Why Think Luxembourg for a Private Equity / Venture Capital Entity?

LG@vocats, March 2007

Avocats, Luxembourg / Lawyers, Luxembourg

Luxembourg’s law of 15 June 2004 on Capital Risk Investment Company (Société d’Investissement à Capital Risque) (“SICAR”) establishes an attractive regulatory and tax regime for venture capital or private equity entities with a view to encourage their establishment in Luxembourg.

From a tax perspective, the SICAR is not taxed on income generated by eligible investments. Moreover, at the investor’s level, there is neither Luxembourg withholding tax nor capital gain exposure in the hands of a non resident investor.

The fact that a SICAR may be used for a wide range of investments, that it may have a variable capital, that is not subject to legal restrictions regarding risk spreading policy, and that it has a relatively light approval procedure, provides flexibility to its investors.

Moreover, regulatory requirements such as the regulatory authority approval of the articles, the obligation to publish a prospectus and to have a depository for the SICAR’s assets, should provide certain security to the investors.

What is it?

· A SICAR is a regulated Luxembourg entity, governed by Law of 15 June 2004, the corporate purpose of which is to invest its assets in securities representing capital risk in order to provide its investors with the benefit of the result of the management of its assets. It is not subject to risk spreading limitations.

· Capital risk is given a broad definition as it comprises direct or indirect contribution of assets to entities in view of their launch, development or listing on a stock exchange. This wide definition gives a substantial amount of flexibility regarding the nature of the targets of the SICAR’s investments. Indeed, as most companies require funds for their launch, development or listing, it would seem that most commercial entities may be considered as targets for the SICAR.

Who can benefit from it?

· To benefit from the SICAR regime, the investors must qualify as “well informed investors”, that is institutional investors, professional investors or any other investor who:

o Declares in writing that it is a “well informed” investor and invests a minimum of EUR 125,000.- in the SICAR; or

o Obtains a declaration delivered by a financial services professional or by a regulated management company, certifying his/her expertise, experience and knowledge in adequately appraising capital risk investments.

How is it organized?

· SICARs may be set up as a limited partnership, partnership limited by shares, co-operative in the form of a public limited company, public limited company or limited liability company and are subject to general provisions applicable to commercial companies.

· A share capital of at least EUR 1,000,000.- must be subscribed within 12 months. However, only 5% of each share must be paid-up.

· SICARs have the possibility to have a variable capital thereby allowing non-formalistic share capital increase or decrease.

· The payment of dividends, or interim dividends, is not subject to any restriction other than those set forth in its articles. There are no legal reserve building obligations.

How is it supervised / controlled?

· As for common undertakings for collective investments, the custody of the assets of a SICAR must be entrusted to a depository which must be a Luxembourg credit institution. The depository’s task is to ensure that the SICAR is managed in the best interest of the investors. It must:

o Ensure that the subscription price for the shares of the SICAR has been received by it within the time limits set forth in its articles of incorporation;

o Control that for any transaction involving the assets of the SICAR, a consideration is paid or has been received by it within the customary time limits; and

o See to it that the income of the SICAR is applied in accordance with its articles.

· A SICAR is regulated vehicle. As such it must be authorized by the CSSF (i.e. the financial services regulator) and will remain subject to its supervision. As its investors are “informed investors”, the SICAR is only subject to a relatively light approval procedure. It will be authorized if the CSSF approves its articles and the choice of the depository for its assets. In addition, the management body of the SICAR and of the depository must be reputable and have sufficient experience.

· The law provides for the publication of:

o A prospectus which shall include the necessary information for investors in relation to the proposed investments and the potential risks linked to such investments; and

o An annual report within 6 months from the period to which it relates. The SICAR is exempted from the obligation to provide semi-annual report or consolidated accounts.

How is it taxed?

· A SICAR organized as Limited Partnerships is a flow through entity for Luxembourg tax purposes and not taxable as such in Luxembourg.

· While other corporate forms are Luxembourg taxable entities (corporate tax rate at 29,63% for the city of Luxembourg, tax treaty access), because of the following specificities the tax liability is practically nil:

o Income generated by eligible investments (i.e. dividends and capital gain income resulting from the sale or liquidation of relevant investment / securities does not constitute taxable income) is tax exempt;

o Income arising from funds held pending their investment in capital risk shall not constitute taxable income (this exemption is only applicable for a 12 months period preceding their investment in capital risk and where it can be established that the funds have been effectively invested in capital risk).

· In addition, SV are not subject to wealth tax, contribution duty is limited to EUR 1,250.- and management services provided to the SICAR (wide definition) are VAT exempt.

What is the non resident investor’s Luxembourg tax exposure?

There is no Luxembourg withholding tax nor capital gain exposure in the hands of a non resident investor, investing either in a flow through or in a non flow through Luxembourg SICAR.