Overview and key features 7. The regulated structuring options: the SICAR and the SIF 8. Authorisation 10. Regulatory supervision 11

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5 Table of contents Introduction 5 Private equity structuring options and solutions 7 Overview and key features 7 The regulated structuring options: the SICAR and the SIF 8 Authorisation 10 Regulatory supervision 11 Eligible investments 12 Eligible investors 13 Capital 14 Financing 15 Distributions to investors 16 Redemptions of shares/units 17 Valuation and reporting requirements 18 Basics on Luxembourg taxation 19 Taxation of the vehicle 20 Taxation of investors 22 Annex - Basics on legal forms 23 Definitions 27 Private Equity at Arendt & Medernach 29 Arendt & Medernach Private Equity Team 31 About Arendt & Medernach 32 A broad range of practice areas 33 Disclaimer: the following brochure does not constitute legal advice and is merely intended to raise awareness about private equity. Arendt & Medernach shall not incur liability of any kind should this document be used as a basis for responding to legal questions.

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7 Introduction Private equity and venture capital in Luxembourg With more than 13,500 funds/fund units and assets under management above EUR 2,500 billion at the end of 2013, Luxembourg has asserted itself as Europe s leading investment funds domicile. The Luxembourg fund centre is the prime location for the pan-european and global distribution of UCITS labelled investment funds and Europe s first jurisdiction for real estate funds. Drawing on the success of its investment funds industry and a cluster of competencies in the structuring and acquisition of international private equity transactions built over a period of more than 20 years, Luxembourg has emerged and is positioning itself as the leading European domicile for private equity funds as well. Its appeal derives from numerous factors which have contributed to creating a business-enabling environment: contract-based company law provisions, the responsiveness of the Luxembourg legislator to practitioners needs, a multilingual community of professional service providers, experienced and business-oriented supervisory and tax authorities and a politically stable environment. The rapid development of the Luxembourg private equity and venture capital servicing infrastructure combined with the steadily evolving Luxembourg legal structuring toolbox, i.e., legal structuring solutions comprising special purposes vehicles and investment vehicles alike, e.g. the SOPARFI (financial participation company société de participations financières), the SICAR (investment company in risk capital société d investissement en capital risque), the SIF (specialised investment fund fonds d investissement spécialisé) have enabled Luxembourg to become the leading EU centre for domiciling both private equity funds and private equity acquisition vehicles in the same jurisdiction. No other EU or off-shore domicile can lay claim to the same track record and industry compatibility in the rapidly evolving current international legal, regulatory and tax environment. Modernisation of the Luxembourg partnership regime More recently, the implementation of the AIFMD provided a further opportunity to position Luxembourg as the leading European alternative investment funds (AIF) centre with a special focus on private equity and venture capital. The Luxembourg legislator thus modernised the Luxembourg partnership regimes in The modernisation involved a complete overhaul of the existing common limited partnership regime (CLP) and the creation of an entirely new special limited partnership regime (SLP). The essential difference between the CLP and the SLP is that the special limited partnership does not have a legal personality distinct from that of its limited partners making it similar to the English limited partnership, while the CLP is comparable to Scottish limited partnerships. Structuring flexibility and tax transparency being the main features of CLPs and SLPs, private equity managers and their advisers are showing great interest in these new options. 5

8 Introduction Impact of the AIFMD on the Luxembourg private equity sector The implementation of the AIFMD raises a number of challenges for the private equity sector some of which may not yet have been fully assessed. From now on, private equity investment fund managers will be divided into two categories, i.e., sub-threshold or small alternative (i.e., private equity) investment fund managers and authorised alternative investment fund managers. While small private equity fund managers will merely be subject to registration in the country in which they are established, they will not be entitled to any of the possible benefits (i.e., the marketing or management passport) of the AIFMD. In the post-aifmd environment within the EU, their placement activities will thus in most cases remain confined to their domestic market with very limited private placement options outside. Small managers wishing to expand their fund raising footprint will thus face significant hurdles within the EU. Authorised alternative investment fund managers will however be entitled to market their AIFs to professional investors not only in their home Member State but also in the other Member States. Moreover, they will be authorised to manage AIFs established in other Member States and even in third countries. By introducing a harmonised EU regulatory framework, the AIFMD thus aims to monitor systemic risk at EU and international levels, to harmonise investor protection standards and, last but not least, to create a single market. Further information on the AIFMD and its Luxembourg implementing law of 12 July 2013 is available in our AIFMD brochure. New European venture capital label In July 2013 the Regulation on European Venture Capital Funds (EuVECA), a regime creating an EU label for investment funds investing primarily in SMEs, became directly applicable in all European Member States. The EuVECA Regulation aims to establish uniform rules for the marketing of venture capital funds across the EU. More precisely, just like the AIFMD, the EuVECA Regulation creates a passport enabling registered managers to market their venture capital funds to qualified investors, thus stimulating fund raising across Europe for the benefit of start-ups. By introducing a single rulebook available to managers of funds in the EEA falling below the AIFMD thresholds, venture capital funds will have the potential to attract more capital commitments. The present brochure purports to provide its readers with an overview of the Luxembourg structuring options available for private equity managers using Luxembourg fund structuring and investment solutions. It does not address all legal and tax aspects in relation thereto and does not purport to set out all the opportunities offered by Luxembourg to the private equity community. 6

9 Private equity structuring options and solutions Overview and key features The non-regulated structuring option: the SOPARFI The SOPARFI (société de participations financières) is the most common European private equity vehicle used for cross-border acquisitions. The SOPARFI takes full advantage of its access to double tax treaty benefits. A SOPARFI is organised in the form of an ordinary commercial company governed by the 1915 Law. It is commonly used for holding and financing private equity investments. It may however also be structured as an alternative investment fund. SOPARFIs are subject to ordinary corporate income tax and are not subject to the prudential supervision of the CSSF (supervisory authority of the financial sector in Luxembourg - Commission de Surveillance du Secteur Financier). SOPARFI legal forms A SOPARFI will most typically be organised in the form of an SCA, SA or SARL. Other less frequent forms may be chosen. A SOPARFI will in principle always be a fiscally opaque corporate entity subject to ordinary income tax and eligible to double tax treaty benefits. This is why the CLP and SLP should in principle not be labelled as SOPARFIs since they are fiscally transparent, hence not subject to tax and furthermore not eligible to double tax treaty benefits. In practice however, the CLP and SLP may often be a suitable alternative if a fiscally transparent and non-regulated special purpose vehicle or alternative investment fund solution is desired. SOPARFI key features Legal forms: company or partnership forms only, no contractual form (FCP); No investment restrictions or limitations; No risk-spreading requirements; No investor requirements (unless subject to AIFMD); No authorisation or prudential supervision by the CSSF; Fixed share capital; Standard minimum accounting and publication requirements subject to corporate form chosen; Audit required if certain quantitative thresholds are exceeded; Fully subject to tax status if established as a company, but conditional exemption of dividend income, liquidation proceeds and capital gains derived from qualifying participations as well as income and gains derived from qualifying IP rights, and entitlement to double tax treaty benefits. 7

10 Private equity structuring options and solutions The regulated structuring options: the SICAR and the SIF The SICAR The SICAR was introduced by the law of 15 June 2004 on investment companies in risk capital (the SICAR Law). SICARs will be organised in a corporate form subject to the 1915 Law. As its name suggests, the SICAR is a dedicated private equity and venture capital investment company regime. A SICAR must invest in assets qualifying as risk capital investments in order to provide its investors with the benefit of the management of these risk capital assets. The SICAR is subject to the supervision of the CSSF. The SICAR was designed for private equity and venture capital investment policies. A SICAR must directly or indirectly contribute its assets to entities in view of their launch, development or listing on a stock exchange. A SICAR is not subject to risk-spreading requirements. SICAR legal forms The SICAR may be organised as an SCA, SA, SARL, CLP or SLP. SICAR key features Legal form: company or partnership forms only, no contractual form (FCP); Investments in risk capital only; No risk-spreading requirements; Eligible, i.e., well-informed investors only; Prior authorisation of the CSSF and ongoing prudential supervision; Variable or fixed share capital structure; Flexible financing, distribution and exit options; Standard minimum accounting and publication requirements subject to corporate form chosen; Prior authorisation by and ongoing prudential supervision by the CSSF; Independent audit requirement; Depositary bank or function requirement; Fully subject to tax status if established as a company, but exemption of income and gains derived from risk capital securities and entitlement to double tax treaty benefits (subject to limitations on a treaty by treaty basis). 8

11 Private equity structuring options and solutions - The regulated structuring options: the SICAR and the SIF The SIF The specialised investment fund regime is a multi-purpose alternative investment fund regime created by the law of 13 February 2007 on specialised investment funds (the SIF Law). It represents today Europe s most recognisable alternative investment fund regime and is widely accepted by managers and investors alike. While the regime was designed to accommodate all alternative investment fund asset classes, it is particularly well-suited for private equity and venture capital investments. Very flexible private equity vehicle The SIF is a regulated alternative investment fund regime and offers maximum structuring flexibility combined with the usual Luxembourg investor protection features (i.e., ongoing prudential supervision, depositary function, independent audit, etc.). SIF legal forms The SIF may be organised as an SCA, SA, SARL, CLP or SLP. SIF key features Legal form: company, partnership or contractual form (FCP); No investment restrictions; Subject to mandatory risk-spreading requirement (i.e., 30% safe harbour rule) unless organised as a feeder structure; Eligible (i.e., well-informed) investors only; Prior authorisation and ongoing prudential supervision by the CSSF; Variable or fixed share capital structure; Flexible financing, distribution and exit policy; Standard minimum accounting and publication requirements subject to corporate form chosen; Independent audit requirement; Depositary bank or function requirement; Tax exempt status with limited entitlement to double tax treaties, if established as a company. 9

12 Private equity structuring options and solutions Authorisation SOPARFI SICAR/SIF No prudential authorisation Prior authorisation Items subject to authorisation SOPARFIs are not subject to authorisation from the CSSF. They may therefore be set up very quickly. A SICAR or a SIF may not start its activities until it is authorised by the CSSF. Once authorised, the SICAR or the SIF is registered on the official list of SICARs or SIFs. The authorisation is granted only if (i) the CSSF approves: the constitutive documents (prospectus, articles of incorporation, LP Agreement, etc.); the directors or managers, as well as, concerning SIFs, the persons entrusted with the management of the investment portfolio; the choice of the depositary; the choice of the auditor; the choice of the delegate investment manager and its regulatory status; the agreements with the service providers (i.e., depositary, administrator and auditor); concerning SIFs, the description of the risk management process and the conflict of interests policy; and (ii) the SICAR or the SIF must demonstrate that their head office (administration centrale) is located in Luxembourg. Directors/managers must be of sufficiently good repute and have sufficient experience for performing their functions. The same requirement applies to the persons or delegates entrusted with the portfolio management. If and when applicable, the CSSF will also verify how the SICAR/ SIF complies with the AIFMD, i.e., whether a registered or authorised AIFM is to be appointed or whether the SICAR/SIF is internally managed. 10

13 Private equity structuring options and solutions Regulatory supervision SOPARFI SICAR/SIF No CSSF supervision, no depositary SA, SCA and SARL are subject to supervision by auditors Permanent supervision by the CSSF Depositary Conflicts of interest Audit Risk Management SOPARFIs are not subject to the supervision of the CSSF and are not required to appoint a depositary (except if they qualify as AIFs and are managed by duly authorised AIFMs). However, the operations and the annual financial statements shall be supervised by one or more statutory auditor(s) in an SA, a supervisory board in an SCA and one or more statutory auditor(s) in an SARL, unless the SARL has less than 25 shareholders. No statutory auditor is required in SOPARFIs set up as CLPs or SLPs. In addition, an independent auditor (réviseur d entreprises agréé) shall be appointed replacing the statutory auditor(s) in a SOPARFI set up as an SA, SCA or SARL if certain thresholds (total balance sheet, turnover and/or number of employees) are exceeded. SICARs and SIFs remain subject to the permanent supervision of the CSSF until the close of their liquidation. Any amendment to the constitutive documents and any changes in the various appointments (i.e., management, delegates and services providers) are subject to prior CSSF approval. Depositary bank or professional of the financial services sector providing depositary services, subject to conditions 1. SIFs and SICARs must be structured and organised in such a way as to minimise the risk of investors interests being prejudiced by conflicts of interests arising between the SIF and any person contributing to the business activity of the SICAR/ SIF or linked to the SICAR/SIF. A Luxembourg independent auditor (réviseur d entreprises agréé) shall audit the accounting information contained in the annual report of SICARs and SIFs. The auditor s report and qualifications, if any, shall be included in full in the annual report. In addition, the auditor has some duties of notification to, and of extensive supervision at the request of, the CSSF under certain circumstances. Appropriate risk management systems must be implemented to detect, measure, manage and monitor the risk of positions and their contribution to the overall risk profile of the portfolio Further to the EuVECA regime introduced by the corresponding EuVECA Regulation eligible venture capital funds do not need a depositary, but are only subject to reinforced annual auditing requirements. If a SICAR or SIF wants to avail itself of the EuVECA label, it is currently still subject to the depositary requirement. The SICAR Law and the SIF Law would need to be amended so as to permit a SICAR or SIF without a depositary function.

14 Private equity structuring options and solutions Eligible investments SOPARFI SICAR SIF No restrictions Investments in risk capital only No risk-spreading requirement Fund of funds investments No investment limitations Risk-spreading requirement Fund of funds, feeder funds and cross investments The SOPARFI s corporate purpose is to hold and manage financial participations in other undertakings. No investment restrictions or risk-spreading requirements apply (cf. the tax section below). A SICAR must invest its funds in assets representing risk capital. Investment in risk capital is defined in the SICAR Law as the direct or indirect contribution of assets to entities in view of their launch, development or listing on a stock exchange. Two conditions shall be cumulatively met: (i) the risk relating to the investments of the SICAR must be high and (ii) the SICAR must aim at contributing to the development of the entities in which it invests. A SICAR may thus invest in a single target company only. A SICAR may invest in other private equity funds provided the underlying private equity or venture capital funds comply with the risk capital investment requirements as per the SICAR Law. SIFs may invest into any asset class and apply any investment policy or strategy. A SIF must spread the risks of its investments. In principle, investments in any target company may not exceed 30% of the SIF s assets or subscription commitments. Ramp-up periods may apply. A SIF may invest directly in other private equity funds provided the underlying private equity or venture capital funds comply with the risk spreading requirements as per the SIF Law. The SIF may also be used as a feeder fund provided the underlying master fund is subject to equivalent diversification. If the SIF is organised as an umbrella structure, investments across compartments may be permitted. 12

15 Private equity structuring options and solutions Eligible investors SOPARFI SICAR/SIF No restrictions Three categories of eligible investors Institutional investors Professional investors Well-informed investors There are no restrictions on the eligibility of investors of a SOPARFI, unless it qualifies as an AIF and is marketed by a fully authorised AIFM. In that case, investors will have to qualify as professional investors. Only well-informed investors may invest in a SICAR or a SIF. Well-informed investors are: institutional investors, professional investors or investors investing certain minimum amounts or obtaining a special certification. Firms and organisations, the purpose of which leads them to manage substantial funds and assets. Examples of these investors are banks and other professionals of the financial sector, insurance and reinsurance undertakings, social security institutions, pension funds, large industrial and financial groups and dedicated structures set up by those entities. Entities which are required to be authorised or regulated to operate in the financial markets such as credit institutions, insurance companies and commodity derivatives dealers, among others. Large undertakings which meet two of the following size criteria on a company basis: (i) balance sheet total of EUR 20,000,000; (ii) net turnover of EUR 40,000,000; (iii) own funds of EUR 2,000,000. This category also includes some States or international bodies or institutions and other institutional investors, the main activity of which is to invest in financial instruments, including entities dedicated to the securitisation of assets or other financing transactions. If the SICAR or the SIF qualifies as an AIF and is managed by a fully authorised AIFM, it may only market its interests and shares to investors which are professional clients or may, on request, be treated as professional clients within the meaning of Annex II of the Directive 2004/39/EC. Those who, although not qualifying as institutional or professional investors, may evidence that they are sufficiently sophisticated to understand and bear the risks associated with the nature of investments of the SICAR or the SIF. In addition to confirming in writing that he/she/it adheres to the status of well-informed investor, such investor shall invest a minimum of EUR 125,000 in the SICAR or the SIF or obtain an assessment made by one of the financial sector entities listed by the SICAR Law or the SIF Law which certifies the investor s expertise, experience and knowledge in adequately appraising an investment in risk capital in case of a SICAR, or in a SIF. Exception for managing persons and other persons taking part in the management The eligible investor requirements do not apply to persons that take part in the management of a SICAR or a SIF. 13

16 Private equity structuring options and solutions Capital SOPARFI SICAR/SIF Only fixed share capital, but authorised capital possible Nominal or par value share issue price Payment of shares requirements depending on legal form Variable share capital possible Share issue price 5% paid-up shares The share capital of a SOPARFI is fixed in the constitutive documents (articles of incorporation, LP Agreement). To the extent applicable, any issue of new shares is subject to the formalities, quorum and majority requirements applicable to amendments of the constitutive documents. However, a SOPARFI set up as an SA or SCA may provide for an authorised share capital whereby the shareholders delegate to the management their power to increase the share capital within certain limits. The above rules do neither apply to the CLP nor to the SLP. New shares of a SOPARFI are issued either at (and cannot be issued below) the nominal value, or, in the absence thereof, at par, each time with or without an issue premium. Each share of an SA or SCA must be paid up to at least 25%. Each share of an SARL must be entirely paid up. No minimum capitalisation requirement applies to the CLP or SLP. A SICAR or a SIF set up as an SA, SCA, SARL, CLP or SLP may opt for a variable capital structure, i.e. a capital the amount of which is equal to the NAV of the entity at all times. A SICAR or SIF with variable capital, as well as a SIF structured as an FCP may always issue new shares/units in accordance with the conditions and procedures set forth in its constitutive documents. New shares/units/interests of SICARs or SIFs may be issued in accordance with the method set forth in their constitutive documents, e.g. fixed subscription price (with actualisation mechanism) or at NAV. Each of the shares or, where applicable, units of a SICAR or SIF must be paid up to at least 5%, except for a SICAR or SIF organised as a CLP or SLP in which case no such minimum applies. 14

17 Private equity structuring options and solutions Financing SOPARFI SOPARFI/ SICAR/SIF SICAR/SIF Minimum share capital amount depending on legal form Listing possible Tracker shares possible Variety of equity, debt and hybrid financing instruments Minimum capital of EUR 1 million for SICARs and 1.25 million for SIFs after one year Listing Umbrella structure possible At incorporation, an SA or an SCA must have a minimum share capital of EUR 31,000, while an SARL has a minimum share capital of EUR 12,500. No other minimum share capital amount is required beyond the incorporation of an SA, SCA or SARL. No minimum capital applies to CLPs or SLPs. The securities of a SOPARFI in the form of an SA or an SCA may be publicly traded. Even though a SOPARFI cannot be set up as an umbrella structure, it may issue tracker shares tied to the performance of specific assets. Depending on their legal form, SOPARFIs, SICARs and SIFs may i.a. be financed through a variety of equity, debt and hybrid instruments (including (convertible) preferred equity certificates, i.e. CPECs and PECs, mandatory redeemable preferred shares, i.e. MRPS). In addition to the minimum (share) capital requirements upon incorporation (see above), the subscribed (share) capital of a SICAR, increased by any issue premium, shall reach EUR 1 million and the subscribed (share) capital of a SIF, increased by any issue premium, shall reach EUR 1.25 million no later than 12 months following the authorisation by the CSSF. Additional capitalisation requirements may need to be taken into consideration for SICARs and SIFs qualifying as internally managed AIFs (i.e. being itself the AIFM) in accordance with the AIFM Law. In such cases, they must have an initial capital of at least EUR 300,000. While it is legally possible, admitting the securities issued by a SICAR and a SIF to trading on a recognised stock exchange will require the implementation of a deferred settlement mechanism permitting the verification of the qualifying investor status. A SICAR or SIF may be set up as an umbrella structure with segregated portfolios of assets and liabilities represented by compartments or sub-funds. 15

18 Private equity structuring options and solutions Distributions to investors SOPARFI SICAR SICAR/SIF SIF 10% statutory reserve Statutory formalities applicable to distributions depending on legal form No statutory formality applicable to distributions No statutory reserve Minimum or no statutory formalities applicable to distributions A SOPARFI set up as an SA, SCA or SARL must allocate 5% of its annual net profits to a statutory non-distributable reserve until such reserve equals 10% of its share capital. Distributions by way of annual dividends are subject to the approval of the shareholders/partners. Distributions by way of interim dividends are possible for an SA, SCA or SARL if certain formalities are fulfilled. Depending on the legal form adopted distributions may only be made if statutory distributable profits are available. The CLP or SLP are thus not subject to these statutory restrictions. Distributions by way of annual dividends and interim dividends in a SICAR are not subject to any restrictions other than those set forth in the constitutive documents. Distributions may only be made to the extent that the minimum share capital of EUR 1 million is respected. SICARs and SIFs (governed by Chapters 2 and 3 of the SIF Law) are not required to set up a statutory reserve. Distributions by way of annual dividends in a SIF set up as a company are subject to the approval of the shareholders/ partners. Distributions by way of interim dividends throughout the year in a SIF with variable share capital are not subject to any restrictions other than those set forth in the constitutive documents. Distributions in a SIF may only be made to the extent that the minimum share capital of EUR 1.25 million is maintained. Distributions in a SIF structured as an FCP are not subject to any restrictions other than those set forth in the management regulations, provided that the minimum net assets amount of EUR 1.25 million is maintained. 16

19 Private equity structuring options and solutions Redemptions of shares/units SOPARFI SICAR/SIF Statutory requirements applicable to share redemptions depending on legal form Limited statutory requirements applicable to share redemptions As a matter of principle, shares of a SOPARFI set up as an SA or SCA may not be redeemed without shareholders approval. Shares may be redeemed by way of a capital reduction if (i) they comply with specific restrictions (i.e. among others, only fully paid-up shares can be redeemed without exceeding 10% of the subscribed capital) or (ii) they qualify as redeemable shares as such shares are issued in accordance with the legally imposed terms and conditions to be set forth in the constitutive documents of the company. Shares may also be redeemed and cancelled by way of a capital reduction, or partial liquidation, under certain conditions (i.e. among other restrictions, approval of the shareholders under the requirements applicable to amendments of constitutive documents and protective measures in favour of creditors). Shares of a SOPARFI set up as an SARL may only be redeemed if they are immediately cancelled by way of a capital reduction approved by the shareholders under the requirements applicable to amendments of the constitutive documents. The CLP and SLP are not subject to any statutory restrictions. Redemptions (and subsequent cancellation) of shares of a SICAR or SIF with variable share capital are not subject to any restrictions other than those set forth in their constitutive documents, provided that the minimum share capital of EUR 1 million in case of a SICAR or of EUR 1.25 million in case of a SIF is maintained. Redemptions of units of a SIF structured as an FCP are not subject to any restrictions other than those set forth in its management regulations, provided that the minimum amount of net assets of 1.25 million is respected if the redeemed units are cancelled. Redemptions of shares of a SIF with fixed share capital are subject to the same restrictions as those set out above and applicable to a SOPARFI, which therefore depend on the legal form of the SIF with fixed share capital. 17

20 Private equity structuring options and solutions Valuation and reporting requirements SOPARFI SICAR/SIF Asset valuation at cost No prospectus and minimal reporting requirements Fair value asset valuation Prospectus/issuing document requirements Minimal reporting requirements The assets of a SOPARFI are valued at cost in accordance with Lux GAAP. They shall or may be written down depending on whether or not it is foreseeable that the loss in value is durable. Other accounting principles may be applied such as IFRS. SOPARFIs whose securities are not offered to the public are not required to publish a prospectus. SOPARFIs organised as an SA, SCA and SARL must establish and submit to the (general meeting of) shareholders for approval the annual accounts for each financial year within 6 months from the end of the financial year to which the accounts relate. SOPARFIs set up as a CLP or SLP are not subject to reporting requirements. SOPARFIs may be exempt from having to prepare consolidated financial statements, provided that certain conditions are met. The assets of a SICAR shall be valued on the basis of their fair value in accordance with its constitutive documents. For SIFs, while valuations will generally be done at fair value, the constitutive documents may provide for alternative valuations. SICARs and SIFs must establish an issuing document or prospectus. There is no requirement in terms of minimum content or specific layout, other than the requirement to include the information necessary for investors to be able to make an informed assessment of the investment proposed to them and of the risks associated therewith. Essential elements of the prospectus shall be up to date when securities are issued to new investors. SICARs and SIFs shall issue an audited annual report for each financial year within 6 months from the end of the financial year to which it relates. They are not required to prepare consolidated financial statements. Additional reporting requirements may apply under the AIFM Law, the scope and frequency of which depend among others on the type of AIF managed by the AIFM (open or closed-ended funds) and the magnitude of the assets under management. 18

21 Private equity structuring options and solutions Basics on Luxembourg taxation 19

22 Private equity structuring options and solutions Basics on Luxembourg taxation Taxation of the vehicle SOPARFI SA, SARL, SCA CLP, SLP Income tax: Corporate income tax (CIT) Maximum 21% (with a minimum of EUR 3,000 per year), but: (i) 100% exemption for dividends, liquidation proceeds and capital gains derived from qualifying participations (ii) 80% exemption on qualifying IP rights n/a Municipal business tax (MBT) 6.75% (in Luxembourg-city), but: (i) 100% exemption for dividends, liquidation proceeds and capital gains derived from qualifying participations (ii) 80% exemption on qualifying IP rights n/a (except in limited cases) Withholding Tax: Dividends 15% but exemption for qualifying parent companies and reduction under tax treaties. n/a Liquidation proceeds n/a n/a Interest 2 n/a n/a Royalties n/a n/a Net worth tax 0.5% per year on NAV on 1 January, but: (i) 100% exemption on qualifying participations (ii) 100% exemption on qualifying IP rights (iii) option to avoid/reduce tax burden through a specific 5 year net worth tax reserve n/a Subscription tax n/a n/a Registration duties VAT EUR 75 on incorporation, share capital increase through contribution in cash against shares or other amendments of the constitutive documents. No VAT exemption, except if the relevant entity qualifies as an AIF and the services rendered qualify as fund management services Assuming the beneficiary of the payments opts for the exchange of information procedure if interest payments fall within the scope of the EU Savings Directive 2003/48/EC and said beneficiary is not a Luxembourg resident individual.

23 Private equity structuring options and solutions Basics on Luxembourg taxation Taxation of the vehicle SA, SARL, SCA SICAR CLP, SLP SIF Income tax: Corporate income tax (CIT) Maximum 21%, (with a minimum of EUR 3,000 per year) but: 100% exemption for profits derived from (i) risk capital securities and (ii) funds to be invested within 12 months in risk capital securities. n/a n/a Municipal business tax (MBT) 6.75% (in Luxembourg-city), but: 100% exemption for profits derived from (i) risk capital securities and (ii) funds to be invested within 12 months in risk capital securities. n/a n/a Withholding Tax: Dividends n/a n/a n/a Liquidation proceeds n/a n/a n/a Interest 3 n/a n/a n/a Royalties n/a n/a n/a Net worth tax n/a n/a n/a Subscription tax n/a 0.01% on net asset value but exemptions available. Registration duties EUR 75 on incorporation, share capital increase through contribution in cash against shares or other amendments of the constitutive documents. VAT VAT exemption for management. VAT exemption for management Assuming the beneficiary of the payments opts for the exchange of information procedure if interest payments fall within the scope of the EU Savings Directive 2003/48/EC and said beneficiary is not a Luxembourg resident individual.

24 Private equity structuring options and solutions Basics on Luxembourg taxation Taxation of investors SA, SARL, SCA SOPARFI CLP, SLP SA, SARL, SCA SICAR CLP, SLP SIF Taxation of Luxembourg residents: Companies and individuals acting in the course of their business undertaking Dividends, liquidation proceeds and capital gains from qualifying participations may be exempt, otherwise a 50% exemption applies on dividends. Interest is taxable as ordinary profit. Tax transparent (except MBT): profits and wealth directly taxable in the hands of the shareholders, irrespective of any actual distribution. Dividends, liquidation proceeds and capital gains from qualifying participations may be exempt, otherwise a 50% exemption applies on dividends. Interest is taxable as ordinary profit. Tax transparent: profits and wealth directly taxable in the hands of the shareholders, irrespective of any actual distribution. Dividends, liquidation proceeds, capital gains and interest are taxable as ordinary profits. Individuals acting in the course of the management of their private wealth A 50% exemption applies on dividends. Capital gains and liquidation proceeds are exempt unless (i) realised within the first 6 months following the acquisition, or (ii) in case of substantial participation (>10%). Interest is generally subject to a final 10% withholding tax. Tax transparent (except MBT): profits and wealth directly taxable in the hands of the shareholders, irrespective of any actual distribution. A 50% exemption applies on dividends. Capital gains and liquidation proceeds are exempt unless (i) realised within the first 6 months following the acquisition, or (ii) in case of substantial participation (>10%). Interest is generally subject to a final 10% withholding tax. Tax transparent: profits and wealth directly taxable in the hands of the shareholders, irrespective of any actual distribution. Dividends are taxable as ordinary income. Capital gains and liquidation proceeds are exempt unless (i) realised within the first 6 months following the acquisition, or (ii) in case of substantial participation (>10%). Interest is generally subject to a final 10% withholding tax. Taxation of Luxembourg non-residents 4 Not taxable in Luxembourg unless: (i) investment is held in a Luxembourg permanent establishment or permanent representative, or (ii) capital gains realised on a substantial participation (>10%) within 6 months. Not taxable in Luxembourg unless: (i) investment is held in a Luxembourg permanent establishment or permanent representative, or (ii) CLP, SLP, qualifies as Luxembourg permanent establishment or permanent representative. Not taxable in Luxembourg unless investment is held in a Luxembourg permanent establishment or permanent representative. Not taxable in Luxembourg unless investment is held in a Luxembourg permanent establishment or permanent representative. Not taxable in Luxembourg unless investment is held in a Luxembourg permanent establishment or permanent representative Subject to tax treaties concluded by Luxembourg.

25 Basics on legal forms Please note that this comparative chart covers only requirements of the 1915 Law 1. SARL SA SCA 1. Key features Closely held company (intuitu personae), as evidenced by applicable specific rules (cf. items 8. and 9. below) although this form is widely used for structuring PE acquisition vehicles. Listing not permitted. Particularly suitable for joint venture structures as the corporate governance rules relating thereto are very flexible. Listing permitted. Particularly convenient for private equity fund initiators who want to retain control over the management function (cf. item 9. below). Listing permitted. 2. Constitutive documents Articles of incorporation. Notarial deed required. 3. Minimum capital EUR 12,500 EUR 31, Contributions In cash or in kind: contributions in kind are not subject to a valuation report from an independent auditor (réviseur d entreprises agréé). 2 In cash or in kind: contributions in kind are subject to a valuation report from an independent auditor (réviseur d entreprises agréé). 5. Form of securities Bearer 3 or registered form. Bearer, registered or dematerialised form. 6. Shareholding One or more limited shareholders (no more than 40). One or more limited shareholders (no upper limit). One or more general partners and one or more (separate) limited shareholders/partners (no upper limit). 7. Liability Shareholders are only liable up to the amount paid-up and/or committed. Shareholders are only liable up to the amount paid-up and/or committed. General partners are indefinitely, jointly and severally liable (but may be incorporated as limited liability companies or limited partnerships). Limited shareholders are only liable up to the amount paidup and/or committed. 1 The FCP is not subject to the1915 Law. 2 The 2007 Law requires a valuation report from an independent auditor (réviseur d entreprises agréé) notwithstanding the legal form adopted by the related SIF. 3 Draft bill 6625 contemplates to introduce a lock-up mechanism for bearer shares.

26 CLP SLP FCP 1. Key features Suitable for structuring joint ventures, SPV as well as openended funds and closedended funds. Particularly convenient for private equity transactions where (i) tax transparency is required at the level of the partnership and (ii) fund initiators want to retain total control over the management (cf. item 9. below). The CLP has a legal personality of its own. Listing permitted. Suitable for structuring joint ventures, SPV as well as openended funds and closedended funds. Particularly convenient for private equity transactions where (i) tax transparency is required at the level of the partnership and (ii) fund initiators want to retain total control over the management ( cf. item 9. below). No legal personality. Listing permitted. Undivided collection of assets, without legal personality unlike a company or a common limited partnership, managed by a Luxembourg management company on behalf of joint owners whose rights are represented by units. Allows for total control over the management. The management company may be set up notably as an SA, SCA or SARL. No legal personality. Listing of units permitted. 2. Constitutive documents LP Agreement. High contractual freedom. No notarial deed required. LP Agreement. High contractual freedom. No notarial deed required. Formed by written agreement. High contractual freedom. No notarial deed required. 3. Minimum capital No requirement. EUR 1,250 million under the SIF regime. 4. Contributions In cash, in kind or by way of sweat equity (apport en industrie). Contributions in kind are not subject to a valuation report from an independent auditor (réviseur d entreprises agréé) Form of securities Partnership interests which may also take the form of units (registered form only). Otherwise capital accounts mechanism. 6. Shareholding One or more general partners and one or more (separate) limited partners (no upper limit). In cash or in kind: contributions in kind to the FCP are subject to a valuation report from an independent auditor (réviseur d entreprises agréé). Bearer or registered form. One or more unitholders (no upper limit). 7. Liability General partners are indefinitely, jointly and severally liable (but may be incorporated as limited liability companies or limited partnerships). Limited partners are only liable up to the amount paid-up and/ or committed. Unitholders of the FCP are only liable up to the amount paid-up and/or committed. 4 The SIF Law requires a valuation report from an independent auditor (réviseur d entreprises agréé) notwithstanding the legal form chosen.

27 Basics on legal forms SARL SA SCA 8. Transfers of securities Transfers to non-shareholders are subject to the prior approval of shareholders representing three-quarters of the share capital. No statutory restriction on transfers. No statutory restriction on transfers. 9. Management By one or several managers. One-tier SA: by a board of directors of three directors at least, if the SA has several shareholders. Two-tier SA: by a management board of two members at least, supervised by a supervisory board of three members at least, if the SA has several shareholders. By one or more managers who do not need to be general partner. In case the manager is not the general partner: only liable for the execution of its mandate. General partner(s) cannot be dismissed without their consent, unless otherwise provided for by the articles of incorporation. 10. Amendment to constitutive documents By (i) a majority in number of the shareholders and (ii) such majority representing at least three-quarters of the share capital, in the presence of a Luxembourg notary. By a quorum representing at least half of the share capital and the positive vote of twothirds of the shareholders present or represented, in the presence of a Luxembourg notary. If the quorum is not reached at the first meeting, the second meeting will no longer require a minimum quorum. By a quorum representing at least half of the share capital and the positive vote of twothirds of the shareholders present or represented, in the presence of a Luxembourg notary. If the quorum is not reached at the first meeting, the second meeting will no longer require a minimum quorum. 11. Accounting/ auditing obligations Approval of annual accounts within 6 months following the end of the financial year. Publication of the annual accounts with the Luxembourg trade and companies register. One or more statutory auditors shall be appointed in case the SARL has more than 25 shareholders. If certain thresholds are met, the audit shall be entrusted to an independent auditor (réviseur d entreprises agréé) and in that case a statutory auditor is no longer required. Approval of annual accounts within 6 months following the end of the financial year. Publication of the annual accounts with the Luxembourg trade and companies register. One or more statutory auditors shall be appointed. If certain thresholds are met, the auditing shall be entrusted to an independent auditor (réviseur d entreprises agréé) and in that case a statutory auditor is no longer required. Approval of annual accounts within 6 months following the end of the financial year. Publication of the annual accounts with the Luxembourg trade and companies register. A supervisory board shall be appointed. If certain thresholds are met, the audit shall be entrusted to an independent auditor (réviseur d entreprises agréé) and in that case the supervisory board is no longer required. 12. Tax transparency Not tax transparent (but check-the-box eligible for US tax purposes). Not tax transparent. Not tax transparent (but check-the-box eligible for US tax purposes).

28 CLP SLP FCP 8. Transfers of securities Unless otherwise determined in the LP Agreement: Transfer of limited partner s interests requires general partner s approval. Transfer of general partner s interest subject to the conditions applicable for the amendment of the LP Agreement (cf. item 10. below). No statutory restriction on transfers. 9. Management By one or more managers who do not need to be general partners. In case the manager is not the general partner: only liable for the execution of its mandate. By a Luxembourg management company. 10. Amendment to constitutive documents Unless otherwise determined in the LP Agreement, by partners representing three-quarters of partnership interests and by all general partners. Management regulations of FCPs may be amended by the management company, unless otherwise specified in the management regulations. Unitholders of FCPs may be entitled to withdraw in case of amendment having a materially adverse effect on them. 11. Accounting/ auditing obligations 5 For CLPs whose turnover does not exceed 100,000 EUR: No obligation to keep their accounting books in accordance with requirements of the commercial code. No obligation to keep annual accounts in accordance with the requirements of the commercial code. No publication of the annual accounts. No audit required. No approval of annual accounts by unitholders required. No publication of the annual accounts. An independent auditor (réviseur d entreprises agréé) shall be appointed. No audit required. 12. Tax transparency Tax transparent. 5 This item does not consider specific rules applying under Luxembourg investment fund laws (SIF, SICAR).

29 Definitions AIF(s) AIFM(s) AIFMD AIFM Law Annual Accounts Law Banking Law CLP CPECs CSSF EEA ESMA EU EU Parent-Subsidiary Directive EuVECA Alternative Investment Fund(s) Alternative Investment Fund Manager(s) Directive 2011/61/EU of the European Parliament and of the Council of 8 June 2011 on Alternative Investment Fund Managers and amending Directives 2003/41/EC and 2009/65/EC Law of 12 July 2013 on alternative investment fund managers Law of 19 December 2002 on the annual accounts of companies, as amended Law of 5 April 1993 on the financial sector, as amended Common Limited Partnership (société en commandite simple) Convertible Preferred Equity Certificates Supervisory authority of the financial sector in Luxembourg (Commission de Surveillance du Secteur Financier) European Economic Area including EU Member States as well as Iceland, Liechtenstein and Norway European Securities and Markets Authority European Union Directive 90/435/EEC of the Council of 23 July 1990 on the common system of taxation applicable in the case of parent companies and subsidiaries of different Member States, as amended European Venture Capital Fund(s) EuVECA Regulation Regulation (EU) 345/2013 of the European Parliament and of the Council of 17 April 2013 on European venture capital funds FCP IFRS IP rights LP Agreement LuxGAAP MRPS MBT NAV PECs PFS Common fund (fond commun de placement) International Financial Reporting Standards Intellectual Property rights Limited Partnership Agreement Luxembourg Generally Accepted Accounting Principles Mandatory Redeemable Preferred Shares Municipal Business Tax Net Asset Value Preferred Equity Certificates Professional of the Financial Sector within the meaning of the Banking Law 27

30 Prospectus Directive Directive 2003/71/EC of the European Parliament and of the Council of 4 November 2003 on the prospectus to be published when securities are offered to the public or admitted to trading and amending Directive 2001/34/EC, as amended SA SARL SCA SICAR SICAR Law SIF SIF Law SLP SMEs SOPARFI SPV UCI Law UCITS VAT Public limited liability company (société anonyme) Private limited liability company (société à responsabilité limitée) Corporate partnership limited by shares (société en commandite par actions) Investment company in risk capital (société d investissement en capital à risque) Law of 15 June 2004 on the investment company in risk capital, as amended Specialised Investment Fund (fonds d investissement spécialisé) Law of 13 February 2007 on specialised investment funds, as amended Special Limited Partnership (société en commandite spéciale) Small and Medium sized Enterprises Financial participation company (société de participations financières) Special Purpose Vehicle Law of 20 December 2010 on undertakings for collective investment, as amended Undertaking for Collective Investments in Transferable Securities within the meaning of Part I of the UCI Law Value Added Tax 1915 Law Law of 10 August 1915 on commercial companies, as amended 28

31 Private Equity at Arendt & Medernach Luxembourg is the leading European domicile for structuring international private equity transactions. In this complex legal, tax and regulatory environment, our dedicated Private Equity Team, with its longstanding experience, fully understands the continuously evolving context of the private equity market and the underlying high expectations of our clients. In particular, our team recognises the importance of providing top-quality legal and tax advice in a timely and practical manner allowing our clients to respond quickly to opportunities in this competitive environment. Our clients range from private equity houses/fund managers to professional investors, financial institutions and funds of funds. We are committed to tailoring our services to the diverse expectations of our clients. With this in mind, we have formed a Team of specialists dedicated to private equity fund structuring and transactions, which combines the private equity experience and know-how of our corporate, tax and regulatory specialists. Arendt & Medernach s Private Equity practice distinguishes itself from its competitors by providing a onestop shop that offers high quality services across the board. As such, we represent private equity managers in all aspects of their activities. We design strategic and tax-efficient structures, offering innovative features as necessary. We assist in the setting-up of virtually all types of funds. Our lawyers are familiar with the dynamics of the different stages of the fund raising cycle as well as the investment cycle, covering all legal, regulatory and tax aspects, including any VAT matters. 29

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33 Arendt & Medernach Private Equity Team Pierre Beissel, Partner Tel: (352) Yves Lacroix, Partner Tel: (352) Camille Bourke, Partner Tel: (44) Catherine Martougin, Partner Tel: (352) Gilles Dusemon, Partner Tel: (352) Alexander Olliges, Partner Tel: (352) Marc Elvinger, Partner Tel: (352) Carsten Opitz, Partner Tel: (352) Francis Kass, Partner Tel: (352) Our Private Equity Team is supported by our Tax Team: Eric Fort, Partner Tel: (352) Alain Goebel, Partner Tel: (352) Bruno Gasparotto, Principal Tel: (352) Thierry Lesage, Partner Tel: (352) Arendt & Medernach 2014