Shaping the future of Chinese investments in Luxembourg

The Grand Duchy of Luxembourg has recognisably been the European hub for China’s leading financial institutions since the opening of the overseas subsidiary of the Bank of China in Luxembourg in 1979. As of today, numerous Chinese banks, including the seven largest, have their European headquarters or subsidiaries in the grand duchy. These institutions have progressively broadened their scope of business, expanding into capital market activities and asset management, and they now play a key role in financing M&A transactions initiated by Chinese investors, thereby facilitating the expansion of cross-border investments between Europe and China.

Moreover, in 2011, the Luxembourg Stock Exchange (LuxSE) listed the first offshore renminbi (RMB) bonds, better known as dim sum bonds, issued in Europe. This development marked the beginning of a robust exchange between China and Luxembourg, with LuxSE becoming a preferred platform for Chinese investors seeking to list RMB in Continental Europe today.

However, investment flows between the EU and China have continued to face headwinds in recent years, largely influenced by geopolitical tensions and economic uncertainties. Domestic constraints on Chinese outbound capital flows and tightening scrutiny of Chinese investments abroad have not helped the recovery of Chinese investment in Europe and Luxembourg following the COVID pandemic. Although China has moved beyond its zero-COVID strategy, the lasting effects on cross-border travel, business operations, and dealmaking activities are still being felt.

Following an initial recovery from the pandemic, a series of global crises – including the war in Ukraine, rising energy prices, financial market volatility, debt pressures, and instability in the Middle East – contributed to a slowdown in global foreign direct investment (FDI) and cross-border transactions in 2022 and 2023. Encouragingly, 2024 marked a turning point, with global FDI flows showing signs of recovery. Investor sentiment has improved, supported by the resilience of key economies, greater regulatory clarity, and the gradual modernisation of the EU’s investment framework. As financial conditions continue to stabilise, optimism is growing that European and Chinese markets will rebuild stronger, more resilient investment ties in the years ahead.

As regards practical considerations for making investments in Luxembourg, in general there is no specific pre-approval process for M&A transactions, although the deals may be subject to an approval process by the competent Luxembourg authority.

As for the restrictions on investment, specific rules may apply in certain sectors. For instance, for acquisitions in the financial sector (such as banks or asset managers), an investor must notify its intention to acquire a certain threshold in a Luxembourg bank or financial sector entity to the regulator, the Commission de Surveillance du Secteur Financier (CSSF). The CSSF has the right to oppose the transaction based on reasonable grounds and legal criteria.

Other restrictions are established by the law of May 19 2006 (the Takeover Law), which implements Directive 2004/25/EC on takeover bids, as amended, and applies to certain industries or to the acquisition of companies with securities admitted to trading on a regulated market in Luxembourg, where the CSSF, being the competent authority, shall supervise bids impartially and independently of all parties to the bids.

Generally, the following rules apply to Chinese investors and investments, and there are no currency restrictions and no specific contractual provisions that arise in relation to Chinese investments.

To implement Regulation (EU) 2019/452 of March 19 2019, the law of July 14 2023 on FDI (the FDI Law) was adopted to safeguard critical assets that are deemed crucial for national security or public order. The FDI Law introduces a mandatory notification and pre-approval requirement for non-European investors (i.e., natural persons or legal entities residing outside the European Economic Area) seeking to acquire control over a Luxembourg entity operating in specific activities – such as energy, finance, health, telecoms, and data – deemed critical for the national security or public order in the grand duchy.

FDIs that were not completed before September 1 2023, potentially falling in the scope of the FDI Law, must be reported to the Luxembourg Ministry of the Economy, along with relevant information about the investment, such as products, services, business operations, and countries of business activity. In order to determine whether a screening process is necessary, a preliminary analysis will be conducted by the ministerial screening committee. If required, the Ministry of the Economy and the Ministry of Finance will undertake a detailed assessment to evaluate whether the proposed FDI is likely to impact security or public order, and consequently a decision will be made to prohibit or allow the investment.

The newly introduced FDI regime has a potentially broad scope, covering any investment made in Luxembourg by a non-European investor taking control of a Luxembourg entity operating in one of the relevant sectors. However, the FDI Law does not impose any additional requirements on financial firms, given that any merger or acquisition contemplated by such entities must be approved in advance by the competent regulatory authority.

It is also important to highlight that ‘portfolio investments’ (meaning acquisitions of securities for the purposes of completing a financial investment without gaining control over a Luxembourg legal entity) are not covered by the FDI Law, and Luxembourg holding companies are also exempt from the screening regime. Furthermore, while private equity fund investments may fall under the FDI Law, it is uncommon for private equity funds based outside the EU to acquire targets in Luxembourg.

The EU continues to advance its legal framework on ESG aspects, sustainable investments, and related disclosure obligations. These developments have significant implications for the M&A market and influence the strategies of Chinese outbound investments in Europe. Key legislative initiatives include Regulation (EU) 2019/2088 of November 27 2019 on sustainability-related disclosures in the financial services sector and Regulation (EU) 2020/852 of June 18 2020 on the establishment of a framework to facilitate sustainable investment.

On the same topic, the Corporate Sustainability Reporting Directive (CSRD) entered into force in January 2023. The CSRD, among others, requires large companies, as well as listed SMEs, operating in the EU to disclose information on their ESG performance in their annual financial reports. Non-EU companies with substantial activities in the EU will also be covered. The first category of impacted companies will have to apply the new rules starting from the financial year of 2024, and publish their reports in 2025.

Moreover, the Corporate Sustainability Due Diligence Directive (CSDDD) came into effect in July 2024. The CSDDD aims to force large EU and non-EU companies with significant EU activities to disclose the actual and potential human rights and environmental adverse impacts of their operations and value chains, and those of their subsidiaries. The national transposition process, for the first group of companies, is expected to be completed by July 2027.

On the same topic, the Stop-The-Clock Directive, which forms part of a package of legislative reforms proposed by the European Commission to streamline sustainability regulation known as the ‘Omnibus Simplification Package’, was published in the Official Journal of the European Union on 16 April 2025, with EU member states required to transpose it by December 31 2025. The directive postpones:

• The application of the CSRD requirements for large companies that have not yet started reporting by two years; and

• The transposition deadline and the first phase of application CSDDD for the largest companies by one year.

In parallel, substantial amendments to the CSRD and CSDDD are also being discussed. For instance, the European Commission has proposed raising the CSRD thresholds to cover only companies with over 1,000 employees and turnover above €50 million or assets over €25 million, exempting about 80% of previously covered firms. Additionally, the CSDDD’s scope would be narrowed to focus primarily on direct suppliers. If adopted, these changes are expected to reduce administrative burdens on companies by 25%, potentially saving European businesses approximately €40 billion, and will represent a significant component of the EU’s 2025 legislative agenda.

The Chinese government has been increasingly promoting sustainable investment practices and prioritising ESG factors in overseas investments since the ‘Belt and Road Initiative’ was incorporated into the Constitution of China in 2017. Notably, the volume of Chinese greenfield investments in Europe is even higher than the volume of M&A transactions per year. In 2024, Chinese FDIs in Europe continued to be dominated by greenfield projects, particularly in the electric vehicle and battery manufacturing sectors. The implementation of effective ESG policies and strategies by target companies may therefore attract green and ESG-standardised investments from Chinese investors.

On August 23 2023, the Ministry of the Economy introduced before the Luxembourg parliament a draft bill of law, No. 8296 (the 8296 Bill), proposing a mandatory ex ante notification and screening procedure for mergers concerning certain entities operating in Luxembourg. The 8296 Bill provides that any merger, acquisition, or creation of a joint venture that does not fall under the EU merger control regime set out in Council Regulation (EC) 139/2004 on the control of concentrations between undertakings shall be notified in advance to the Luxembourg Competition Authority if:

• The aggregate turnover realised in Luxembourg by all enterprises involved in the concentration exceeds €60 million; and

• At least two of the enterprises participating in the concentration generate an individual turnover in Luxembourg of at least €15 million.

The purpose of such a regime would be to give Luxembourg’s Competition Authority the power and tools to carry out an ex ante control of certain M&A or other alignments between undertakings that may have a restrictive effect on competition in Luxembourg, and to allow for early detection of such threats to competition, potentially limiting damage to consumers and undertakings alike.

The implementation of the 8296 Bill into law would introduce another regulatory factor for Chinese investors interested in entering the Luxembourg market, as they will be subject to a mandatory pre-notification and screening process when considering mergers, acquisitions, or joint ventures in the grand duchy. This will introduce complexity to their investment approach and highlight the significance of conducting thorough due diligence and ensuring compliance with Luxembourg’s competition laws.

The 8296 Bill is in the last stages of its adoption procedure and is expected to be transposed into law in the near future.

On July 12 2023, the Foreign Subsidies Regulation (Regulation (EU) 2022/2560, or FSR) entered into force. The FSR establishes a framework designed to address the potential negative impacts of foreign subsidies on fair competition within the EU. As of October 12 2023, companies operating in the EU are required to inform the European Commission about any financial assistance they receive from non-EU governments that could influence their market behaviour and/or alter fair market competition.

The FSR also empowers the European Commission to investigate and potentially intervene in cases where foreign subsidies are deemed to distort competition or harm the EU’s interests. Overall, the regulation seeks to safeguard the integrity and stability of the EU’s internal market, as well as ensure and promote fair competition for businesses operating within it.

The most common legal entity used for Chinese investment into Luxembourg is a private limited liability company (société à responsabilité limitée, or SARL) or a public limited liability company (société anonyme, or SA). Both are commonly used as structures for the acquisition of companies.

The SARL structure is commonly preferred to the SA, partly due to its lower minimum share capital requirement. Regarding investment activities by funds established by Chinese investors in Luxembourg, the most common structure appears to be the reserved alternative investment fund (RAIF), and, to some extent, the specialised investment fund (SIF). Both are set up as limited partnerships in the form of a société en commandite simple (SCS) or a société en commandite spéciale (SCSp). In addition, an investment company in risk capital (société d'investissement en capital à risque, or SICAR) is also commonly used by investors, including Chinese investors, to pool money for investment.

The key requirement for creating and using any of these vehicles is the establishment of an entity in Luxembourg with sufficient substance. A minimum share capital must be allocated to the Luxembourg vehicle, and appropriate management procedures must be implemented. More specifically, a majority of the management members of the vehicle shall be Luxembourg resident and regular board meetings shall be held in the grand duchy, to ensure decisions are made in Luxembourg.

In establishing investment funds that carry out M&A activities, investors must verify that these comply with the alternative investment fund managers regime and obtain the applicable approvals from the CSSF. Although RAIFs do not require prior approval from the CSSF, SIF and SICAR investment vehicles must be pre-approved by the CSSF before they can begin their business activities.

Court litigation and arbitration are the most frequently used methods for resolving disputes. Arbitration is generally preferred by foreign investors due to its advantages, including easier enforcement of arbitral awards compared with court judgments, greater flexibility, and enhanced privacy.

Luxembourg is party to 106 bilateral investment protection treaties, including a treaty with China, the latest version of which entered into force in 2009. The grand duchy’s increasing role as a platform for cross-border investments, joint ventures, and investment funds carrying out M&A activities worldwide has allowed its arbitration courts to develop significant expertise in international agreements and international commercial law matters.

Luxembourg courts are known for reviewing disputes in a neutral and independent manner within a reasonable timeframe and issuing enforcement judgments recognised abroad as far as other jurisdictions are covered under respective regulations and treaties. The most important pieces of regulation on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters are the Recast Brussels Regulation (Regulation (EU) No. 1215/2012) and the Lugano Convention.

Case law also serves as a valuable source of legal precedent and guidance for resolving disputes effectively.

However, parties in Luxembourg often prefer to resolve disputes outside arbitration and courts to preserve confidentiality and ensure the seamless continuation of their business.

Regarding taxation, Luxembourg benefits from an extended network of double taxation treaties advantageous for FDI into and out of the grand duchy. Luxembourg and China have signed a double tax treaty, enabling companies to avoid double taxation on profit repatriation to Chinese investors, provided several conditions are met. In addition, the European Parent–Subsidiary Directive (Council Directive 2011/96/EU) generally provides an exemption of withholding tax on dividends paid to a qualifying EU parent company.

The law of March 25 2020 implementing Council Directive (EU) 2018/822 of 25 May 2018 amending Directive 2011/16/EU as regards mandatory automatic exchange of information in the field of taxation in relation to reportable cross-border arrangements (DAC6), which entered into force on July 1 2020, requires intermediaries to disclose to the Luxembourg tax authorities any cross-border arrangements that meet certain conditions. This regime inevitably impacts cross-border M&A structuring by Chinese investors, as cross-border M&A tax structuring in terms of the review of the share purchase agreement, tax structuring upon acquisition, cash repatriation strategies upon sale, etc. needs to be carried out in accordance with such a transparency regime.

Moreover, on May 3 2023, the Luxembourg parliament adopted a law transposing further amendments to Council Directive 2011/16/EU on administrative cooperation in the field of taxation (DAC7) into national legislation. The proposed reform contains several sections that complement and extend the existing domestic rules on tax transparency and exchange of information.

In addition, in October 2023 the Council of the EU adopted further amendments to Council Directive 2011/16/EU on administrative cooperation in the field of taxation (DAC8), with the aim of introducing new reporting obligations for service providers or operators involved in providing crypto-asset services to EU resident customers. EU countries will transpose DAC8 by December 31 2025, with 2026 being the first reporting year.

The European Commission proposed the latest amendment to Directive 2011/16/EU (DAC9) on October 28 2024 (DAC9). This proposal incorporates the OECD’s GloBE top-up tax information return into EU law, simplifying multinational enterprises’ filing obligations through centralised reporting. Once adopted, EU member states must transpose the new rules into domestic laws by December 31 2025, with the first exchange of information scheduled for 2026.

Finally, in December 2021, the European Commission proposed the first draft of the Anti-Tax Avoidance Directive (ATAD 3), amending Council Directive 2011/16/EU, with the aim of preventing the misuse of shell entities for tax purposes. The European Parliament approved the proposal on January 2023, but it is not yet effective, due to difficulties in obtaining unanimous consent from all the EU member states. ATAD 3 would introduce a multi-step test to identify shell entities, and establishes automatic information exchange for all in-scope entities. If adopted, the new regime is expected to impact EU corporate taxpayers, including Chinese investors that set up legal entities in the EU or Luxembourg with minimal substance and no actual economic activity, posing a risk of being used for improper tax purposes, including tax evasion and avoidance.

Overall, the business relationship between Luxembourg and China continues to evolve, shaped by mutual interests and economic cooperation. Luxembourg remains an attractive gateway for Chinese investors into Europe, offering legal and political stability, and a robust and transparent regulatory framework. Its growing fund industry and reputation as a hub for green finance further reinforce its role as a strategic location for facilitating Chinese outbound investments.

On the other hand, the legal and regulatory environment for Chinese investments into Luxembourg is now marked by heightened scrutiny, expanded transparency obligations, and a growing emphasis on sustainability. ESG factors are becoming more prominent in investment decision making. To remain competitive, Chinese investors are therefore encouraged to deepen their expertise in ESG topics and align their investments with evolving European sustainability standards. This strategic alignment would not only strengthen their position in the EU market but also demonstrate dedication to fostering long-term value creation and practising responsible investment principles.

Furthermore, strict capital controls in China, socio-economic factors, and expanding screening regimes and scrutiny of Chinese investment in the EU might slow down Chinese investment in, and through, Luxembourg in 2025.

Nevertheless, opportunities remain for certain sectors, such as consumer goods, automotive, electric vehicles, and infrastructure. Emerging trends focused on environmental sustainability, climate change, and technological advancements – particularly the rise of AI – also continue to gain momentum. Chinese businesses, positioned at the forefront of these developments, remain an appealing prospect for European investors seeking to engage with these dynamic markets.

Looking ahead, Chinese investors must stay well informed and adapt to the evolving legal and regulatory landscape. Engaging with experienced local legal and financial advisers will be essential in navigating this complex environment and unlocking the full potential of Luxembourg as a strategic platform for business growth in Europe.