Microfinance Vehicles - A Very Favorable Tax Environment

This article was published in Global Business Magazine in October 2010

Microfinance vehicles (MFVs) are funds that supply capital to institutions that specialise in providing micro-loans or microcredits to people that earn just barely enough to survive. These micro-loans allow such disadvantaged people to develop an activity to improve their living conditions, usually an agricultural or a trading activity, or any other micro-undertaking.

Today, there are more than 20 MFVs in place in Luxembourg. The increase of the number of Luxembourg MFVs over recent years is due both to their flexibility (as any type of vehicle can be used in order to act as microfinance fund) and also a tax regime that has become more and more attractive over the years, as well as the Luxflag certification, which can be obtained if necessary.

Luxembourg MFVs can generally be set up as regulated investment vehicles, for instance, as an undertaking for collective investments (UCIs) under the form of a Part II fund (as regulated by the Law of 20 December 2002 Law), a specialised investment funds (SIFs) or as a risk capital investment company (SICAR). They can, however, also be set up as an unregulated investment vehicle. Luxembourg, therefore, offers all types of vehicles to all types of investors.

While a regulated investment vehicle will, in most cases, be more adapted to large size and longer-term investments due to its implementation costs, unregulated vehicles are often more adapted to smaller and/or short- terms investments. In effect, the related implementation costs are lower and the implementation process quicker.

The tax treatment of the vehicle will obviously depend on the legal form chosen. Unregulated vehicles, such as securitisation vehicles, as well as SICARs are, in principle, fully taxable on their income; but they benefit from certain exemptions or tax deductions so that it can often be managed to keep the related tax cost at a low level. In case the preferred solution is to use an UCI (i.e. a Part II fund or a SIF), the vehicle will not suffer any tax, neither on its income nor on its net asset value. UCIs and SIFs are, in principle, subject to an annual subscription tax (taxe d'abonnement) at 0.05% on the value of the UCI's net assets and at 0.01% for SIFs. Nevertheless, the 2010 budget law extended the subscription tax exemption already granted to certain other types of investment funds (funds of funds, money market funds, pension pooling...