As the UCITS administration centre, Luxembourg has become a prime location for alternative investments, offering a comprehensive legal toolkit for setting up funds, which can be tailored to private equity managers’ needs.
The country, by transposing the EU’s Alternative Investment Fund Managers (AIFM) directive into law, has managed to make its passport the passport of choice for distribution not only across the EU but around Asia and Latin America as well.
With an attractive fiscal framework, and fund managers benefiting from the extensive Luxembourg tax treaty network, it now has €900 billion in regulated alternative funds and hosts more than 260 authorised AIFMs and 605 registered AIFMs. This has made the country a magnet for much of the world´s expertise in legal and compliance matters relating to alternatives.
Explore Fund Structures: UCI Part II | SIF | RAIF | SICAR | SCS/SCSp/SCA
Got a question?
UCI Part II
Fund vehicle description
A UCI Part II fund can take two different forms. The first is an open-ended collective investment fund, also known as a fonds commun de placement (FCP). An FCP is a contractual form, which means that it has not separate legal status. As a result, it must be managed by a Luxembourg alternative investment fund manager (AIFM) or by a management company that appoints a third party AIFM.
A UCI Part II Fund may also be structured as a société d’investissement à capital variable, or SICAV. A SICAV is a legal entity that takes the form of an investment company registered as a public limited company (société anonyme). While it may operate as either an open-end or closed-end fund, the variable share capital must always equal the fund’s net asset value. The SICAV must be managed by a third party AIFM or be registered/authorised as an AIFM itself.
Key considerations
The primary advantages of setting up a UCI Part II fund in Luxembourg include:
- Flexibility on asset acquisition. A Part II fund is required to invest its assets according to the principle of risk-spreading but are not restricted as to the type of assets it can acquire.
- Few investor limitations. A Part II fund is an investment fund that can invest in all types of assets. It qualifies as an alternative investment fund (AIF) and can be sold to all types of investors.
Tax Implications
When establishing a UCI Part II fund, it’s important to understand the tax implications.
- The general income tax rate in Luxembourg is 24.94%.
- UCI Part II funds are exempt from corporate and municipal business tax as well as net wealth tax.
- Dividends received, capital gains realised and other income received from a UCI Part II fund are outside the scope of taxation.
SIF
Fund vehicle description
A specialised investment fund, or SIF, usually qualifies as an AIF and can be sold to well-informed investors. SIFs that have appointed an EU AIFM can market their shares, units or partnership interest via a specific passport to well-informed investors across the EU.
The SIF regime is available for multiple legal structures, including FCPs (fonds communs de placement) governed by a management company; SICAVs (sociétés d’investissement à capital variable); and SICAFs (sociétés d’investissement à capital fixe).
Key considerations
There are many advantages to setting up a SIF in Luxembourg, including:
- Straightforward approval process. The CSSF, Luxembourg’s financial regulation institution, requires approval for only the fund’s Directors, Central Admin, Depository and Auditor.
- Few restrictions. SIFs are not subject to any investment restrictions or leverage rules, offering increased freedom and flexibility for investors.
- Flexible legal structure. SIFs may be structured as a closed-end legal entity with a variable capital (SICAV), a closed-end fund with a fixed capital (SICAF) or a contractual form (FCP) with a management company.
Tax implications
When establishing a SIF, it’s important to understand the tax implications.
- Despite a national general income tax rate of 24.94%, the tax burden for SIFs is very low.
- SIFs are only subject to a subscription tax rate of 0.01% of its net asset value.
- Regardless of the legal form the SIF takes, SIFs are exempt from corporate and municipal business tax as well as net wealth tax.
- Dividends received, capital gains realised and other income received from a SIF are outside the scope of taxation.
RAIF
Fund vehicle description
Luxembourg’s Reserved Alternative Investment Fund (RAIF) is a broad alternative investment fund structure that can invest in all types of assets. The RAIF regime is available for multiple legal structures, including FCPs (fonds communs de placement) governed by a management company; SICAVs (sociétés d’investissement à capital variable); and SICAFs (sociétés d’investissement à capital fixe). Regardless of which legal structure constitutes the RAIF, an authorised external AIFM must be appointed.
Key considerations
The primary advantages of setting up a RAIF in Luxembourg include:
• Easy set-up. RAIF may be constituted in just a few months, and does not require approval from the CSSF, Luxembourg’s financial regulation institution.
• Increased flexibility. RAIF is only lightly regulated, with few borrowing rules or restrictions. This allows for flexibility on investments.
• Beneficial tax framework. RAIF is only subject to a subscription tax rate of 0.01% of its net asset value.
Tax implications
When establishing a RAIF, it’s important to understand the tax implications.
• Despite a national general income tax rate of 24.94%, the tax burden for RAIF is very low.
• RAIF is only subject to a subscription tax rate of 0.01% of its net asset value.
• Regardless of the legal form the RAIF takes, RAIF is exempt from corporate and municipal business tax as well as net wealth tax.
• Dividends received, capital gains realised and other income received from a RAIF are outside the scope of taxation.
SICAR
Fund vehicle description
A SICAR (société d’investissement en capital à risqué) is an investment company in risk capital for private equity and venture capital funds.
A SICAR can be established in any of the following legal forms:
• A public limited company (société anonyme, or SA)
• A private limited liability company (société à responsabilité limitée, or SARL)
• A partnership limited by shares (société en commandite par action, or SCA)
• A cooperative company organised as a public limited liability company (société cooperative organisée comme une S.A.)
• Limited partnership (société en commandite simple, or SCS, and société en commandite simple à capital variable)
Key considerations
There are many advantages to setting up a SICAR in Luxembourg, including:
• Flexibility on asset acquisition. A SICAR is not subject to risk spreading obligations, offering more flexibility to investors. There is no investment restriction within a SICAR except for the risk capital criteria.
• Fewer restrictions on payments. There is no restriction on dividend payments nor legal reserve requirements
• Tax benefits. A SICAR is fully transparent for Luxembourg tax purposes.
Tax implications
The general income tax rate in Luxembourg is 24.94%.
When establishing a SICAR, it’s important to understand the tax implications.
One point to be aware of is that taxation rates vary greatly depending on the legal form upon which the SICAR is established.
Dividends distributed by a SICAR are not subject to withholding tax.
Capital gains realised by non-resident investors are not subject to tax in Luxembourg
Moreover, any income derived from assets held in risk capital during the investment are exempted from taxable income, provided they are invested in risk capital within 12 months.
SCS/SCSp/SCA
Fund vehicle description
Luxembourg offers three types of limited partnership regimes: SCS (société en commandite simple), SCSp (société en commandite spéciale) and the SCA Société en commandite par actions which is a partnership limited by shares.
The major difference between the two types is that the SCSp does not have a legal personality of its own. Conversely, the SCS does acquire its own legal personality separate from that of its partners.
Both forms of limited partnerships have been increasingly used as onshore fund vehicles, segregated account vehicles, co-investment vehicles and carry vehicles.
A SCS and SCSp may be used as a fund vehicle, either regulated (Part II UCI; SIF, SICAR or RAIF) or Unregulated.
If unregulated, it is governed by main legislation on Luxembourg company law and some AIFMD provisions may apply.
SCA Société en commandite par actions is a partnership limited by shares. The SCA can have an unlimited number of shareholders. Shares are transferable as per the provisions of the articles of association it has a legal personality of its own. GP has full personal liability and retains full control of the company’s investments.
Key considerations
There are many advantages to setting up a limited partnership regime in Luxembourg, including:
• Contractual freedom. Both the SCS and SCSp offer a high level of contractual freedom and structural flexibility. There is opportunity to determine the rules governing the function of the partnership.
• Fast incorporation. Both the SCS and SCSp can be incorporated relatively quickly under a private deed. This incorporation does not require the CSSF’s approval, streamlining the process.
• Low running costs. There are no requirements to appoint an AIFM, Depository or Auditor, which makes a limited partnership a less expensive option.
• European Passporting benefits. Both a SCS and SCSp may benefit from the European Passporting if they are registered as an Alternative Investments Fund (AIF).
Tax implications
When establishing a limited partnership, it’s important to understand the tax implications.
• There is no taxation at the fund level. Both the limited partnership and special limited partnership are transparent for tax purposes.
• Unregulated SCS and SCSp vehicles are a VAT-taxable person in Luxembourg, despite the non-legal personality of the SCSp.
• Regulated SCS and SCSp may be set up as umbrella fund vehicles (with segregated pools of assets), which affects tax and legal transparency.
• SCA is subject to corporate income tax
