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12 August 2013
In response to high demand from the international fund communities, new legislation has come into force that significantly broadens the legal framework for private equity and venture capital fund structuring through Luxembourg.
The amended legislation, implemented by the Luxembourg authorities on
15 October, modernises the société d’investissement à capital risque law (Sicar) of 15 June 2004, presenting sponsors and investors with a more versatile and flexible investment vehicle.
Since its enactment four years ago, take up of the Luxembourg Sicar has mostly been by European international private equity and venture capital firms as an alternative to traditional limited partnership structures in risk capital. However, following ongoing collaboration between the authorities and these industries, as well as lessons learnt since Sicar’s existence, the new legislation brings forth an updated regime that aims to take modern day requirements into consideration.
A significant change concerns the new ability to create multiple investment compartments, a function that coincides with the evolution of the investment approach adopted by the global private equity communities.
Umbrella funds can now be established and varying investment policies and pools of assets applied. This provision will, among other benefits, provide increased structuring possibilities with regards to asset classes, investors and in terms of distribution policies. In practice, this also allows for compartments to be liquidated separately and securities can have a different par value within each sub-fund.
At the same time, investor liabilities are now limited to each sub-fund and complete segregation of assets and liabilities for compartment is guaranteed by law. This principle of bankruptcy remoteness of each sub-fund is, of course, an indispensable aspect required to make the scheme attractive to investors.
As certain investors, despite being seen as experts, were previously restricted, the qualified investor status has been extended to those involved in the Sicar’s management.
This provision is a direct and literal reflection of a feature in the law governing specialised investment funds (SIFs), an investment vehicle introduced in Luxembourg in February 2007. Officers and other persons who interfere with the management of the Sicar have now been excluded from the qualified investor requirement. As a result, the new law allows for an additional category of investors in Sicars in line with international practice.
Assets are now recognised according to the ‘fair value’ concept as opposed to their ‘value of realisation estimated in good faith’. This clarification was necessary and aligns the Sicar with other regimes, in particular with the SIF.
The Sicar’s flexibility concerning the minimum share capital of e1m (£800,000) has been extended and today relates to subscribed share capital increased by share premium.
Generally, the revised regime eases many of the regulatory burdens. Examples include the fact that requirements on the custodians of Sicars have been lightened and the depositary bank is now released from its obligations to ensure timely collection of subscriptions, payments and correct allocation of income. Sicars are, however, required to put at the disposal of their investors their annual report and the auditor’s report within six months following the end of the accounting year.
In many respects, these changes bring the Sicar regime in line with many of the key characteristics of the SIF while offering further competitive advantages to its operational flexibility. Comparatively, both regimes now apply the same rules with respect to custodian obligations and the ability to create different compartments. The key differences among them, however, remain with their investment policies and risk diversification requirements – none for the Sicar.
While giving the Sicar a fresher appearance on the legal and regulatory sides, the legislator has preserved its key tax benefit. This relates to full tax neutrality for both inbound and outbound income and earnings, in other words, a full exemption from corporate income tax of profits derived from risk capital, and for outbound distributions, which will continue to be made withholding tax-free to investors – regardless of their type and residence. The introduction of the principle of multi-compartments within the Sicar does not alter or restrict its full tax neutrality in any respect for domestic tax purposes.
It should also preserve its international tax efficiency through its access to certain double tax treaties.
These changes, together with other initiatives from the Luxembourg government such as the abolition of capital duties and ratification of new double tax treaties, provide the long-awaited increased flexibility, while making the jurisdiction even more favourable for establishing funds.
They should give way to a sense of liberation in how private equity investors choose to structure their investments. They will be welcomed by the financial communities, particularly at a time when new measures are needed to positively reignite activity across economies.
François Pfister is a partner at Oostvogels Pfister Feyten