How Luxembourg can compete with Ireland for the UCITS market leadership - A comparative review

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Luxembourg has long played a leading role in the European asset management industry, particularly in liquid assets, with the UCITS framework making strong its reputation for regulatory excellence, since the early adoption. Recently, however, Ireland has become the main European attractive destination for liquid asset flows, pushing Luxembourg to expand its expertise in alternative investments such as private equity, infrastructure, and real estate. This change has strongly increased the Luxembourg’s position in alternatives, but the country now faces the challenge of reestablishing its presence in liquid assets. In this article, I’ll explore strategies Luxembourg can use to reestablish its presence in liquid assets and regain market space while strengthening its overall position.

Luxembourg’s historical success in liquid assets was supported by its early and strong adoption of the UCITS framework, establishing a robust reputation for investor protection, transparency, and a well-regulated environment, driven by the CSSF. UCITS products benefited from these principles, becoming synonymous with Luxembourg’s financial identity and drawing significant institutional interest. However, as regulation and operating costs have changed, Ireland took advantage by becoming a more efficient hub for UCITS, offering quicker approval times and predictable processes. Today, these factors have made a significant impact, positioning Ireland as the leading hub for listed products.

On the other hand, Luxembourg has become a top choice for private equity and real estate funds showing its flexibility and ability to handle complex fund structures while attracting a wide range of investors. However, to regain its position in the liquid asset market, Luxembourg must adjust to the changes impacting UCITS and broaden its appeal to different types of investments.

From my perspective within Luxembourg’s regulatory and compliance environment, the two most important challenges in the liquid asset market are regulatory predictability and cost structure. Luxembourg-based Management Companies face higher costs and complex regulatory procedures, which can dissuade UCITS managers seeking smoother and faster solutions.

From my perspective, one of the key differences affecting the appeal of UCITS launches lies in the regulatory processes. In Ireland, the Central Bank of Ireland uses a "self-certification" model, allowing UCITS funds to launch quickly, with detailed regulatory checks occurring ex-post, meaning after the fund is operational. This significantly speeds up the process and provides asset managers with the flexibility to enter the market sooner. In contrast, Luxembourg’s approval process involves thorough reviews before the fund is launched (ex-ante), ensuring full compliance upfront but with the negative downside of slowing the timeline.

The CSSF has made significant improvements in modernizing regulatory processes, with recent efforts aimed at enhancing transparency and improving timelines. I covered this in a previous article about how Luxembourg manages innovation and investor protection, especially with digital assets—check it out here. However, asset managers with specific timing needs could benefit from even more predictable approval processes. Additional steps toward streamlined procedures, such as further digitization and closer collaboration with ManCos, could support these managers in aligning their product launches more effectively with market demands.

While Luxembourg’s approach emphasizes rigorous investor protection, it ensures that funds meet the highest standards before entering the market and this rigorous pre-approval provides a significant advantage for investors. The extensive checks and oversight mean that funds launched in Luxembourg offer stronger investor protection, making Luxembourg funds a safer and more reliable investment choice, even if it comes at the cost of speed.

Today, managers prioritize speed and certainty when launching UCITS products. Potentially, an important development would be the establishment of a digital portal that allows ManCos to track the status of applications in real time could mitigate uncertainties and enable managers to allocate resources more efficiently. This would reduce the bottlenecks currently associated with approval processes, supporting faster market entry for UCITS products.

Cost remains a key factor in the jurisdictional appeal of UCITS. In Luxembourg, the standard taxe d'abonnement rate is 0.05% annually on net assets. However, for institutional share classes, this rate is reduced to 0.01%. This lower rate is designed to attract institutional investors by offering a more favorable tax environment. This can be a notable expense, especially when compared to Ireland’s approach. In Ireland, funds are subject to a flat annual fee of €3,000 per sub-fund, rather than a percentage-based tax on net assets. This lower, predictable fee structure can be more cost-effective, particularly for smaller or budget-conscious liquid funds, and may influence managers choice of jurisdiction in favor of Ireland over Luxembourg.

One more important factor that makes Ireland attractive for UCITS funds is tax efficiency. For funds investing heavily in U.S. assets, Ireland’s tax treaty with the United States reduces the withholding tax on dividends from U.S. equities to 15%, compared to higher rates in other jurisdictions. This tax saving can have a big impact on returns, making Ireland a cost-effective choice for asset managers looking to maximize profitability for their investors.
To stay competitive and attract more UCITS funds, Luxembourg could explore ways to improve tax efficiency, such as negotiating new tax treaties or offering incentives for specific types of investments. Additionally, Luxembourg can focus on enhancing digital infrastructure to speed up fund approval processes and reduce administrative burdens. By combining these efforts with its already strong reputation for investor protection and regulatory expertise, Luxembourg can offer a more balanced and appealing option for asset managers.
An alternative approach could be modest tax reductions or incentives specifically for smaller or sustainable funds, without significantly raising the tax rate for larger funds. For example, Luxembourg could consider targeted tax incentives for ESG-focused or impact funds to draw in sustainable investments, aligning with Luxembourg's commitment to green finance. This way, Luxembourg could attract a broader range of funds without imposing a higher tax burden on larger players, helping retain the appeal for all fund sizes.

One approach might be to introduce a scaled tax structure where funds with assets under €100 million pay a reduced taxe d’abonnement rate, while larger funds continue at the standard rate. For example, smaller UCITS funds could benefit from a 0.03% rate, making Luxembourg more accessible for emerging funds and UCITS funds at earlier stage.

Additionally, the evolution of investor preferences is shaping the competitive dynamics between Luxembourg and Ireland. With a growing emphasis on sustainability, both jurisdictions have stepped up efforts to appeal to ESG-focused funds. Ireland’s existing tax advantages provide a strong base for funds investing in U.S. equities, while Luxembourg's commitment to green finance and potential ESG tax incentives could redefine its appeal. As ESG investment trends continue to accelerate, how each jurisdiction aligns its regulatory and tax frameworks with these global shifts will be critical in attracting future fund flows

To further attract sustainable investments, Luxembourg could offer an additional reduction—say, 0.02%—for funds that meet specific ESG criteria. This would mean a sustainable fund under €100 million could potentially pay a rate of 0.01%, helping Luxembourg capture more interest from the growing ESG market.

As an ESG leader, Luxembourg could strengthen its position by waiving or reducing the taxe d’abonnement for ESG-compliant funds. This would not only support Luxembourg’s green finance initiatives but also appeal to managers committed to sustainable investments, differentiating Luxembourg in an increasingly competitive market. This shift would require clear regulatory guidance, yet it could create substantial long-term benefits by establishing Luxembourg as the go-to jurisdiction for green UCITS. By embracing digital solutions to speed up approval processes and offering targeted tax incentives, especially for smaller and ESG-focused funds, Luxembourg can make itself more appealing to asset managers.

Ultimately, the choice between Luxembourg and Ireland for UCITS fund domiciliation comes down to the specific needs of asset managers. Those prioritizing speed and operational efficiency may find Ireland’s self-certification model and cost-effective fee structure more attractive. Meanwhile, managers focused on investor protection and regulatory thoroughness may continue to favor Luxembourg, particularly as it explores digital enhancements and targeted tax reforms. These differences highlight how each jurisdiction is uniquely suited to different strategic objectives, creating a diverse landscape for European asset management.

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The views and opinions expressed in this article are my own and do not reflect the official policy, position, or opinions of any financial institution, or other organization.
The content of this article is based on personal research of the author and understanding of AML (Anti-Money Laundering) and compliance topics.