25 June 2007
Luxembourg’s flexible approach to corporate law has given investors a range of tailored fund structures. François Pfister and Stef Oostvogels report
Luxembourg can offer many benefits to the international investment community, including a booming financial sector, a large degree of flexibility, political stability and a talented workforce. Over the years the country has strengthened both its efforts to become Europe’s key domicile for investment funds and its expertise in this area. Data provided by the Commission de Surveillance du Secteur Financier (CSSF) shows that it is a popular jurisdiction with net assets under management accounting to approximately e2tr (£1.35tr), as at April 2007.
The country’s flexible corporate law has given rise to a number of tailored fund structures for investors and promoters, opening up a whole new range of possibilities for investing. And, following recent developments in the market, it now offers investors a well-rounded range of vehicles competitively positioned alongside other jurisdictions’. Among these are a range of regulated and unregulated vehicles that may appeal particularly to the private equity markets. Although traditionally opting for no regulation, the industry is increasingly looking to regulated structures to cater for a greater and more varied investor base.
For investors seeking regulation, key structures in Luxembourg include the well-known Société d’Investissement à Capital Variable (Sicav) and Fonds Communs de Placement (FCP), the Société de Participations Financières (Soparfi), the Société d’Investissement en Capital à Risque (Sicar) and more recently the updated Specialised Investment Fund (Sif). While each vehicle has certain attractions, investors can benefit from ‘onshore tax-paying’, taking advantage of tax treaties and EU directives if using Sicar or Soparfi. The Sif and Sicar have been quite topical lately, as legislation has now been passed that increases their attractiveness further.
Looking to Sicar, new legislation was passed in June 2004 in response to a demand for a sound pan-European investment vehicle. It is open to investment funds, professional investors, pension funds, commercial companies and individuals who have either certified that they are aware of risks, or invest more than e125,000 (£84,520).
The Sicar is a fully taxable company that is tax-exempt on profit resulting from the management of funds invested in transferable securities such as shares, warrants and bonds. No withholding taxes are charged on the payment of dividends to its shareholders, irrespective of who they are and where they are located.
Generally, the Sicar offers a lighter degree of regulation than most other regulated vehicles and is considered to be a sound alternative to the traditional limited partnership for most private equity and venture capital funds. It is highly popular in Luxembourg, with more than 130 already registered.
In the news recently has been the Sif, which has the appropriate supervision by the CSSF and operates under a highly flexible regime. Since its introduction in February this year, the definition of eligible investors has been significantly broadened so that companies, including many private equity investors that had previously been restricted, can now invest. It is generally accessible to institutions, professionals and private investments of more than e125,000 (£84,520) or those who have their investment expertise confirmed by a trusted financial institution.
Sifs are now open to the ‘informed investor’ and can invest in almost anything investors want to access such as real estate or hedge funds, and can also be used to invest in buyouts and infrastructure projects, to name a few examples. There are also fewer investment restrictions and the reporting requirements have been lightened.
There are two types of Sif: the Sif-fund and the Sif-Sicav. The Sif-fund is financially transparent and has to be held by a management company that has been established in Luxembourg, while the Sif-Sicav is established as a company, is non-transparent and only requires the use of a depository bank based in Luxembourg for supervision of assets and safekeeping.
On the other side of the coin, as with the Sicar, no public distribution is possible. However, the fact that it is now possible to set up funds before the CSSF’s prior approval is a plus. Several corporate forms are also available and it will be permitted to set up ‘umbrella funds’.
On the whole, it is widely believed that the Sif will not only have a big impact on the Luxembourg market, but on the funds industry in general, as it has the seriousness of being regulated yet still remains flexible, which is what investors have been asking for.
Similar to mutual funds in the US, the Sicav has been very appealing to the UK and European markets. This structure is applicable to all types of investors, including private clients, and offers public distribution possibilities. The Sicav is a Luxembourg-registered company, the key function of which is to invest in financial assets for the benefit of shareholders on the basis of risk diversification. Umbrella funds are available, offering a wide range of investment strategies to retail clients. The management is conducted by a regulated body.
The Sicav is not subject to corporate tax but to an annual registration tax on its net assets (maximum 0.5 per cent). With this structure, risk diversification rules must be respected and filing with regulators can sometimes be complicated, but there are many parties that can help.
Investors seeking a lesser degree of regulation can do so via the Soparfi, an investment vehicle governed by the Commercial Companies Act 1915, as amended. The Soparfi can be a public limited company of a limited-liability company that allows the operation of a business while giving the numerous advantages of a Luxembourg base. Dividends received from any company in which the Soparfi has at least a 10 per cent shareholding, or whose acquisition cost was at least e1.2m (£810,000), are excluded from taxable profit if the shares were held for 12 months. Capital gains are excluded from taxable profit if held for a year and total at least 10 per cent of the company shareholding, or have an acquisition cost of at least e6m (£4.06m).
The Soparfi is accessible to all types of investor (under certain conditions, including the retail market) and diversification rules are not required. There is no supervision by the CSSF and it has the benefits offered by double tax treaties and European directives. This vehicle, however, cannot be qualified technically as a fund.
The focus for Luxembourg and other jurisdictions to expand and update their investment structures will form an integral part of tomorrow’s world. Private equity, for example, has helped improve our economies and in many ways is changing the way we do business by making everything much more efficient. By creating specialised fund structures that can cater for this market, Luxembourg is in a prime position to help with the industry’s succession even further.
François Pfister and Stef Oostvogels are partners at Oostvogels Pfister Roemers