During the past few years, activity levels in Luxembourg have been reaching record highs. Most of the world's leading financial institutions now have offices in the Grand Duchy and domestic law firms have been expanding to meet the demands of the increasing number of investment funds residing in the country. Luxembourg is now at a point where, not only is it the key domicile for European investment funds but also, a large majority of the world's international transactions are being structured through Luxembourg investment vehicles. So why has this small country of only 450,000 inhabitants spread across a mere 1,000 square miles been attracting so much attention recently?

In many ways, Luxembourg's recent growth in the international marketplace is linked to a corresponding upturn in the investment fund and private equity markets and, specifically, the measures the country has taken to accommodate each of these areas. Also, with a surge in investment into alternative asset classes such as real estate, we are now witnessing more and more funds being introduced for these areas together with legislation being adapted to cater for this growth – resulting in a greater number of companies turning to Luxembourg for its holding and financing structures.

Change is clearly a good thing if we consider what it has achieved for Luxembourg. A continuous review of legislation and taxation has increased the country's appeal and extended its status to become a key jurisdiction for holding companies and special purpose vehicles. Some years ago, for example, the authorities recognised the need for a competitive venture capital and private equity investment structure compared with that of its European counterparts, and subsequently introduced the law on SICAR (societe d'investissement en capital a risque). For more than two years now, alongside vehicles such as SOPARFIs (societe de participation financiere) and UCIs (undertaking for collective investment), this legislation has been a key growth driver of the Luxembourg fund market.

Signed in 2004, the law on SICAR was created specifically for investors in 'risk capital', namely private equity and venture capital, and is subject to light regulation by the Commission de Surveillance du Secteur Financier (CSSF). The introduction of the law arrived at an explosive time in the financial marketplace and has since been offering investors around the world a more flexible, tax-efficient regulatory framework representing a sound alternative to the UK and Channel Islands limited partnership structures. What has been particularly appealing to international investors has been the regulated yet 'hassle free' nature of the legislation.

Under the SICAR regime, companies are easy to set up, manage and exit while at the same time combining the advantages of a regulated entity with the tax efficiency of a multiple choice of fund vehicles that are transparent or tax resident.

With the SICAR, there is no need to diversify risk either geographically, by sector or otherwise, and there is no minimum or maximum investment levels as investors should be fully aware of the increased risks and anticipate a higher than average return on investment.

This flexible definition has enabled a much wider spread of private equity, giving investors greater choice compared with what is possible with some other fund structures.

Providing investors with a high degree of flexibility is an undertone running throughout almost every legislative change in Luxembourg. When it enacted the law on SICAR, for example, it simply looked at what was happening in other markets taking on board the lessons from the mistakes those countries had made. Luxembourg then took everything into account with the new legislation and made it less rigid and more even. Combined with tax neutrality, that has made it a product which is very appealing for international investors. More recently, there have been talks of further amendments to the legislation following the arrival of the European Commission's investigation and the subsequent amendments to the law to ensure its compliance with the European Union (EU).

Only last month, we witnessed another development which should have a big impact on the Luxembourg fund industry. Parliament gave the green light on the Specialised Investment Fund (SIF), which replaces the existing law of 19 July, 1991, on undertakings for collective investment for institutional investors. The new law removes many of the obstacles that previously existed and gives way to an investment fund which will extend considerably the range of eligible investors and provides for a regulated structure which is a great deal more flexible. Again, this is attractive to a number of sectors as there is greater scope for investing in a wider range of asset classes, offering a broader range of industries the option to launch investment funds.

This is a prime example of why activities in Luxembourg have been soaring – the country has been reaching out to investors worldwide by providing greater flexibility together with the regulation increasingly sought after for investments of this nature.

Looking back, we have seen a number of recent developments, including the legislation on securitisation vehicles, on specialised investment funds, new legislation on family asset management holdings – a whole range of products that have led to increased activity levels throughout Luxembourg. During the past 20 years, the participation exemption for corporate structures has been improved systematically. In doing this, it has opened up the market further and attracted investors by the dozens. Importantly, Luxembourg has been the main jurisdiction behind specialist structures for tax neutrality and includes the SOPARFI which, together with the SICAR, offers sound alternatives to offshore limited partnerships.

Overall, Luxembourg is an ambitious market which aims to be at the core of the world's financial markets and is consistently taking strong measures to maintain its competitive position within the EU. These legislative developments are just a few of the regimes put in place to facilitate investment activity through the country. Even with all this activity and growth, however, a major objective of Luxembourg's authorities is to ensure the country maintains its strong reputation. Today, Luxembourg offers investors some of the strongest legislation in this field with independent auditors supervising all the activities of the financial sector. As a result, the country has become very strict, with very few scandals to report.

It is important to remember, however, that financial markets are always subject to change so Luxembourg must continue to work hard to stay on top. The country's competitive status has been the result of many years of hard work together with ongoing support from the Government in building a legislative framework to the merit of the country's financial status, so it must continue to put in great efforts to stay in competition with other offshore jurisdictions bearing in mind recruitment and market volatilities.

While Luxembourg can boast an adaptable marketplace with flexible legislation, the bigger picture must always be kept at the front of the mind and businesses must take every measure to ensure they keep pace with what lies ahead.