Luxembourg as Europe’s launchpad for NPL and Direct Lending

Luxembourg has firmly established itself as a premier European hub for non-performing loan (NPL) investments and direct lending strategies. With a robust regulatory framework, a mature fund ecosystem, and a surge in private credit activity, it offers a compelling proposition for fund managers and investors seeking exposure to alternative credit.

Ricky Marshall, Sales Executive at Belasko, dives into how Luxembourg is unlocking opportunity in the NPL and direct lending space.

A market on the rise

Luxembourg’s private debt fund sector has experienced remarkable growth. According to the ALFI/KPMG Private Debt Fund Survey 2025, AUM in Luxembourg-domiciled private debt funds surged by 24.7% year-on-year, reaching approximately €635 billion by the end of 2024[1].

Direct lending remains the dominant investment strategy, accounting for 52% of private debt funds, followed by mezzanine (17%) and distressed debt (11%). Structurally, Reserved Alternative Investment Funds (RAIFs) now represent 64% of the market, while Special Limited Partnerships (SCSp) are the preferred legal form for 80% of debt vehicles.

This combination of strong growth, strategic focus, and structural flexibility continues to position Luxembourg at the forefront of Europe’s private credit evolution.

Regulatory tailwinds: AIFMD II and NPL reform

Luxembourg’s regulatory environment has been instrumental in attracting credit fund managers. The upcoming implementation of AIFMD II by April 2026 introduces the Loan Origination Fund (LOF) designation, providing a harmonised framework for alternative investment funds (AIFs) to originate loans across the EU[2].

Key features include:

• Leverage caps: 175% for open-ended and 300% for closed-ended funds.
• Risk retention: Funds must retain 5% of the notional value of originated loans.
• Diversification limits: No more than 20% exposure to a single borrower in certain cases.

Luxembourg is well-positioned to lead in this space, having already embraced loan origination through its regulatory guidance and fund structuring flexibility.

On the NPL front, the Law of 15 July 2024 transposes the EU’s NPL Directive into national law. It establishes a clear framework for transferring NPLs from banks to non-bank investors and introduces a new regulated profession, credit servicers, licensed by the CSSF[3]. These servicers manage loan recovery and borrower communications, ensuring compliance with transparency and consumer protection standards.

NPL activity: a growing opportunity

While Luxembourg’s NPL ratio remains low by European standards, it rose to 2.3% in Q4 2024, the highest since 2017[4]. This increase, driven by economic headwinds and real estate sector vulnerabilities, has prompted banks to consider offloading distressed assets.

The new legal framework facilitates the creation of a secondary market for NPLs. Banks can transfer non-performing exposures to specialised investors, freeing up capital for new lending. For investors, this opens access to real estate-backed NPLs, particularly in commercial property and SME lending, sectors with rising default rates but also strong recovery potential.

Structuring advantages

Luxembourg offers a wide array of fund vehicles tailored to private credit strategies:

• Reserved Alternative Investment Funds (RAIFs): Now the most popular structure, RAIFs offer regulatory efficiency and flexibility, with indirect supervision via an authorised AIFM.
• Special Limited Partnerships (SCSp): Favoured for their contractual freedom and tax transparency, SCSp structures mirror Anglo-Saxon limited partnerships.
• Specialised Investment Funds (SIFs) and Part II Funds: Suitable for institutional investors seeking regulated vehicles.

This structural diversity allows managers to tailor vehicles to their strategy, investor base, and jurisdictional needs.

Tax and legal certainty

Luxembourg’s tax regime is highly favourable for credit funds. Most vehicles benefit from tax neutrality, and there is no withholding tax on interest payments to non-residents. The country’s securitisation law also enables efficient structuring of NPL acquisitions through special purpose vehicles.

From a legal standpoint, Luxembourg offers strong creditor protections. The 2005 Collateral Law ensures swift enforcement of security interests, a critical factor for NPL investors. The new NPL law further reinforces these protections, mandating comprehensive pre-sale disclosures and post-sale reporting to the CSSF.

A mature ecosystem

Luxembourg’s ecosystem of fund administrators, legal advisors, auditors, and depositaries is well-versed in the complexities of private credit. This depth of expertise ensures smooth fund setup, compliance, and ongoing operations.

The CSSF’s proactive stance has fostered a pragmatic regulatory culture. This has enabled Luxembourg to act as a testbed for EU financial reforms, including AIFMD II and the NPL Directive.

Investor confidence and distribution

As Europe’s largest fund centre, Luxembourg enjoys strong investor trust. Institutional investors are drawn to its regulatory rigour, governance standards, and global distribution capabilities. The AIFMD passport allows Luxembourg funds to be marketed across the EU, a key advantage for cross-border strategies.

The revised European Long-Term Investment Fund (ELTIF 2.0) regime further enhances access to private credit for qualified retail investors. Luxembourg is expected to play a central role in hosting these semi-public vehicles.

The Luxembourg advantage

Luxembourg’s ascent in the NPL and direct lending space is underpinned by a unique combination of market momentum, regulatory foresight, and structural flexibility. As Europe’s financial landscape evolves, it offers fund managers and investors a stable, scalable, and sophisticated platform for alternative credit strategies.

For firms like Belasko, with deep operational expertise in NPL and direct lending fund administration, Luxembourg provides the ideal environment to support clients in navigating complexity, ensuring compliance, and delivering performance.

To explore how Belasko can support your private credit strategy in Luxembourg, get in touch with Ricky Marshall, ([email protected]).

[1] ALFI/KPMG Private Debt Fund Survey 2025 (released 2 October 2025)

[2]CSSF – Law of 15 July 2024 transposing Directive (EU) 2021/2167 on NPLs

[3]Baker McKenzie – “Implementation of the NPL Directive in Luxembourg” (Aug 2024)

[4]Paperjam – “Luxembourg NPLs rise but stay manageable: BCL” (Dec 2024)