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10 July 2020 / news

Third country firms operating in Luxembourg: Regulator clarifies “provision of investment services in Luxembourg”

On 1 July 2020, the CSSF published a new regulation and circular aimed at clarifying the legal regime for third-country firms intending to provide investment services in Luxembourg.


On 1 July 2020, the CSSF published CSSF Circular 20/743 which amends CSSF Circular 19/716 regarding the provision in Luxembourg of investment services or performance of investment activities and ancillary services in accordance with Article 32-1 of the law of 5 April 1993 on the financial sector, as amended (the LFS) and CSSF Regulation N° 20-02 on the equivalence of certain third countries with respect to supervision and authorization rules for the purpose of providing investment services or performing investment activities and ancillary services by third-country firms.

The localisation of investment services

In a first stage, CSSF Circular 19/716 clarified the different options available under the LFS to third country firms wishing to provide investment services or to perform investment activities in Luxembourg, in particular by setting out the conditions to be met and the process to be followed by such firms.

Now, CSSF Circular 20/743 clarifies the concept of services provided “in Luxembourg.”

CSSF Circular 19/716 as amended by CSSF Circular 20/743 now states that “Article 32-1 of the LFS applies to investment services provided ‘in Luxembourg’, meaning on the territory of Luxembourg”.

Before the publication of CSSF Circular 20/743, it was often debated as part of licensing discussions whether investment services were actually provided in Luxembourg or in the third country in question. This debate arose for instance in the context of Brexit and due to the fact that the Financial Conduct Authority in the United Kingdom provided some guidance on the “characteristic performance” test required to determine where an investment service is provided, whereas the CSSF did not provide similar guidance.

Circular 20/743 explains that the investment service is deemed to be provided “in Luxembourg” where one of the following conditions is met:

  • The third country firm has an establishment (for instance, a branch) in Luxembourg;
  • The third country firm provides an investment service to a retail client established or located in Luxembourg; or
  • The place where the “characteristic performance” of the service is provided, i.e. the essential service for which payment is due, is Luxembourg.

The Circular also explicitly states that there can be situations where, although the third country firm provides investment services to a client, other than to a retail client, established or located in Luxembourg, the service can be considered as not being provided "in Luxembourg."

For third country firms providing investment services into Luxembourg without having an establishment in Luxembourg, the first question will therefore be to determine whether the services are provided to retail clients or not. If that is the case, the requirements under the LFS apply. If this is not the case, then the relevant firm will need to determine where the “essential service” is provided.

Unfortunately, the Circular does not provide any examples to help in determining whether the essential service for which payment is due is located in Luxembourg. One could consider, for instance, that where the employees providing the service are located in the third country in question, and the decisions (for instance portfolio management decisions) are taken in the third country in question, the “essential service” would be provided in the third country and not in Luxembourg. This approach would be consistent with the Luxembourg interpretation of the location of the “characteristic performance” of a contract.

CSSF Circular 20/743 adds an accountability element, making it the responsibility of the relevant third country firm to carry out the analysis set out above prior to providing any services in Luxembourg, to document the analysis, and to retain a copy thereof.

Reverse solicitation

CSSF Circular 20/743 also makes minor amendments regarding reverse solicitation, which is sometimes explored as an alternative to a licensing requirement by third country firms providing an investment service to a Luxembourg client.

There are no substantial changes as CSSF Circular 19/716, as amended, now merely includes a definition of “reverse solicitation” to ease the reading of the circular, but otherwise limits itself to reiterating the principle already included in Article 32-1 of the LFS, i.e. that where an investment service is provided on the basis of reverse solicitation, the third country firm can provide investment services without establishing a branch or obtaining a decision from the CSSF, regardless of the type of client. The added value of CSSF Circular 19/716 in this respect is to clarify that the possibility of relying on reverse solicitation must be assessed by the third country firm continuously and for each individual service, taking into account the ESMA Q&A on MiFID II and MiFIR investor protection and intermediaries topics

First list of equivalent third countries also released

CSSF Regulation 20-02 provides for a list of equivalent third countries pursuant to Article 32-1(1) of the LFS. The current list includes Canada, Switzerland, the United States, Japan, Hong Kong, and Singapore. To the extent firms in these jurisdictions intend to provide investment services in Luxembourg on a cross-border basis, they may now do so, benefitting from “equivalent jurisdiction” status.

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