ELTIF in Luxembourg: structure, liquidity and authorisation

An ELTIF, or European long-term investment fund, gives an alternative investment fund a European label for long-term investments. The label can support distribution across the European Union. It also permits distribution to retail investors, who do not qualify as professional investors, when the required protections are met.

It does not replace the fund itself. A Luxembourg ELTIF retains its legal form and applicable national rules, with an authorised manager and service providers. The investment strategy and investor group determine whether the label is suitable.

The ELTIF label

The consolidated ELTIF Regulation sets common rules for eligible assets, diversification, borrowing, liquidity and investor information.

Only an EU alternative investment fund managed by an authorised EU alternative investment fund manager (AIFM) can receive the label. Where its legal form permits internal management, the fund may apply at the same time for ELTIF authorisation and authorisation as an AIFM. In Luxembourg, the Commission de surveillance du secteur financier (CSSF), the financial supervisor, authorises the ELTIF as a product.

The label adds a European marketing passport, allowing cross-border distribution under a notification procedure. It is therefore useful when a long-term strategy needs wider distribution than an ordinary private alternative investment fund (AIF) can provide.

The eligible investments

At least 55% of the ELTIF’s capital must be invested in eligible assets. For this test, capital includes contributions and uncalled commitments, amounts that investors have promised but have not yet been asked to pay. Charges borne by investors that reduce the amount available for investment are deducted. The fund must reach the required allocation by the date in its rules, normally no later than 5 years after authorisation or half its life, whichever is earlier.

Eligible assets include equity, meaning ownership interests, or debt in businesses that meet the Regulation’s conditions, real assets such as property, and holdings in permitted funds. Specified simple, transparent and standardised securitisations, which turn exposure to assets or risks into financial instruments, are also eligible. The list also covers European green bonds issued by qualifying undertakings. Neither category admits every securitisation or every bond marketed as green.

An ELTIF may invest in other ELTIFs and in EU AIFs managed by EU AIFMs. The permitted categories also include European venture capital funds and European social entrepreneurship funds. UCITS, funds covered by the EU rules for investment in transferable securities, are also eligible. Every target fund in these categories must invest in eligible investments under Article 9(1) and (2) and must not itself invest more than 10% of its assets in any other collective investment undertaking. The latter limit does not apply to feeder ELTIFs, which invest through a master ELTIF. Only the eligible portion of those funds’ underlying assets counts towards the 55% requirement. A fund-of-funds strategy, which invests through other funds, therefore needs information about the assets those funds hold.

The remaining portion can include liquid assets that are eligible for a UCITS portfolio. These liquid assets can help the fund manage its cash and meet permitted redemptions, where investors return units or shares to the fund for payment.

Retail ELTIFs follow diversification limits, which restrict how much of the fund’s capital can be invested in a single asset or issuer. A 20% limit applies to several categories, including exposure to one qualifying undertaking, one real asset or one target fund. Professional-only ELTIFs receive greater flexibility under the Regulation.

Retail and professional investors

ELTIF 2.0 removed the former 10,000-euro minimum investment and the former 10% portfolio cap for certain retail investors. Retail distribution now relies on a suitability assessment under MiFID II, the EU rules for markets in financial instruments, and on the protections in the ELTIF Regulation. The assessment considers whether the investment fits the investor’s knowledge, experience, financial situation and investment objectives.

Those protections include clear information about the long-term and potentially illiquid nature of the investment. A retail investor can cancel without penalty during the subscription period and for 2 weeks after signing the initial commitment or subscription agreement.

A professional-only ELTIF can use broader diversification and borrowing limits. The chosen investor group therefore affects the portfolio rules and the suitable Luxembourg wrapper.

Closed and open structures

An ELTIF can be closed-ended. Investors then wait until the end of the fund’s life for the ordinary redemption of their units or shares.

Redemptions during the life of the fund are also possible. They require a documented redemption policy, liquid-asset capacity and tools that protect the remaining investors. A minimum holding period may be chosen, but is not compulsory. If requests exceed the amount available for redemption, each request must be met in the same proportion.

The 2024 delegated regulation links the redemption frequency, notice period, liquid-asset capacity and percentage available for redemption. The manager must also explain valuation and when liquidity tools are activated. It must describe stress testing, which examines how the fund could meet redemption requests in difficult but plausible conditions.

An open or semi-liquid label therefore does not guarantee liquidity. Withdrawals remain subject to the fund’s rules and the cash that its portfolio can provide.

The Luxembourg wrapper

The ELTIF label applies alongside the Luxembourg fund regime. A Part II UCI, an undertaking for collective investment under Part II of the Luxembourg investment fund law, is often used for a retail strategy. Its own regime permits those investors and already involves CSSF product supervision.

A RAIF, or reserved alternative investment fund, can carry the label for well-informed investors. The RAIF regime itself does not require prior product approval, but the ELTIF itself is authorised and supervised as a European product.

Specialised investment funds (SIFs), investment companies in risk capital and other Luxembourg AIFs can also qualify. The right choice depends on investor eligibility, asset policy, tax treatment and the supervision required by the national fund regime.

The authorised AIFM

Every ELTIF must be managed by an authorised EU AIFM. A fund whose legal form permits internal management may itself be the authorised AIFM. Other structures use an external manager, which may be part of the group that initiates the fund or an appointed third-party AIFM. A RAIF must use the external route.

The AIFM is responsible for portfolio and risk management. For an ELTIF with redemptions, it must align liquidity management, valuation, the frequency of subscriptions and redemptions, and stress testing with the assets held by the fund.

The manager’s operating model must therefore be settled early. A prospectus cannot promise withdrawal terms that the AIFM and service providers cannot run in practice.

The Luxembourg tax treatment

ELTIF is a regulatory label, not a separate income-tax regime. Income taxation continues to follow the Luxembourg fund regime.

The law of 21 July 2023 introduced an exemption from subscription tax for funds authorised as ELTIFs. The exemption also covers individual compartments, sub-funds with their own pools of assets and liabilities, that hold ELTIF authorisation. The exemption can apply to Part II UCIs, SIFs and RAIFs that would otherwise fall within their ordinary subscription-tax rules.

The tax position of investors and underlying assets remains separate. Withholding taxes, treaty access and the treatment in an investor’s home state depend on the structure and the relevant law.

The CSSF application

The application explains the strategy, eligible-asset test, diversification, borrowing, investor group and redemption design. The constitutional documents and prospectus must match that description.

The CSSF ELTIF page sets out the current filing route and questionnaire. The exact process depends on whether the application concerns a new fund, a new compartment or an existing structure.

For a semi-liquid ELTIF, the file must connect any chosen holding period, the notice period, redemption frequency, liquid assets and liquidity tools. For example, a portfolio with infrequent asset disposals cannot support frequent redemptions solely by assuming that new subscriptions will continue. The documented liquidity capacity must support the terms offered to investors.