The Luxembourg authorities have adopted a new law on venture capital and private equity investment companies that creates a new type of entity – the Socit d’investissement en capital risque,” or SICAR – which provides an alternative to the Anglo-Saxon limited partnership structures that the private equity and venture capital industries have used so far.
“The law provides a comprehensive yet flexible framework that we believe will position Luxembourg as a prime jurisdiction for European private equity and venture capital vehicles,” says a spokesman for Linklaters in Luxembourg. He explains that the new law provides private equity and venture capital houses with a genuine alternative to the classic Channel Islands or Caymans-based private equity partnership.
Linkalters say that, although the classic structure has many advantages (particularly for US and UK-based investors and private equity managers) it is not appropriate for investment in jurisdictions such as France and Italy, where there has been increasing demand in recent years for an alternative structure for pan-European investment which meets the specific needs of Continental European investors and managers. These requirements include the ability to structure as an ‘onshore’ tax-paying (but tax-efficient) vehicle to take advantage of tax treaties and EU Directives, a light (but reassuring) degree of regulation, and legal structures (including companies) more familiar to Continental European investors than the Anglo-Saxon limited partnership.
The SICAR is a regulated entity, but with a very light degree of regulation. Unlike other Luxembourg regulated structures there is no need for approval of the promoter and the investment manager, both of which may be outside Luxembourg. The commercial terms of the SICAR can also be flexible – in particular, there are no investment diversification requirements, and normal rules on the paying-in and return of capital are relaxed to avoid cash being trapped in the structure.
“The new law is very flexible with respect to the way investments in private equity or venture capital is made and the same goes for the various exit strategies,” says Linkalaters.
A SICAR is a regulated Luxembourg company that invests in private equity or venture capital. It can take various corporate forms, namely the Luxembourg equivalent of a limited partnership (SCS), a partnership limited by shares (SCA), a public limited company (SA), a limited liability company (Srl) or a cooperative company which has adopted the form of a public limited company (SCoop). The choice will often be guided by tax considerations.
The registered office and seat of central administration of a SICAR must be located in Luxembourg. The investment management function can, however, be performed outside of Luxembourg and there is no Luxembourg residence requirement with respect to the conducting persons, such as the members of the board of directors. The minimum share capital must be Euro 1 million (or its equivalent in any other currency); this minimum amount must be reached within 12 months of the establishment of the SICAR. The share capital may, in principle, be fixed or variable. Payment of shares can be made in cash or in kind.
Dividend payments can be organized in a flexible manner and there is no requirement to create a legal reserve – in other words, a SICAR can match the ‘committed capital, self-liquidating’ flexibility of a limited partnership, for IRR maximisation purposes.
SICARs do not benefit from a general income tax exemption on all kind of revenues, but provide the option to structure either for tax transparency or for a taxable (but low tax) approach. When incorporated as either a SCA, a SA, a Srl or a SCoop, a SICAR is subject to corporate income tax in Luxembourg and should therefore in principle be able to claim treaty protection. Revenues received from securities and gains realised on the disposal of these securities will, however, be income tax exempt in Luxembourg. When incorporated as a SCS, a SICAR is fiscally transparent. Moreover the profits share of foreign investors investing in the SCS will not be subject to any tax in Luxembourg.
Regardless of its company form, any payment by a SICAR to its investors will be free from Luxembourg withholding tax. Finally, the SICAR will only be subject to a capital duty of 1,250 EUR, and the fees for management services rendered to a SICAR will be VAT exempt.
“The new law provides private equity houses with an attractive new regulated vehicle, in a flexible and tax efficient framework,” concludes Hermann Beythan, partner in Linklaters’ Investment and Management Practice in Luxembourg. “It positions Luxembourg as a prime jurisdiction for the European private equity industry, and will further reinforce Luxembourg’s status as an international financial centre.”