Luxembourg Funds: How a Grand Duchy Became the World’s Asset-Management Capital
The year was nineteen-eighty-eight. Luxembourg—a modest grand duchy nestled between France, Germany, and Belgium, home to half a million souls—was implementing a new European directive on something called UCITS funds. Most European financial capitals treated the matter as bureaucratic housekeeping. Luxembourg saw the opportunity of a lifetime.
Three decades on, the Grand Duchy manages nearly six trillion euros in fund assets—more than France’s entire G.D.P. It’s the world’s second-largest fund market, after the United States. As of June, 2025, Luxembourg hosted three thousand one hundred and four funds containing thirteen thousand four hundred and four sub-funds. BlackRock, Vanguard, Goldman Sachs, JPMorgan—every titan of global asset management maintains its European distribution center there.
But the numbers tell only part of the story. Luxembourg’s real magic lies in having built a system that is at once sufficiently regulated to win the trust of the world’s largest institutional investors and sufficiently flexible to accommodate the most sophisticated investment strategies. A hedge fund investing in Russian debt can domicile in Luxembourg. A private-equity fund buying German family businesses can domicile in Luxembourg. A conventional European-equity fund serving American retirees can domicile in Luxembourg. All operate under the same legal umbrella, yet play by fundamentally different rules.
If you manage capital exceeding a hundred million euros and haven’t considered Luxembourg as a potential jurisdiction, you’re probably leaving money on the table. Or worse—you’re working with a structure less efficient than your competitors’.
London, Dublin, or Luxembourg? Why the Small Capital Won the Great Rivalry
After the two-thousand-and-eight financial crisis, it seemed obvious that London would retain its position as Europe’s unchallenged asset-management leader. The City had everything: centuries of tradition, Europe’s greatest concentration of financial talent, the English language, common law, a culture of risk-taking. Dublin, meanwhile, offered the European Union’s lowest corporate tax rate and the status of an English-speaking jurisdiction friendly to American managers. Malta was building a reputation in gaming and blockchain technology.
And yet Luxembourg prevailed. Not because it was cheapest—it wasn’t. Not because it had the best talent pool—it didn’t; most specialists are expatriates. It won because it understood something fundamental: in the post-crisis era, what matters isn’t merely tax efficiency but, above all, regulatory credibility combined with operational flexibility.
London lost its E.U. passport after Brexit—a fundamental advantage for distribution across Europe. Suddenly, a fund manager in London could no longer automatically sell funds in France or Germany. He needed separate registrations, local compliance officers, national depositaries. Costs exploded. Many managers simply relocated their European operations to Luxembourg or Dublin.
Dublin competed aggressively, particularly in exchange-traded funds. BlackRock, Vanguard, and State Street park their European E.T.F.s there. But in more sophisticated structures—hedge funds, private equity, real estate, debt funds—Luxembourg maintains an edge, thanks to a broader menu of legal structures and deeper regulatory experience.
Consider a concrete example: An American fund manager wants to establish a private-equity fund investing in European tech companies. He needs a structure permitting long-term investments—upward of ten years—financial leverage, performance-based compensation for managers, distribution to American and Asian institutional investors, and minimal withholding tax on dividends from European portfolio companies.
In Dublin, he has options: an Irish limited partnership or an Irish collective-asset-management vehicle. Both work, but Dublin’s ecosystem of service providers—lawyers, tax advisers, depositaries—is considerably smaller and less experienced in private equity than Luxembourg’s.
In Luxembourg, he has choices: a specialized investment company in risk capital (société d’investissement en capital à risque, or SICAR), a specialized investment fund (fonds d’investissement spécialisé, or SIF) structured as a special limited partnership (société en commandite spéciale, or SCSp), or a reserved alternative investment fund (fonds d’investissement alternatif réservé, or RAIF) in corporate or partnership form. Each structure has nuances. A SICAR provides full exemption from capital-gains tax if seventy per cent of assets constitute risk capital. An SCSp offers tax transparency—no taxation at the partnership level; each partner settles up individually. A RAIF provides speed of launch, without financial-supervisory approval.
For Whom Does Luxembourg Make Sense?
After all the technical details, the key question is: Is Luxembourg the right jurisdiction for your fund?
Luxembourg makes sense if:
Target assets under management exceed fifty to a hundred million euros. Below this threshold, operating costs—two hundred thousand to three hundred thousand euros annually—amount to too large a percentage of assets under management. You might consider cheaper alternatives, like Ireland or Malta, or offshore jurisdictions.
You’re planning distribution in Europe. The E.U. passport for UCITS, easier notification for alternative investment funds, brand recognition among European institutional investors—these are real advantages justifying higher costs.
You need tax efficiency in the structure. If your fund invests in European companies and you expect significant dividend income, Luxembourg’s double-taxation-treaty network can save millions in withholding taxes. If you’re investing mainly in U.S. securities, the tax benefit is smaller, because the U.S. has a flat thirty-per-cent withholding tax for non-treaty jurisdictions, and most have a maximum fifteen-per-cent treaty rate.
Your investors require regulatory comfort. Institutional investors—pension funds, insurance companies, sovereign-wealth funds—often have restrictions on the jurisdictions in which they can invest. Luxembourg is practically always on the approved list. The Caymans or the British Virgin Islands sometimes aren’t.
You need sophisticated structures. If your fund is a simple long-only equity strategy, you may not need the flexibility of Luxembourg structures. But if you’re doing complex credit strategies with derivatives, leverage, multiple share classes, and waterfall structures, Luxembourg legal forms—particularly the SCSp—provide tools that offshore jurisdictions often lack.
Luxembourg doesn’t make sense if:
Your fund is a small niche strategy with limited asset-under-management potential. If the realistic target is twenty to thirty million euros, operating costs in Luxembourg will be high. Ireland or Malta may be cheaper alternatives; offshore jurisdictions are even cheaper, though with blemishes on credibility.
Your investors are mainly U.S. taxable individuals. For American investors subject to U.S. tax, a Luxembourg structure often offers no tax advantages. Taxable American investors pay U.S. tax on worldwide income regardless, so the fund’s tax neutrality in Luxembourg doesn’t change their tax liability. They may prefer U.S.-domiciled funds—regulated investment companies, partnerships—which are simpler for U.S. tax reporting.
You don’t have the resources for sophisticated fund management. A Luxembourg fund requires professional service providers, proper governance, and regulatory compliance. If your team is two or three people without experience in regulated funds, the learning curve can be overwhelming. Starting with a simpler jurisdiction may be more sensible.
Your strategy requires full control and minimal oversight. If you want a completely discretionary investment policy with no constraints and don’t want to answer questions from an alternative-investment-fund manager or depositary, Luxembourg isn’t for you. Offshore jurisdictions offer greater flexibility, though at the cost of credibility with institutional investors.
Conclusion: Is It Worth Paying for Quality?
Luxembourg isn’t the cheapest jurisdiction for funds. It’s not the fastest to set up, though the RAIF has dramatically improved speed. It doesn’t offer the most exotic tax benefits—some offshore jurisdictions have zero taxation at all levels.
But it offers something more valuable: a proven, credible, flexible framework accepted by sophisticated investors worldwide. Institutional capital flows where there’s confidence. Confidence comes from regulation, track record, and ecosystem quality. Luxembourg has all of that.
For a fund manager with ambitions of building substantial assets under management and attracting institutional capital, the question isn’t “Can I afford Luxembourg?” but “Can I afford not to be in Luxembourg?” The difference in assets under management that you can attract with a Luxembourg fund versus an offshore fund can be two or three times. That justifies higher setup and operating costs many times over.
Kancelaria Prawna Skarbiec offers comprehensive advice on structuring investment funds in Luxembourg, working with leading law firms, tax advisers, and service providers in the Grand Duchy. We help managers choose the optimal structure, navigate the regulatory process, and establish efficiently functioning funds in full compliance with E.U. regulations and tax-planning best practices.
