US Fund Managers: Structuring Considerations For Belgian Private Privak Investors In A Luxembourg Fund - New York Office Snippet

US fund managers rely on a Luxembourg access point (Lux Fund) within their fund structure to cater to the preferences of EU investors and to streamline distribution in the EU using a marketing passport. Certain EU investors require that the Lux Fund preserves their local tax benefits, including Belgian investors that invest through a so-called Private Privak (PP).

The PP regime is a Belgian tax and regulatory framework designed for private equity investments. Belgian family offices and fund-of-fund entities often operate through a PP. It's essential for US fund managers entering the Belgian market to understand how to accommodate PP investors. 

It is key that the PP's investment in the Lux Fund does not deprive the PP of its tax neutral status in Belgium. A PP is exempt from Belgian corporate income tax if it exclusively invests in shares issued by (i) companies that meet the conditions of the Belgian participation exemption regime (PER), which conditions include being subject to a nominal or effective tax rate of at least 15% or (ii) other PPs or similar EU funds. For purposes of the foregoing, a look-through approach applies for entities that are transparent for Belgian tax purposes. This is the case for a Luxembourg limited partnership (SCSp), the default legal form of a Lux Fund. If the Lux Fund is an SCSp, condition (i) will not be met as soon as any of the SCSp's investments are not shares meeting condition (i). Hence, a Lux Fund that meets condition (ii) is often preferred.

An efficient access point for PPs is a Luxembourg partnership limited by shares (SCA) that adopts the Reserved Alternative Investment Fund (RAIF) status. An SCA-RAIF should be regarded as comparable to a PP, thus meeting condition (ii) above, provided it opts for a Luxembourg tax exemption based on the nature of its assets rather than its legal form (known as the SICAR tax regime). Generally, such Luxembourg tax exemption applies if the SCA-RAIF's assets are classified as private equity-type securities.

Belgian individual investors in a PP are currently not taxed but will soon be taxed at a rate of 10% on redemption and liquidation proceeds and capital gains derived from a PP, provided that the PP's investments (directly or via another fund) consist for at least 90% of equity investments.

Belgian corporate investors in a PP are not taxed on distributions and capital gains derived from a PP to the extent they stem from equity investments of the PP (on a look-through basis) that meet the requirements of the Belgian PER.

Considering the structuring costs, a dedicated access point for PP investors such as an SCA-RAIF obviously requires critical mass in terms of AUM sourced from PP investors. The positive aspect is that it can also serve as an access point for other EU investors, such as for certain Dutch investors.

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