A THOROUGH UNDERSTANDING OF PRIVATE EQUITY

RETOUR SOMMAIRE

A CACEIS PRODUCT DEVELOPMENT PUBLICATION - 2010

MAIN ACTORS AND STRUCTURES

UCI Part II

SICAR

SIF

SOPARFI

SV

Unlike FCP, SICAV/F benefits from certain double tax treaties. Investments may be made through fully taxable subsidiaries benefiting from double tax treaties and the EU parent-subsidiary directive.

However, they can generally avoid any substantial tax in Luxembourg as they are authorised to exempt from their tax base all income and capital gains deriving from: > Investments in transferable securities (tax authorities have accepted in certain cases that loans may be assimilated to securities for the purpose of the tax exemption, as long as the loan agreement includes a clause providing for the possibility to transfer the loan to a third party); > Temporary cash investments pending investments in risk capital for a maximum period of 12 months. SICARs established as an SCS are fiscally transparent and the profit share of foreign investors investing in these SICARs is not subject to any tax in Luxembourg. Fiscally opaque SICARs may in principle claim treaty protection and benefit from the parent- subsidiary directive. However, the eligibility of SICARs must be reviewed on a case-by- case basis depending on the jurisdiction of the target company.

Exemption is granted on the following conditions: > Dividend and liquidation gains exemption on share- holdings of at least 10% or an acquisition cost of at least E 1.2 million provided such qualifying holding participation is held for at least 12 months; > Capital gains exemption of share- holdings of at least 10% or an acquisition cost of at least E 6 million provided such qualifying holding participation is held for at least 12 months. A 15% withholding tax will be applied on the gross amounts of dividends paid by the SOPARFI (subject to tax treaties and EU parent- subsidiary directive). No withholding tax is levied on liquidation payments. There is no formal legal rule concerning thin capitalisation. The Luxembourg tax authorities usually consider that an acceptable debt/equity ratio is 85:15. If this ratio is not complied with and the SOPARFI is over-indebted, interest paid on the excess debt on a loan received from its shareholder or to a bank, when the loan of the bank is guaranteed by the shareholder, can be considered as a hidden profit distribution subject to dividend withholding tax at a rate of 15% and such interest is then not deductible. > Auditor required if two of the following criteria are met during two successive years: - Total balance sheet exceeds E 3.125 million; - Net turnover exceeds E 6.25 million; - Average number of employees exceeds 50.

No withholding tax except if SV falls under the EU Savings directive.

Tax regime

2.2

> Depositary required (credit institution); > Administrative agent (Luxembourg PFS) required unless the administration duties are performed by the management company itself in Luxembourg; > Auditor.

> Depositary required (credit institution); > Administrative agent (Luxembourg PFS or unregulated company) required unless the administration duties are performed by the SICAR or the management company itself in Luxembourg; > Auditor.

> Depositary required (credit institution); > Administrative agent (Luxembourg PFS) required; > Auditor.

In case of regulated SV: > Depositary required (credit institution); > Administrative agent (Luxembourg PFS) required unless the administration duties are performed by the securitisation company itself in Luxembourg; > Auditor.

Administrator/ Depositary/Auditor requirement

Source: LFF-ALFI, 2009

Over the past five years, an increasing number of private equity vehicles have been set up in Luxembourg following the implementation of the SICAR and SIF as new lightly regulated onshore structures that proved to be major successes. Indeed, these complementary vehicles offer key advantages: Tax neutrality for investors and high tax efficiency for GPs, flexibility in structuring through various corporate forms, variable capital and compartments/sub-funds, as well as operational efficiency (achieved for instance by an explicit consolidation exemption). Both vehicles have put Luxembourg on the map as a leading jurisdiction for private equity structuring. Even during the recent financial situation, private equity in Luxembourg has shown surprising levels of growth, still picking up new funds and with private equity houses and man- agers establishing or enlarging offices in Luxembourg.

A thorough understanding of PE | page 45