Sif and sound
15 September 2008
In London and New York the phrase ‘credit crunch’ accurately describes the sound of bankers and lawyers chewing nervously on their fingernails. But so far the sound has not yet reached Luxembourg, which has managed to retain its strong standing as a magnet for financial capital.
“On the contrary, the country is doing well out of the current crisis,” says Thibaut Partsch, a counsel at the Luxembourg office of Loyens & Loeff. “It’s built on its knowhow and reputation for capital markets and fund investment vehicles and extended its regulatory regime to private equity vehicles.”
Some of the more canny firms have already spotted the potential of the Luxembourg market during these times of financial uncertainty. This year Allen & Overy promoted two associates to partner in Luxembourg, making up corporate lawyer Fabian Beullekens and tax specialist Jean-Luc Fisch.
With its law of 13 February 2007 on specialised investment funds (Sifs) – known as the Sif law – Luxembourg has turned into an attractive option for private equity deals, with more than 600 specialised investment funds approved by the Luxembourg supervisory authority, the Commission de Surveillance du Secteur Financier (CSSF).
The Luxembourg government is preparing to reform the law of 15 June 2004 relating to investment companies that focus on risk capital – the Société d'investissement en capital à risque (Sicar) law – to increase the efficiency of the Sicar investment vehicle.
Sifs are investment funds that are reserved for experienced and well-informed operators in financial services, such as institutional investors, professional investors or any other investor who has at least e125,000 (£101,100) to spend, or are certified as such by banks, investment companies or management companies.
“Luxembourg’s established a supervisory regime for these types of funds that strikes an efficient balance between investors’ protection and the vehicle’s flexibility,” comments Partsch.
Investors are protected by the strict requirements placed on these investment vehicles. First, a Sif’s assets must be safeguarded by a custodian bank.
Second, the Sif is subject to an approval by the CSSF, which will verify that the Sif’s management has the necessary professional qualifications, good reputation and level of respectability to manage the Sif.
Third, all Sifs must prepare an issuing document, which has to state clearly any information that could affect investors when they make decisions to invest their money.
In addition, this document is supplemented by an annual report following a preset reporting template, making sure that there is always a minimum level of disclosure.
Sifs can be structured with a maximum flexibility: they may adopt the form of an FCP (a co-owned asset managed by a management company), the form of a Sicav (an investment company with variable capital), or any form of company allowed in Luxembourg. Sifs may have compartments allowing for the creation of pools of assets, segregating the resulting profits.
Despite the flexibility, Sifs do have a capital requirement of e1.25m (£1m) and are not allowed to invest in assets worth more than 30 per cent of the total capital. That said, Sifs do enjoy favourable taxation as they are only subject to a one-time fixed charge of e1,250 (£1,011) and an annual subscription tax (taxe d’abonnement) of 0.01 per cent of the Sif’s total net assets.
Meanwhile, the regime of Sicars, which invest in riskier capital, are being modified to meet the high demand for the investment product. The Sicar was the first vehicle created by Luxembourg exclusively for private equity transactions. And it will be modernised soon. In a similar regulatory measure for Sifs, Sicars are restricted to well-informed investors who will enjoy exactly the same protection as those established for Sifs.
“On the structural point of view, the Sicar may adopt any form of Luxembourg company, including the limited partnership, whose regime is likely to be clarified by the new law,” says Partsch.
Sicars will also have the possibility of having compartments, in the same way that Sifs do. The main requirements resting on the Sicars are that their capital reaches an amount of e1m (£808,900) within a year of incorporation and that they limit the risk of their investments.
“From the point of view of tax,” says Partsch, “a Sicar is subject to corporate income tax on its worldwide profits and should thus qualify as a tax resident for Luxembourg’s tax treaties.”
The return on the investment, whether in the form of interest income, capital gains or dividends, will be exempt from corporate income tax.
Taking into account the hybrid nature of venture capital and private equity funding, the Luxembourg investment company benefits a great deal from the tax breaks. All other income is fully subject to Luxembourg corporate income tax. A Sicar will also be exempt from the annual 0.5 per cent net wealth tax.
So far the regulatory environment for Sifs and Sicars has attracted a lot of attention from the international financial community and has helped guide Luxembourg’s investment managers through the credit crunch without coming to much harm. This trend looks set to continue as the Sicar becomes an even more appealing prospect thanks to the flexibility of the law.