Unregulated investment vehicle in Luxembourg
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Luxembourg is the largest investment center in Europe and the second largest in the world (after the USA). Luxembourg offers investors and investment managers a structure that fully matches the above criteria – an unregulated investment fund in the form of a partnership.
What are the factors determining the choice of a structure?
An investment fund is a reliable and profitable investment tool. Its main goal is to pool the capital of individual investors into a single pool for subsequent investment and multiplication, under the management of a professional investment manager (Management Company).
The term “investment fund” often refers not only to licensed investment funds but also to certain types of legal entities (for example, holding companies or different types of trusts). To choose the most suitable option, you need to carefully analyze the essence of the planned activities of the investment fund. Compare the funds operating on the market by several indicators:
- When choosing an investment fund, an investor should look at historical returns, the management company, and the asset structure. Not the last role in this list is played by the reputation of the company.
- As for the fund’s profitability, a potential investor should evaluate the return of the fund from the beginning of its operation – in this way you can compare the results of the fund under different conditions of the fund market. You should look at the historical average annual return since the foundation of the fund, compare this return with the average market return for this class of funds.
- Evaluate the structure of the fund’s investment portfolio. You should look for the presence of illiquid weakly traded securities in the structure of the fund. If you cannot get any information about the securities in which the fund has invested, then it is also better to refrain from participating in it.
Finally, if you have chosen several funds with a fairly high average annual return, a reputable management company and an understandable composition of the investment portfolio, you should compare the fees and commissions that you will have to pay when buying an investment certificate or fund shares.
Key factors of unregulated investment funds in Luxembourg
Funds can be created in the form of a partnership (societe en commandite simple, S.C.S., hereinafter referred to as “Partnerships”) or a special partnership (societe en commandite spéciale, S.C.Sp., hereinafter referred to as “Special Partnerships”).
Both forms of the Fund are tax transparent. This means that the Fund is obliged to pay corporate income tax in Luxembourg itself. The taxation of the Fund’s profits is carried out directly at the level of partners – in accordance with the rules that are applied to them under the laws of the country in which they are recognized as tax residents.
The main difference between Partnerships and Special Partnerships is that Partnerships are classic legal entities, while Special Partnerships do not have independent legal personalities, i.e. do not form a legal entity.
Fund partners are divided into two types:
- investment partner (“general partner” / “GP”);
- limited partners – investors (“limited partners” / “LP”).
Individuals and legal entities from any country (both from Luxembourg and from other countries) can act as investors and managing partners.
Investors are liable for the Fund’s obligations only to the extent of their contribution to the Fund’s capital. The Managing Partner has unlimited liability and is responsible for the obligations of the Fund with all its property – from this point of view, the managing partner of the fund, as a rule, is a limited liability company, and not an individual.
From a taxation and asset protection point of view, it may be preferable for investors to structure their investment in the Fund through a Luxembourg company applying a special regime “SPF” (“société de gestion de patrimoine familial”) – family wealth management company. SPFs are exempt from corporate income tax and are specifically designed for private wealth management.
Investors can transfer any property to the Fund’s capital: money, real estate, intellectual rights, know-how, and so on. There is no minimum or maximum capital for the Fund, but in order to avoid the obligation to obtain a license from the Luxembourg Financial Regulator (CSSF), it is necessary that the amount of assets under management of the Fund does not exceed 100 million euros.
Foundations in the form of partnerships are required to prepare financial statements annually. In some cases, a mandatory audit is required. The volume of published data for Partnerships is wider than for Special Partnerships.
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Luxembourg unregulated funds practical examples
There are 3 options:
- Simple capital pooling.
The Client puts up investors’ funds in a common pool of projects and manages them. Investors have equal shares of profit in each project. The Client acts as a managing partner and manages the assets that investors have transferred to the Fund and which have been acquired by the Fund.
The Client may also simultaneously act as an investor and invest his own funds in the Fund’s projects along with other investors.
This version of the structure is suitable for managing family assets. In this case, family members or their personal companies can act as investors. Income from all investment projects will be distributed among all investors proportionally.
- Segregation of investors’ rights.
The Client puts up investors’ funds in various projects. You can invest in one or more projects. The investment pool for each project and related shareholder rights are segregated from other projects.
The fund invests in two parallel projects (in reality, there can be an unlimited number of them). Investors participating in project A (for example, owning and leasing commercial real estate) are not involved in project B (investing in a venture start-up) and are not liable for the risks associated with it, and vice versa. Both groups of investors contribute to the overall costs of the Fund (eg administrative costs).
- Pooling more capital.
This structure allows you to attract additional investors (Co-Investors) to the investment project. The Fund-controlled investment SPV attracts the investments of Co-Investors in exchange for digital assets that provide the right to income from Co-Investments.
The income from the Investment Project is divided at the SPV level between the Fund and the Co-Investors who have invested in digital assets.
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