Understanding UCITS
The terminology used in the investment world can be confusing and you may have seen investment funds referred to as mutual funds, collective investment vehicles and UCITS. A short explanation is that mutual funds, investment funds and UCITS are all types of collective investment vehicles. A collective investment vehicle is a mechanism for investors to pool their money with other investors in order to access a wide variety of assets and securities. However, not all investment funds are UCITS. Here we examine UCITS, a type of fund that was created for retail investors and can be marketed throughout Europe.
- European directives
- Luxembourg’s legislation and regulation
- UCITS funds and tax
- Luxembourg’s fund industry
European directives
UCITS refers to a series of European Union directives that established a common regulatory regime for marketing collective investment vehicles throughout Europe. It stands for Undertakings for Collective Investment in Transferable Securities. UCITS typically invest in securities listed on public stock exchanges and regulated markets. The UCITS directives have brought European investors an enormous array of choice and a consistent level of protection. Investors can invest in any UCITS fund that has been registered for sale in their country. Before the first UCITS directive investors were largely limited to funds established in their country of residence. The UCITS directives have thus greatly widened the choice of funds available to investors in the EU. Investors may also invest in certain non-UCITS funds, but they should ensure they understand the legal and tax implications of such investments in their home country.
Luxembourg’s legislation and regulation
Luxembourg was the first EU country to pass the UCITS legislation into national law in 1988 and it has since become a major centre for investment funds. The latest version of the UCITS directive, UCITS IV, was agreed by the EU in 2009 and will take effect in July 2011. The changes it will bring are mostly technical or affecting fund management companies, but they also include new provisions for providing information to investors in a straightforward and easy-to-understand two-page format, known as a Key Information Document.
Luxembourg also benefits from a well-respected regulator, the Commission de Surveillance du Secteur Financier (Financial Sector Supervisory Commission, or CSSF for short). The CSSF is responsible for authorising the managers of funds and service providers such as administrators, as well as the funds themselves. In addition to other fund governance requirements, the regulator also oversees investor protection measures, including the diversification of fund investments and the safekeeping of fund assets by a custodian bank.
UCITS funds and tax
Investment funds in Luxembourg pay an annual subscription tax that ranges from 0.01 to 0.05 per cent of their net assets (certain types of fund, mainly for financial institutions, are exempt from this tax). Apart from the subscription tax, Luxembourg funds are not subject to any other tax at the fund level in Luxembourg. This means that the fund’s returns (both income and any capital gains) are not reduced by tax before they reach investors, who then may have to pay tax on income and capital gains according to the rules of their home country or the country where their investments are held.
Luxembourg’s fund industry
Luxembourg has been an important fund centre for more than 20 years. It is the biggest centre in Europe, measured by the value of fund assets, and second only to the US worldwide. The steady increase in the number of funds and their value has led to the development of a comprehensive fund services sector. Fund management companies, law firms, accountants and auditors, fund administrators and custodians have helped create a strong financial services infrastructure.
This comprehensive professional infrastructure, together with Luxembourg’s exceptional experience of pan-European marketing, its multinational population and unique multilingual skills, has helped cement its reputation as an international investment fund centre. Luxembourg funds are sold to investors all over the world, in more than 65 countries. The country also benefits from a large number of well-qualified individuals who can act as independent directors on fund boards. Their role includes looking after the interests of investors as well as ensuring the fund is run properly.
The sector is represented by the Association of the Luxembourg Fund Industry (ALFI). ALFI exists to promote fund investment and to raise Luxembourg’s profile as a financial centre. ALFI co-operates with the government and the regulator to draw up and refine legislation and regulation for the fund sector. It is involved in the training of industry staff to ensure professionalism and to develop specialist expertise. ALFI also encourages its members to behave ethically and to treat their investors fairly, and takes an active role in efforts to curb money laundering.