The vast majority of private equity (PE) funds are unregulated. The PE industry has a strong appetite for Luxembourg limited partnerships, a fund structure that is universally understood by investors who are familiar with common law partnerships. The special limited partnership (société en commandite spéciale) (SCSp) is most often used and differs essentially from the common limited partnership (société en commandite simple) (SCS) in that it has no legal personality.

However, as a result of the implementation of the Anti-Tax Avoidance Directives (Directive (EU) 2017/952 of 29 May 2017 (ATAD 2) and amending Directive (EU) 2016/1164 as regards hybrid mismatches with third countries), partnerships limited by shares (société en commandite par actions) (SCA) have been increasingly used in combination with traditional limited partnerships over the past year. This is because the SCA is considered to be a taxable corporation for Luxembourg tax purposes, usually in the investor's jurisdiction, which avoids any hybrid mismatch issue in relation to ATAD 2.

The year 2022 was more challenging for fundraising, in particular for new teams and the trend is expected to continue in 2023. This had an impact on the choice of vehicle with an increased demand for SICAVs, because they provide broader fundraising opportunities, including to retail investors.

In relation to PE funds and their managers, the Sustainable Finance Disclosure Regulation ((EU) 2019/2088) (SFDR) aims to prevent greenwashing by private investment fund managers and the financial services industry more generally. This compelled PE managers and portfolio advisers, as well as non-EU managers managing a Luxembourg fund or marketing funds in the EU under applicable national private placement regimes, to look into their compliance with the high-level principles in the SFDR, with reporting obligations to be complied for the first time by December 2023.

On the deals side, European PE remained resilient in 2022, with both deal value and deal count, however, that deal flows have been marked by GP-led secondaries and bolt-on acquisitions in existing portfolio companies given the more challenging exit environment.

As inflation spiralled, central banks have had to increase interest rates, which resulted in a correction in public markets. In an attempt to shield from the dropping valuations, there has been an increase in sponsor-to-sponsor exits.

(Pitchbook, 2022 European PE Breakdown.)

Global PE fundraising in the first half of 2022 underwent a slowdown, as aggregate volume dropped 27% year-on-year to USD337 billion (PE International, Fundraising Report H1 2022). The number of funds also fell, with limited partners (LPs) opting to remain committed to a smaller group of managers. Funds that held final closes during the period fell nearly 40% to 622, from 1,033 in H1 last year and 1,890 in the entirety of 2021.

It is difficult to provide an accurate estimate for the time needed to raise funds. This varies significantly depending on the characteristics of the fund, the track-record of the initiators, commitment sizes, the limited partners' familiarity with the model of the fund, the investor's appetite for investing in a particular region, and other variables. However, while 2022 was a challenging year for many PE fund managers, Luxembourg largely benefitted from the continued success of the largest global or US managers (many of them using Luxembourg as their European sleeve(s)) which only experienced a slight drop in commitments compared to 2021. This mitigated the greater challenges faced by many European sponsors facing a drop in fundraising in 2022.

The level of activity in Luxembourg in relation to investments by regulated vehicles is:

(CSSF's Newsletter No. 263 of December 2022.)

There are no overall statistics relating to the volume of activity of non-regulated funds. Based on the statistics published by Invest Europe, EUR138 billion of equity was deployed in 8,895 European companies in 2021, far exceeding levels recorded in any year and representing an increase of 51% from 2020's total of USD91 billion. With respect to VC investments, EUR20 billion was invested into 5,334 European companies during the same time period, more than a 70% year-on-year increase from 2020 (Invest Europe, Investing in Europe: PE Activity 2021, May 2022).

The investment policies followed by SICAR units at 31 December 2022 were:

With sector-based distribution, a lot of entities preferred not to limit their investment policy to a particular investment sector. Among the entities having adopted a specialised policy, there is a concentration in the real estate, energy, technology and services sectors.

SICARs' net assets, according to the main investment policy, were:

(CSSF's Newsletter No. 263 of December 2022.)

In addition, SIFs include a considerable number of vehicles investing in clean technologies. These are infrastructure projects with equity investments not included in the above statistics as they were made by unregulated PE funds set up, in most cases, as SCSps.

The asset class as whole continues to grow in Europe and there are record assets under management in the industry. Dealmaking was characterised by smaller but more numerous deals, with mega-deals of over EUR1 billion hitting a nine-year low as PE cheques got smaller across the industry and borrowing costs increased. During 2022, there were underlying themes, such as take-privates (which allowed sponsors to take advantage of lower valuations) and bolt-ons (as companies sought to continue growing through mergers and acquisitions (M&A)) (Pitchbook, 2022 European PE Breakdown).

Categories of investments have reached records:

(Invest Europe, Investing in Europe: PE Activity 2021, May 2022.)

A total of 3,720 European companies were exited during 2021, a 13% increase from 2020. Divestments at cost in 2021 were up 60% from the year before to EUR41 billion.

The most prominent exit routes by amount were:

(Invest Europe, Investing in Europe: PE Activity 2021, May 2022.)

This is a marked difference with 2022 with fewer exits, but a steady flow of bolt-on acquisitions and secondary transactions, given the challenging market conditions fuelled by the Russia-Ukraine war, the energy crisis and rise of interest rates in Europe, all negatively affecting valuations. VC fund net asset values (NAVs) reversed course in 2022, and the expectation is that if a renewed bull market does not take hold quickly, NAV growth will likely be negative in the near term for VC and PE.

(Preqin, Global Private Market Fundraising Report, 2022.)

The structural considerations for VC funds are the same as for PE funds and are driven by three key factors:

The corporate and regulatory structures available are the same as for PE funds (and the related tax treatments are therefore the same), although there is also a regime specifically for VC fund managers known as European venture capital funds (EuVECA). The EU legislators recognised the positive impact VC fund managers can have on small businesses in need of capital for growth. However, the number of managers using the regime is low.

Pension funds, funds of funds and family offices were the main contributors to fundraising in the French and Benelux regions in 2021. According to the 2021 European PE Activity report of Invest Europe of May 2022, contributions to the total amount of funds raised in 2021 came from the following sources:

No numbers have been published for 2021 with a purely Luxembourg focus.

The main fund players in Luxembourg are PE houses. Information is not publicly available for non-regulated vehicles.

The market share of fund initiators in Luxembourg by country of origin (in terms of assets under management) as at 30 November 2022 was:

(Association of the Luxembourg Fund Industry (ALFI).)

Luxembourg non-regulated vehicles benefit from several tax incentives. These are generally available to all Luxembourg-resident companies (irrespective of their underlying investments or the nature of their shareholders).

This regime applies to a financial interest holding company and provides that if certain holding thresholds (percentage or value) and subject-to-tax requirements (only required for non-EU subsidiaries) are fulfilled, dividend payments and capital gains are fully tax exempt in Luxembourg. In the same way, dividends paid to shareholders are generally not subject to domestic withholding tax in the case of corporate shareholders established in the EU or tax treaty countries. Finally, Luxembourg has a far-reaching network of treaties avoiding double taxation.

Under the general tax regime, RAIFs are exempt from Luxembourg income and wealth taxes. They are subject to an annual subscription tax charged at an annual rate of 0.01% based on the RAIF's total net assets, valued at the end of each calendar quarter. The following are exempt from the subscription tax:

A different tax regime applies to a RAIF that invests in risk capital and that is not a mutual fund (fonds commun de placement) (FCP), which is similar to the one applicable to SICARs as provided below:

A SIF is not subject to tax, apart from a registration tax (taxe d'abonnement) of 0.01% calculated on the net asset value at quarter-end. This is subject to certain exemptions.

These tax incentives are available irrespective of the profile of the investors and the nature of the underlying investments.

See above, Incentive Schemes.

The structures most commonly used for PE funds are similar to the structures used for VC funds (other than the EuVECA).

SCSps, SCSs, and soparfis are non-regulated vehicles that have the object of holding and financing participations in portfolio companies.

Limited partnerships. By far the most commonly used forms of non-regulated vehicles are the SCSp and the SCS. There is a strong appetite for Luxembourg limited partnerships, due to their key features:

Limited companies and partnership limited by shares. Other unregulated fund structures include:

RAIF. Many sponsors consider a RAIF instead of a regulated vehicle as it avoids the over-layering of supervision due to the implementation of the AIFM Directive (2011/61/EU) in Luxembourg.

RAIFs combine the legal and tax features of regulated AIFs like SIFs or SICARs, without the regulatory licensing or oversight of the Financial Sector Supervisory Commission (Commission de Surveillance du Secteur Financier) (CSSF). RAIFs are subject to favourable tax and legal regimes.

Whether or not existing funds should become a RAIF requires a case-by-case analysis from tax, legal and regulatory perspectives. For example:

In addition, the absence of a regulatory approval requirement allows managers to reduce the time to market their fund and reduces costs compared to other types of regulated fund vehicles. A RAIF is the structure of choice in comparison to Luxembourg regulated funds.

The assessment of whether a RAIF should be preferred to an unregulated fund structure depends on the initiator's key drivers.

RAIFs can be set up as one of the following corporate forms:

These various possibilities offer significant contractual freedom.

The following vehicles are supervised and authorised by the CSSF.

SICARs. These were implemented to offer a new lightly regulated vehicle for investment in PE to well-informed investors. They combine a flexible corporate structure for investing in risk capital, with the benefits of light supervision by the CSSF and a neutral tax regime.

SICAR is an optional regime, and must be formalised in the object clause of the company's articles of association. SICARs can be incorporated as one of the following companies:

While general corporate law provisions apply to SICARs, they have substantial flexibility in determining their articles of association:

SIFs. SIFs are subject to lighter statutory rules than other UCIs. The following can create or invest in a SIF:

The SIF aims to be an attractive vehicle through its flexible functioning rules, and the extensive scope of assets open to investment. A SIF can be used to invest in any kind of assets without limitation, to the extent it complies with the general risk spreading rules. It is authorised and supervised by the CSSF and has a neutral tax regime. A SIF can be created as:

The legal provisions and types of companies under which a SIF can be incorporated allow investors to set up their own corporate governance rules in a flexible manner:

A SIF can be organised with several segregated sub-funds.

In addition, there is an increased appetite from PE managers for Luxembourg-based UCIs, which are subject to the provisions of the second part of the Luxembourg 2010 law transposing the UCITS Directive, commonly referred to as Part II SICAVs. A Part II SICAV is an authorised fund that is set up as a SICAV and is either open-ended or closed-ended with variable capital. The Part II SICAV fund is launched subject to approval from the CSSF and it is supervised by the CSSF on an ongoing basis, for example, through regular reporting requirements. While more regulated, it is currently a vehicle that has gained traction to expand the reach of the distribution of the fund, which can be expanded to retail investors, (that is, funds can be marketed to professional investors in the EEA under the AIFMD passport and can be offered to retail investors in Luxembourg). However, a number of EU jurisdictions allow Part II SICAVs to be marketed to their retail investors under applicable private placement regimes.

Part II SICAVs must invest capital based on the principle of risk spreading, and the 2010 law and other CSSF regulations provide for specific restrictions. There are no restrictions with respect to eligible assets (unlike in the case of UCITS) and borrowings of up to 25% of net assets are allowed without any restrictions.

The subscribed capital is at least EUR1.25 million, within six months of the date of approval from the CSSF.

The risk diversification requirements are defined by IML Circular 91/75 and 02/80 and the requirements are less stringent than those applicable to UCITs. A Part II SICAV can't invest more than 20% of its net assets in securities issued by a single issuer.

It can be a single fund or an umbrella with multiple compartments and may have an unlimited number of share/unit classes, depending on the needs of the investors to whom the fund is distributed.

There has also been reform to European Long Term Investment Funds (ELTIFs). A review of the ELTIF Regulation was finalised in October 2022, approved by the European Parliament on 15 February 2023 and adopted by the Council of the EU on 7 March 2023. The amending regulation will come into force 20 days following its publication in the Official Journal of the EU and apply nine months later.

Under the amended Regulation, ELTIFs solely marketed to institutional investors can borrow up to 100% of the NAV of the ELTIF (and up to 50% for ELTIFs marketed to retail investors). The aim of the amendments is to:

The review was conducted in response to findings that the product was unpopular (less than 100 since 2015, with a small amount of assets under management). The benefit of an EU-wide marketing passport may also appeal to sub-threshold managers who do not have AIFMD passport rights.

A RAIF is subject to two different tax regimes, depending on whether it has opted for the special tax regime (see below):

The tax status of SICARs depends on the legal form chosen (see below).

SCS and SCSp. These are tax transparent and therefore not subject to tax in Luxembourg, except for municipal business tax if they perform or are deemed to perform commercial activities. Tax is levied at investor level, according to the law of where they are tax resident. Double tax treaties or EU directives may apply in the country of the investor and the country of the portfolio company, depending on the relevant regulations.

SICARs as corporations. They are in principle fully taxable in Luxembourg at 24.94% for 2022, including contributions to the employment fund and municipal business tax for the city of Luxembourg (this can vary slightly for other municipalities). They should in principle benefit from double tax treaties and the Parent-Subsidiary Directive (2011/96/EU), at least from a Luxembourg perspective. If a country does not recognise the SICAR, alternative structuring is available.

The tax regime applicable to SICARs incorporated as a corporation is as follows:

SIFs are not subject to:

A SIF is subject to either:

SIFs formed as SICAFs can benefit from double tax treaties. The application of double tax treaties to SIFs is generally complex and must be reviewed on a case-by-case basis. SIFs formed as FCPs generally do not benefit from double tax treaties.

Management services for these vehicles are exempt from VAT. SIFs are considered as VAT taxable persons but their activities are generally exempt from VAT. Therefore, they cannot in principle deduct input VAT. Active VAT strategy should therefore be implemented to mitigate VAT costs for these vehicles, notably on deal fees (for example, use of VAT exemption on certain services received, recharge of costs, and so on).

The following tax treatment applies:

Under current Luxembourg VAT legislation, the management of AIFs benefits from a VAT exemption. The Luxembourg VAT legislation was amended by the Luxembourg Law of 12 July 2013 on Alternative Investment Fund Managers (AIFM Law) to specifically cover AIFs in the VAT exemption regime. This VAT exemption applies, in principle, to administration, portfolio and risk management services rendered to a fund. Services delegated to a third party may also benefit from a VAT exemption. VAT exemptions are, however, to be interpreted strictly and in the light of Luxembourg and European case law. A case-by-case analysis is advisable.

The use of a foreign structure is unlikely as Luxembourg is typically used as a platform for holding and acquisition vehicles in operating groups, either in Luxembourg itself or abroad. The features of Luxembourg as a holding location are equally strong for Luxembourg targets and foreign targets. Therefore, it is unlikely that foreign holding vehicles would be set up to acquire a Luxembourg group.

Foreign investment vehicles commonly used for PE funds in other jurisdictions are generally tax transparent (subject to review on a case-by-case basis) in Luxembourg, such as:

Despite the recent trend in the market for longer term funds, in large buyouts the majority of funds are still ten years, either from the first or final closing date. There are then typically two possible extensions of one year each. In some cases, the first extension can be at the manager's discretion, but both extensions usually either require advisory board consent or often consent from 50% of the investors.

The main objective of PE and VC funds is to have the highest return on capital possible at the time of the exit (capital gain) and a seamless repatriation without tax leakage.

VC funds focus on promising private companies with high growth potential, taking usually a minority participation with the view to realising a return from their investment only on the occurrence of a liquidity event. PE funds usually hold more than 50% of the equity of the company they invest in (which has growth possibilities and where they can improve profitability). PE investment objectives include, in some cases, distributions before liquidity, although the largest part of their return occurs when a liquidity event occurs (that is, the acquisition of the company or a public offering of its shares). Accordingly, VC and PE firms insist on certain rights as part of their investment, to ensure that there is an opportunity for liquidity. In this respect, the interests of founders and investors in both PE and VC (that is, achieving significant financial return from an appreciation in the value of their equity holdings) are aligned.

The volume of equity bridge financings for both VC and PE funds has increased considerably because, in the current market conditions, they boost the internal rate of return (IRR) of these funds.

Whether the management bodies require CSSF approval depends on the type of investment vehicle used.

The AIFM Law imposes new requirements on Luxembourg-based AIFMs, which must now be authorised by the CSSF when managing assets acquired with leverage in the fund of EUR100 million or more, or assets under management with no leverage in the fund of EUR500 million or more. These requirements include, among other things:

The CSSF is also the competent authority for approving SICARs and SIFs, and specifically requires the following:

There is no requirement for a promoter.

In respect of VC funds, in addition to the above, the establishment of an EuVECA is subject to CSSF approval. CSSF approval ensures compliance with rules relating to diversification, the conduct of business, investment policy, treatment of investors, delegation, and conflicts of interest.

SIFs, SICARs and Part II SICAVs are regulated entities, and are, therefore, subject to prior approval from the CSSF before they are launched. These vehicles must issue a prospectus or issuing document, which is examined or approved by the CSSF. The central administration of the fund (that is, bookkeeping, share registrar and transfer agent services) must be located in Luxembourg. RAIFs are supervised through the AIFM managing them.

Soparfis are non-regulated vehicles and therefore do not require regulatory approval. For the avoidance of doubt, this includes the limited partnerships. However, for those Soparfis whose equity can be offered to the public, a prospectus complying with the rules of the Prospectus Regulation ((EU) 2017/1129) must be approved by the CSSF.

Exemptions from publishing a prospectus apply in some circumstances.

For example, Article 4 Part II of Luxembourg law of 16 July 2019 provides that the obligation to publish a prospectus shall not apply to offers of securities to the public:

A SARL must have a minimum of one shareholder and a maximum of 100. An SCA, an SCS and a SCSp must have a minimum of two shareholders (at least one unlimited partner, who often is the general partner, and one limited partner) with no maximum limit. The minimum required for an SA is one shareholder.

The investors in a SICAR, SIF or RAIF must be well-informed investors, which are any of the following:

Managers and other persons who are involved in the management of a RAIF, SICAR or SIF are no longer required to certify their status as a well-informed investor to be an eligible investor. Further, as for any fund, the manager is responsible for the compliance with anti-money laundering requirements for any investor in the fund it manages.

There are no statutory or other limits on maximum or minimum investment periods, amounts or transfers of investments in SICARs and SIFs, as well as in any unregulated fund vehicle. Any limits are subject to the contractual terms agreed by the parties themselves. The investments in a SICAR must be made for a certain period of time with the intention of a later sale at a profit. For a SICAR or a SIF, the Commission for the CSSF can also give some additional requirements for a specific investment policy. Risk spreading rules apply to RAIFs that both:

While no specific rules are included in the RAIF Law, the position taken is to apply the diversification rules applicable to SIFs.

The prospectus or issuing document and the articles of association or management regulations regulate the relationship between the investors and the fund. No best practice guidance is published in Luxembourg.

The main aim of the prospectus or issuing document is to protect the investors by giving them information on the nature of the investments to be made. Among other provisions, the prospectus states the rules relating to:

Regarding key investor protections trends, with no fault provisions, voting thresholds are usually 75%, whereas for fault provisions only a simple, or occasionally two-third, majority is typically required. The pendulum tends to swing in favour of investors in relation to no-fault removal provisions. A key feature of the investor protections is the treatment of carried interest following removal of the GP or termination of the fund. In the overwhelming majority of cases, GPs are permitted to retain all the carried interest from investments made before the no fault event. On a fault removal or termination, the carried interest treatment is generally much more investor-friendly.

PE funds commonly take securities or financial instruments in a portfolio company (that is not situated in Luxembourg but in the country of the target to be acquired by the PE or VC fund), which may carry specific financial or voting rights (such as preferred dividend rights). More complex and hybrid instruments can be used, depending on the financial arrangements and ultimate tax planning at investor level, which enable profit repatriation, capital gains or dividend flows in a tax efficient manner. The nature of certain hybrid instruments is currently being revised in the light of the OECD base erosion and profit shifting project (BEPS), as well as based on the Anti-Tax Avoidance Directives. As a general rule, a pure Soparfi can be financed up to 85% by debt, provided equity represents the remaining 15% of the company's total financing.

The issue or transfer of shares is subject to statutory legal requirements and the specific provisions of the company's articles of association. Generally, transfers or issues require approval by an extraordinary general meeting of shareholders (general meeting), or by the board for authorised capital.

PE funds can take a preferred equity interest in an investee company. However, debt investments or a mix of preferred equity and debt are also common.

The legal restrictions on the transfer of shares depend on the type of company:

The potential levying of withholding tax and capital gains tax is assessed on a case-by-case basis depending on the type of fund and investor.

Auctions are common even for smaller and medium-sized buyouts. Most recent transactions for the acquisitions of financial services companies were carried out by auction. Auctions are not specifically regulated as such, but competition law is always considered.

Buyouts of listed companies in Luxembourg are not common, as few companies have their shares (as opposed to debt instruments) listed on the regulated market of the Luxembourg stock exchange. Until recently, Luxembourg did not have specific legislation regulating takeover bids.

The hostile takeover bid by Rotterdam-based Mittal Steel for steel producer Arcelor prompted the Luxembourg Government to implement the Takeover Directive (2004/25/EC). As a result, security holders are now protected, and have enough time and information to allow them to reach a properly informed decision on the bid. In addition, new principles on mandatory offers, squeeze-outs, sell-outs and rights of withdrawal all regulate takeover bids and allow for better security for this type of transaction.

These documents do not need to be made publicly available.

These documents must be made publicly available.

These documents usually include:

These documents do not need to be made publicly available.

These documents usually include:

These documents do not need to be made publicly available.

The most standard representations and warranties include the following:

Usually, warranty and indemnity protection are provided from both the seller in the sale and purchase agreement and management in the investment and shareholders' agreement. If the seller is a PE fund, the scope of the representations and indemnity deal protection is more limited.

Lockbox arrangements are much less common since the financial crisis. Earn-out provisions are now the preference with a substantial part of the purchase price dependent on the target's financial performance after closing.

The sponsor is usually represented at the board of the target and obtains (as a shareholder) regular reporting from management.

The fund can also require an undertaking from the target's management to remain in office for a minimum duration. Some service contracts (such as IT and accounting) can be extended for an agreed duration.

The articles of association of the target include the sponsor's rights to various exit routes, for example:

Non-contractual duties, such as duties of confidentiality and loyalty to the portfolio company, derive from general civil law obligations to act in good faith in the execution of any contract. These obligations are also usually set out contractually (common in employment contracts, but less common in the corporate mandate between the company's management body (managers or directors) and the company).

Managers with a corporate mandate must also exercise their mandate in line with the principles of good management, and act in the company's best interest.

A PE investor typically imposes the following terms on management in an MBO:

The measures depend on the outcome of negotiations between the fund and its management, and the legal rules regulating the target.

However, a fund typically requires from its portfolio company:

Whether these protections should be inserted in the articles of association or in a shareholder agreement is considered on a case-by-case basis.

The remuneration of key managers of the target or target group is usually tied to the performance of the target or target group with a management incentive plan often set-up as one of the various corporate vehicles.

Financing by debt can come either from the investors (to benefit from the deduction of interest) or from third parties.

Investors' debt financing can take several forms, ranging from straightforward shareholder loans to hybrid, convertible or subordinated instruments. Interest paid to investors must be at arm's length. In addition, as far as holding activities are concerned, an 85:15 debt-to-equity ratio is generally regarded in practice as acceptable (other ratios may be acceptable provided the overall interest is not excessive). There are interest limitation rules from 2019 (Anti-Tax Avoidance Directive (EU) 2016/1164).

Third party financings usually take the form of senior or mezzanine loans (syndicated or otherwise). Bond issues are also an option (parties enjoy a large degree of freedom in their terms and conditions), with bonds becoming very common for financings from EUR200 million for add-on and refinancing. Debt-to-EBITDA (earnings before interest, taxes, depreciation, and amortisation) ratios have been, in most cases in 2018 around 7x EBITDA, with a general trend towards weaker covenants, larger credit lines and narrower pricing, although the European lenders have been more cautious than US lenders.

Protection for debt providers is regulated by the Law of 5 August 2005 on financial collateral arrangements, implementing the Financial Collateral Directive (2002/47/EC).

Pledge of assets (contrat de gage). This is the most common way of taking security over Luxembourg assets. Pledges over shares or intra-group receivables and bank accounts are usually taken over all securities issued down to the target and certain members of the group. Ring-fencing is usually one level below the fund and the management company set-up for the management incentive plan (if any), to ensure that:

Depending on the business of the target or target group, a pledge over various items such as the business, IT rights and insurance contract rights will be granted in favour of third-party lenders. Mortgages remain rare in the practice of leveraged finance deals.

Transfer of ownership by way of security interest (transfert de propriété à titre de garantie). This transfer can apply to the same assets as for a pledge of assets. On default, the transferor does not need to transfer ownership back, in accordance with the terms and conditions agreed in advance by the parties.

Contractual subordination, acceleration and netting mechanisms are frequently used to secure investments.

In principle, an SA or SCA can advance funds, make loans or provide security with a view to the acquisition of its shares by a third party, under the following conditions:

However, this rule does not apply to the acquisition of shares by, or for, the company's employees.

The above rules do not apply to an SARL, SCS or SCSp.

Insolvency procedures are regulated by law, notably the:

All creditors, other than secured and privileged creditors, must be treated equally. Payments to secured and privileged creditors are made in the following order:

However, pledges and transfers of ownership through security interest remain valid and fully enforceable, despite the start of insolvency proceedings against the grantor, to the extent they apply to financial instruments (including all types of securities) or receivables (including those resulting from bank accounts), as well as netting arrangements. Secured assets covered by these security interests are, therefore, not included in the assets available for distribution to the general pool of creditors.

Shareholders' capital contributions are only repaid once all other creditors have been fully satisfied.

It is possible, and common in some circumstances, for debt holders to achieve equity appreciation through using conversion features on convertible debt instruments, warrants and options.

Typically, these instruments are highly subordinated and have a lower interest rate, as their remuneration or appreciation is embedded in the conversion feature. Through the conversion feature, the instrument appreciates in value according to the appreciation of the shares into which the instrument is convertible. The law permits high legal flexibility for the design of these instruments, combined with extensive administrative tax practice. It is advisable to confirm the tax treatment with the Luxembourg direct tax authorities depending on the circumstances.

There is no specific legislation regulating management incentives. Share options are most commonly used to encourage management to be involved in the company's development, since they can benefit from favourable tax treatment in certain circumstances (see Question 28).

The following are also used:

Ratchets are used and their mechanism is defined contractually, as they are not regulated and can take different forms.

Share options are most commonly granted to encourage management to be involved in the company's development, as they may benefit from favourable tax treatment.

The 2021 budget law dated 19 December 2020 introduced a new tax regime providing for a 50% tax exemption for bonuses granted to employees, within the limit of 25% of the employee's gross remuneration and 5% of the employer's commercial profits for the preceding year. Despite the exemption, the bonus also remains fully deductible for the employer.

Article 30 of the AIFM Directive provides (subject to certain exceptions) limitations on distributions, capital reductions, share redemptions or purchases of own shares by a private or public portfolio company during the first two years of ownership by a PE fund managed by an AIFM. Although drawn from European company law applicable to public companies, the restrictions under Article 30 of the AIFM Directive apply to private and public companies owned by PE funds, and therefore are more burdensome than the regulatory regimes in place in many EU member states at the moment.

The AIFM:

Therefore, the acquisition structure considers such restrictions to accommodate necessary cashflow to upstream in light of the overall transaction with equity/quasi-equity financing by the sponsor (for example, repayment of loan notes is not covered by the Article 30 provisions, so if an investment is structured by way of loan notes the Article 30 restrictions would not apply).

Further, interim and annual dividends require distributable reserves. Soparfis must retain a legal reserve of 5% of their yearly profit, up to 10% of the share capital of the company.

There are no other restrictions on interim dividend distributions for limited liability companies or SARLs. SCAs and SAs can only distribute interim dividends in certain circumstances, and if their articles of association allow this.

Distribution of dividends is generally subject to a 15% withholding tax, unless the rate is reduced (even to nil) by a:

There is no withholding tax on liquidation proceeds or on interest payments (except in specific circumstances) (see Question 4).

Anti-corruption provisions are usually included in the warranties and restrictive covenants of the acquisition agreement. In addition, it is increasingly common to include principles of good governance into the rules of procedure for management.

In general, it is prohibited to corruptly solicit, receive, promise or offer any gift, reward or other advantage, whether directly or indirectly, as an inducement to a person to do or refrain from doing anything (Articles 246 and 247, Luxembourg Criminal Code).

Active and passive corruption in the private sector is punishable, for natural persons, by one month to five years' imprisonment and a fine (Article 36, Luxembourg Criminal Code).

Trade sales and secondary buyouts remain the most common form of exit. The form of exit used mainly depends on:

With corporate vehicles, an exit (full or partial) can be made through the following ways, or a combination of all or some of them:

The advantages of trade sales include:

The disadvantages of trade sales include:

The advantages of a secondary buyout include:

The disadvantages of a secondary buyout include:

In most cases, the form of exit from an unsuccessful portfolio company depends on the foreign law applicable to that company. The usual forms of exit are the sale to another fund or to the management. An asset sale is rarer in practice, as is an insolvent exit. However, a voluntary winding-up is most likely to be the preferred exit of the Luxembourg holding vehicle. In some cases, the bankruptcy rules can also apply.

There are no particular advantages or disadvantages to the different methods. Liquidation should not trigger any adverse legal (in particular, tax) consequences.

Since the European Commission's October 2020 consultation on a proposed Amending Directive, the Council of the EU and the European Parliament have been proposing further amendments to the AIFM Directive. Once finalised, the Amending Directive will enter into force 20 days following its publication in the Official Journal of the EU. EU member states will then have 24 months to implement it. The key areas of review relate to:

In addition, new transparency requirements on providing information on AIF loan portfolios are to be fed into investor disclosures and national competent authorities. The final shape of these rules is yet to be determined, pending the outcome of the trialogue negotiations. Further output is expected in 2023.

In addition to the AIFMD II above, the marketing and pre-marketing of funds is being implemented taking into consideration the European Securities and Markets Authority's final report of December 2022 on implementing technical standards and regulatory technical standards to specify the information to be provided and the content and format of notification letters to be submitted by AIFMs (and UCITS ManCos) to national competent authorities to undertake cross-border marketing or cross-border management activities in host member states. These complement the EU legislative package on cross-border distribution of funds (that has applied since August 2021).