The SICAR is Luxembourg’s latest bid to remain the jurisdiction of choice for investors seeking a tax-efficient route into property investment. The vehicle offers less regulation and minimal tax, but may only be used to hold risk-bearing or actively managed assets
Last July, EuroProperty highlighted the trend towards the use of Luxembourg as the jurisdiction of choice for non-listed pan-European property funds. Investors are now comfortable with the fonds commun de placement (FCP) fund vehicle, and new FCPs are being formed at a steady rate. Recent launches include the Henderson Global Investors Outlet Mall Fund this year and the Heitman/First Islamic Bank Crescent Euro Industrial II Fund last year.
However, FCPs are subject to a high level of regulation and certain structural issues mean that complicated tax planning is required to extract cash from fund structures. These drawbacks mean that Luxembourg still has competition from other jurisdictions and vehicles, such as UK/Guernsey limited partnerships and German vehicles. The lack of simple comparability for investors remains a problem, and one that increases due diligence costs for investors and sponsors.
But in May Luxembourg introduced a new venture capital vehicle that may provide an interesting alternative to the FCP. The Société d’Investissement en Capital á Risque (SICAR) is designed to pool venture capital and private equity interests, but may also be suitable for property investment – specifically, for investments bearing a degree of equity and operating risk.
A new Luxembourg securitisation vehicle has also been introduced, and is likely to have applications for property investment. This shows the efforts the Luxembourg authorities are making to ensure Luxembourg remains the jurisdiction of choice for sponsors and investors.
The SICAR can take a number of corporate forms: public limited company (SA), private limited company (S RL) or partnership limited by shares (SCA) – but may also take the form of a limited partnership (SECS). SICARs that take a corporate form are fully taxable and are designed to be eligible for benefits under Luxembourg’s double tax treaties, as well as under EU directives.
However, Luxembourg’s treaty partners have yet to indicate whether they will bestow treaty benefits on the vehicle and, critically, it is yet to be determined whether SICARs will qualify for exemption from France’s annual 3% property tax. The Sicaf and Sicav vehicles have already been excluded from benefiting from the French tax treaty.
Although the SICAR vehicle is taxable, its taxable base should be minimal. Investment income and realised gains from risk investments are not taxable. Distributions are exempt from withholding tax, as are redemptions by non-resident investors, regardless of the level or period of holding. The vehicle is also exempt from net wealth tax and VAT for management charges. All in all, Luxembourg tax should be capped at €1,250 capital duty when a fund is set up.
The SICAR is subject to the approval of Luxembourg’s regulatory body the CSSF, and eligibility will be limited to institutional, professional or “knowledgeable” investors. But the degree of regulation should be lower than with FCPs, with no gearing restrictions or risk spreading rules.
The key point is that the SICAR must invest in “risk bearing” investments – securities representing risk capital. Investment in risk capital is defined as the direct or indirect contribution of assets to entities in view of their launch, listing on a stock exchange or development. This means the SICAR cannot be used for direct investment in property. Passive, indirect holding of property by a SICAR without adding value to it will also not be allowed.
However, funds that engage in property development via a subsidiary, where there is real underlying risk to the investors, are expected to qualify. Quite where the line will be drawn is not yet clear, but it is hoped that funds pursuing opportunity strategies, as well as value-added funds that take on risk or actively manage assets (such as shopping centres) may qualify.
Preliminary guidance will have to be requested from the CSSF to ensure that the SICAR structure is an appropriate vehicle for proposed funds. As was the case for FCPs, it is expected that over time the use of the new vehicle will develop and it will become clearer as to whether new funds will qualify to be formed as a SICAR.
Other benefits to investors include the ability to distribute payments to investors free of withholding tax, as with an FCP. But in contrast to the FCP, there will be no need to use financing techniques to eliminate withholding tax on dividends paid to SICARs, as the vehicle will qualify for the Luxembourg participation exemption.
The fact that the SICAR can take a corporate form also means that a level of Luxembourg holding company may be eliminated from typical fund structures. These elements should make fund structures using the SICAR easier for investors to understand. Investors’ local tax analysis should also be more straightforward, due to the corporate form of the fund vehicle. For investors with a low effective tax rate on dividends, the SICAR may give a better post-tax result than other vehicles.
Provided that the profile of a proposed property fund fits the necessary risk criteria, the SICAR will offer a number of advantages that will make it a very attractive vehicle for the future.
David Brown is head of real estate funds and Jacqueline Bennett a director in the Deloitte real estate team in London. Pascal Noel is a specialist funds tax partner in Deloitte Luxembourg.
