Luxembourg: Retrospective Of Key Regulatory Developments In The First Half Of 2023

OUR INSIGHTS AT A GLANCE

• The regulatory landscape in both Europe and Luxembourg underwent significant developments in the first half of 2023. The ELTIF 2.0. aiming to enhance the effectiveness and attractiveness of long-term investment funds within the EU became effective.
• The MiCA Regulation was adopted, officially marking the launch of a harmonised regulatory framework for the crypto-asset market for the first time in the world.
• The Law modernising legal framework pertaining to Luxembourg investment funds was adopted, with the objective to further enhance Luxembourg's position as a leading global hub for investment funds by streamlining and improving the regulatory framework.

During the first half of 2023, Luxembourg consistently strengthened its regulatory framework to maintain its allure as a prime destination for businesses and investors. At European level, those six months saw notable advancements in the regulatory environment, focused on bolstering legal efficiency, transparency, investor protection and sustainable finance.

ELTIF 2.0

The new regulation relating to the European Long-Term Investment Fund ("ELTIF 2.0")¹ was published in the Official Journal of the European Union on 15 March 2023. It became effective on 9 April 2023, with the revised regime set to apply from 10 January 2024.

The ELTIF 2.0 reform aims to enhance the effectiveness and attractiveness of long-term investment funds within the European Union. ELTIFs are investment vehicles designed to facilitate financing for projects requiring long-term capital, such as infrastructure development, real estate and other productive sectors.

The ELTIF 2.0 reform introduces several key changes to the existing ELTIF framework:

• wider range of eligible investments and clearer definition of real assets;
• structuring opportunities for master-feeder structures and fund-of-fund strategies;
• amended thresholds in portfolio composition and diversification requirements;
• lighter requirements for retail investors.

Overall, the ELTIF 2.0 reform strives to promote long-term investments, boost economic growth and support sustainable development within the European Union. By expanding the investment opportunities, enhancing transparency and simplifying regulations, the reform aims to create a more conducive environment for long-term investment funds and attract a broader range of investors. This is of particular importance for Luxembourg, given its recognised leadership in the European fund industry.

MiCA

On 16 May 2023, the European Council formally adopted the long-awaited regulation on markets in crypto-assets ("MiCA"), officially marking the launch of a harmonised regulatory framework for the crypto-asset market for the first time in the world. The framework applies to both traditional institutions of the financial sector and new players emerging in the crypto ecosystem.

MiCA aims to establish a harmonised regulatory regime that promotes investor protection, market integrity and financial stability while fostering innovation in the crypto-asset industry. MiCA applies to various types of crypto-assets, including cryptocurrencies, utility tokens and stablecoins, regardless of whether they are centralised or decentralised. The regulation sets out requirements for issuers, service providers and trading platforms operating within the EU.

However, MiCA expressly excludes a number of crypto-assets from its scope, notably:

• crypto-assets that qualify as financial instruments within the meaning of MiFID II² ;
• crypto-assets representing services or physical assets that are unique and not fungible with other crypto-assets, including digital art and collectibles, product guarantees and real estate;
• digital assets issued by central banks acting in their monetary authority capacity, including central bank money in digital form or crypto-assets issued by other public authorities, including central, regional and local administrations.

Under MiCA, crypto-asset issuers must comply with disclosure obligations, providing comprehensive information to potential investors regarding the asset, its underlying technology, the associated risks and the costs and charges linked to their operations. They are also required to meet capital requirements, ensuring that they have adequate financial resources to support their operations and safeguard investors' interests.

Additionally, MiCA introduces a new concept of "crypto-asset service providers" ("CASPs") that offer services such as exchanging, transferring and safeguarding crypto-assets on behalf of clients. CASPs are subject to authorisation and extensive regulatory requirements, including measures to prevent money laundering and terrorist financing, and shall meet strict operational and security standards to protect clients' assets.

Overall, MiCA aims to create a comprehensive and consistent regulatory framework for crypto-assets across the EU. By implementing these rules, the European Commission intends to foster investor confidence, mitigate risks and support the development of a well-regulated and competitive digital finance market in Europe.

Law modernising Luxembourg investment funds

On 11 July 2023, a new law to modernise the Luxembourg legal framework pertaining to investment funds, specifically amending the SICAR Law³, the SIF Law⁴ , the AIFM Law⁵ and the RAIF Law⁶ , was adopted (the "Law").

The objective of this legislation is to further enhance Luxembourg's position as a leading global hub for investment funds by streamlining and improving the regulatory framework.

The Law encompasses several key measures, including:

• Extension of legal corporate forms available for Part II UCIs;
• Decrease of the minimum investment threshold for well informed investors from EUR 125,000 to EUR 100,000;
• Extension of the timeframe provided to achieve the minimum regulatory capital from 12 to 24 months for SICARs, SIFs and RAIFs, and from 6 to 12 months for Part II UCIs.

These measures aim to facilitate the operations of investment funds in Luxembourg by providing greater flexibility and adaptability to market conditions. By modernising the legal framework, Luxembourg strives to attract and retain investment fund managers and investors, reinforcing its status as a prominent player in the global investment fund industry. As far as ELTIFs and PEPPs are concerned, the Law added them to the list of funds and investments benefiting from the subscription tax exemption in the framework of the latest action plan of the Capital Markets Union by which the European Commission has encouraged Member States to put in place national tax incentives to accompany the emergence of these European products.

Conclusion

The regulatory landscape in both Europe and Luxembourg underwent significant developments in the first half of 2023. These initiatives not only solidify Luxembourg's position as a premier global hub for investment funds, but also ensure that the jurisdiction continues to be appealing to fund managers and investors alike. The progressive regulatory measures implemented during this period enhance transparency, investor protection, legal certainty and sustainable finance, making Luxembourg an attractive destination for businesses and investors seeking a robust and secure environment. These advancements further establish Luxembourg's leadership in the European fund industry and contribute to its ongoing success as a preferred choice for international fund activities.

Footnotes

1. Regulation (EU) 2023/606 of the European Parliament and of the Council of 15 March 2023 amending Regulation (EU) 2015/760 as regards the requirements pertaining to the investment policies and operating conditions of European long-term investment funds and the scope of eligible investment assets, the portfolio composition and diversification requirements, the borrowing of cash and other fund rules, OJUE, L 80/1, 20 March 2023 https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:32023R0606

2. Directive 2014/65/EU of the European Parliament and of the Council of 15 May 2014 on markets in financial instruments, OJUE, L 173/349, 12 June 2014.

3. Law of 15 June 2004 relating to the investment company in risk capital.

4. Law of 13 February 2007 relating to specialised investment funds.

5. Law of 12 July 2013 on alternative investment fund managers.

6. Law of 23 July 2016 on reserved alternative investment funds.

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