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May 2012
The Luxembourg Investment Company in Risk Capital (SICAR)
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Introduction
The investment company in risk capital (société d’investissement en capital à risque (SICAR)) regime was established by the law dated 15 June 2004, which was amended on 24 October 2008 (the SICAR Law). The end product is a lightly regulated, operationally flexible and fiscally neutral investment vehicle for a qualified international investor base specifically dedicated to private equity and venture capital investments.
The key characteristics of the SICAR are the following:
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1. Eligible Investments
According to the SICAR Law, a SICAR may invest only
in risk-bearing assets in order to provide its investor(s)
with the benefits of the result of the management of its
assets in consideration for the risk they incur. Based on
CSSF Circular 06/241, risk capital within the meaning
of the SICAR Law is characterized by the simultaneous
combination of two elements: high risk inherent in
portfolio investments and the intention to develop the
target entities. This potentially qualifies any type of
investment in unlisted companies whether in the form
of equity or debt, without any geographical restrictions.
Listed companies may also qualify as risk-bearing
investments to the extent the investment aims at the
financing of a new business development, for example.
The SICAR is not subject to any risk diversification
requirement.
2. Eligible Investors
The SICAR regime is reserved for well-informed
investors, meaning institutional investors, professional
investors or any other investor who:
(a) has confirmed in writing that it adheres to the
status of well-informed investor; and
(b) (i) either invests a minimum of EUR 125,000 in
the SICAR; or
(ii) has obtained an assessment certifying
its expertise, experience and knowledge in
adequately appraising an investment in risk capital
made by a credit institution within the meaning
of Directive 2006/48/EC, by an investment firm
within the meaning of Directive 2004/39/EC, or by
a management company within the meaning of
Directive 2001/107/EC.
In addition, the directors/managers (dirigeants) and
other persons who are involved in the management of
the SICAR, including the management of the assets
of the SICAR (i.e. the personnel of an appointed
investment manager or investment adviser) do not need
to be certified as “well-informed” as a result of their
involvement in the management of the SICAR or its
assets.
3. Supervision
The SICAR regime applies upon formal election and is
subject to the prior approval by the Commission for the
Supervision of the Financial Sector (Commission de
Surveillance du Secteur Financier (CSSF)). The CSSF
verifies that the SICAR and its representatives comply
with the applicable legal provisions and contractual
arrangements.
Once authorised, the SICAR will be entered onto an
official list maintained by the CSSF.
4. Management
The CSSF devotes special attention to the qualification
of the directors/managers (dirigeants) of the SICAR. The
legal representatives of a SICAR need to submit proof
of their professional qualifications and experience, good
standing and honourability to manage the SICAR. The
directors/managers are not subject to any residency
requirement. In practice, the appraisal of the CSSF
will consider the qualifications and experience of the
management team in its entirety.
5. Disclosure and Reporting Obligations
The SICAR must comply with various disclosure
requirements. It must compile inter alia a prospectus
and an annual report. The annual report must be
finalised within six months after the end of the
financial period to which it pertains and must be
provided to investors. Although the annual reporting
obligations are in line with the reporting obligations of
commercial entreprises, the SICAR is not subject to
consolidated reporting.
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for the repatriation of proceeds and to recognise the
validity, in Luxembourg, of the Anglo-Saxon practice of
financing the limited partnership via non-interest bearing
loan commitments. A SICAR may thus, amongst others,
replicate the operational and legal flexibility typically
associated with Anglo-Saxon limited partnerships.
Depending on the choice of fund vehicle, there will
usually be a high degree of structuring flexibility,
including for the organisation of subscriptions,
redemptions or distributions, the valuation methodology,
or the compartmentalisation of assets, liabilities, or
investors.
The minimum capitalisation of a SICAR (share capital
and premium included) is EUR 1,000,000, which has
to be reached within 12 months of its approval by the
CSSF. At least 5% of each share must be paid up (in
cash or in kind) at subscription.
A SICAR may opt for variable or fixed share capital. The
distribution policy (e.g. periodicity) is freely determined
in the constitutional documents. The various structuring
options are meant to allow tailor-made profit repatriation
schemes.
7. Compartments
SICARs may be constituted with multiple
compartments, each compartment corresponding
to a distinct part of the assets and liabilities of the
SICAR. Compartments not only allow initiators and
managers to combine different investment policies
within the same legal entity but furthermore permit
a “vintage” year approach whereby investors may
participate in different investment tranches over
time. The compartmentalisation also facilitates the
introduction of certain “excused investor” provisions,
allowing for the creation of segregated side-pockets
in respect of assets in respect of which certain
investors may not participate.
The annual accounts must furthermore be audited by a
Luxembourg authorised external auditor. The auditor is
appointed and remunerated by the SICAR. The auditor
must inform the CSSF about serious (graves) violations
of the applicable legal provisions or about any facts or
decisions which could potentially threaten the continuity
of the company.
6. Legal Form
SICARs may be structured in several ways: a private
limited liability company (société à responsabilité
limitée), public limited liability company (société
anonyme), corporate partnership limited by shares
(société en commandite par actions), limited
partnership (société en commandite simple) or
cooperative company in the form of a public limited
liability company (société coopérative sous forme de
société anonyme).
Luxembourg limited partnerships deserve special
attention. A limited partnership is an agreement entered
into by one or several general partners with unlimited,
joint and several liability together with one or several
limited partners who participate pro rata in the profits
but who also share the losses up to the amount of their
capital commitment. A Luxembourg limited partnership
has unlimited legal capacity and may be considered
a separate legal entity from its partners. The property
of the limited partnership will thus be treated as the
partnership’s property. The mutual rights and duties of
the partners towards the limited partnership and among
themselves can be organised with maximum flexibility.
The partnership agreement may furthermore be adopted
under private seal or in a public deed. The importance
of the limited partnership as an investment vehicle
becomes clearer when looking at its fiscally transparent
treatment (see below). Moreover, the rules relating
to SICARs that have adopted the form of a limited
partnership have been clarified to allow further flexibility
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9. Taxation
A SICAR organised as a capital company will be
subject to corporate income tax on its worldwide
profits (combined rate for the city of Luxembourg
(2012): 28.8%) and should thus qualify as a tax
resident for Luxembourg’s tax treaties. The return
(whether in the form of interest income, capital
gains or dividends) derived from securities will be
exempt from corporate income tax. Taking into
account the hybrid nature of venture capital and
private equity funding, the SICAR thus benefits from
an extended exemption regime. The returns on
funds held pending investment will also benefit from
the exemption, provided the funds are invested in
venture capital and/or private equity projects within
a 12-month period. All other income is fully subject
to Luxembourg corporate income tax. A SICAR will
further be exempt from the annual 0.5% net wealth
tax.
Most importantly, the regime provides the requisite
flexibility needed to ensure flexible, tax neutral and
swift profit repatriations and extractions, whether by
way of redemption, distribution or liquidation. Dividends
received from a SICAR and capital gains realised on the
disposal of shares by non-resident shareholders will not
be subject to Luxembourg tax, either by withholding or
assessment.
The tax features of the limited partnership may be
easily summarised. Although the limited partnership is
a legal entity separate from its partners, it is not liable
itself for income or net wealth taxes in Luxembourg.
The limited partnership is to be treated as transparent
for Luxembourg tax purposes and profits received
from a partnership as well as capital gains realised on
the disposal of a partnership interest by non-resident
partners will not be subject to Luxembourg tax, either by
withholding or assessment.
The constitutional documents of the SICAR must
expressly allow the creation of compartments and
need to foresee the applicable operational rules. The
prospectus must thus describe the specific investment
policy of each compartment.
Unless otherwise provided for in the constitutional
documents of the SICAR, the rights of investors and of
creditors relating to a specific compartment or which
have arisen in connection with the creation, operation
or liquidation of that compartment shall be limited to the
assets of that compartment. Consequently, the assets of
that compartment are exclusively available to satisfy the
rights of investors in relation to that same compartment
and the rights of creditors whose claims have arisen
in connection with the creation, the operation or the
liquidation of that compartment.
Again, unless the constitutional documents provide
otherwise, for the purpose of the relations between
investors, each compartment will be deemed to be
a separate entity. Each compartment may thus be
separately liquidated. When the last compartment is
liquidated, though, the SICAR itself will be deemed
liquidated.
8. Depository
The Luxembourg SICAR regime distinguishes
itself from other venture capital and private equity
regimes in that the SICAR assets must be entrusted
to a Luxembourg established depositary bank. The
legislator thereby clearly aims at a higher investor
protection standard. The depositary is a routine
institution for Luxembourg-based investment
companies, which operates independently in the
exclusive interest of investors.
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It is worth noting that fund management services
rendered to a SICAR will not be subject to Luxembourg
VAT.
10. Conclusion
The SICAR with its flexible structuring options and
its neutral tax regime completes the product range of
existing investment vehicles available in Luxembourg.
The SICAR does not replace any of the existing regimes
but merely closes the gap by delivering a tailored private
equity and venture capital investment vehicle aimed at
both the domestic and international qualified investor
base.
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Contacts
● MarcMeyers
T +352466230306
● ThibautPartsch
T +352466230233
● PieterStalman
T +352466230403
● JohanTerblanche
T +352466230245
www.loyensloeff.lu
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