Following its deposit, draft Bill No. 8628 will undergo parliamentary review, including opinions from the Council of State and relevant professional chambers. The draft bill may be subject to amendments, and once adopted, the law will be published in the Luxembourg Official Journal.

The law is scheduled to enter into force on 16 April 2026, with certain reporting obligations deferred until 16 April 2027. Transitional provisions apply to existing loan-originating alternative investment funds (AIFs) constituted before 15 April 2024, allowing them to comply with the new leverage and concentration limits by 16 April 2029, subject to specific conditions.

For further information and to discuss what this development might mean for you, please get in touch with your usual Baker McKenzie contact.

Key takeaways

Loan origination by AIFs

• “Loan-originating AIF” is defined as a fund whose primary strategy is loan origination or whose originated loans represent at least 50% of its net asset value (NAV). It includes both direct and indirect lending, including cases where the AIF or its manager is involved in structuring or pre-approving the loan.
• The draft bill introduces the harmonized European regime for loan-originating AIFs (LOFs), granting AIFs the express right to originate loans and establishing common rules for this activity. Luxembourg exercises its national discretion to prohibit AIFs from granting loans to consumers or servicing consumer loans within Luxembourg. This restriction applies regardless of the AIF’s domicile or the manager’s location, provided the consumer is in Luxembourg. However, Luxembourg AIFs may still originate loans to consumers in other EU Member States, unless prohibited by local law. In the commentaries to the articles section of the draft bill, it is further mentioned that the prohibition on AIFs managing loans granted to Luxembourg consumers is without prejudice to the manager’s right to manage an AIF that has acquired a portfolio comprising such loans on the secondary market, after it has been granted by a third party and to manage such loans granted to consumers.
• Whether or not these AIFs qualify as loan-granting AIFs, managers of AIFs that carry out lending activities must have effective policies, procedures and processes in place for granting loans. Further, they must implement robust policies and procedures for credit risk assessment and loan portfolio management, subject to annual review when the AIFs they manage are exposed to loans through third parties.
• These obligations do not apply to the granting of shareholder loans where the notional value of such loans does not exceed in total 150% of the capital of the AIF.
• New risk diversification requirements will also apply, as follows:
  • Loans to a single borrower that is a financial entity, AIF or undertaking for the collective investment in transferable securities (UCITS) may not exceed 20% of the AIF's capital. This limit does not apply to loans granted by a feeder AIF to a master AIF.
  • Leverage is capped at 175% for open-ended LOFs and 300% for closed-ended LOFs, calculated using the commitment method.
  • A 5% risk retention applies to loans transferred to third parties, with exceptions for liquidation, regulatory requirements, or credit deterioration. The percentage of each loan is retained: a) until maturity for loans with a maximum term of eight years or for loans granted to consumers regardless of their term; and b) for at least eight years for other loans.
• “Originate-to-distribute” strategies are prohibited.
• Open-ended LOFs are generally not permitted, unless the manager can demonstrate to the Financial Sector Supervisory Commission (CSSF) that the fund’s liquidity risk management is compatible with its investment strategy and redemption policy.

Liquidity management tools

• All open-ended AIFs and UCITS must select at least two appropriate liquidity management tools from a harmonized list, including redemption gates, swing pricing, anti-dilution levies and side pockets, among others. The selection must be disclosed and communicated to the CSSF.
• Additional tools beyond the harmonized list provided by the Directive are permitted under the draft bill, provided they are compatible with the fund’s investment strategy and liquidity profile.
• Redemption in kind is restricted to professional investors and must correspond to a pro-rata share of the fund’s assets, except for funds marketed exclusively to professionals or index-tracking ETFs.
• In exceptional circumstances, the CSSF may require activation or deactivation of liquidity management tools to protect investors or financial stability.

Delegation and ancillary services

• The draft bill clarifies and expands the scope of ancillary services that AIFMs and UCITS management companies may provide to third parties, including benchmark administration and credit servicing.
• Managers may now offer third parties the same functions and activities they perform for their own funds, provided conflicts of interest are appropriately managed.
• The commentaries to the articles specify that the concept of “third party” must be interpreted broadly and may therefore also cover, for example, not only other AIFs but also, without this list being exhaustive, structures such as intermediary vehicles, co-investment vehicles, or carried interest vehicles, whether linked to funds managed by the manager; funds initiated, managed, or advised by an entity belonging to the same group to which the manager belongs; or other legal entities, such as pension funds, securitization vehicles or insurance vehicles.
• This expansion supports economies of scale and enhances Luxembourg’s competitiveness as a cross-border fund-management hub.
• Delegation rules are aligned between AIFMD and UCITS, requiring managers to notify the CSSF of all delegation and sub-delegation arrangements, including detailed information on delegates, their jurisdiction, and supervisory status.

Substance and governance

• Substance requirements are now established for both AIFMs and UCITS management companies. At least two EU-resident individuals must be fully dedicated to the management company’s activities.
• The program of activity submitted for authorization must detail the organizational structure, human and technical resources, reporting lines, and time allocation of key personnel. Firms must also describe how they comply with their obligations under the Sustainable Finance Disclosure Regulation (SFDR).
• These requirements reflect existing CSSF practice and are not expected to materially impact Luxembourg managers already in compliance.

Depositary services

• The Directive introduces a new provision allowing Member States that face a lack of competitive depositary service offerings to permit their local AIFs to appoint a depositary located in another Member State. This provision does not apply to Luxembourg, which benefits from a well-established and competitive depositary services market. Depositaries for Luxembourg funds must therefore be established in Luxembourg. However, an AIF established in a Member State that has made use of this option may, under certain conditions, appoint a depositary based in Luxembourg.

Transparency, reporting, and investor protection

• Periodic reporting obligations are enhanced for both AIFMs and UCITS management companies, including detailed disclosures on delegation, liquidity management, leverage and the composition of loan portfolios.
• Investors must receive comprehensive information on all fees, charges and commissions, as well as the composition of loan portfolios for loan-originating AIFs.
• The CSSF is empowered to share supervisory data with other EU authorities and the European Securities and Markets Authority.

Auditor report exemption for contributions in kind

• Investment Companies with Variable Capital (SICAVs) are now exempt from the requirement to obtain an independent auditor’s report for the issuance of shares in exchange for contributions in kind, provided unitholders are treated equitably. While the exemption is designed for SICAV UCITS, the commentaries to the articles section make it clear that the exemption should also extend to UCITS established as common funds (fonds commun de placement or FCP), and to redemptions carried out in kind.

Practical implications

To prepare for the new Luxembourg regime, fund managers and service providers should:

• Review and update credit risk, leverage and diversification policies for loan-originating AIFs.
• Assess and amend fund documentation and operational procedures to include at least two liquidity management tools for open-ended AIFs and UCITS.
• Reassess delegation frameworks and ancillary service offerings, ensuring that all delegation structures are robustly justified and that conflicts of interest are effectively managed.
• Confirm that substance and governance arrangements meet the codified standards, with at least two EU-resident individuals fully dedicated to management activities and clear reporting lines documented.
• Upgrade internal systems and investor communications to meet enhanced reporting and disclosure obligations.
• Review depositary arrangements and auditor report processes in light of the clarified rules and new exemptions for SICAVs.