Brexit Impact 2: Luxembourg Transitional Regime

Many firms in the United Kingdom do business with Luxembourg on a cross-border basis. Luxembourg is one of the principal “low tax” jurisdictions within the European Union (EU) and consequently the continuation of financial services business between the two jurisdictions is of paramount importance.

To this end, Luxembourg has passed “Brexit Laws”, which make provision for temporary continuation of existing cross-border business from the UK. Under the current assumption that Brexit will happen on 31 October 2019, any notifications to the Commission de Surveillance du Secteur Financier (CSSF – the Luxembourg regulator) to utilise the transitional regime must be made by 15 September 2019. These notifications can be made utilising the CSSF’s eDesk portal.

The CSSF has set the transitional period at 12 months following a hard Brexit.

Included in the transitional regime

Firms providing cross-border services under the following directives may be allowed to participate in the transitional regime:

  • Capital Requirements Directive (CRD)
  • Markets in Financial Instruments Directive II (MiFID II)
  • Payment Services Directive 2 (PSD2)
  • Electronic Money Directive (EMD)

Additionally, funds (and their managers) sold cross-border under the following directives may be allowed to participate in the transitional regime:

  • Undertakings for Collective Investments in Transferable Securities (UCITS)
  • Alternative Investment Funds Managers Directive (AIFMD)

However, it should be noted that participation in the transitional regime is not automatic and will require assessment by the CSSF.

Transitional Regime – Services

Whether a UK firm is allowed to apply the transitional regime follows assessment by the CSSF, as stated above. Following its assessment, the CSSF will inform each UK firm as to whether they can benefit from the transitional regime.

To apply for participation in the transitional regime the UK firm must already be providing the services on a cross-border basis into Luxembourg. Furthermore, the transitional regime will only apply to contracts that have entered into force before Brexit (“existing contracts”) and contracts concluded after Brexit with close links to existing contracts (“closely-related contracts”).

A UK firm that intends to continue providing services into Luxembourg post-Brexit either (1) on an ongoing basis and/or (2) with the intention of forming new contracts should submit an application for authorisation to the CSSF as soon as soon as possible. It should be noted that authorisation can take up to 12 months following receipt of a complete application file.

UK firms not participating in the transitional regime and that have not been granted authorisation must cease all activities in Luxembourg from the date of a hard Brexit.

Transitional Regime – Funds and their Managers

Immediately following a hard Brexit UK funds and UK Managers will no longer have access to the passport regimes under either UCITS or AIFMD. UK funds (whether UCITS or Alternative Investment Fund (AIF)) will become non-EU AIFs and UK Managers will become non-EU Alternative Investment Fund Managers (AIFMs).

All UK funds and managers (UK entities) must notify the CSSF of their intention and the way that they intend to continue to provide services in Luxembourg by 15 September. This initial notification must be followed up with any application for authorisation, notification or other information by 31 October 2019.

The two options for a UK funds will be:

  • To give notification that it will be sold to professional investors in Luxembourg under Article 42 of AIFMD (Article 100(2) of the Law of 17 December 2010)
  • To apply for authorisation to be sold to retail investors as an individually registered fund under Article 43 of AIFMD (Article 100(1) of the Law of 17 December 2010)

It should be noted that at time of writing there is only one non-EU AIF registered for retail sale in Luxembourg and only four AIFs in total (EU and non-EU) are registered for such retail sale.

On the basis of the information and applications/notifications submitted the CSSF may, on a case-by-case basis, allow funds and/or their managers to continue their activities in Luxembourg on a temporary basis under the transitional regime. The CSSF will inform such funds and their managers within 10 business days of submission of the required information.

Entities that have already submitted an application for authorisation must still submit the Brexit notification.

Still to come

The CSSF is expected to communicate any transitional provisions that may apply to UK investment funds being included in investment portfolios that have restrictions on their non-EU investment holdings. This is expected to allow a regime where, for a temporary period, the UK investment fund holdings may continue to be counted under the “EU” portion of the investment portfolio.

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