PwC Luxembourg is the leading professional services firm in the country with around 2,400 people. Similarly, its Real Estate and Infrastructure team is the largest multidisciplinary team of specialists in the Grand Duchy with more than 250 experts supporting global real estate managers; these range from tax advisers and engineers to auditors and fund accountants.
“We service a large segment of the Luxembourg and international real estate market and this allows our team to deliver tailor-made specialised services to our clients,” explains Amaury Evrard, Partner and Real Estate Leader at PwC Luxembourg. “We can make the most of our global tax structuring team for managers who choose to operate through Luxembourg RE funds. Our network is very well recognised by the Luxembourg and international real estate community.”
Since Luxembourg introduced the Specialised Investment Fund (SIF) in 2007 the number of real estate funds has grown substantially – although precise consolidated figures are not known given that not all funds are regulated. Nevertheless, with the AIFMD in full swing and a new legal structure – the Special Limited Partnership (SCSp) – for managers to use, Luxembourg is well placed to build the same level of success with alternative funds as it did 20 years ago with UCITS funds.
PwC Luxembourg’s real estate and infrastructure business is a centre of excellence, working with numerous professional organisations such as, for example, INREV, ALFI (Association of the Luxembourg Fund Industry) and the country’s financial regulator, the CSSF. “We sit on numerous committees where alternative fund structures and products are discussed both from a regulatory, a tax and an operational perspective. This helps keep clients up to speed with developments, which in turn benefits their investors,” adds Evrard.
One important group initiated by the Luxembourg Government – the Alternative Investment Group – a few years ago began discussions amongst the market players, the Luxembourg regulator and tax authorities to develop a new and more flexible, legal structure for global managers to avail of. What resulted was the Special Limited Partnership.
“Before the AIFMD came into force, if a real estate or private equity fund promoter wanted a regulated vehicle they would have put Luxembourg products at the top of the list. Conversely, if they wanted something unregulated and more flexible, the UK was often at the top of their short list primarily because of the UK Limited Partnership,” explains Alexandre Jaumotte (pictured), partner, Luxembourg Real Estate and Infrastructure Tax Leader.
Jaumotte continues: “Then AIFMD arrived and the mindset of real estate managers changed slightly and we started getting approached by a number of private equity and real estate houses to establish regulated products. In the past they would stuck with the UK LP but given that the obligations that the Directive places on the Manager are very similar to those that apply to Luxembourg regulated vehicles, the rationale became: ‘Well, if the Manager (the AIFM) has to be regulated anyway it’s probably better if the fund is too’.
“Indeed, this helps marketing of the fund without simple duplication of costs and administrative burden. For private equity players, this new partnership form is a new onshore alternative of fund structuring, regulated or not regulated as a product, linked to an EU-based AIFM to access the AIFMD distribution passport to EU investors.
“We quickly realised that what Luxembourg needed was a more flexible legal regime from a corporate governance perspective, that could meet the wishes of fund promoters and which could be either regulated or unregulated. This is where the idea was born to create the Luxembourgish Special Limited Partnership.
“The SCSp has been created through close collaboration between the authorities and the market players.”
Christine Casanova, a director in the Alternative Group, explains that alongside the updated SCS regime, managers now have greater choice over whether to establish a structure with (SCS) or without legal personality (SCSp). There will obviously be tax transparency considerations depending on how the partnership is structured.
As Casanova explains: “Investors in some jurisdictions may want to have a partnership without legal personality and this is where the new SCSp is helpful in terms of providing tax transparency. Other investors in other jurisdictions may prefer to invest in a vehicle having legal personality.
“With SCSp, full tax and legal transparency from an investor’s perspective may allow them to claim direct treaty benefits with the investment country.”
The revamped common limited partnership and the new special limited partnership are both, if properly set up, fully transparent for Luxembourg tax purposes also. No income tax leakage may be expected. There is no withholding tax on payments made by the partnership to the limited partners and the general partner.
This applies whether the partnerships are set up as regulated or unregulated vehicles.
Relying on the full transparency of the partnership for an investor perspective, works well if the GP/LP arrangement consists of a limited number of investors. However, where there are multiple (potentially global) investors involved, Casanova says the partnership might best be structured with a platform underneath to reduce the burden of individual tax filings.
“Here, investors would not rely on tax transparency but would have an entity claiming the treaty benefits on their behalf,” adds Casanova.
It is critical for any manager that they work through how best to structure the partnership. They need to decide whether the legal framework has legal personality or not, whether it needs full tax transparency or not, and whether the fund they launch (e.g. a SIF, a SICAR or a Part II fund) will be regulated or not.
Jaumotte says that the two main questions PwC asks its clients are the following:
• #1 – Who are your investors? Are you targeting institutional investors? If yes, are they coming from Europe, the US, Asia? Or are you targeting HNW individuals or corporations?
“This is a key question because the answer will drive the choice of vehicle,” says Jaumotte. “It will help the Manager decide whether they need a regulated or unregulated vehicle. If the Manager is targeting European institutional investors that cannot invest into an unregulated structure then clearly they will go down the regulated fund path. So that’s the first question: who are your targeted investors?”
• #2 – Where are your investments located? If, for instance, the Managers invest across Europe in a pan-European fund and they want access to treaty protection and avoid double, even sometimes triple, taxation, then Jaumotte says it may be better to consider a vehicle without the “legal personality than a vehicle with legal personality or to consider the setting-up of an investment platform underneath the fund”.
“Depending on what the answers are to these 2 key questions, we can guide the client on whether it’s best to have legal personality or not; to have a regulated product or not. Once that is established, one needs to consider whether the fund will be open-ended or closed-ended and what is the distribution policy of the fund because that will also guide the choice and the regulatory regime of the vehicle.
“And of course, there is a taxation consideration. If, for instance, the Manager is targeting tax-exempt institutional investors they will need to invest a fund with no tax on distribution otherwise investors may be hit with different levels of taxation.”
The Luxembourg common limited partnership and special limited partnership may be used as funds vehicles but also as e.g. feeder funds or vehicles, as joint venture or co-investment vehicles, a pooling vehicle for management, a carry vehicle in the private equity industry or a property-owning entity in the real estate industry.
As Casanova concludes: “The only limit is imagination.”