Luxembourg, a European hub for investments funds … a European hub for investments funds and wealth management Kuwait, 5 March 2014 2 Luxembourg, a European hub for investment funds

Luxembourg, a European hub for

investments funds and wealth

management

Kuwait, 5 March 2014

2 Luxembourg, a European hub for investment funds and wealth management 5 March 2014 Kuwait City Copyright © 2014 Arendt & Medernach

Agenda

Welcome Bishr Shiblaq, Head of Dubai Representative Office, Arendt & Medernach

Introduction Guy Harles, Co-Chairman of the Strategy Board, Partner, Arendt & Medernach

Overview on Luxembourg investment vehicles Florence Stainier, Partner, Arendt & Medernach

Update on investment fund structuring in Luxembourg Florence Stainier, Partner, Arendt & Medernach

Private wealth management in Luxembourg Guy Harles, Co-Chairman of the Management Board, Partner, Arendt & Medernach

Islamic finance in Luxembourg and Shari’ah compliant case studies Bishr Shiblaq, Head of Dubai Representative Office, Arendt & Medernach


Welcome

Bishr Shiblaq Head of Dubai Representative Office

Arendt & Medernach


Introduction

Guy Harles Co-Chairman of the Strategy Board, Partner

Arendt & Medernach


About Luxembourg

Capital : Luxembourg

Spoken languages:

English, French, German,

Luxembourgish

GDP (nominal) USD 57

billion

Founding member of i.a.

the European Union (EU),

UN, NATO, OECD, FATF

Founding member of the

Eurozone


The Luxembourg Financial Centre – Main Pillars

Financial sector

We

alth

Ma

na

ge

me

nt

Inte

rna

tio

nal

Lo

an

s

Asse

t M

an

ag

em

en

t

& I

nve

stm

en

t fu

nd

s

Insu

ran

ce

Str

uctu

red

Fin

an

ce

The 5 Strategic Pillars

of the Luxembourg Financial Sector


The Luxembourg Financial Center - Advantages

Favorable business environment

Stable government with strong political support for financial services

industry

Investor-friendly legislation (forerunner in implementing EU law)

Flexible and attractive legal and tax framework

Responsive, pragmatic and accessible regulatory and tax authorities

Top level financial center

149 credit institutions (total balance sheet EUR 713 billion)

3,902 investment funds (EUR 2,615 billion AUM) making Luxembourg

the 2nd largest investment fund center worldwide

96 insurance companies and 261 reinsurance companies

Figures as at 31.12.13 Source CSSF


Economy / Political Stability

Source: CIA World Factbook as 1 January 2012

Political stability

Luxembourg – 8.92/10

2012 (nominal) per capita gross domestic product (in USD)

1 Liechtenstein 141,100

2 Qatar 104,300

3 Luxembourg 81,100

4 Bermuda 69,900

5 Monaco 63,400

6 Singapore 60,500

7 Jersey 57,00

8 Falkland Islands 55,400

9 Norway 54,200

10 Brunei 50,000


Risk Rating

The ten safest countries (considering the following risks: economic, political, structural, credit rating, debt and access to capital markets)

Rank Country Points (maximum = 100)

Source: Euromoney, January 2013

Standard and Poor’s credit

rating for Luxembourg: AAA

1 Norway 89.87

2 Luxembourg 87.29

3 Singapore 86.81

4 Sweden 86.81

5 Switzerland 86.78

6 Finland 84.54

7 Denmark 82.64

8 Hong Kong 82.43

9 Netherlands 81.82

10 Canada 81.82


Corporate Taxes

EU/EFTA ranking

1 Luxembourg

2 Cyprus

3 Ireland

4 Denmark

5 Bulgaria

6 Switzerland

9 United Kingdom

11 Spain

12 Netherlan

15 Malta

21 Germany

28 France

30 Italy

Source: Paying taxes 2013, World Bank, IFC and PWC

The Total Tax Rate (TTR)

measures the amount of all

taxes and mandatory

contributions borne by the

business and is expressed

as a percentage of

commercial profits. The

total amount of taxes

borne is the sum of all the

different taxes and

contributions payable after

accounting for deductions

and exemptions.

EU/EFTA ranking

1 Luxembourg 11 Spain

2 Cyprus 12 Netherlands

3 Ireland 15 Malta

4 Denmark 21 Germany

5 Bulgaria 28 France

6 Switzerland 30 Italy

9 United Kingdom


International presence in Luxembourg

First private banking centre in the Euro zone, third largest in the world for

international private banking

Establishment of numerous multinational companies : Amazon, Arcelor

Mittal, China Airlines, Dupont de Nemours, Ferrero, Procter & Gamble,

SES, Skype, iTunes, PayPal, SAIC, etc.

First stock exchange for international bonds, largest RMB denominated

bonds listed in Europe


64 DTTs in force

30 DTTs pending

Europe and Central Asia

America

1. Albania

2. Armenia

3. Austria

4. Azerbaijan

5. Belgium

6. Bulgaria

7. Croatia

8. Cyprus

9. Czech Republic

10. Denmark

11. Estonia

12. Finland

13. France

14. Georgia

15. Germany

16. Greece

17. Guernsey

18. Hungary

19. Iceland

20. Ireland

21. Italy

22. Isle of Man

23. Jersey

24. Kazakhstan

25. Kirgizstan

26. Latvia

27. Liechtenstein

28. Lithuania

29. Macedonia

30. Malta

31. Moldova

32. Monaco

33. Netherlands

34. Norway

35. Poland

36. Portugal

37. Romania

38. Russia

39. Serbia and Montenegro

40. Slovakia

41. Slovenia

42. Spain

43. Sweden

44. Switzerland

45. Tajikistan

46. Turkey

47. Ukraine

48. United Kingdom

49. Uzbekistan

Luxembourg Double Tax Treaty (DTT) Network

50. Argentina

51. Barbados

52. Brazil

53. Canada

54. Chile

55. Mexico

56. Panama

57. San Marino

58. Trinidad and Tobago

59. United States of America

60. Uruguay

61. Bahrain

62. Botswana

63. Egypt

64. Israel

65. Kuwait

66. Lebanon

67. Mauritius

68. Morocco

69. Niger

70. Oman

71. Qatar

72. Saudi Arabia

73. Seychelles

74. South Africa

75. Syria

76. Tunisia

77. United Arab Emirates

78. Brunei

79. China

80. Hong Kong

81. India

82. Indonesia

83. Japan

84. Laos

85. Malaysia

86. Mongolia

87. New-Zealand

88. Pakistan

89. Philippines

90. Singapore

91. South Korea

92. Sri Lanka

93. Thailand

94. Vietnam

South and

East Asia Africa and

Middle East


Investment protection treaties concluded by the Belgo-Luxembourg Economic Union

Treaties pending

Treaties in force

51. Serbia

52. Singapore

53. Slovakia

54. Slovenia

55. South Africa

56. Sri Lanka

57. Thailand

58. Tunisia

59. Turkey

60. Ukraine

61. United Arab

Emirates

62. USA *

63. Uruguay

30. Latvia

31. Lebanon

32. Libya

33. Lithuania

34. Macedonia

35. Madagascar

36. Malaysia

37. Malta

38. Mauritius

39. Mexico

40. Moldova

41. Mongolia

42. Morocco

43. Mozambique

44. Paraguay

45. Peru

46. Philippines

47. Poland

48. Romania

49. Russia

50. Saudi Arabia

64. Uzbekistan

65. Venezuela

66. Vietnam

67. Yemen

68. Bahrain

69. Barbados

70. Belarus

71. Botswana

72. Brazil

73. Comoros

74. Congo, DR

75. Costa Rica

76. Cuba

77. Ethiopia

78. Guatemala

79. Ivory

Coast

80. Korea

81. Liberia

82. Mauritania

83.

Montenegro

84. Nicaragua

85. Oman

86. Pakistan

87. Panama

88. Qatar

89. Rwanda

90. Sudan

91.

Tajikistan

92. Togo

93. Uganda

94. Zambia

* Treaty of friendship,

establishment and navigation Source: KPMG

1. Albania

2. Algeria

3. Argentina

4. Armenia

5. Azerbaijan

6. Bangladesh

7. Benin

8. Bolivia

9. Bosnia &

Herzegovina

10. Bulgaria

11. Burkina Faso

12. Burundi

13. Cameroon

14. Chile

15. China

16. Croatia

17. Cyprus

18. Czech

Republic

19. Egypt

20. El Salvador

21. Estonia

22. Gabon

23. Georgia

24. Hong Kong

25. Hungary

26. India

27. Indonesia

28. Kazakhstan

29. Kuwait


EU Free Trade Agreements

Source: EU Commission – June 2011


Overview on

Luxembourg

investment vehicles

Florence Stainier Partner

Arendt & Medernach


Different types of Luxembourg Investment Vehicles

Undertaking

for collective

investment

Specialised

investment

fund

Investment

company in

risk capital

Vehicles for

securitisation

transactions

Société de

Participation

Financière

dedicated to

holding,

managing and

financing

subsidiaries

Common

limited

partnership

(CLP) and

special limited

partnership

(SLP)

Société de

gestion de

Patrimoine

Familial. A

vehicle

dedicated to

the

management

of private

wealth

2010 UCI Law

Part I as

amended

(UCITS) and II

(UCI)

respectively

AIFM Law of

2013

2007 SIF Law

as amended

AIFM Law of

2013

2004 SICAR

Law, as

amended

AIFM Law of

2013

2004 Securitisation

Law

1915

Companies

Law

Supervised:

2007 SIF Law

or 2004 SICAR

Law

Law of 14 May

2007 on the

family wealth

management

company, as

amended

SOPARFI Securitisation

vehicle

Limited

partnership

CLP/SLP

UCI/

UCITS SIF SICAR SPF


Supervised vehicles for every taste (1)

Key criteria

Retail Investors

Mixed Retail and

Non Retail

Investors

Well – Informed Investors,

Institutional Investors and

Professional Investors

Investment restrictions Restricted Flexible Very Flexible N/A

Eligible assets

TS, MMI,

UCIs, cash,

derivatives

Subject to CSSF

prior approval

No

restrictions

Venture

Capital,

Private

Equity

Risk diversification High Medium Low None

UCITS UCI SIF SICAR


Supervised vehicles for every taste (2)

Supervisory

framework Strong Strong More flexible More flexible

Target Investors All, but mainly

retail All

Well-informed,

Institutional,

Professional

Well-informed,

Institutional,

Professional

Ease of public

distribution

EU Passport

EU passport, if

in the scope of

AIFMD,

Prospectus

Passport for

Closed-ended

funds

EU passport, if in

the scope of

AIFMD,

Private

Placement with

sophisticated

investors

EU passport, if in the

scope of AIFMD,

Private Placement with

sophisticated investors

UCITS UCI SIF SICAR


Luxembourg Limited Partnerships

CLP

SLP

SCA

Suitable for any

structuring purpose,

including collective

investment

undertakings

A real boost for the

fund raising activities

of private equity

managers

Common Limited

Partnership

Special Limited

partnership

Corporate

partnership by shares


Luxembourg Limited Partnerships

CLP/SLP/

SCA

High

Confidentiality

Operational

flexibility

Contractual

flexibility

Legal

certainty

Full tax

transparency

Flexible

governance


Special Limited Partnership: specific features

SLP

No legal

personality

Assets

registered

in the name

of the SLP

Ring-

fencing Domicile


Update on investment

fund structuring in

Luxembourg

Florence Stainier Partner

Arendt & Medernach


1. Luxembourg investment fund industry - recent figures

2. New developments:

A. UCITS update

B. AIFMD update

3. Challenges and opportunities for Kuwaiti asset managers


1. Luxembourg investment fund industry - recent

figures


Luxembourg fund industry – 20 years of sustained

growth

Figures as at 31.12.13 Source CSSF

2.615.363 billion of assets

under management

3.902 UCIs


Luxembourg the second largest fund center

worldwide

0%

10%

20%

30%

40%

50%

60%

America Europe Africa, Asia & Pacific

Figures as at January 7, 2014 Source: Investment Company Institute (ICI) – Worldwide Mutual Fund Market Data, thrid quarter 2013

Luxembourg is the second largest fund

centre in the world after the USA 57%

22%

12%

10%


Luxembourg market share of foreign cross-border funds registered for sale

Source: Lipper LIM and PwC analysis, December 31, 2012

Germany 63% Switzerland 67% France 65%

Sweden 68%

South Korea 96%

Japan 60%

Hong Kong 72% Taiwan 76%

Singapore 69%

Bahrain 77%

Chile 68%

Peru 98%

UK 57%

South Africa 60%

Luxembourg funds: the vehicle of choice for cross-

border distribution


2. New developments


Undertakings for collective investment in transferable securities (UCITS) are

pooled investment schemes, otherwise known as investment funds (EU) or

mutual funds (US), which meet the criteria laid down by EU Directives in this

area

UCITS benefit from a “European passport” which permits the underlying

shares or units to be offered for sale throughout the European Union following

authorisation of the fund in one Member State

Over the last 20 years UCITS have built up a first class reputation for the high

level of protection afforded to investors. They are recognised by financial

market supervisory authorities around the world (especially in South America &

in Asia) and accepted for distribution in their respective markets

Luxembourg is by far the most popular domicile for UCITS

1. What is a UCITS?


2. Recent developments

Additional memorandum of understanding (MoU signed with Morocco and Oman)

Discussions on eligible assets (use of derivatives, efficient portfolio’s management,

collateral, …)

Eligibility of funds under trash ratio

Additional substance requirements for self-managed UCITS and management

companies

UCITS V

UCITS VI


B. AIFMD update


The AIFMD - What is it about?

Direct regulation of Alternative Investment Fund Managers (“AIFM”)

Indirect regulation of Alternative Investment Funds (“AIF”)

Creation of a European market for alternative investments via a EU

Passport


The AIFMD - Scope

managing or

EU AIFM marketing in the EU

managing

Non EU AIFM marketing in the EU

EU AIF Non EU AIF

EU AIF

Non EU AIF

EU AIF

EU AIF

Non EU AIF

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The AIFMD - What is an AIF?

Large definition of AIF: any undertaking for collective investment

not subject to the UCITS Directive

which raises capital

from a number of investors

with a view to invest in accordance with a defined investment policy for the

benefit of those investors


The AIFMD - What is an AIFM?

= legal person whose regular business is to manage one or more AIFs

The AIFM shall be either:

an external manager: the legal person appointed by the AIF or on behalf

of the AIF and which is appointed for managing the AIF (external AIFM),

or

where the legal form of the AIF permits an internal management and where

the AIF’s governing body chooses not to appoint an external AIFM, the

AIF itself, which shall then be authorised as AIFM


The AIFMD - Are there any exemptions?

Smaller AIF exempted: Management of AIF portfolios with assets < euro 100 million (including assets

acquired through the use of leverage)

Management of AIF with assets < euro 500 million (is case of unleveraged portfolios

and no redemption rights during a 5 years period)

Some actors excluded: Captive funds

Management of pension funds

Employee participation or savings schemes

Supranational institutions

National central banks

Investment undertakings, such as family office vehicles, which invest the private

wealth of investors without raising external capital


Authorization

Capital

Conduct of business, including

remuneration

Conflicts of interest

Risk management

Delegation

Marketing provisions

At the level of the AIFM

At the level of the AIF

Liquidity management

Valuation

Depositary

Transparency

Leverage

Controlling interests

Marketing provisions

Reporting obligations

The AIFMD - What does it regulate?


The AIFMD - Timeline

07/2013 22/07/2014 21/07/2015 2018

Transposition

of the Directive

into national

law

(22/07/2013)

Passport

becomes

available for all

EU AIFM

marketing EU

AIFs in the EU

Authorisation

must be

obtained by

existing AIFM

Passport

becomes

available for all

EU AIFM

marketing Non-

EU AIF in the EU

and for Non-EU

AIFM marketing

EU/ Non EU AIF

in the EU

Private

placement

regimes are

replaced by

passport

regime

Grand fathering for existing AIFM Coexistence of passport and private placement regimes


The AIFMD – Timeline impact on non-EU AIFM

From 2014-2015: Private placement regimes

Non EU AIFM may continue to market non-EU AIF under the private

placement regimes, on a country-by-country basis provided that the

following requirements are fulfilled:

Transparency requirements

Reporting obligations

Cooperation agreement between competent authorities

FATF


The AIFMD - Timeline impact on non-EU AIFM

From 2015-2018: Dual marketing regime (Private placement or EU

passport)

Requirements for EU passport under the AIFMD:

Member State of reference + legal representative

Cooperation agreement

Tax agreement + FATF

From 2018: End of the private placement regimes


The AIFMD - Distribution aspects


3. Challenges and opportunities for Kuwaiti asset

managers


Key considerations for choosing the right investment

vehicle

What about cross-

border distribution?

Do I need a European

passport?

? Which assets? Real estate or

transferable securities?

Which investment

strategies?

Do I need flexibility?

Listing or no listing?

High or low risk

diversification?

Retail or well-

informed Investors?


Conditions:

Investment management delegation under the 2010 Law Part I (UCITS)

and the AIFM Law

Only to persons/entities registered or authorized for the purpose

of investment portfolio management

Existence of cooperation between local supervisory authority and

CSSF (MoU)

Kuwaiti asset manager managing a Luxembourg

UCITS or Luxembourg AIF


No MoU with the CSSF = no investment management delegation

But

Investment management delegation through a subsidiary

established in a country where a MoU has been concluded with

Luxembourg

Advisory function to a regulated investment manager


UCITS or Luxembourg AIF


Opportunities

Benefit of UCITS passport

High level of regulation: protection of investors, depositary bank

Compliance with Shari’ah principles, as the case may be

For retail and institutional

Investments capacities in the region


UCITS


Opportunities

Benefit of AIFM passport in Europe - to see in the future impact in Middle

East

Flexibility in terms of investments


Only for institutional, high net worth or advised individual


Kuwaiti asset manager managing a Luxembourg AIF


Kuwaiti asset manager managing a Luxembourg SIF

(non AIF)

Conditions:

Investment management delegation (under the SIF law)

Only to persons/entities registered or authorized for the purpose of

investment portfolio management

Existence of cooperation between local supervisory authority and

CSSF (MoU)

But CSSF may approve the delegation if the delegated is of

sufficient good repute and has appropriate experience


Investment management delegation may be approved by the CSSF

Investment management delegation through a subsidiary

established in a country where a MoU has been concluded with

Luxembourg

Advisory function to a regulated investment manager


(non AIF)


Opportunities

Flexibility in terms of investments


Only for institutional, high net worth or advised individual



(non AIF)


Private wealth

management in

Luxembourg

Guy Harles Co-Chairman of the Strategy Board,

Partner

Arendt & Medernach


Luxembourg largest wealth management center in the

Euro zone

Asset protection

Control &

managing

tax risks

Efficient transfer

of wealth to

future generations

Mitigation of

tax costs

Succession

planning

Family planning Tax structuring

Mitigation of

political risks

Mitigation of

criminal &

economic risks

Diversification Managing risks Wealth

optimization

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Overview of available vehicles in the private wealth

sector

Private Wealth

Structures

Corporate Tools

Contractual Tools

SIF

SPF

Insurance Products

SICAR

Fiduciary Agreements

SOPARFI

Family foundation


Corporate vehicles available


SOPARFI Holding Company

Non supervised and non regulated corporate vehicle governed by the

Luxembourg law of 10 August 1915 on commercial companies, as

amended

Contract based

No restrictions regarding eligible investors

No restrictions regarding eligible assets

No restrictions regarding investment strategies

No risk diversification rules

Possibility to create hybrid financing instruments, classes of shares


SOPARFI Holding Company (cont’)

Tax regime:

Fully taxable regime but participation exemption regime (on dividends, liquidation

proceeds and capital gains deriving from qualifying participations)

Benefice of double tax treaties (DTTs) and EU Directives

Large choice of legal forms e.g.:

Public limited company (S.A.)

Private liability company (S.à r.l.)

Civil partnership (S.C.)

Corporate partnership limited by shares (S.C.A.)


SOPARFI Holding Company (cont’)

Other tax advantages No WHT on royalties payments

No WHT on interest payments made to individuals (except for the Saving

Directive)

No capital duty on incorporation of companies through contributions in cash

(except a fixed registration duty of EUR 75)

No stamp or registration duty on disposal of shares (except a fixed registration

duty of EUR 12 in case of voluntary registration)

Losses may be carried forward indefinitely

Fiscal consolidation regime available

Functional currency available

No CFC rules

No legal thin cap rules but debt-to-equity ratio of 85/15 usually required by tax

authorities for holding activity

Advance tax confirmations and advance pricing agreements available


Family Wealth Management Company (SPF)

Non supervised and non regulated corporate vehicle governed by the

Luxembourg law of 11 May 2007 on the Family Wealth Management

Company, as amended

Investment vehicle dedicated to the management of private, family

wealth of individuals

No family link between the shareholders

Eligible shareholders:

Any individual acting within the framework of the management of his private wealth

Any wealth management entity acting exclusively in the interest of the private wealth

of individuals (Family Office – Trust – Private Foundation)

Any intermediary entity holding the shares on a fiduciary basis on behalf of the

investors


Family Wealth Management Company (SPF) (cont’)

SPF may acquire, hold, manage and sell any financial assets to the

exclusion of any commercial activity

No risk diversification rules

A SPF company must be set up in the form of :

private limited liability company (S.à r.l.)

public company limited by shares (S.A.)

cooperative in the form of limited company (Coop S.A.) or

partnership limited by shares (S.C.A.)


Specialised Investment Fund (SIF)

Regulated corporate vehicle (under the supervision of the

Luxembourg supervisory authority – CSSF) governed by the law of

13 February 2007 relating to specialised investment funds, as

amended

Eligible investors are well-informed investors:

institutional investors

professional investors

other sophisticated investors, such as HNWI, who:

Adhere to the informed investor status

Either invest a minimum of 125.000€ or have been subject to an

assessment made by a bank, an investment firm or a management

company certifying their expertise, experience and knowledge in

adequately apprising an investment in the specialised investment fund


The « umbrella fund » / « multi-compartments » fund might be an

appropriate tool for wealth management purposes

One single legal entity with separate and segregated investment cells

Assets and liabilities of one compartment will be ring-fenced from the

other compartments but only one operational entity

Advantages for high net worth families:

Cost reduction (a single board of directors, the same distributor, same

custodian, same transfer and paying agent, same issuing documents, etc.)

High degree of investment diversification

Very flexible placement strategy for family members

Flexibility and global coverage of investments (market sectors and assets)

Specialised Investment Fund (SIF) (cont’)



1st scenario:

Family

member A

Family

member B

Family

member C

Board of

Directors

Custodian

Bank

Administrator

Auditor

Compartment Compartment Compartment

A B C

SIF



2nd scenario :

Board of

Directors

Custodian

Bank

Administrator

Auditor

Compartment Compartment Compartment

A B C

SIF

Family

Hedge Funds

PE

Real Estate

Shares Shares



SIF offers investment opportunities to sophisticated retail or private

investors, including HNWI:

No restrictions regarding eligible assets (e.g. gold, works of art

and wine are eligible)

No restrictions regarding investment strategies

Not subject to sector specific investment restrictions

Risk-spreading rules


Investment Company in Risk Capital (SICAR)

Eligible investors :

Institutional investors

Professional investors

Other sophisticated investors, such as HNWI

Specifically designed for private equity : allows to contribute assets to

entities in view of their launch, development or listing on a stock exchange

Investments must show the typical characteristics of risk capital investments

(in particular liquidity risks), e.g. venture capital investments

No diversification rules


The Luxembourg family foundation

A New bill regarding the Luxembourg family foundation has been

submitted to Parliament on 22 July 2013

The family foundation is limited to the management of private wealth of

individuals and patrimonial entities

No involvement in any commercial, industrial, agricultural or liberal activity

An orphan structure set up through a notorial deed

Capital contribution of min Eur 50.000 paid up in cash or in kind to be

made by individual founder or wealth management entities (e.g. trusts,

foundations)


Luxembourg family foundation- legal framework

The family foundation may:

- own any movable and immovable property, tangible or intangible assets

- Enter into insurance contracts as a subscriber or beneficiary

- Set up other public or private foundations or trusts or be the beneficiary of

such foundations or trusts

- Hold shares in a company as long as it is not involved in the company’s

management

The family foundation may further issue certificates representing rights on

certain assets owned by it:

- The certification mechanism grants certificate holders certain economic rights

on the assets

- The assets remain under the legal control of the family foundation


Family Foundation

Orphan structure

Individual Patrimonial

entity

settlor

and / or

Board of

Management

Supervisory

Board

Management

Assets

Certificate

holders /

Beneficiaries

(including

settlors)

proceeds

Securities

Life insurance


Luxembourg family foundation- taxation framework

Fully taxable entity

Tax exemption on income deriving from:

- Securities (dividends, profit sharing, interest payments)

- Gains on the disposal and transfer of movable properties

- Gains on the transfer of assets in favour of beneficiaries, certificate holders or

settlors of the family foundation or their successors

Net wealth tax exemption

Registration duty or gift tax depending on the kinship


Fiduciary agreement

Luxembourg law of 27 July 2003 on fiduciary contracts

Continental trust although no unilateral deed but a contractual agreement

Definition: A fiduciary contract is a contract by which a person, the fiduciant

(principal), agrees with another person, the fiduciary, that subject to the

obligations determined by the parties, the fiduciary becomes the owner of

the assets which shall form the fiduciary assets

Limited scope of professionals acting as fiduciary: credit institutions

investment firms

securitisation companies

pension funds, etc. ...


Fiduciary agreement (cont’)

Transfer of ownership

Segregation of the assets (outside the scope of the personal assets of the

fiduciary in case of bankruptcy, insolvency): the fiduciary assets are

segregated: from the personal assets of the fiduciary

from any other fiduciary assets

Fiduciary agreements may be used for various purposes: Management purposes (fiducie–gestion);

Guarantee purposes (fiducie–sûreté);

Credit purpose (fiducie–crédit);

Carrying purpose (fiducie–portage);

Gift or inheritance purpose (fiducie–donation).


2. Insurance products

Luxembourg has developed a strong experience in using insurance

products as private wealth tools

Luxembourg insurance sector under the supervision of the Commissariat

aux Assurances (CAA)

Definition: a contract pursuant to which, the stipulator, receives from

another person, the promising party, the promise that the promising party

will perform a certain task for the benefit of a third party, the beneficiary

Certain flexibility: as long as the beneficiary has not accepted the

contract: Policy holder remains in control of the assets (≠ transfer of ownership)

Policy holder remains in control of the investment policy (especially if unit-linked insurance

products)

Policy holder benefits from great protection and confidentiality of assets


Insurance products (cont’)

Efficient vehicles for estate planning purposes.

Insurance products benefit from tax advantages, a favourable tax

treatment and from broad international tax recognition.


Islamic Finance in

Luxembourg and

Shari’ah compliant

case studies

Bishr Shiblaq Head of Dubai Representative Office

Arendt & Medernach


Islamic Finance in Luxembourg


Luxembourg : an early mover in Islamic Finance

First Islamic finance institution licensed in Luxembourg in 1978

First Western country to host a Shari’ah compliant insurance

(Company Solidarity Takaful S.A.) in 1983

First Western stock exchange to list a Sukuk (Malaysia Global

Sukuk) in 2002

First EU Central Bank to become a member of the Islamic

Financial Services Board (IFSB)

First Annual IFSB meeting in a Non-Muslim country (May 2011)


Luxembourg : a prime location for setting up

Shari’ah- compliant products

Strong commitment by the Luxembourg authorities

Various initiatives/visits in the Middle East to promote Luxembourg

Working groups and task forces set up in order to develop Islamic

finance in Luxembourg

Governmental study on Islamic finance products


Luxembourg : a prime location for setting up

Shari’ah- compliant products

No need for specific legislation for Shari’ah compliant transactions

No additional requirements imposed by the Luxembourg regulator to

qualify as Shari’ah compliant vehicle

Islamic investment guidelines are commonly accepted by Luxembourg

authorities and service providers:

prohibited activities (Haram) (gambling, alcohol, production or sale of pork

products…) and purification of of haram / cleansing of cash dividends

specific investment limits enable exclusion of Riba and prohibition of

Gharar

ban to invest in any interest bearing assets/debt instruments (Riba)

ban to enter into futures or forward contracts, derivative instruments and

short sales (Gharar / maysir)

specific investment restrictions (in terms of interest revenue and

borrowings)


Luxembourg: the leading non-muslim domicile

for Shari’ah compliant funds

Source : Thomson Reuters’ Global Islamic Asset Management Report 2014


Luxembourg : a prime venue for listing Sukuk

The first international Sovereign Sukuk was listed in Luxembourg

Luxembourg holds the third worldwide rank in Sukuk listing with EUR 5.5

billion Sukuk under management

Luxembourg Stock Exchange (LuxSE), a leading listing market:

Leading Listing Market for bonds, securities and sukuk with 46 % of

international bonds in Europe being listed

Over 4200 issuers from 105 different countries

More than 55 countries have at least one issue of their sovereign debt

listed


Shari’ah compliant case studies


Investment Bank &

Investors Investment Bank &

Investors

CaymanCo 2

LuxCo 1

LuxCo 2

Equity

Equity & Mudaraba/s

(Profit participating loan). Structured to reduce

taxation at Luxco 1 (as well as minimize capital

duty)

Equity, Qard Al Hassan (Interest free loan) and

Murabaha Structured to minimize (capital duty

and) taxation

UAE Real Estate

Company

Qatar Private Equity

Company Turkey Equity Fund

Equity

Private Equity: Shari’ah compliant transaction


Sukuk structuring in Luxembourg


Sukuk holders

Sukuk al-Ijara

SPV1

(buyer-lessors)

Originator2

(lessee)

Originator2

(seller)

1

Sukuk

amount

Issuing

Sukuk

3

Rental

Ijara

agreement

Ijara

assets

Proceeds 2

3

4

Redemption amount

Periodic payments

Purchase and sale undertaking

Sukuk al-Ijara are securities representing the ownership of a specific asset under a lease agreement.

They offer a fixed return and can be transferred to other parties in the secondary market.

Structuring overview

1 the Sukuk holders pay the sukuk subscription

amount to the SPV/issuer

2 The seller sells the beneficial title of the assets

(Ijara assets) to the SPV in return for the

purchase price, which is paid upfront by the

SPV

3 The SPV leases the Sukuk assets (Ijara

agreements) to the originator (lessee) for the

duration of the facility. Rental income (Ijara

installments) generated by the Shariah-

compliant assets is distributed to Sukuk

holders through the SPV

4 At maturity a redemption amount is paid

against the transfer of Sukuk certificates, which

are then cancelled

----- Fund flows


Sukuk holders

Sukuk al-Musharaka

SPV1

(Musharik)

Originator

(Musharik)

1

Sukuk

amount

Issuing

Sukuk

Sale of Musharaka units 5

3

Periodic profits

Musharaka agreements

2 Contribution in

cash or in kind

5

Extra returns

2 Contribution in

cash

Shariah-compliant

project

4 Share of profit

and loss

4 Share of profit

and loss

Sukuk Al-Musharaka are designed for the development of specific projects/ activities involving the contribution

of capital by all parties to the Musharaka agreement


1 The SPV issues Sukuks under a Musharaka

agreement(partnership) with the originator

2 Each partner (Musharik) provides the

Musharaka with a contribution (Sukuk proceeds

from the SPV, land or cash from the originator)

3 Profits are distributed according to a pre-

determined ratio (e.g.90:10). The originator, in

its capacity of management agent, is in charge

of distributing the fund flows received through

the Musharaka to both Musharik and receives

the potential surplus as performance fees

4 Under the Management agreement, profits are

shared in the pre-agreed ratio between the SPV

and the originator. Any losses are distributed in

accordance with the proportion of capital

provided by the originator and the SPV

5 Profits/losses are passed on to the investors in

the form of periodic returns


Sukuk holders

Sukuk al-Murabaha

SPV1

(buyer-lessors)

Originator

(purchaser)

Commodity

supplier

1

Sukuk

amount

Issuing

Sukuk

Murabaha

agreement

Sale price

on deferred

payment

terms

Spot delivery

Purchase price 2

4

Return from

deferred price

4 3

3

Spot

delivery

Sukuk al-Murabaha are certificates of equal value issued for the purpose of financing the purchase of goods through a

Murabaha agreement, so that the Sukuk holders become owners of the Murabaha commodity.


1 The Sukuk holders pay the Sukuk

subscription amount to the SPV/issuer

2 The SPV enter into a Murabaha

agreement under which it agrees to sell,

and the originator agrees to purchase,

certain commodities from the SPV on spot

delivery and deferred payment terms

3 The commodity supplier makes spot

deliveries of the commodities to the SPV

in exchange for the purchase price. The

SPV then sells these commodities to the

originator

4 The originator pays the deferred price in

installments to the SPV at regular

intervals, which are passed on to Sukuk

holders

---- Fund flows


Sukuk holders

Mixed-asset Sukuk

SPV1 Originator2

(seller and buyer)

1

Sukuk

amount

Issuing

Sukuk

Sukuk assets

Proceeds 2

3

Periodic payments

Purchase and sale undertaking

•Real estate assets

•Shariah-compliant shares

•Highly-liquid assets

2

Proceeds

A mixed-asset Sukuk is backed by a portfolio of Shariah-compliant investments.

It offers the advantage of a diversified pool of assets, its tradability is assured and the maturing or defaulting assets can be

repurchased


1 The Sukuk holders pay the Sukuk

subscription amount to the SPV/issuer

2 The originator allocates a portfolio of

Shariah-compliant assets and sells the

beneficial title of these “mixed assets’ to

the SPV in return for the purchase price,

which is paid upfront

3 Returns are paid to Sukuk holders on a

periodic basis form the income generated

by the Shariah-compliant assets

---- Fund flows


Innovative Sukuk structures

Luxembourg is a domicile for innovative Sukuk structures:

Deutsche Bank: Al Miyar SA Sukuk issuance platform

Dar Al Istithmar: Al Waseelah Capital SA Sukuk issance platform

The US 1.350 billion International Islamic Liquidity Management

(IILM) landmark Sukuk

The IILM program:

Issuing short-term Shari’ah compliant financial instruments

Facilitating effective cross-border Islamic liquidity management


Tax treatment of Sukuk

Analysed as debt instrument from a Luxembourg tax perspective

Thus, the remuneration paid to the sukuk holder = interest

payment

remuneration is tax deductible at the level of the sukuk issuer

not subject to a WHT in Luxembourg

Remuneration = income from transferable securities

Luxembourg tax provisions related to typical silent partners and

profit-linked obligations are not applicable


Undertaking

Counterparty

Case study: Sukuk issuance platform

Investors/Depositors

3

Proceeds

Periodically

Monitors Shariah

compliance

Islamic Investment

Account

Securities Settlement

Securitisation

Undertaking

Market

Investment

Manager

Shariah

Monitor

1 The issuer was established as a securitisation undertaking under

Luxembourg Law, with each issue of securities made by a separate

compartment. The issuer may issue a shariah-compliant note and

certificate to investors.

2 The originator of the Sukuk acts as arranger and undertaking

counterparty in respect of the relevant compartment of the issuer

3 The proceeds of each Sukuk are deposited into segregated securities

accounts, held with a custodian in the name of the relevant compartment

of the issuer. Each custody account, and therefore each Shariah

compliant asset, is held by the issuer for a specific series of Sukuk.

4 The investment manager uses the amounts in the accounts to purchase

Shariah-compliant assets.

5 An independent entity with a Shariah board monitors the Shariah

compliance of the issuer and the underlying investment structure assets

Sukuk issuance platform allows multiple market participants, both islamic

and conventional to become originators

The platform allows for the issuance of tradable Islamic money market

products settling with short settlement cycles, enabling the issuance of

overnight products or other short-dated money market instruments

2

4

5

Cash

Shariah-compliant

shares

Commitment

Amounts

PUD

SUD

Investment

Management

Agreement

1

PUD: Purchase Undertaking Deed

SUD: Sale undertaking Deed


20%

Case study: possible structure

Equity Investors

Class A Sukuk:

Murabaha Contract

Funds

PPM for Financing Facilities

+

Murabaha Contracts

Murabaha Investors

(Sukuk holders)

Class B Sukuk: Class C Sukuk:

30% 50%

Lux. Securitisation SPV (Murabaha Financing Co)

Min. 20% of Capitalization

Yielding Bonds Distressed

Murabaha Investment Company

Other

Management Agreement

PPM for Equity Investment

+

Subscription Forms

Max. 80% of Capitalization

Manager

Shari’a Advisory Board

Metal Trade between the parties to allow for the

financing of the Murabaha Investment Company in a

Shari’a compliant way

Contact us

Guy Harles, Partner

Private Wealth

Tel : +352 40 78 78 204

Email : [email protected]

Bishr Shiblaq, Head of Dubai Representative Office

Bank Lending, Structured Finance

Tel : +971 44 34 88 65


Florence Stainier, Partner

Investment Funds

Tel : +352 40 78 78 543


Disclaimer

This presentation of Arendt & Medernach is designed to provide with summarized information and illustrations regarding the topics covered

by such a presentation. This information and those illustrations are not intended to constitute legal advice and do not substitute for the

consultation with legal counsel required before any actual undertakings.

Documents

Luxembourg, a European hub for investments funds … a European hub for investments funds and wealth management Kuwait, 5 March 2014 2 Luxembourg, a European hub for investment funds