Scope of the Circular
The Circular has entered into force on 19 December 2025.
This new Circular gathers most of the interpretative rules for (i) SIFs, (ii) SICARs and (iii) Part II UCIs in a single text.
The Circular excludes from its scope:
- European long-term investment funds (ELTIF),
- money market funds (MMF),
- European venture capital (EuVECA) or a European social entrepreneurship (EuSEF) labelled funds; and
- closed-ended funds or compartments which were authorised before the entry into force of the Circular (i.e. 19 December 2025).
Open-ended funds authorized by the CSSF before this date may continue to apply their existing rules.
Key changes for SIFs, SICARs and Part II UCIs
The following changes have been made to the regulatory regimes of SIFs, SICARs and Part II UCIs.
- Investment limits – Risk spreading (Part II UCIs/SIFs)
Unless a different calculation basis is accepted by the CSSF, the Circular sets out the following diversification rules:
- fund addressed to unsophisticated retail investors may not invest:
- more than 25% of its assets or commitments to subscribe in one particular asset, entity or vehicle[1], and
- for infrastructure assets, the cap is set at 50% per infrastructure asset.
- funds addressed to well-informed investors[2] or professional investors may not invest:
- more than 50% of its assets or commitments to subscribe in one particular asset, entity or vehicle, and
- for infrastructure funds, assets, the cap is set at 70% per infrastructure asset.
A look-through approach needs to be conducted if the fund (i) subscribes to one and the same undertaking for collective investment or other investment vehicle or (ii) uses of derivatives instrument in order to verify that a comparable appropriate diversification of the underlying assets is complied.
A ramp-up period may be set in the fund documentation in order to allow the fund to build up its portfolio, which is in principle limited to:
- one year for funds investing in liquid assets, and
- four years for funds investing in illiquid assets, being noted that, in this case, the diversification limit may be suspended during wind down period to manage exits.
For avoidance of doubt, when the fund is set up as an umbrella fund, the above-mentioned rules apply on each compartment basis.
Those changes to the risk spreading rules may impact Tax Circular LIR 168quater/2, released on 12 August 2025 (the “Tax Circular”).
The Tax Circular concerns the Collective Investment Vehicle (“CIV”) carve-out from the reverse hybrid rules, which states that funds investing more than 30% in a single issuer may fail the diversification test for CIV carve-out purposes. This threshold is particularly relevant for non-regulated structures, since UCIs, SIFs and reserved alternative investment funds (“RAIFs”) [3] automatically qualify as CIVs for the carve-out.
The Tax Circular refers to the risk-spreading requirements set out in the law of 13 February 2007 relating to SIFs to determine whether a portfolio is appropriately diversified. Improper diversification is deemed to occur if a fund allocates more than 30% of its assets or commitments to securities issued by the same issuer, unless this allocation is adequately justified.
This raises the question of whether the change in investment limits under the CSSF Circular constitutes adequate justification for the purposes of the CIV carve-out under the Tax Circular.
- Concept of security representing risk capital (SICARs)
The Circular provides further guidelines on the concept of “risk capital” which is a key consideration to determine whether a fund is a SICAR. A SICAR shall “invest its assets in securities representing risk capital in order to ensure for its investors the benefit of the result of the management of its assets in consideration for the risk which they incur”[4].
To clarify this concept, the CSSF focuses on three main criteria:
- The intention to develop the target entity: the management by the SICAR of the assets contributed to the target entity should create value. In this context, the SICAR shall have a certain degree of supervision over the target entity and shall not adopt a pure passive approach. For example, the SICAR may be represented with the management body of the target entities.
- The specific risk: associated with the SICAR’s investments must go beyond the mere market risk. In this context, a case-by-case analysis may be conducted taking into consideration several criteria such as the number and type of target entities, the activities and markets, the degree of maturity, the development project may be taken into consideration to justify the risk capital characteristic.
- The SICAR shall have an exit strategye. the investment must be limited in time, the objective of the SICAR being to resell them with a profit after a holding period.
In view of the foregoing criteria, the CSSF has issued some guidelines on the adequation of each type of asset (such as securities, cash, debt, real estate, commodities, infrastructure) or investment mode (intermediary vehicle, undertakings for collective investment) with the concept of risk capital. In particular, it explicitly recognized that risk capital may encompass debt financing strategies for non-listed companies.
Finally, although the Circular does not formally apply to RAIFs, the Circular is expected to serve as an interpretative reference when assessing the rules applicable to the concepts of risk spreading and risk capital, consistent with the previous market practice.
- Portfolio Management Techniques
Funds may use of portfolio management techniques such as securities lending or borrowing or repos, by a fund to manage its portfolio more efficiently, provided that such techniques are:
- in the interest of the fund’s investors and not entail a change in its investment objectives or the assumption of higher risk than disclosed to investors;
- economically appropriate, i.e. either be profitable or enable a risk reduction and/or a cost reduction and/or a generation of additional capital or income for the fund;
- compliant with the applicable risk spreading rules applicable to the fund, in particular when assessing the collateral received and the counterparty risk.
- Borrowing for investment purposes
Funds may borrow to make investments (within the limit of risk capital for SICARs) or to meet fees, expenses or redemptions. Borrowing may be secured by fund assets.
The Circular sets out the following borrowing limits:
- for funds that marketed to unsophisticated retail investors, borrowing for investment must not exceed 70% of assets/commitments
- for funds reserved to well-informed or professional investors, no hard cap applies provided the maximum borrowing limit is disclosed in the fund documentation.
Temporary borrowings secured by capital commitments or debt securities issued by the fund whose income is linked to the performance of the assets in the portfolio of the fund do not count against the above-mentioned limit.
Those rules apply in addition to leverage rules that may otherwise be applicable.
- Transparency
The Circular reinforced requirements concerning the content of the sales documents of the fund, without prejudice to Article 23 AIFMD disclosures.
In particular, sales documents of the fund shall:
- clearly describe investment policy, strategies, objectives, investment limits and calculation bases, including any use of intermediary vehicles;
- detail risks, conflicts of interest, and specific information if investing in other funds or vehicles (including look-through where appropriate);
- explicitly disclose clearly all terms and conditions relating to subscriptions and redemptions (including redemption frequency, notice and settlement, liquidity management tools and how redemption orders are handled);
- specify borrowing limits;
- provide details of the distribution of proceeds and all fees or charges (particularly where target funds or vehicles are managed by the same initiator);
- describe procedures for modifying the investment policy or making other material changes, in compliance with applicable law. A notice period with a free redemption right may be required; and
- for unsophisticated retail investors, include risk disclaimers where private investments are present or long fund lifespans are possible.
If you have any questions, please contact your trusted advisor at Tiberghien Luxembourg or any of the authors of this publication.
[1] subject to exclusions for securities issued or guaranteed by OECD member states (including regional or local authorities) and by EU or international supranational bodies, and for target UCIs/vehicles that are subject to comparable or stricter diversification requirements under their prospectus or issuing document (offering document) or governing law.
[2] which is the definition of eligible investors for SIFs, SICARs.
[3] governed by the law of 23 July 2016 on reserved alternative investment funds, as amended.
[4] Article 1 (1) of the law of 15 June 2004 on investment company in risk capital, as amended.
