Private equity in Luxembourg: market and regulatory overview

A Q&A guide to private equity law in Luxembourg.

The Q&A gives a high level overview of the key practical issues including the level of activity and recent trends in the market; investment incentives for institutional and private investors; the mechanics involved in establishing a private equity fund; equity and debt finance issues in a private equity transaction; issues surrounding buyouts and the relationship between the portfolio company's managers and the private equity funds; management incentives; and exit routes from investments. Details on national private equity and venture capital associations are also included.

To compare answers across multiple jurisdictions visit the Private Equity Country Q&A Tool.

This Q&A is part of the global guide to private equity. For a full list of jurisdictional Q&As visit


Market overview

1. How do private equity funds typically obtain their funding?

Government agencies were by far the largest contributor to fundraising in the Central and Eastern Europe (CEE) region in 2013 and this continued in 2014. Contributions to the total amount of funds raised in 2013 also came from the following sources:

  • Funds of funds: 14.2%.

  • Pension funds: 5.5%.

  • Banks: 3.5% (lower than in 2009, 2010, 2011 and 2012).

  • Government agencies: 48.3%.

  • Insurance companies: 1.5%.

No numbers have been published yet for 2014, but government agencies contributed to the vast majority of PE funds set up in 2014.

Family offices play an increasingly important role in the fund raising process of most PE funds.

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

In relation to the geographical origin of initiators of risk capital investment companies (sociétés d'investissement en capital à risque) (SICARs) (the Luxembourg vehicle dedicated to private equity and venture capital):

  • European initiators dominate with 87.9% of the market. Of these, French investors initiated the most SICARs with 19% market share, followed by Swiss, German, Spanish and Luxembourg investors.

  • 36% came from other European and non-European countries.

  • US-based private equity houses set up the most non-European SICARs, with 7%.

In total, investors came from 31 different countries.

2. What are the current major trends in the private equity market?

Current major trends include the following:

  • Luxembourg is the leading PE jurisdiction in Europe. The Luxembourg Law of 12 July 2013 on Alternative Investment Fund Managers (AIFM Law), transposing the Alternative Investment Fund Managers Directive (AIFM Directive) was the opportunity to roll out a new regime for limited partnerships, matching the expectations of many investors familiar with common law partnerships set up in the UK, Delaware or the British Virgin Islands (BVI). Since the AIFM law, existing funds set up outside Europe have migrated to Luxembourg from offshore jurisdictions. Also, with the passport of alternative investments funds managers (AIFMs) now available, AIFMs that are set up outside of Luxembourg obtain their passport to manage alternative investments funds (in regulated and unregulated Alternative Investment Funds (AIFs)) in Luxembourg. The number of AIFs set up in Luxembourg continue to increase and Luxembourg remains the second largest global leader for domiciled funds, behind the US, with EUR2.6 trillion assets under management as at 31 December 2014. Luxembourg is gaining significant ground against offshore centres.

  • The vast majority of PE funds are unregulated funds. The PE industry has a strong appetite for Luxembourg limited partnerships, a fund structure that is universally understood by investors. The AIFM Law profoundly reformed the société en commandite simple (SCS) and introduced a new form of limited partnership, the société en commandite spéciale (SCSp) in the Luxembourg Act dated 10 August 1915 on commercial companies, as amended (Companies Act). The SCS and the SCSp are the structures of choice for PEs. The SCS (as a Scottish limited partnership and a Delaware limited partnership) has separate legal personality. The SCSp (as an English limited partnership and a Cayman limited partnership) does not. Despite the lack of legal personality, the assets contributed to the SCSp are registered in the name of the partnership and can only satisfy the rights of creditors that have been created in relation to the creation, running or liquidation of the SCSp. Therefore, the assets of the SCSp are not available to personal creditors of the general partners or the limited partners but only to creditors of the SCSp. The introduction of the SCSp has led to 523 establishments of this type of vehicle from its creation since the AIFM Law to mid-March 2015, with a total of 50,000 unregulated structures in Luxembourg, some of which are PE funds. No statistics are currently available on the number of unregulated structures used by PE funds. In practice, 80% of the structures are set up as unregulated funds.

As of January 2015, Luxembourg private equity regulated vehicles included:

  • 287 risk capital investment companies (sociétés d'investissement en capital à risque) (SICARs).

  • 32 securitisation vehicles.

  • Some of the 1,591 specialised investment companies (fonds d'investissement specialisés) (SIFs).

Most PE players are prepared for the implementation of the OECD base erosion and profit shifting initiative (BEPS) as they paid attention to the substance of the funds when they were established in Luxembourg. The market expects to see more Luxembourg-based AIFMs in funds structures when BEPS unfolds.

3. What has been the level of private equity activity in recent years?


Fundraising in 2013 was much greater than 2012 and is expected to be greater than 2014. In 2012 the following was raised:

  • EUR16.7 billion for PE funds.

  • EUR3.9 billion were raised for venture capital (VC) funds (often assimilated to PE in Europe).

This contrasts sharply with 2013, which was by far the best fundraising year since 2007 were the following were raised:

  • EUR45.4 billion for PE funds.

  • EUR4.6 billion for VC funds.

The provisional numbers for 2014 are that the following was raised:

  • EUR33.2 billion for PE funds.

  • EUR3.7 billion for VC funds.


The level of activity in relation to investments by regulated vehicles (see Question 6) is as follows:

  • Risk capital investment companies (sociétés d'investissement en capital à risque) (SICARs). Based on the provisional figures as at 31 December 2013, the capital commitments of investors in SICARs totalled about EUR20.5 billion. The SICARs' total balance sheet was EUR32.3 billion.

  • Undertakings for Collective Investments (UCIs). This includes specialised investment companies (fonds d'investissement specialisés) (SIFs). Net assets in non-listed transferable securities and venture capital totalled EUR10.87 billion and EUR0.94 billion respectively, as at December 2013.

There are presently no overall statistics relating to the volume of activity of non-regulated funds (see Question 6). Based on the statistics published by the European Private Equity & Venture Capital Association (EVCA), the number of companies financed and amounts injected in companies between 2012 and 2014 by PE funds and CV funds were as follows:

  • PE: EUR28 billion in 2012 and 2013 and EUR30 billion in 2014, in less than 1,000 companies in each calendar year.

  • VC: EUR3 billion in 2012, 2013 and 2014, in less approximately 3,000 companies each calendar year.

The investment strategies followed by SICARs as at 31 December 2013 were as follows (Commission for the Supervision of the Financial Sector (Commission de Surveillance du Secteur Financier) (CSSF) Annual Activities Report 2013):

  • Buy, build and sell investments: 198.

  • Investments through buyout instruments: 32.

  • Investments through mezzanine instruments: 18.

  • Investments by risk capital funds in early stage investments: 115.

In practice, combined strategies are generally used in the area of risk capital.

In terms of assets, risk capital funds recorded an increase by 45.16% and buyout instruments increased by 27.16% in 2013, whereas buy, build and sale investments decreased by 19.14% and mezzanine investments decreased by 34.1%.

With sector-based distribution, 180 entities preferred not to limit their investment policy to a particular investment sector. Among the entities having adopted a specialised policy, there is a certain concentration in the real estate, energy, technology and services sectors.

SICARs' net assets, according to the main investment policy, were as follows (CSSF's annual activities report 2013):

  • Private equity: EUR20,622.5 million.

  • Private equity and venture capital: EUR3,816.4 million.

  • Venture capital: EUR1,508 million.

  • Mezzanine: EUR1,087.6 million.

In addition, specialised investment companies (fonds d'investissement specialisés) (SIFs) include a considerable number of vehicles investing in clean technologies, infrastructure projects and tangible assets such as art, wine, jewellery and similar assets.


Categories of investments have not changed much since 2012 and remain overall less than 2011:

  • Growth investments totalled:

    • EUR4 billion in 2012 and 2013;

    • EUR5 billion in 2014.

  • Buyouts investments totalled:

    • EUR28 billion in 2012 and 2013;

    • EUR30 billion in 2014.

  • Venture capital totalled EUR3 billion for each of these years.

In 2013:

  • A total of 2,290 European companies were exited representing former equity investments of EUR33.2 billion. The amount divested by PE funds increased by 53% to EUR28 billion.

  • The most prominent exit routes by amount were:

    • trade sale: 27%;

    • sale to another private equity firm: 26%;

    • sale of quoted equity (14%) representing almost 40% of the divested companies.

  • The most realised exit routes in terms of amount divested in 2013 a sale to another private equity firm, trade sale and sale of quoted equity.


Many private equity sponsors are looking, in 2015, at IPOs as an exit strategy. There has been a high level of exists generally in 2014, given that many firms held target groups acquired between 2006 and 2007 and were waiting for the right time to sell or list IPOs. In addition, 2014 had very low interest rates, there were strong corporate balance sheets and stock markets were rising, all providing the right environment for exits making 2014 a year for record books, with an increase of 16% in Europe and 22% in North America of the number of exits.



4. What recent reforms or proposals for reform affect private equity in your jurisdiction?

Alternative Investment Fund Managers Directive (AIFM Directive)

The AIFM Directive introduced a harmonised EU regulatory and supervisory framework for AIFMs. Luxembourg transposed the AIFM Directive with the Law of 12 July 2013 on Alternative Investment Fund Managers (AIFM Law). The AIFM Law was a major change and meant the implementation of multiple reform components simultaneously, which include providing the legal framework for:

  • The characterisation of Luxembourg non-UCITS (Undertakings for Collective Investment in Transferable Securities) funds as alternative investments funds (AIFs).

  • The regime to apply to the funds that qualify as AIFs and the regime to apply to their AIFM.

  • Marketing Luxembourg AIFs abroad and marketing non-Luxembourg AIFs in Luxembourg.

AIFM licence

The process and formalities to obtain a licence as an AIFM in Luxembourg is well established and information is available on the Commission for the Supervision of the Financial Sector's (Commission de Surveillance du Secteur Financier) (CSSF) website on what information must be provided to the CSSF when applying for the licence, which normally must be obtained within three months from the date of the application. This applies to any AIFM responsible for the risk or management portfolio of an AIF. The CSSF also makes available on its site useful information on how to minimise delays for new funds. Some funds are considering the costs of the authorisation regime in light of the specific requirements imposed by the CSSF to obtain the AIFM licence together with their objective to streamline operations and lower costs on a global basis, and the pragmatic approach of the CSSF has had positive echoes with the industry. Basically, the CSSF has adopted an approach equivalent to the requirements it set out for management companies authorised to manage UCITS funds with a European passport. The delegation of functions for the operating parts of the AIFM reflects nothing more than the standards set out by the AIFM Directive, which are considered as a minimum core on which to base rules on the decision-making processing and the organisational structure of the AIFM. Therefore, a Luxembourg AIFM can choose to delegate any of its function to another regulated AIFM.


Much interest has been shown to date by the industry for passports to be obtained in Luxembourg, as the AIFM Directive is perceived as a brand that is comparable to that of the UCITS. Some AIFMs considered opting into the authorisation regime, although they are below the de minimis threshold, to obtain a marketing passport in Luxembourg to market the AIF to professional investors in other member states under certain conditions. In Luxembourg, subject to the satisfaction of certain conditions, an EU and a non-EU AIFM can market an AIF to retail investors. While this does not mean that no marketing activity can take place for AIFMs under the registration regime, a case-by-case analysis is required for each jurisdiction in which marketing would take place under the private placement regime of some member states subject to certain conditions, but not all member states. In practice, PE houses have opted in many cases for an authorised AIFM, either set-up by themselves or made available by a Luxembourg provider. The CSSF processes marketing notifications on behalf of AIFMs based in Luxembourg promptly, within a maximum 20 days.

Luxembourg limited partnerships (LPs)

The AIFM Law answered to the expectations of the PE industry and profoundly modernised the legal framework applicable to LPs. This reform certainly explains the flock of new investments in and through Luxembourg since the enactment of the AIFM Law. Since the implementation of the AIFM Law, there are three forms of LPs:

  • The partnership limited by shares (société en commandite par actions) (SCA).

  • The common limited partnership (société en commandite simple) (SCS).

  • The special limited partnership (société en commandite spéciale) (SCSp).

The SCS and the SCSp are structures of choice for a vast array of PE houses. The SCS and SCSp are established by executing a private limited partnership agreement (LPA) entered into between one or more unlimited partners (often the general partner (GP)) and one or more LPs. The LPA does not need to be notarised and can be drafted in any language. However, regulated funds, specialised investment companies (fonds d'investissement specialisés) (SIFs), risk capital investment companies (sociétés d'investissement en capital à risque) (SICARs) and Part II UCIs adopting the form of a SCS or a SCSp all must be established by notarial deed. The key features of the SCS and SCSp, which have become the reference structures in Luxembourg, are as follows:

  • Confidentiality guaranteed. The names of the LPs are not published at the Luxembourg trade and companies register. Also, the accounts of the SCSp do not have to be filed with the Luxembourg trade and companies register and, therefore, no information on the performance of that limited partnership is available to the public.

  • Safe harbour for actions by LPs. The Luxembourg Act dated 10 August 1915 on commercial companies, as amended (Companies Act) introduced a non-exhaustive list of actions that may be taken by LPs, which do not, as such, put their limited liability at risk.

  • Wide choices for contributions. Contributions to a SCS and SCSp can be made in kind, cash or industry and can include loans granted to the partnership, with no debt-to-equity ratio to be complied with. In comparison, in the UK, there is a minimum of 1% equity required and a statutory limitation on capital return applies. In Luxembourg, a mere statement in the LPA by the partners suffices for non-cash contributions. Contributions, withdrawals, loans, allocations to profits, losses and expenses can be booked for each partner in a capital (and loan) account.

  • GP and LP creditors cannot seize the partnership's assets. The assets contributed to the partnership are registered in the name of the partnership and can only satisfy the rights of creditors that have been created in relation to the partnership's business. The partnership's assets are not available to the GPs or the LPs' creditors.

  • High flexibility on power and economic distributions. Limited or multiple (as well as non-voting) partnership interest (that may be represented by securities issued by the partnership) are permitted, which allows investors to distribute powers as they deem fit in the LPA. There is also no clawback on distributions with insolvency, except for fraud.

  • Freedom to organise transfers of partnership interests. The LPA organises all conditions relating to the redemption, transfer, splitting or pledge of their participations by the LPs. The Companies Act provides conditions to transfers if such transfers are not dealt with in the LPA. The Companies Act also provides that partnership interests can be listed on a stock exchange or a regulated market.

SIF law

The Law of 26 March 2012, which came into force on 1 April 2012, significantly amended the Law of 13 February 2007 in relation to SIFs (SIF Law) to, among other things:

  • Grant more flexibility in the structuring and operation of SIFs.

  • Increase the regulatory authority of the CSSF.

  • Implement by anticipation some of the forthcoming requirements of the AIFM Directive.

The law covers the authorisation process, delegation of specific tasks and functions to third parties, risk management and conflicts of interest. It also permits cross investment between compartments of SIFs, and modifies reporting and general meeting requirements.

The SIF Law was amended to cater for SIFs that qualify as AIFs and that must be managed by an authorised AIFM. Given that the definition of AIFs is extensive under the AIFM Law, most SIFs qualify as AIFs.


The same approach was adopted for SICARs as for SIFs. The law of 15 June 2004 on SICARs (SICAR Law) was amended after the implementation of the AIFM Law to include in the SICAR Law specific provisions to SICARs that qualify as AIFs and must be managed by an authorised AIFM. Most SICARs qualify as AIFs.

Tax reforms

The AIFM Law implemented various tax measures.

SCSp. The SCSp has no legal personality and is treated as tax transparent from a tax perspective. As with the SCS, the SCSp is not subject to Luxembourg corporate income tax and net wealth tax. Its distributions are free of withholding tax and proceeds received from them are not taxable in Luxembourg in the hands of non-resident investors who have no permanent establishment in Luxembourg.

However, SCSp, like the SCS and other Luxembourg partnerships, can eventually be subject to municipal business tax if it performs a commercial activity or its GP is a capital company owning an interest of at least 5% in the partnership and the SCSp does not itself perform any commercial activity (Geprägetheorie theory and doctrine applied by the tax law). Circular Letter L.I.R. No. 14/4 issued on 9 January 2015 confirmed that an SCS or SCSp that qualifies as an AIF is deemed as not conducting a commercial activity.

Carried interest regime. This is the introduction of a new regime for carried interest (reduced tax rate). Broadly, employees of AIF managers and of management companies of an AIF can benefit from the following:

  • A full tax exemption on a capital gain realised on the sale or redemption of their interest in the AIF, if the holding period exceeds six months and the interest does not exceed 10% of the AIF.

  • A reduced tax rate of about 10% on the carried interest if the following conditions are met:

    • the employee transfers his residence to Luxembourg during the year this law enters into force, or during the following five years;

    • the employee was neither a Luxembourg tax resident nor taxable in Luxembourg on professional income during the five-year period preceding the year of the enforcement of this law;

    • the carried interest is an incentive based on the net assets of the AIF or its profit;

    • the other investors in the AIF have fully recovered their investment.

  • This reduced rate is available for a maximum period of ten years following the year the employee applied for the regime or started its functions in the AIF.

Other tax reforms. These include:

  • VAT exemption on management services provided to AIFs.

  • AIFs established outside Luxembourg are not subject to tax in Luxembourg, even if these AIFs are managed and controlled in Luxembourg by local managers or a local management company.

European venture capital regulation (EuVECA Regulation)

In addition to the AIFM Law, the recent adoption of the EuVECA Regulation (Regulation (EU) No 345/2013 of the European Parliament and of the Council of 17 April 2013 on European venture capital funds) may also benefit SICARs that adopt venture capital strategies.

The EuVECA Regulation applies on an optional basis to eligible EU managers of AIFs whose total assets under management are below the threshold set out in Article 3.2(b) of the AIFM Law.

EuVECA introduces a passport for the marketing of AIFs that qualify as EuVECA to EU-based eligible investors.

A SICAR may qualify as EuVECA essentially if:

  • It invests at least 70% of its aggregate capital contributions and uncalled committed capital in European or third country non-listed entities employing less than 205 persons and whose annual turnover or annual balance sheet does not exceed EUR50 million or EUR43 million, respectively.

  • Provided that the investment is made through qualifying instruments, including but not limited to, equity or quasi-equity instruments, or secured or unsecured loans.

European long term investment fund

On 26 June 2013, the European Commission proposed to introduce a new investment fund regime for long term investments in companies and projects, the European Long Term Investment Fund (ELTIF) (COM(2013) 462/2). The ELTIF regime will be introduced by a European regulation, meaning that unlike a regime created by a European directive such as the UCITS directive or the AIFMD, this regime will be applicable at the moment of entry into force of the regulation. Only EU AIFs subject to the AIFMD will be eligible to qualify as ELTIFs under the new regime.

The ELTIF regime intends to introduce a fund label similar to the UCITS label. This should facilitate cross-border distribution of ELTIFs, subject to compliance of the relevant ELTIF with a number of structuring and investment policy requirements and restrictions.

These are in particular:

  • The obligation to reduce risks through the spreading of assets.

  • The obligation to use derivatives only to manage interest rate or currency risks and not for speculation.

  • The prohibition of short selling the investment in commodities as well as a prohibition of securities lending and repo agreements.

  • A limitation on the amounts the ELTIF can borrow.

  • A requirement concerning the object of the ELTIF, which may only invest in certain types of long-term assets, such as infrastructure, transport and sustainable energy projects.

  • Minimum information requirements for investors.

Also, due to the non-liquid nature of eligible ELTIF investments, investors in principle are not allowed to withdraw their money or redeem their shares before a pre-determined end date of the relevant ELTIF.


Tax incentive schemes

5. What tax incentive or other schemes exist to encourage investment in unlisted companies? At whom are the incentives or schemes directed? What conditions must be met?

Incentive schemes

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

Participation exemption. Dividends received and capital gains realised by a fully taxable Luxembourg resident company are exempt from corporate income and municipal business tax if all of the following conditions are fulfilled (participation exemption):

  • The distributing company or the disposed participation is:

    • a fully taxable Luxembourg resident company;

    • a company resident in another EU member state that is covered by Article 2 of Directive 2011/96/EU on the taxation of parent companies and subsidiaries (Parent-Subsidiary Directive);

    • a non-resident company that is fully liable to a foreign tax comparable to Luxembourg corporate income tax (it is generally accepted that a foreign corporate income tax is comparable, if it leads to at least an effective tax rate of about half of the Luxembourg corporate income tax, that is, about 10.5%).

  • At the date of realisation of the income (dividend or capital gain), the Luxembourg company has been holding (or undertakes to hold) the participation for at least an uninterrupted period of 12 months.

  • During this 12-month period, the participation does not fall below 10%, or the acquisition price of the participation does not fall below EUR1.2 million (for dividends) or EUR6 million (for capital gains).

If the above requirements are not met, it is possible in certain circumstances to apply for a tax relief of 50% off the dividend income.

Liquidation proceeds received by a fully taxable Luxembourg resident company are generally also exempt from corporate income and municipal business tax under the same conditions. Further, liquidation proceeds paid by a fully taxable Luxembourg resident company are free of withholding tax.

Distribution to foreign investors. Interest paid by a Luxembourg company is not subject to withholding tax if it is a transaction made at arm's-length. Dividends are generally subject to 15% withholding tax, unless an exemption (such as under the Parent-Subsidiary Directive) or reduced rates (arising from the investor's domestic tax law or any applicable double tax treaty) apply.

Except under limited circumstances, capital gains realised by foreign investors on the sale of Luxembourg companies are not subject to tax in Luxembourg.

Double tax treaties. As of March 2015, Luxembourg has 75 double tax treaties in force. In addition, talks have also been initiated with several additional countries.

Tax grouping rules. Fiscal unity is applicable to municipal business tax and corporate income tax on a written request to the tax authorities. The companies commit to apply this regime for a period of at least five years. Fiscal unity means that there is only one sole taxpayer for the companies belonging to the group. The head of the group must be either a:

  • Luxembourg fully taxable corporation.

  • Luxembourg permanent establishment of a foreign company, if the foreign company is fully subject to a tax comparable to the Luxembourg one.

The companies that can belong to the group are Luxembourg fully taxable corporations that are at least 95% owned, directly or indirectly, by the head of the group, from the beginning of the financial year when the request for the application of this regime is made. Under special circumstances the Ministry of Finance can grant the fiscal unity regime to a company that is owned at a lower percentage than 95%, but at least 75%, if the participation or the group would be of special relevance to the Luxembourg economy.

Net-worth tax. There is no fiscal unity for net-worth tax purposes but it is possible to reduce net worth tax under certain conditions. A net worth tax credit is granted if a reserve equalling five times the amount of net worth tax is created and maintained for five years. The amount of net worth tax credited cannot exceed the amount of corporate tax, including solidarity surcharge, but before the deduction of corporate tax credits. However, the amount of minimum tax cannot be considered for the net worth tax credit.

Thin capitalisation rules. There are no thin capitalisation rules in Luxembourg tax law. Administrative practice requires a debt-to-equity ratio of 85:15 for holding activities. Liabilities involved in financing activity are generally excluded. Under certain circumstances and subject to confirmation from the tax authorities, the ratio can be extended to 99:1.

Foreign controlled corporations. There is no list of foreign-controlled corporations. Certain foreign companies cannot benefit from the participation exemption.

IP box regime. Luxembourg taxpayers owning an IP right can benefit under certain circumstances from an exemption from 80% of the:

  • Net income generated by the IP right.

  • Capital gain on disposal of the IP right.

The IP right must have been either acquired or constituted by the Luxembourg taxpayer after 31 December 2007.

At whom is it directed

These tax incentives are directed at Luxembourg holding companies (sociétés de participations financière (Soparfis)) and are available irrespective of the nature of the investors and the underlying investments.


See above, Incentive schemes.


Fund structuring

6. What legal structure(s) are most commonly used as a vehicle for private equity funds in your jurisdiction?

Non-regulated vehicles

Soparfis are non-regulated vehicles that have the object of holding and financing participations in portfolio companies. Soparfis benefit from all EU directives, particularly the Parent-Subsidiary Directive, and also from double tax treaties signed by Luxembourg. The most commonly used forms of non-regulated vehicles currently are the:

  • Private limited company (société à responsabilité limitée) (SARL). This is commonly used for investing in private equity, since it offers significant flexibility. The minimum share capital is EUR12,500 and the number of shareholders is limited to 40. There are also restrictions on the transfer of SARL shares (for example, their transfer to a third party requires a prior agreement of a majority of shareholders representing 75% of the share capital, and they cannot be offered to the public).

  • Partnership limited by shares (société en commandite par actions) (SCA). The SCA requires at least:

    • one general partner with unlimited liability being in charge of the management (commandités);

    • one limited partner with limited liability (commanditaires), who cannot be involved in the management of the SCA.

The rules applicable to public limited companies (société anonyme) (SA) generally also apply to SCAs. The SCA regime has been modernised by the AIFM Law. When the common limited partnership (société en commandite simple) (SCS) or special limited partnership (société en commandite spéciale) (SCSp) are structures available to sponsors, these are now much preferred in comparison to the SCA (see Question 4).

Public limited companies (société anonyme) (SA). Its minimum share capital is EUR31,000. There is no restriction on the number of shareholders and its shares are freely transferable. The board of directors requires in principle at least three directors. It can also be listed.

However, Luxembourg has seen extensive use of the SCS and SCSp since the introduction of the AIFM Law (see Question 4).

Regulated vehicles

The following vehicles are supervised and authorised by the regulatory authority, the Commission for the Supervision of the Financial Sector's (Commission de Surveillance du Secteur Financier) (CSSF) (

Risk capital investment companies (sociétés d'investissement en capital à risque) (SICARs) were implemented to offer a new lightly regulated vehicle for investment in private equity to well-informed investors (see Question 12). It combines 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:

  • SCS.

  • SCSp.

  • SCA.

  • Co-operative (société cooperative organisée sous forme de société anonyme).

  • SARL.

  • SA.

These various possibilities offer significant contractual freedom. While general corporate law provisions apply to SICARs, they have substantial flexibility in determining their articles of association:

  • The share capital of the SICAR must be at least EUR1 million. This minimum must be subscribed to within one year of incorporation and paid up in principle at least up to 5% of the capital, including share premium. It is also possible to opt for variable capital, whatever the corporate form, since the introduction of the (SICAR Amendment Law). This new development should attract more foreign investors familiar with the tax incentive vehicles of common law limited partnerships.

  • Although SICARs are supervised by the CSSF (see Question 10), their reporting obligations are lighter than those of Undertakings for Collective Investments (UCIs), although they must prepare and publish annual accounts, and update the prospectus on the issue of additional shares. An independent auditor (approved by the CSSF) must audit the annual accounts. However, a SICAR is not required to publish a bi-annual report.

  • Since the SICAR Amendment Law, there is no mandatory legal requirement to calculate the net asset value on a compulsory bi-annual basis. The net asset value must be based on the principle of fair value (similar to the SIF regime).

  • SICARs must invest in risk capital and have no obligation of investment diversification (unlike UCIs). Therefore, SICARs can invest all of their funds in a single company or project. A SICAR can also be structured as an umbrella vehicle with separate compartments enabling it to run different investment policies in each compartment.

  • The duty of the custodian is the same as for specialised investment companies (fonds d'investissement specialisés) (SIFs) (that is, its monitoring duty is restricted to the general safekeeping of the assets).

SIFs. SIFs are subject to lighter statutory rules than other UCIs. The following can create or invest in a SIF (see Question 12):

  • Institutional investors.

  • Professional investors.

  • Other well-informed investors (whether legal or physical persons).

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 (see Question 13). It is authorised and supervised by the CSSF and has a neutral tax regime. A SIF can be created as:

  • A common fund (fonds commun de placement) (FCP). This is a contractually drawn up set of jointly owned assets with no legal personality, managed by a Luxembourg management company.

  • An investment company with a variable share capital (société d'investissement à capital variable) (SICAV), incorporated as any of the following:

    • SCA;

    • SCS;

    • SCSp;

    • co-operative;

    • SARL;

    • SA.

  • A company with a fixed share capital (société d'investissement à capital fixe) (SICAF), which is incorporated as any of the following:

    • SCS;

    • SCSp;

    • SCA;

    • co-operative;

    • SARL;

    • SA;

    • unlimited company (société en nom collectif) (SNC);

    • civil company (société civile).

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:

  • The subscribed share capital (including share premium) must be at least EUR1.25 million, within 12 months of the date of CSSF approval. The shares need only be paid up to a minimum of 5%.

  • SIF supervision and its reporting obligations are the same as for a SICAR as are the issuing document requirements (that is, information necessary for the investors to form their view on the investments proposed and its related risks). The SIF's issuing document must provide for the quantifiable limits to be complied with (CSSF's circular 07/309 relating to the risk-spreading principle for the SIF) (see Questions 10, 11 and 13).

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

7. Are these structures subject to entity level taxation, tax exempt or tax transparent (flow through structures) for domestic and foreign investors?

Risk capital investment companies (sociétés d'investissement en capital à risque) (SICAR)

The tax status of SICARs depends on the legal form chosen and these are discussed below.

Société en commandite simple (SCS) and Société en commandite spéciale (SCSp). SCS and SCSp 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 (see Question 4). 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 29.22% (from 2013), 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, 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:

  • Gains or income from transferable securities are not subject to tax.

  • Income from cash arising from investment in risk capital is not subject to tax, subject to certain conditions.

  • SICARs are not subject to net-wealth tax.

  • SICARs are not eligible for the tax group regime (see Question 5).

  • Distributions by SICARs are free of withholding tax.

  • There is generally no tax in Luxembourg on the disposal of an interest in a SICAR by non-resident investors.

  • SICARs are considered as VAT persons but their activities are exempt from VAT. They therefore cannot deduct input VAT. Management services for these vehicles are also exempt from VAT.

  • SICARs are subject to a fixed annual fee of EUR1,500 and a registration fee of EUR1,500 (EUR2,650 for umbrella SICARs) payable to the Commission for the Supervision of the Financial Sector's (Commission de Surveillance du Secteur Financier) (CSSF).

Specialised investment companies (fonds d'investissement specialisés) (SIFs)

SIFs are not subject to:

  • Corporate income tax.

  • Municipal business tax.

  • Net-wealth tax. They are subject to a subscription tax on the net asset value (0.01%), which is calculated quarterly. The law allows some specific exemptions.

A SIF is subject to either:

  • An annual fee of EUR1,500 (EUR2,650 for umbrella structures).

  • A registration fee of EUR1,500 (EUR2,650 for umbrella structures).

SIFs formed as investment companies (SICAVs) can benefit from double tax treaties. 35 double tax treaties currently apply to these vehicles and their application is generally complex and must be reviewed on a case by case basis. SIFs formed as common funds (fonds commun de placement) (FCPs) generally do not benefit from double tax treaties.

SIFs are considered as VAT persons but their activities are exempt from VAT. Therefore, they cannot deduct input VAT. Management services for these vehicles are also exempt from VAT.

The following tax treatment applies:

  • Domestic investors. Income received by both individuals and corporate domestic investors from SIFs is taxable under the usual tax rules. Capital gains realised by individual investors are taxable if the sale occurs less than six months following the purchase of the units and the seller holds more than 10% of the SIF.

  • Foreign investors. No Luxembourg tax applies. Income derived from a SIF is taxed in the country where the investors are resident.

  • Non-regulated vehicles (Soparfis). See Question 6.

8. What (if any) structures commonly used for private equity funds in other jurisdictions are regarded in your jurisdiction as being tax inefficient (whether by not being recognised as tax transparent or otherwise)? What alternative structures are typically used in these circumstances?

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 as for 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 private equity funds in other jurisdictions would generally be tax transparent in Luxembourg, such as:

  • UK Channel Islands limited partnerships.

  • Caribbean alternative investment vehicles.

  • Delaware limited liability companies.


Investment objectives

9. What are the most common investment objectives of private equity funds?

The main objective of private equity 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. Return is usually measured by the internal rate of return (IRR) achieved by the fund over its life cycle. Closed-ended PE funds have a life cycle of eight to 12 years. Some PE funds are evergreen. PE investors usually expect an average annual IRR of 20% to 25%. The volume of equity bridge financings has increased considerably because, in the current market conditions, they boost the IRR of funds.


Fund regulation and licensing

10. Do a private equity fund's promoter, principals and manager require authorisation or other licences?

Whether the management bodies require Commission for the Supervision of the Financial Sector's (Commission de Surveillance du Secteur Financier) (CSSF) approval depends on the type of investment vehicle used.

The Luxembourg Law of 12 July 2013 on Alternative Investment Fund Managers (AIFM Law) imposes new requirements on Luxembourg based alternative investment fund managers (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 obligation to retain eligible conducting officers.

  • The enhancement of the central administration and substance of the structure.

  • The necessity to introduce rules or policies on risk management, compliance, internal audit, transparency, remuneration and conflict of interest situation.

The CSSF is also the competent authority for approving risk capital investment companies (sociétés d'investissement en capital à risque) (SICARs) and specialised investment companies (fonds d'investissement specialisés) (SIFs), and specifically requires the following:

  • SICAR or SIF directors and managers must prove their ability to perform their duties. The AIFM Law implies changes in this respect (see Question 4).

  • Constitutive documents to be produced (prospectus, issuing documentation, management regulations or articles of incorporation), which must comply with the applicable laws.

  • The appointment of a custodian with whom the SICAR's or SIF's assets are deposited.

  • The appointment of an independent auditor (for monitoring obligations, see Question 6).

There is no requirement for a promoter. 

11. Are private equity funds regulated as investment companies or otherwise and, if so, what are the consequences? Are there any exemptions?


Specialised investment companies (fonds d'investissement specialisés) (SIFs) and risk capital investment companies (sociétés d'investissement en capital à risque) (SICARs) are regulated entities, and are, therefore, subject to prior approval by the Commission for the Supervision of the Financial Sector's (Commission de Surveillance du Secteur Financier) (CSSF) before they are launched. These vehicles must issue a prospectus or issuing document, which is examined or approved by the CSSF (see Question 14). The central administration of the fund (bookkeeping, share registrar and transfer agent services) must be located in Luxembourg.

Soparfis are non-regulated vehicles and therefore do not require regulatory approval. However, for those Soparfis whose equity can be offered to the public, a prospectus complying with the rules of the Law dated 10 July 2005 implementing Directive 2003/71/EC on the prospectus to be published when securities are offered to the public or admitted to trading (Prospectus Directive) must be approved by the CSSF.

Exemptions from publishing a prospectus apply in some circumstances.

12. Are there any restrictions on investors in private equity funds?

Number of investors

A private limited company (société à responsabilité limitée) SARL must have a minimum of one shareholder and a maximum of 40. A partnership limited by shares (société en commandite par actions) (SCA), a common limited partnership (société en commandite simple) (SCS) and a limited partnership (société en commandite special) (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.

Type of investors

The investors of risk capital investment companies (sociétés d'investissement en capital à risque) (SICARs) and specialised investment companies (fonds d'investissement specialisés) (SIFs) must be well-informed investors, which are any of the following:

  • An institutional investor.

  • A professional investor.

  • Any other investor that:

    • confirms in writing that it adheres to the status of a well-informed investor;

    • invests a minimum of EUR125,000 or is certified by a credit institution, a investment firm or a management company as having expertise, experience and knowledge in adequately appraising an investment in the SICAR or in the SIF.

Managers and other persons who are involved in the management of a SICAR or a SIF are no longer required to certify their status as a well-informed investor to be an eligible investor.

13. Are there any statutory or other maximum or minimum investment periods, amounts or transfers of investments in private equity funds?

There are no statutory or other limits on maximum or minimum investment periods, amounts or transfers of investments in risk capital investment companies (sociétés d'investissement en capital à risque) (SICARs). 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. With respect to a SICAR or a specialised investment company (fonds d'investissement specialisés) (SIF), the Commission for the Supervision of the Financial Sector's (Commission de Surveillance du Secteur Financier) (CSSF) can also give some additional requirements for a specific investment policy.


Investor protection

14. How is the relationship between the investor and the fund governed? What protections do investors in the fund typically seek?

The prospectus or issuing document and the articles of association or management regulations regulate the relationship between the investors and the fund.

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:

  • The investment strategy.

  • Distributions.

  • Information rights.

  • Key man provisions.

  • Fees, expenses and the remuneration policy.

  • Commitments.

  • Exit.

  • Divorce.

  • Carried interest.

  • Hurdle rates.


Interests in portfolio companies

15. What forms of equity and debt interest are commonly taken by a private equity fund in a portfolio company? Are there any restrictions on the issue or transfer of shares by law? Do any withholding taxes or capital gains taxes apply?

Common forms

Private equity 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 venture capital 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 are currently being revised in the light of the OECD base erosion and profit shifting project (BPES). 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. Sometimes this ratio can be reduced to 99/1. However, for mixed Soparfis (companies conducting certain other activities in addition to holding participations) the 85/15 (or 99/1) ratio generally only applies to their holding activities.

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.


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

  • Private limited company (société à responsabilité limitée) (SARL). A SARL's shares can be transferred to non-shareholders if a majority of the current shareholders, representing at least three-quarters of the corporate capital, agree to this in a general meeting. Specific clauses can also be included in the articles of association relating for example to pre-emption and rights of first refusal for the benefit of the remaining shareholders.

  • Partnership limited by shares (société en commandite par actions) (SCA) and public limited liability companies (Société Anonyme) (SA).  The general partners' and limited partners' shares of an SCA are freely transferable. An SA's shares are also freely transferable. Other provisions relating to restrictions on transfers, pre-emption and first-refusal rights are generally allowed, but are subject to certain restrictions, as a shareholder of an SA or SCA cannot be fully restricted from selling its shares.

  • Common limited partnership (société en commandite simple) (SCS) and the special limited partnership (société en commandite special) (SCSp). The general partners' and limited partners' shares in a SCS or a SCSp are not freely transferable. The conditions of transferability are usually provided in the LPA.



16. Is it common for buyouts of private companies to take place by auction? If so, which legislation and rules apply?

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

17. Are buyouts of listed companies (public-to-private transactions) common? If so, which legislation and rules apply?

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 Directive 2004/25/EC on takeover bids. 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.

Principal documentation

18. What are the principal documents produced in a buyout?

Equity documents

These documents usually include:

  • Letter of intent.

  • Binding offer or memorandum of understanding.

  • Confidentiality agreement.

  • Share purchase agreement.

  • Shareholder agreement.

  • Amended and restated employment and service contracts.

  • Documents relating to the guarantees concerning the purchase price payment and the satisfaction of potential liabilities (for example, in case of breach of a representation and warranty).

Financing documents

These documents usually include:

  • Senior or mezzanine facility agreements.

  • Security documents granting security over the shares and assets of the acquisition vehicle and the target.

  • Inter-creditor agreement.

Buyer protection

19. What forms of contractual buyer protection do private equity funds commonly request from sellers and/or management? Are these contractual protections different for buyouts of listed companies (public-to-private transactions)?

Representations and warranties

The most standard representations and warranties include the following:

  • The organisation of the target and its ownership.

  • The target's capitalisation (equity and shareholder debt, if any).

  • Legal and regulatory compliance.

  • The target's financial position (particularly the accuracy of the accounts on which the purchase price is based).

  • Important contracts relating to the business of the target.

  • Litigation.

  • Employment.

Purchase price adjustment

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.

Information rights in favour of the sponsor

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

Management continuity

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:

  • IPO.

  • Sale of all or part of the target.

  • Liquidation.

  • Merger.

20. What non-contractual duties do the portfolio company managers owe and to whom?

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.

21. What terms of employment are typically imposed on management by the private equity investor in an MBO?

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

  • Exclusivity.

  • Non-solicitation.

  • Confidentiality.

  • Non-competition clause.

  • Management incentive plan with an economic return to management in line with the performance of the target.

  • Good leaver or bad leaver rights and obligations for those managers leaving the target prior to an exit.

22. What measures are commonly used to give a private equity fund a level of management control over the activities of the portfolio company? Are such protections more likely to be given in the shareholders' agreement or company governance documents?

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:

  • Shareholder approval of some major decisions, stricter quorum rules, majority voting for some decisions and veto rights.

  • The right to submit a list of candidates from which the shareholder meeting must choose a manager.

  • Stricter quorum rules and majority requirements for board resolutions.

  • The right to receive certain relevant information.

  • The creation of internal committees in the portfolio company (right of information and consultation).

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.


Debt financing

23. What percentage of finance is typically provided by debt and what form does that debt financing usually take?

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).

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-EDITDA (earnings before interest, taxes, depreciation, and amortisation) ratios have been, in most cases in 2013 and 2014 around 6 to 6.3 times EDITDA.


Lender protection

24. What forms of protection do debt providers typically use to protect their investments?

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


Pledge of assets (contrat de gage). This is the most common way of taking security over Luxembourg assets. Pledge 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 notch below the fund and the management company (manco) set-up for the management incentive plan to ensure that the fund or management are not a party to the inter-creditor arrangements and, in the case of small PE funds, that the Alternative Investment Fund Managers Directive (AIFM Directive) thresholds are not reached. 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 and structural mechanisms

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


Financial assistance

25. Are there rules preventing a company from giving financial assistance for the purpose of assisting a purchase of shares in the company? If so, how does this affect the ability of a target company in a buyout to give security to lenders? Are there exemptions and, if so, which are most commonly used in the context of private equity transactions?


Partnership limited by shares (société en commandite par actions) (SCA) and public limited liability companies (Société Anonyme) (SA). 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:

  • Transactions must take place under the supervision of the board of directors or the management board (which must issue a specific report), and gain prior approval at a general meeting of shareholders.

  • The transaction must be at fair market value, particularly in relation to interest received by the company and in relation to security provided to the company for the loans and advances.

  • The credit standing of the third party must be duly investigated.

  • The aggregate financial assistance granted must at no point result in the reduction of the net assets below the amount specified in the Luxembourg Act dated 10 August 1915 on commercial companies, as amended (Companies Act).

  • The company must include a reserve in the liabilities in the balance sheet, which is unavailable for distribution, of the total amount of the financial assistance.

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

Private limited company (société à responsabilité limitée) (SARL), common limited partnership (société en commandite simple) (SCS) and the special limited partnership (société en commandite special) (SCSp). The above rules do not apply.


Insolvent liquidation

26. What is the order of priority on insolvent liquidation?

Insolvency procedures are regulated by law, notably the:

  • Commercial and Civil Codes.

  • The Law of 24 May 1989 relating to employment contracts.

  • The Law of 5 August 2005 on collateral arrangements and Regulation (EC) No 1346/2000 on insolvency proceedings.

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

  • The receiver's fees and the liquidation expenses.

  • Privileged claims, for example, money owed to employees, certain social security contributions and outstanding taxes.

  • Payment of the lower ranking privileges and secured creditors.

However, pledges and transfers of ownership by way of 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 if and when all other creditors have been fully satisfied.


Equity appreciation

27. Can a debt holder achieve equity appreciation through conversion features such as rights, warrants or options?

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/or options.

Typically such 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.


Portfolio company management

28. What management incentives are most commonly used to encourage portfolio company management to produce healthy income returns and facilitate a successful exit from a private equity transaction?

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 29).

The following are also used:

  • Share purchase plans.

  • Phantom share plans.

  • Other types of bonus schemes linked to the company's results.

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

29. Are any tax reliefs or incentives available to portfolio company managers investing in their company?

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 in certain circumstances.

On 20 December 2012, the tax authorities issued a new circular (LIR 104/02) on the taxation of stock option plans granted to employees. This circular applies from 1 January 2013 and replaces the old circular from 11 January 2002.

A promise made by the employer to the employee that he will receive a benefit under certain conditions is not taxable employment income (it only becomes taxable for the employee when the asset is put at the disposal of the employee). Therefore, a distinction is made between a transferable and non-transferable stock option.

Generally, capital gains on the disposal of options or shares are taxable as extraordinary income (Articles 99bis and 100, LIR). The calculation of the taxable basis (that is, the gain) differs depending on the transferability features of the options or shares.

30. Are there any restrictions on dividends, interest payments and other payments by a portfolio company to its investors?

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

There are no other restrictions on interim dividend distributions for limited liability companies or private limited company (société à responsabilité limitée) (SARLs). Partnership limited by shares (société en commandite par actions) (SCAs) and public limited liability companies (Société Anonyme) (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 by a:

  • Double tax treaty or the rules implementing the Parent Subsidiary Directive (which have been extended and adapted to dividend distributions).

  • Funding instrument allowing repatriation of the profits free of withholding tax (see Question 27).

There is no withholding tax on liquidation proceeds or on interest payments (see Question 5). 

31. What anti-corruption/anti-bribery protections are typically included in investment documents? What local law penalties apply to fund executives who are directors if the portfolio company or its agents are found guilty under applicable anti-corruption or anti-bribery laws?

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 the management.

It is prohibited, in general, 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 forbear 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's to five years' imprisonment and a fine (Article 36, Luxembourg Criminal Code).


Exit strategies

32. What forms of exit are typically used to realise a private equity fund's investment in a successful company? What are the relative advantages and disadvantages of each?

Forms of exit

Risk capital investment companies (sociétés d'investissement en capital à risque) (SICARs) are typically organised for a limited duration and, therefore, provide for certain exit mechanisms allowing investors to realise their investment. While the SICAR Law does not prescribe a particular exit scenario, initiators may foresee a variety of exit mechanism such as:

  • Trade sale.

  • Initial public offering.

  • Liquidation of the investments and of the SICAR.

Investors may be allowed to dispose of their investment in the SICAR in the secondary market, unless the terms provide for a lock-up or consent right.

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

  • The form of the corporate vehicle.

  • Where the portfolio company is located.

  • The contractual and commercial reasons for the exit.

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

  • Redemption of the funding or debt instruments.

  • Redemption of shares.

  • Voluntary liquidation of the corporate vehicle.

  • Distribution of dividends. This is used less frequently as it is generally subject to withholding tax (see Questions 5 and 30).

33. What forms of exit are typically used to end the private equity fund's investment in an unsuccessful/distressed company? What are the relative advantages and disadvantages of each?

Forms of exit

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 buy-out 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.

Advantages and disadvantages

There are no particular advantages or disadvantages to the different methods. Liquidation should not trigger any adverse legal, in particular tax, consequences (see Questions 5).


Private equity/venture capital associations

Luxembourg Private Equity & Venture Capital Association (LPEA)


Description. The LPEA represents, promotes and protects the interests of the Luxembourg private equity and venture capital industry.

The Association of the Luxembourg Fund Industry (ALFI)


Description. ALFI is the official representative body for the Luxembourg investment fund industry.

European Private Equity & Venture Capital Association (EVCA)


Description. EVCA is the representative body for the European private equity industry.

Online resources

Luxembourg Commission for the Supervision of the Financial Sector's (Commission de Surveillance du Secteur Financier) (CSSF)


Description. This is the website of the Luxembourg financial supervisory authority. Laws and regulations are generally accessible in French and English. English translations are not binding.

Luxembourg Private Equity & Venture Capital Association (LPEA)


Description. The LPEA represents, promotes and protects the interests of the Luxembourg private equity and venture capital industry.

The Association of the Luxembourg Fund Industry (ALFI)


Description. ALFI is the official representative body for the Luxembourg investment fund industry.

European Private Equity & Venture Capital Association (EVCA)


Description. EVCA is the representative body for the European private equity industry.

Direct tax authorities (Administration des Contributions Directes)


Description. This is the website of the Luxembourg direct tax authorities.

Indirect tax authorities (Administration de l'Enregistrement et des Domaines)


Description. This is the website of Luxembourg indirect tax authorities.

Contributor profiles

Alexandrine Armstrong-Cerfontaine, Managing Partner

King & Wood Mallesons

T +352 27 47 56 34 01
F +352 27 47 56 34 20

Professional qualifications. Luxembourg, Avocat; France, Avocat; England and Wales, Solicitor

Areas of practice. Private equity; venture capital; fund formation; corporate finance; restructurings.

Languages. English, French, German

Professional associations/memberships. Luxembourg Bar; Paris Bar; Law Society; LPEA; ALFI.

Publications. Regular publications on regulatory issues in fund formation, corporate finance including leverage finance and private equity issues.

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