The anticipated modification of the existing EU regulation regarding European long-term investment funds (ELTIFs) was approved by the European Parliament and the Council of the European Union on 15 March 2023. Regulation (EU) 2023/606 (”ELTIF 2.0”) was published in the Official Journal of the European Union on 20 March 2023 and amends Regulation (EU) 2015/760. With ELTIF 2.0, the EU legislature hopes to make the ELTIF a more accessible and attractive investment vehicle by improving the flexibility of the regulatory regime. ELTIF 2.0 entered into force on 9 April 2023 (20 days after its publication in the official journal) and will apply as from 10 January 2024.
This alert summarises the key changes introduced by ELTIF 2.0 and provides an overview of the Belgian tax regime for ELTIFs.
Regulation (EU) 2015/760 lays down uniform rules on the authorisation, investment policies, and operating conditions of ELTIFs with the intention of facilitating the raising of capital directed towards European long-term investments in the real economy, in line with the EU’s objective of smart, sustainable, and inclusive growth. However, the regulation has not had the success for which legislators hoped, leading to the EU Commission’s November 2021 proposal to amend the ELTIF regime. Since the adoption of the regulation, only around 85 ELTIFs have been authorised in the EU in total (with none in Belgium).
It can be beneficial for ELTIFs to invest in a diversified portfolio of a master ELTIF to diversify their own portfolios and to benefit from the expertise of the managers of other ELTIFs. ELTIF 2.0 therefore allows ELTIFs to make use of master-feeder structures by investing in master ELTIFs.
Fund-of-funds structures are considered a common and effective means to invest in illiquid assets (such as real estate) and to reinvest excess cash. ELTIF 2.0 gives ELTIFs the possibility of investing in other funds by adopting the structure of a fund-to-fund vehicle.
Taking the common fund-of-funds strategies into account, an ELTIF will also be permitted to invest in undertakings for collective investment in transferable securities (UCITS) as well as EU alternative investment funds (AIFs) managed by EU AIF managers.
Broadened scope of eligible assets
Regulation (EU) 2015/760 currently requires that eligible investment assets that are individual real assets have a value of at least EUR 10 million. However, in practice, real asset portfolios are often composed of a number of individual real assets which each have a value of significantly less than EUR 10 million. To address these issues and to make ELTIFs more accessible, ELTIF 2.0 abolishes the requirement for a minimum value of individual real assets. It is expected that the removal of this threshold will contribute to the diversification of investment portfolios and will stimulate investments in real assets by ELTIFs.
A “real asset” is defined in ELTIF 2.0 simply as “an asset that has an intrinsic value due to its substance and properties” which is a much broader definition than under the current regulation and no longer makes a specific distinction between infrastructure and other assets. For example, commercial property will be permitted since it can contribute to the objective of smart, sustainable, and inclusive growth. As a result, a larger pool of assets will likely qualify as eligible real assets.
Furthermore, the scope of eligible investments assets will be broadened by extending it to certain simple, transparent, and standardised securitisations and green bonds.
Reduction in the threshold for investments
The threshold for the proportion of an ELTIF’s capital that must be invested in eligible assets will be reduced from 70% to 55%. The remainder must be invested in “other assets” as described in article 50(1) of Directive 2009/65/EC regarding UCITS. By reducing the limit for eligible investment assets, ELTIF 2.0 aims to enable managers of ELTIFs to better manage the liquidity of ELTIFs.
Regulation (EU) 2015/760 requires that qualifying portfolio undertakings which are admitted to trading on a regulated market or on a multilateral trading facility have a maximum market capitalisation of EUR 500 million. However, many listed companies with a low market capitalisation have limited liquidity which prevents managers of ELTIFs from acquiring a sufficient stake in such companies within a reasonable timeframe (and therefore negatively affects the potential investment targets of ELTIFs).
In order to resolve this, ELTIF 2.0 increases the market capitalisation threshold for qualifying portfolio undertakings from EUR 500 million to EUR 1.5 billion. To avoid potential changes to the eligibility of such investments due to currency fluctuations or other factors, the determination of the market capitalisation threshold will be made only at the time of the initial investment.
The diversification requirement for investments in each underlying asset or qualifying portfolio undertaking will be increased from 10% to 20%. In addition, ELTIF 2.0 will increase the investment limit from 5% to 10% for investments in other assets (see 2), above) if they have been issued by a single body.
The concentration limits for ELTIFs will be increased from 25% to 30%. An ELTIF will be able to acquire no more than 30% of the units or shares of a single ELTIF, European venture capital fund (EuVECA), European social entrepreneurship fund (EuSEF), UCITS, or EU AIF managed by an EU AIF manager.
Waivers from diversification and concentration requirements
ELTIF 2.0 introduces various waivers from investment limits for ELTIFs marketed solely to professional investors. In particular, the waivers relate to the diversification and concentration requirements (see 2), above).
Flexibility regarding borrowing in cash limit
ELTIF 2.0 also provides for more flexible rules regarding the borrowing in cash limit. The current limit of 30% of the value of the capital of the ELTIF is modified by ELTIF 2.0 and makes a distinction between the types of investor to whom the ELTIF is marketed. For ELTIFs that can be marketed to retail investors, the limit will be set at 50% of the net asset value of the ELTIF. However, for ELTIFs solely marketed to professional investors, ELTIF 2.0 permits a higher leverage limit of 100% of the ELTIF’s net asset value because professional investors have a higher risk tolerance than retail investors.
It is currently foreseen that investors in an ELTIF may request its winding down if their redemption requests, made in accordance with the ELTIF’s redemption policy, have not been satisfied within one year from the date on which they were made. Due to the long-term character of an ELTIF and the fact that an ELTIF’s assets are often illiquid, the winding down possibility is sometimes perceived as disproportionate and is abolished by ELTIF 2.0.
Abolition of cap on portfolio’s exposure and initial minimum amount
ELTIF 2.0 abolishes the 10% cap on a portfolio’s exposure for retail investors whose financial instrument portfolio does not exceed EUR 500,000 as well as the requirement that the initial minimum amount invested in one or more ELTIFs must amount to at least EUR 10,000.
No more investment advice
ELTIF 2.0 also abolishes the requirement for distributors and managers of ELTIFs to provide appropriate investment advice to retail investors, since this was not clearly defined and led to legal uncertainty and confusion.
Alignment of suitability test with MiFiD II
The suitability test that needs to be performed when distributing ELTIFs to retail investors will now be aligned with the markets in financial instruments directive (referred to as MiFiD II).
Possibility of a “green” ELTIF
Another important element of ELTIF 2.0 is that the European Commission will perform an assessment by 11 January 2026 to assess, amongst other things, whether an environmentally sustainable or “green” ELTIF is feasible and whether there should be a general obligation for ELTIFs to comply in their investment decisions with the “do no significant harm” principle (within the meaning of Regulation (EU) 2019/2088 on sustainability-related disclosures in the financial services sector).
Date of application
ELTIF 2.0 entered into force on 9 April 2023 and will apply as from 10 January 2024.
ELTIF 2.0 provides for a transitional regime for five years for ELTIFs already authorised as at 10 January 2024 under the provisions of Regulation (EU) 2015/760 and compliant with that regulation, which will be deemed to comply with ELTIF 2.0 until 11 January 2029.
ELTIFs authorised as at 10 January 2024 under the provisions of Regulation (EU) 2015/760 and compliant with that regulation and that do not raise additional capital, will be deemed to comply with ELTIF 2.0 indefinitely.
It will be possible for ELTIFs authorised before 10 January 2024 to choose to be subject to ELTIF 2.0, provided that the competent authority of the ELTIF is notified.
The ELTIF regulation allows each individual EU member state to establish a competitive tax regime for ELTIFs. In Belgium, the tax framework for ELTIFs has been constructed on the same basis as that for Belgian fund managers, including real estate fund managers, ensuring that ELTIFs can benefit from:
Following the approval of ELTIF 2.0 providing for the removal of various restrictions and impractical requirements (such as the EUR 10 million per asset investment rule) and the introduction of a specific tax framework in 2022, the ELTIF has now finally become a viable alternative to investment structures such as “SICAV/BEVEKs,” B-REITs, and B-REIFs; unlike such structures, the ELTIF has no annual distribution requirement.
Whereas “DRD SICAV/BEVEK,” B-REIT, and B-REIF entities are required to distribute 80% or 90% of their annual net profits (or allocate such funds to debt repayment), no such strict distribution rules apply to ELTIFs, as this would conflict with the long-term investment perspective of the ELTIF. As a result, a Belgium-based ELTIF may opt to accumulate its revenue (dividends and capital gains on shares) for several consecutive years and, subsequently, still offer its Belgian corporate investors the benefits of the DRD exemption on distributed dividends, provided that the underlying income meets certain taxation requirements.
For completeness, it should, however, be noted that the Belgian government intends to introduce some amendments to the DRD rules applicable to investments into investment funds.
David Roelens joined Deloitte Legal – Lawyers in 2007 and heads the firm’s largest practice area, the Corporate and M&A team of lawyers. He gained extensive experience in the corporate M&A department of Clifford Chance (Brussels and New York) where he started his career in 1996. David’s practice focuses on cross-border and domestic M&A and private equity transactions, real estate transactions, debt and equity capital markets and corporate law. He also advises clients in relation to general commercial law, insolvency and restructuring issues. David also worked for a couple of years as company lawyer for bpost and gained a good understand of the functioning of legal departments and the needs and goals of general counsels. Interested in the efficiencies and time-saving that automation can bring about, David co-developed an automated document generation tool, Legau, which allows users to create contracts and legal documents, freeing up their time to spend on risk anticipation rather than remediation and legal counselling. Until 2020, David was the firm’s Finance partner. Since 2016, he has also been on the Supervisory Board - Partnership Council as the representative of the legal practice. He set up regular general counsel round tables in Ghent and due to the success of the initiative is now extending the concept to Antwerp and Zaventem. David is recommended by various legal guides including Chambers (Global and Europe), IFLR1000 and Legal 500. In addition to his extensive legal knowledge and transactional experience, David is known for his interest and understanding of his client's business, and recognized as a true deal maker, offering efficient service delivery. He is fluent in Dutch, French and English.