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1. General
1.1 General Overview of Jurisdiction
Luxembourg is one of the smallest countries in Europe, yet it is a global giant in the investment fund industry. Luxembourg is the second largest investment fund centre in the world and is the leading hub for alternative investment funds (AIFs) in Europe. With its funds being offered in over 80 countries and a 55% global market share in cross-border investment funds, Luxembourg remains the leading global distribution centre for AIFs.
Its multiple structural and regulatory advantages contribute to Luxembourg's enduring success as a leading hub for AIFs.
- Comprehensive legal framework: Luxembourg offers a wide range of regulated and unregulated vehicles, allowing sponsors and managers to tailor their products to their specific tax and regulatory needs.
- Institutional infrastructure: Luxembourg hosts a full-service ecosystem of fund administrators, depositaries, auditors and legal advisers highly experienced in cross-border and alternative strategies. Over the years, many international sponsors have therefore migrated not just back-office but also risk, compliance and portfolio management functions to Luxembourg.
- European and global reach: Luxembourg-domiciled funds benefit from the Alternative Investment Fund Managers Directive (AIFMD) marketing passport across the EEA, making Luxembourg the ideal gate to the European market in combination with its extensive tax treaty networks.
- Legislative leadership: Luxembourg has a long track record of early and consistent implementation of European legislation, from the Undertakings for Collective Investment in Transferable Securities (UCITS) Directive and the AIFMD to the European Long-Term Investment Fund (ELTIF) Regulation, all of which exemplify Luxembourg's agility and adaptability to new developments – the ELTIF Regulation 2.0 is one example of Luxembourg's positioning well to capture the shift towards semiprofessional and high net worth retail investors (so-called democratisation of AIFs).
- Balanced regulatory approach boosting investor confidence: the Commission de Surveillance du Secteur Financier (CSSF) maintains a pragmatic yet rigorous supervisory style, enhancing investor protection while supporting financial innovation.
1.2 Key Trends Loan Origination Funds
Directive (EU) 2024/927 (AIFMD II) establishes, for the first time, a dedicated European framework for loanoriginating AIFs. This provides legal certainty and a harmonised basis for private credit funds across the EU. The new regime expressly recognises both openended and closed-ended loan-originating strategies and sets out clear parameters for their operation, thereby facilitating access to this asset class in a regulated environment.
In particular, AIFMD II acknowledges the possibility for loan-originating AIFs to be structured as open-ended, provided that the AIF's risk management system is compatible with its investment strategy and redemption policy. This offers managers flexibility in tailoring their fund structures to investor needs while demonstrating robust risk management. The regulatory technical standards (RTS) from the European Securities and Markets Authority (ESMA) published on 21 October 2025 (which are still subject to endorsement by the European Commission) provide additional detail on the operational requirements for maintaining an open-ended structure, which further enhances predictability for market participants.
AIFMD II must be implemented into Luxembourg law by 16 April 2026. Based on the recently published Draft Bill No 8628, Luxembourg is expected to implement the new regime without gold-plating, thereby ensuring that sponsors can benefit from the full range of structuring opportunities made available under AIFMD II.
Revival of Regulated Fund Structures
A trend towards regulated vehicles is observable (ie, vehicles that are authorised and supervised by the CSSF), as is the opening of alternative strategies to retail investors, a development that is supported by the revised ELTIF framework. This development has been further enhanced by the CSSF through its new "e-Identification" system (applicable as of April 2025) replacing the existing VISA procedure for offering documents of regulated funds, and featuring a new unique identification number and e-identification date. The new system establishes a catalogue of amendments that do not legally require authorisation and prior review by the CSSF, and is expected to significantly reduce approval timelines through streamlined and more efficient administrative procedures.
Sustainability
Sustainability remains a focus, both for sponsors and for investors. With Circular 24/863, the CSSF confirmed the application of ESMA's guidelines on funds' names using ESG or sustainability-related terms. These guidelines bring additional clarity by introducing quantitative thresholds for the use of such terms, tying them to the proportion of investments used to meet environmental or social characteristic or sustainable investment objectives, and by defining certain excluded investments depending on the terminology employed. This provides fund managers and investors with greater transparency and legal certainty when using ESG references. On a more global scale, the contemplated revision of the Sustainable Finance Disclosure Regulation (SFDR) in the context of the sustainability "Omnibus", once finalised, aims at simplifying and harmonising sustainability reporting requirements across the EU, and could reduce complexity and enhance legal certainty for fund managers and investors alike.
Carried Interest
As part of its ongoing efforts to enhance its attractiveness for fund managers and sponsors and to address gaps in the previous regime, Luxembourg's government recently published a new bill of law to modernise its carried interest tax regime. The new rules, which would apply from tax year 2026 if adopted, foresee that contractual carried interest will be taxed at just a quarter of the standard progressive income tax rate, while participation-linked carried interest may be fully exempt from taxation. Additionally, the bill amends the scope of eligible beneficiaries of the current regime, which, going forward, may include both employees and non-employees, providing managers and sponsors with a more predictable and favourable framework for structuring carried interest.
2. Funds
2.1 Types of Alternative Funds and Structures
Luxembourg offers one of the most comprehensive and flexible investment funds toolboxes in Europe for the establishment of AIFs, making it a go-to jurisdiction for such vehicles globally
Luxembourg AIFs may be set-up as regulated or unregulated vehicles, open-ended or closed-ended funds, purely contractual vehicles (so-called fonds commun de placement FCP) or other structures (eg, in corporate form or as a partnership).
Most Luxembourg AIFs can be established as umbrella funds with multiple segregated sub-funds or as standalone vehicles. The choice between corporate forms (such as public limited liability companies (SAs) or corporate partnerships limited by shares (SCAs)), partnership structures (such as common limited partnerships (SCSs) or special limited partnerships (SCSps)), or FCPs is driven by various factors. Besides governance preferences, factors such as the desired tax and liability regime, eligible investors, and flexibility and cost considerations are determinative in this respect.
For illiquid asset classes such as private equity and private debt, vehicles are often structured as SCSpsAIFs due to the flexibility and alignment with international limited partner/general partner standards. For real estate and infrastructure investments, both corporate forms and partnerships are common. Unregulated, closed-ended reserved alternative investment fund (RAIF) structures remain particularly popular due to their time-to-market advantages in comparison to regulated vehicles such as specialised investment funds (SIFs) or investment companies in risk capital (SICARs)
AIFs are more frequently structured as UCI Part II funds with an additional ELTIF label.
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Originally published by Chambers Global Practice Guides
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
