A new law passed on December 20, 2024, introduces significant tax reforms to the framework governing collective investment schemes in Luxembourg. The changes, published in the Official Gazette (Mémorial A No. 589), specifically modify Articles 175 and 176 of the amended law of December 17, 2010, regarding collective investment undertakings.
These reforms, effective January 1, 2025, aim to modernize the tax environment for Undertakings for Collective Investment in Transferable Securities (UCITS ETFs), aligning Luxembourg’s investment industry with the latest European standards and practices.
Key Changes in the Legislation
The reform focuses on two main areas:
- Tax Exemptions for ETFs (Article 175, Paragraph g):
- A new category of subscription tax exemption is introduced for UCITS ETFs.
- To qualify, ETFs must be traded throughout the day on a regulated market or multilateral trading facility with a market maker ensuring that share prices align closely with the net asset value (NAV) or indicative NAV.
- This exemption applies only to ETF share classes, as certified by Luxembourg’s Commission de Surveillance du Secteur Financier (CSSF).
- Adjustments for Index Funds (Article 175, Paragraph e):
- Index-tracking UCITS must now report their NAV under a separate subscription tax exemption category (Paragraph e). Previously, some ETFs utilized this category, which is now exclusive to non-ETF index funds.
- Technical Alignment in Article 176:
- Updates to ensure consistency with the new tax exemption for ETFs.
Impact of the Reforms
These updates aim to solidify Luxembourg’s position as a leading hub for investment funds by providing a competitive tax environment for ETFs. Here are some of the key impacts:
- Enhanced Competitiveness: The subscription tax exemption for ETFs will attract more fund managers to base their operations in Luxembourg.
- Regulatory Alignment: The reforms align Luxembourg’s legal framework with ESMA guidelines (European Securities and Markets Authority) and European MiFID standards.
- Investor Confidence: By ensuring transparency and compliance, the new rules boost investor trust in Luxembourg’s financial sector.
- Administrative Clarity: The clear separation between ETF-specific exemptions and other index funds reduces ambiguity in tax filings.
What This Means for Investment Managers
Investment managers overseeing UCITS ETFs in Luxembourg must ensure:
- Compliance with the ESMA ETF guidelines (ESMA/2014/937).
- Proper classification of ETF share classes for subscription tax purposes.
- Timely reporting of NAV for both ETFs and index funds under their respective exemptions.
The reforms represent a significant step toward aligning Luxembourg’s practices with international standards while maintaining its appeal as a financial hub.
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