EU Fund Managers: Structuring Considerations For Belgian Private Privak Investors In Luxembourg Private Equity Funds

EU fund managers frequently rely on Luxembourg fund structures to facilitate cross-border fundraising within the EU. Where Belgian investors invest in Luxembourg fund structures through a Belgian Private Privak (Privak), additional structuring considerations arise to preserve the benefits of the Privak regime.

The Privak is a Belgian tax and regulatory regime commonly used by family offices and fund-of-funds for private equity investments. A key requirement is that the Privak retains its tax-neutral status in Belgium. Broadly, this requires the Privak to invest exclusively in shares of companies meeting the conditions of the Belgian participation exemption regime (PER) and/or in other Privaks and similar EU funds.

For that test a look-through approach applies to entities that are transparent for Belgian tax purposes, such as a Luxembourg SCSp. This can create challenges where a Luxembourg fund is structured as an SCSp. Because the SCSp is looked through, underlying assets such as shareholder loans or non-qualifying shares may prevent the Privak from satisfying the relevant conditions. Hence, structures capable of qualifying as a "similar EU fund" for the Privak regime purposes are often preferred.

A Luxembourg partnership limited by shares (SCA) adopting the Reserved Alternative Investment Fund (RAIF) regime offers a solution. An SCA is not looked through for Belgian tax purposes. Where the SCA RAIF invests solely in risk capital, it may opt for the Investment Company in Risk Capital (SICAR) regime and can may be regarded as an EU fund similar to the Privak. Private equity strategies should generally satisfy the risk capital requirement, while the SCA SICAR RAIF benefits from a tax exemption for income and gains derived from risk-capital investments.

At the investor level, Belgian individual investors are subject to a 10% capital gains tax on distributions (share redemption and liquidation distributions) and capital gains derived from a Privak where at least 90% of the ultimate investments. Belgian corporate investors generally benefit from an exemption for distributions and capital gains to the extent these are derived, on a look-through basis, from PER-eligible equity investments.

While establishing a dedicated entry point for Privak investors will only be appropriate where sufficient scale exists, an SCA RAIF can often accommodate both Privak and non-Privak investors, making it an attractive structuring option for fund managers targeting Belgian capital.