LUXEMBOURG Law and Practice Contributed by: Claudia Hoffmann, Daniel Krauspenhaar, Stefanie Samosny and Sascha Wiemann, Luther
ures for potential retail participation through financial instruments. Any fund considering exposure to virtual assets must ensure full compliance with applicable AML/CTF obligations and EU Regulations, including the forthcoming Regulation (EU) 2023/1114 on mar - kets in crypto-assets. Litigation Funding Litigation funding is permissible for Luxembourg AIFs provided that adequate governance arrangements are implemented. There are no specific statutory restric - tions on this asset class; however, managers must ensure that the AIF’s risk management framework appropriately addresses the unique risks associated with litigation finance. Other Non-Traditional Assets Luxembourg AIFs are generally not subject to any restrictions on eligible asset classes (except ELTIFs) and may therefore generally invest in both traditional and non-traditional asset classes (such as consumer credits or cannabis). However, as a general princi - ple, investments should comply with the public order principle (ordre public) and applicable Luxembourg laws and regulations, as well as with the laws and regulations of the jurisdiction where the investments will be made. Furthermore, the CSSF might impose restrictions or require the AIFs/AIFMs to comply with additional obligations. 2.7 Use of Subsidiaries for Investment Purposes It is common for Luxembourg AIFs to establish sub - sidiaries – commonly referred to as special purpose vehicles (SPVs) – for investment purposes or to imple - ment particular strategies. This structuring technique is widely applied across asset classes. The main drivers include the following. • Regulatory and legal considerations – certain jurisdictions require foreign investors to hold assets through locally incorporated entities or impose ownership and licensing restrictions. SPVs facilitate compliance with these requirements. • Co-investments and joint ventures – SPVs provide a practical vehicle for structuring co-investments
or for entering into joint ventures, ensuring clear governance and allocation of returns. • Financing flexibility – SPVs can act as dedicated borrowing entities, facilitating project-level or non- recourse financing that does not impact the overall leverage profile of the main fund. • Tax flexibility – SPVs are frequently used to: (a) mitigate investors’ reporting obligations in the country of investment; (b) facilitate cash repatriation through tailored intra-group financing structures; (c) optimise access to double tax treaties; or (d) avoid unfavourable tax regimes due to discrep - ancies in the implementation of certain interna - tional tax legislation. 2.8 Local/Presence Requirements for Funds Luxembourg does not impose a general requirement for AIFs to appoint a local investment manager. Local presence and substance requirements depend on the AIF’s legal form, regulatory regime, and whether it is internally managed or managed by an external AIFM. Luxembourg FCPs should be managed by a Luxem - bourg management company authorised in accord - ance with Chapters 15, 16 or 18 of the 2010 Law. The management company may appoint an external AIFM to perform the portfolio and risk management of the FCP. AIFs may appoint an AIFM established anywhere in the EU. However, if the AIF is self-managed or if the AIFM is Luxembourg-based, local substance rules apply. Key local substance considerations include the fol - lowing. • Central administration: regulated AIFs must maintain central administration in Luxembourg (accounting, NAV, record-keeping). • Directors/managers: there is no statutory residence requirement for AIF directors/managers, but market practice recommends that at least half of them be Luxembourg-based or able to travel regularly to Luxembourg. • General partner: Luxembourg partnerships (SCSs/ SCSps) require a general partner. While not legally
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