In May, Luxembourg adopted a new law designed to enable continental European private equity and venture capital firms to establish tax-efficient, regulated on-shore investment funds in the country.
Under the legislation, fund managers can establish a Société d'investissement en capital à risqué, or SICAR, to achieve tax efficiency and benefit from Luxembourg regulatory supervision. SICARS, which can take various corporate forms such as the Luxembourg equivalent of a limited partnership (SCS), are in line with tax treaties and EU Directives to minimise the amount of payable tax. They can either be set up from scratch or absorb already existing fund structures.
The SICAR is intended to appeal to both fund managers and investors whose specific requirements are currently not met by the Anglo-Saxon limited partnership, which is the industry standard in US and European private equity.
Managers can either use SICARs as fully-fledged investment vehicles that deploy capital in continental Europe; as side funds that are set up alongside a UK limited partnership to maximise their appeal to investors; or as specialised carry-paying vehicles that achieve tax efficiency for general partners who do not qualify for traditional private equity tax planning.
Jonathan de Lance-Holmes, a London-based partner at law firm Linklaters and head of the firm’s Private Equity Fund Group, said the SICAR was an eagerly awaited piece of fund legislation with compelling legal and commercial features.
Linklaters expects demand for the structure to be significant: “We’re already working on three SICAR mandates, one of which entails the conversion of an already existing structure into a SICAR vehicle,” de Lance-Holmes said.
If SICAR becomes continental private equity firms’ structure of choice, other jurisdictions are bound to take notice. “This initiative will sharpen the pressure on the UK Government to update UK partnership law as well,” de Lance-Holmes said. The UK Government is currently engaged in a consultation process with industry groups about such an update, a process that de Lance-Holmes described as ‘very positive.’