) in on-shore jurisdictions, like Luxembourg, which give access to the EU internal market and offer double tax treaty protection.
The dynamism of Luxembourg is also demonstrated by airport statistics: traffic increased by 14% in 2014 up to approximately 2.5 million passengers.
When is your next flight to Luxembourg?