Article Post on 19 December 2011

Activity of Family Offices in Luxembourg

On 17 November 2011, the Ministry of Finance and Budget presented a draft bill n° 6366 relating to the activity of Family Office in Luxembourg. Once this draft bill is enacted as a law (presumably during the course of 2012), Luxembourg will become the first European jurisdiction to implement a specific legal regimen for this activity. Outside Europe, only the USA recently added this activity to their legislative arsenal, pursuant to the Dodd-Frank Act (July 2010).

The raison d’être of the draft bill is self-explanatory. As everyone knows, Luxembourg is eager to be proactive and stives to be the vanguard of evolution in the field of financial services. In addition to well-established private banking activities, the funds’ industry, private equity servicing, M&A structuring, and other more recent developments (IP/IT regime, Islamic finance), the Family Office market, though having already been active in practice for decades in Luxembourg, lacked a specific and coordinated legal and regulatory framework. On one hand, such specific clients are looking for more transparency and are in need of a global service and independent advisors. On the other hand, the current Luxembourg Family Office offer is fragmented and relatively heterogeneous in terms of know-how.

There is, therefore, clearly an opportunity for Luxembourg to stand at the forefront of this specific niche market by offering a tailor-made legal and regulatory framework that may be attractive and competitive vis-à-vis long-standing jurisdictions of choice (Switzerland, UK, USA, Singapore).

The main guidelines of the draft bill are true to the standard Luxembourg legislative approach, i.e. combining a strict legal and regulatory framework with a businesslike flexible approach. This approach applies to both the definition of “Family Office activities” in the meaning of the draft bill, and to the scope of professionals admitted who will provide the related Family Office activities and services.
 

The functional definition of “Family Office activities”

Family Office activities are defined by the draft bill as the activities “consisting in providing, on a professional level, patrimonial related advice or services to private individuals, families, or patrimonial entities founded/owned by or beneficial to private individuals or families.”

The above general definition of “Family Office activities” is further clarified by the definition of these included sub-concepts: 

  • “Patrimonial related advice or services” are defined as relating to providing:
         (i) “advice in patrimonial structuring, patrimonial planning, patrimonial administrative and financial follow-up”; and,
        (ii) “coordination of services providers acting in relation to a patrimony, as well as to its follow-up and the evaluation of its performance, at the exclusion of the holding of cash or financial instruments owned by clients and investment services and activities in the meaning of the law of 5 April 1993 on the financial sector”;
  • “Patrimonial entities” are defined as any corporate entity, contractual arrangement, trust or foundation owned by or benefiting, directly or indirectly, a sole private individual or family”;
  • “Patrimony” is defined as a portion of a patrimony or to a patrimony as a whole, provided that such patrimony is comprised of cash or financial instruments.

Based on the above definitions, the wide scope of Family Office activities covers all kinds of ad hoc professional services that may be required, including legal services in the broad sense – inheritance and family law aspects, corporate structure and corporate governance, contractual arrangements -, as well as tax planning, financial services, or accounting support. This multi-function and service-oriented approach reflects the tailor-made requirements and specificity which are at the core of our family office activity.


Limited exclusions: “mono” Family Offices / Corporate & trust mandates

Notwithstanding its extensive scope, the draft bill excludes two specific categories:

  • “Mono” Family Offices: these Family Offices are at the service of one private individual or one family only. Given their closed-ended character, it is considered that they are specific actors which do not require a specific legal and regulatory framework. For this is the reason, they are excluded from the scope of the draft bill. However, given the inherent diversity and possibly evolutionary nature of Family Offices, it may not be excluded that initial mono Family Offices may, in the future, become multi-Family Offices. If so, they would then enter the scope of the draft bill;
  • The second exclusion concerns the board members of commercial companies or foundations, trustees, fiduciaries, or judicially appointed mandates. Although possibly acting, directly or indirectly, to the service of families or private individuals, such activities implying fiduciary duties exist on the fringe of the Family Office activity, as such, these persons do not essentially provide professional services. However, there again, should these persons be involved in additional Family Office activities (as previously defined), they would then be subject to the scope of the draft bill.


A protected title

The main innovation of the law in preparation relates to the right of access to the profession of family office. For the purpose of securing a high-caliber level of services and professional integrity, only specified Luxembourg professionals shall be eligible to the Family Office title. The contemplated system will be twofold:

(i) the Family Office denomination will be first reserved to certain professionals subject to regulation;
(ii) in addition, a new specific “Family Office” category of PSF will be created.
 

Access restricted to certain professionals subject to regulation

The professionals admitted to act as Family Office will be professionals who are regulated and who, by the nature of their core professional activities, are used to and regarded as being legitimate to provide Family Office services and support.
The draft bill 6366 provides an exhaustive list of the authorized professionals (“Professionals-Family Office”):

  • Credit establishments;
  • Investments advisers;
  • Asset managers;
  • Authorized domiciliation agents;
  • Specialized PSF authorized as
        (i) Family Office,
        (ii) domiciliaries of companies, or
        (iii) professionals providing services in relation to the incorporation or the management of companies;
  • Attorneys-at-law (Lists 1 and 4);
  • Notaries;
  • Independent auditors & authorized independent auditors; and
  • Chartered accountants.

It may be noted that any professional who would exercise Family Office activities without entering the scope of the above-mentioned list shall have a six month-period, as from the day the Family Office law shall be in force, to comply with the requirements of the law.
Violation of the abovementioned rules shall be criminally sanctioned (imprisonment ranging from eight days to five years and/or a fine ranging from EUR 1,250 to EUR 125,000). 

New specialized PSF

In addition to the authorized professionals listed above, setting up a new category of PSF which will qualify as Family Office (the “PSF-Family Office”) is being considered. The definition and legal framework of the PSF-Family office shall be inserted in a new Article 28-6 of the law of 5 April 1993 in the financial sector, as amended.

Notwithstanding the standard conditions applicable to all PSF, there will be two specific conditions for authorization:

(i) the applicant shall be a corporate entity (and not a private individual); and
(ii) it shall have a share capital of at least EUR 50,000.

Similarly to any PSF, the PSF-Family Office shall be subject to prior authorization (agrément) and to the CSSF supervision. As a result, some of the CSSF circulars shall also apply to the PSF-Family Office.
 


Common features applicable to Family Offices

All Family Offices, whether acting as Professionals-Family Offices or PSF-Family Offices, shall be bound to comply with the following obligations:

  • Professional secrecy will be applicable to Family Offices as well as to their legal representatives, employees, or private individuals acting on their behalf;
  • Transparency of fees and remuneration: Family Offices shall be bound to communicate in written form to their clients all details relating to their remuneration;
  • AML obligations: Family Offices shall be bound by the Luxembourg legislation relating to the fight against money-laundering (“AML”) and the financing of terrorism. In this respect, Family Offices shall be “Professionals Concerned” in the meaning of the law of 12 November 2004, as amended (the “AML Law”). The AML Law will be amended accordingly.


Foresight: the promising future of Family Office in Luxembourg

Luxembourg suffers from current drawbacks while offering huge promises as a Family Office business platform. Current Luxembourg positioning and reputation is not indeed quite yet at par with leading jurisdictions such as the US, Switzerland, or Singapore. However, Luxembourg, by its long-standing expertise in all financial sector services, its outstanding human and technical resources, and its economical and political stability, benefits from all assets necessary for offering a favorable alternative option for the development of Family Office business. In this respect, the future law relating to Family Office aims at providing a most adapted and attractive legal framework.

Share this content