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 shall be enacted as a law (presumably in the course of 2012), Luxembourg will become the first European jurisdiction to implement a specific legal regime 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 at the vanguard of the evolution in the field of financial services. In addition to the well established private banking activities, funds' industry, private equity servicing, M&A structuring and other more recent developments (IP/IT regime, Islamic finance), the Family Office market, although having already been active in practice for decades in Luxembourg, lacked a specific and coordinated legal and regulatory framework. On the 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.
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 to provide 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 benefiting to
private individuals or families".
The above general definition of "Family Office activities" is further clarified by the definition of 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 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, to 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 comprises cash or financial instruments.
Based on the above definitions, the wide scope of Family Office activities covers all kinds of ad hoc professional services which may be required, including legal services in the broad sense – inheritance and family law aspects, corporate structure and corporate governance, contractual arrangements -, tax planning, financial services or accounting support. This multi-function and services' approach reflects the tailor-made requirements and specificity which are at the core of the family office activity.
Limited exclusions: "mono" Family Offices / Corporate & trust mandates
Although 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. This is the reason why they are excluded from the scope of the draft bill. However, given the inherent diversity and possibly evolutive nature of Family Offices, it may not be excluded that initial mono Family Offices further 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 only are on the fringe of the Family Office activity and such 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 be then 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
(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 authorised professionals ("Professionals-Family Office"):
- Credit establishments;
- Investments advisers;
- Asset managers;
- Authorised domiciliation agents;
- Specialised PSF authorised 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);
- Independent auditors & authorised independent auditors; and
- Chartered accountants.
It may be noted that any professional which would exercise
Family Office activities without entering the scope of the
abovementioned list shall have a 6 month-period, as from the day
the Family Office law shall be in force, to comply with the
requirements of the law.
The violation of the abovementioned rules shall be criminally sanctioned (imprisonment ranging from 8 days to 5 years and/or a fine ranging from EUR 1,250 to EUR 125,000.-).
New specialised PSF
In addition to the authorised professionals listed above, it is contemplated to set up a new category of PSF which will qualify as Family Office (the "PSF-Family Office"). The definition and legal regime of the PSF-Family office shall be inserted in a new Article 28-6 of the law of 5 April 1993 of the financial sector, as amended.
Notwithstanding standard conditions applicable to all PSF, there
will be two specific conditions for authorisation:
(i) the applicant shall be a corporate body (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 authorisation (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 to their service;
- 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, its economical and political stability, benefits from all the assets necessary to offer a favorable alternative option for the development of Family Office business. In this respect, the future
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