Luxembourg: Luxembourg Real Estate Investment Regimes

Grand Duchy of Luxembourg provides for a sound environment for international investments in today's unstable global economic context. The recent fluidity of the real estate market proves that the country presents profitable business opportunities in this area as well. Growth in the respective sector keeps increasing upon the entry of major corporations from the US, Germany and France, into the market. Private investors are also attracted by this trend and flux of new projects shows that new arrivals are yet to come.

We can easily state that Luxembourg has managed to adopt new approaches to meet with the regulatory requirements of the real estate industry and achieved a sustainable growth in this respect. The Luxembourgian legislation has developed various vehicles for investing in diversified real estate portfolios and introduced a flexible legal and fiscal atmosphere for cross-border investments.

Real Estate Investment Vehicles

1. Real Estate Funds are mainly regulated by the laws and circulars issued by the "Commission de Surveillance du Secteur Financier" (CSSF) in Luxembourg. The basic laws governing such funds are the Law on the Undertakings for Collective Investment dated 17 December 2010 and the Law on Specialized Investment Funds ("SIFs") dated 13 February 2007.

Real Estate Funds governed by the Law on the Undertakings for Collective Investment or the Law on SIFs can be incorporated either in corporate form such as SICAV (variable-capital investment company or SICAF (fixed-capital investment company), in contractual form (FCP- common investment fund) or as limited partnerships (SCS- limited partnerships with legal personality or SCSp- special limited partnership without legal personality).

Interests in funds which are subject to the Law on the Undertakings for Collective Investment can be sold to any type of investor. Funds regulated under Part I of the said law can be sold to any type of investor in any EU Member State, provided that they comply with certain procedures and investment restrictions. Funds under Part II, on the other hand, shall abide by the local regulations of the respective member, in addition to the investment restrictions.

Interests in funds which are subject to the Law on SIFs can only be sold to "well-informed investors", which enables high net worth individuals to benefit from SIFs. SIFs are not subject to general investment restrictions, on condition that risk dispersals are made at an adequate level.

2. "Société d'Investissement en Capital à Risque" (SICAR) is another vehicle used for real estate investments. SICARs are not classified as funds as per the Law on Investment Companies in Risk Capital (Law on SICARs) dated 15 June 2004. It is mostly designed for qualified investors investing in venture capital and private equity, as not being subject to risk diversification.

A SICAR can be formed in several business types stipulated in Luxembourg laws, such as S.A. (public limited liability company), S.C.S. (limited partnerships with legal personality), S.à r.l. (private limited company), S.C.A. (partnership limited by shares) etc.

3. Real estate investment can also be conducted through establishing a company or partnership, in accordance with the Law on Commercial Companies dated 10 August 1915. Such company or partnership can be in the form of the above-mentioned S.àr.l., S.C.A., SCS or SCSp (special limited partnership without legal personality), by a small group of investors and a simple capital structure. A "Société de Participations Financières" (SOPARFI) can also be formed for this purpose. SOPARFI, meaning a "Financial Holding Company", is a term of convenience rather than a regulated company form, used by the investors for the acquisition of financial investments in all types of companies within or outside Luxembourg. SOPARFIs benefit from the participation exemption regime on qualifying participations.

These forms of investment offer more flexibility and less incorporation and operating costs. However, the types listed in items 1 and 2 above benefit from more favorable tax rules and a higher investor protection.

4. Notwithstanding the above; a real estate investment vehicle may qualify as an "Alternative Investment Fund" (AIF), within the scope of the EU Directive 2011/61 on Alternative Investment Funds Managers, as accepted in Luxembourg via Law on Alternative Investment Fund Managers dated 12 July 2013.

This is to say that whether or not an investment vehicle is established under the Law on Undertakings for Collective Investment (dated 17 December 2010) or under the Law on SIFs (of 13 February 2007) or the Law on SICARs (of 15 June 2004) or under the provisions of the Law on Commercial Companies (dated 10 August 1915); it can qualify as an AIF as per the said Directive the related Law.

AIFs have the advantage of not requiring approval from the Luxembourg authority CSSF, either at the start-up or for the following periods. It is possible to operate any fund strategy within an AIF. In addition, an AIF is not required to have a local Manager, rather, it can be managed by an AIF Manager (AIFM) authorized in an EEA member state under the above-cited Directive.

5. "Funds of Real Estate Funds" that invest in other Real Estate Funds or SICARs and "Indirect Real Estate Funds" that invest in listed property-related securities as portfolio investments can be listed among the other types of real estate investments carried out in Luxembourg.

When selecting among the above structures, the applicable tax regime shall be of the essence. For instance; FCPs and limited partnerships are tax transparent whereas SOPARFIs, SICAVs and SICAFs are non-transparent in tax aspect.

It should also be noted that funds established under the Law on the Undertakings for Collective Investment or the Law on SIFs or the Law on SICARs can form an umbrella structure as well, with multiple sub-funds having specific features, e.g. sub-funds may adopt different investment policies. Such an umbrella structure is deemed as a single entity in legal terms, however, the sub-funds shall be responsible for their own assets and liabilities.

In practice, most of the Real Estate Funds in Luxembourg fall under the Law on SIFs and most of the Real Estate Funds formed in the recent years have adopted the SIF regime. This indicates that the Real Estate Fund investors generally seek an onshore regulated investment fund vehicle for their investments.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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