CHEVALIER & SCIALES

SICAR – PRIVATE EQUITY INVESTMENT VEHICLE

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client memorandum investment management
 client memorandum sicar

summary

The Luxembourg law of 15 June 2004 relating

to the investment company in risk capital, as
amended from time to time (and for the last
time on 29 October 2008) (the “SICAR Law”)
has created a Luxembourg vehicle (“SICAR”)
whose principal object is investing in risk
bearing capital issued by domestic and foreign
companies. The main features and advantages
of the SICAR Law are its legal flexibility and
interesting tax treatment. This legal framework
for Luxembourg private equity and venture
capital funds has had a significant impact in
European private equity deal structures. The
2 main changes introduced by the Law of 29
October 2008 and the guidelines issued by
the Luxembourg regulator (the “CSSF”) on the
concept of “risk capital” are also discussed
hereunder.

This publication has been prepared by the law firm Chevalier & Sciales and is for general guidance only. The contents
hereof are not intended to constitute legal advice and do not substitute for the consultation with legal counsel required
before any actual undertakings.

© 2010 Chevalier & Sciales

 client memorandum
i. key features of the sicar
(a) definition of “investment in risk
capital”
The SICAR Law limits the object of a SICAR to
investment in venture capital and private equity.
Risk investments are defined in the SICAR Law
in a broad manner so as to include any direct or
indirect contribution of assets to entities in view
of their launch, their development or their listing
on a stock exchange. Risk capital includes any
investment that creates for the investor a high
risk with the expectation to realize a gain whose
importance is proportional to the risk borne.
See section (iii) with respect to the concept of
“risk capital”.
(b) legal form
A SICAR can adopt most of the legal forms
used in Luxembourg, such as the company
limited by shares (S.A.), the limited liability
company (S.à r.l.) or the partnership limited by
shares (S.C.A.).
(c) eligible investors
The shares in a SICAR can only be subscribed
by well-informed investors who are either:
• Any institutional investor ; or
• Any professional investor ; or
• Any other investor who meets the following
conditions: Yearly Report”) in compliance with article 32
(i) he has confirmed in writing that he adheres
to the status of well-informed investor; and
(ii) he invests a minimum of 125,000 Euro in the
SICAR; or
(iii) he has obtained an assessment made by a
credit institution within the meaning of Directive
2006/48/EC, by an investment firm within
the meaning of Directive 2004/39/EC or by a
management company within the meaning of
Directive 2001/107/EC certifying his experience
and his knowledge in adequately appraising an
© 2010 Chevalier & Sciales
sicar
investment in risk capital.
The conditions mentioned above do not apply
to directors and other persons taking part in the
management of the SICAR.
(d) authorization by the cssf
A SICAR must be authorized by the CSSF. The
authorization procedure entails:
• The approval of the constitutional documents
(prospectus, articles of incorporation, ancillary
agreements with service providers, etc…);
• Examination whether the directors are
reputable and have sufficient experience
(however, there is no requirement as to the
financial background or capital adequacy of the
directors and shareholders of the SICAR);
• The approval of the institutions that will act
as custodian, administrative agent and auditor.
(e) light supervision
3
Any changes to the constitutional documents
must be approved by the CSSF.
Annual accounts need to be issued and a copy
of the audited annual report shall be submitted
to the CSSF as soon as it is available and in
any event within six months from the end of
the period to which the report relates. In its
circular 08/376 regarding financial information
to be submitted by SICARs, requires that all
Luxembourg SICARs transmit to the CSSF
half-yearly financial information (the “Half-
of the SICAR Law and for the first time for the
financial reporting as at 31 December 2008.
Such requirement on the disclosure of the Half-
Yearly Report is a confirmation of the will of the
CSSF to strengthen its supervision of SICARs.
SICARS shall draw up their Half-Yearly Report,
if appropriate on a compartment basis, in
accordance with a standardized format. The
reference dates for the drawing up of the Half-
Yearly Report are 30 June and 31 December
of each year. SICARs must transmit the Half-
Yearly Report to the CSSF within 45 calendar
 client memorandum
days from the reference date. Finally it should
be reminded that any SICAR shall also submit
to the CSSF a copy of its audited annual report
as soon as it is available and in any event within
six months from the end of the period to which
the report relates (article 28 of the SICAR Law).
There are furthermore no risk diversification
rules and no restrictions as to the investment
policy of the SICAR (other than those mentioned
in the circular issued by the CSSF containing
guidelines and clarifications on the criteria
applied by the CSSF when assessing whether
a project is eligible under the SICAR Law or not.
The promoter of the SICAR is not subject to
supervision.
(f) capital requirements
The subscribed share capital of a SICAR may
not be less than 1,000,000 Euro, of which only
5% needs to be paid up. This minimum must not
be subscribed upon incorporation but must be
reached within a period of 12 months following
4 the authorization of the company.
ii. advantages of the sicar
(a) from a corporate law perspective
• No obligation to create a legal reserve. This
allows investors to distribute the entirety of their
profit;
• No restrictions on redemption of shares or
payment of dividends or interim dividends except
those mentioned in the articles of incorporation.
This allows investor to receive the profits on
investments shortly after they have been made;
• Subscribed capital needs only to be paid up
to an amount of 5%;
• Not subject to any debt-to-equity ratio;
• Flexibility as to the issue of new securities.
There are no formalities attached;
• Possibility to provide for a variable share
capital.
© 2010 Chevalier & Sciales
sicar
(b) from a tax perspective
(i) At the level of the target company (with
regard to the income distributed by the
target company to the SICAR)
• Withholding tax, if any, on income distributed
by the target company to the SICAR should
be reduced in accordance with the double tax
treaty between Luxembourg and the country of
residence of the target company;
• Normally, based on the parent-subsidiary
directive, no withholding tax should be levied on
dividends distributed by EU target companies
to the SICAR, in cases where the conditions
of the participation exemption provided by the
domestic legislation of the target country are
met.
(ii) At the SICAR level (with regard to the
income received by the SICAR)
Fully taxable at a rate of 28,59%, but:
• Dividend distributions by a SICAR are not
subject to withholding tax;
• Income derived from transferable securities
(for instance dividends received and capital
gains on the sale of shares) is exempt from
Luxembourg corporate income tax. Income
that is not related to investment in risk capital
is subject to corporate income tax of 28,59%
(for example interest earned on bank deposits,
management fees, etc…);
• No wealth tax is due;
• No withholding tax on liquidation payments;
• No VAT on the management of the SICAR;
• No subscription tax (taxe d’abonnement).
(iii) At investor level
Non-resident investors are not subject to
Luxembourg tax on any capital gains realized
upon the sale of the shares of the SICAR.
 client memorandum
iii. guidelines on the concept
of “risk captial”
On 5 April 2006, the CSSF issued a circular
letter (06/41) (the “Circular”) containing
guidelines and clarifications on the criteria
applied by the CSSF when assessing whether
a project is eligible under the SICAR law or not.
(a) concept of risk capital
The purpose of the SICAR law is to favour
the collection, in a vehicle specialized in risk
capital, of funds contributed by well-informed
investors accepting with full awareness and
in expectation of a better return the increased
risks most often associated with risk capital, i.e.
lower liquidity, higher price volatility and lower
credit quality.
Risk capital is defined in the SICAR law in
a broad manner as to include any direct or
indirect contribution of assets to entities in view
of their launch, their development or their listing
on a stock exchange. The Circular reminds that
SICAR application files submitted for CSSF
approval require the simultaneous combination
of two elements i.e. (i) a high risk associated
with the investment in the target company and
(ii) the intention to develop the target company,
which is broadly construed as the “creation of
value” at the level of the target companies.
(b) concept of “creation of value”
The creation of value may take different forms:
• The type of financing
Financing may be through bond issuance,
bridge financing, share capital, mezzanine
loans, convertible loans, etc.
• Different investment types
It may take the form of buy-offs, LBO’s, MBO’s,
and management buy-ins, etc.
• No restrictions as to the exit of investors
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The exit of the investors in the target company
can be structured in the most efficient way from
a legal and tax perspective (i.e. via a trade sale
of assets or via an initial public offering).
• Risk repartition
The SICAR law does not impose any risk
repartition with respect to the selected
investments and it is thus possible that certain
SICARs limit their investments to one or several
companies active for example in a niche market
or in extremely specialized sectors.
• Holding period
The CSSF stressed that the contemplated
holding period of an investment is an important
criterion in determining whether it is eligible
to be considered risk capital. Therefore, the
declared intention of the SICAR must be in
general to acquire financial assets with a view
of a resale at a profit.
(c) special case for real estate
investments 5
Whereas the SICAR law does not allow
SICARs to directly hold real estate properties,
the indirect investments via entities which hold
real estate properties is permitted. The Circular
gives criteria of eligibility of investments in
private equity real estate under the SICAR Law.
The CSSF has confirmed that private equity
real estate investments must be made for
the purpose of creating value, which can
be understood as a change to the existing
conditions such as the enhancing of the
valuation of the real estate by renegotiation of
contracts, renewal of tenants and refurbishment
of the properties. Furthermore it is necessary
to demonstrate that the relevant real estate
represents a specific risk, beyond the normal
real estate risk attached to such real estate
in a given market. Such specific risk can lay
for example in the fact that it is difficult to find
tenants or that the real estate is located in an
unfavourable zone.
The CSSF has set out a series of criteria which
 client memorandum
will be taken into account when assessing
whether a private equity real estate investment
is eligible to fall within the scope of the SICAR
law.
• The potential for significant profit due to the
specific risks attached to the property;
• High risk/ expected return ratio;
• Identity of the management, the nature of
their remuneration and procedure for selecting
real estate property;
• Financial participation of the managers;
• Active development of property, limited
holding period;
• Nature of financing: significant leverage,
mezzanine type of financing.
(d) indirect investments
The Circular clarifies the types of companies that
can be used in a structure of indirect investment
in risk capital. The indirect investment via an
6 UCI (undertaking for collective investment) or
another private equity vehicle is acceptable
provided the investment policy of the UCI
restricts them to investing in assets that are
eligible under the SICAR Law. However, the
investments into hedge funds are not eligible as
hedge funds do not pursue the creation of value
for its own investments.
(e) political risk
The geographical localization of investments
in countries where there is a political risk can
be taken into account when assessing whether
a given investment constitutes a given risk.
However, it is possible that it may be necessary
to demonstrate the existence of additional risk
factors so that creation value at the level of the
target company can be proven.
(f) mezzanine loan
Mezzanine financing is an eligible form of
financing insofar as the financing is made to
a non-listed company or to a listed company
© 2010 Chevalier & Sciales
sicar
if the financing is given in view of a specific
development project.
(g) investment in listed securities
A SICAR may invest in listed securities when
associated to a specific development project or
if aimed at a delisting.
It should be noted that the CSSF has not set out
hard rules on what does or does not qualify as a
SICAR but rather guidelines and clarifications.
Each SICAR project will be reviewed by the
CSSF on a case-by-case basis.
iv. amendments to the sicar
law
On 29 October 2008, a law was passed
amending the existing SICAR Law of 15 June
2004 with the aim to make the SICAR regime
more attractive to private equity and venture
capital investors.
The main amendments that have been voted
are briefly set out hereunder:
• Umbrella structure
The new SICAR Law has introduced the
possibility to create multiple compartments. The
principle of compartment segregation already
well known for SIFs, securitization vehicles and
UCITS funds is now also applicable to the SICAR.
Compartment segregration means that the
liabilities of the SICAR can be split into different
compartments each of which are treated as
separate entities making distinct transactions.
The rights of investors and creditors are
limited to the risks of a given compartments’s
assets. Each of the compartments can be
liquidated separately without triggering the
liquidation of other compartments of the
SICAR. The main advantage of the umbrella
SICAR is that it can issue several tranches
of securities corresponding to different
collateral and providing different values, yields
and redemption terms. It is important that
the constitutional documents of the SICAR
 client memorandum
expressly provide for the possibility to have
multiple compartments and expressly outline
the rules that are applicable to them. The issue
document must outline the investment policy of
each compartment. The shares of the umbrella
SICAR may be of different value.
• Minimum capital
The share premium (if any) will be taken into
account for the computation of the minimum
capital. The share capital increased by the
share premium must be at least 1,000,000 Euro
to be reached within a period of 12 months from
its authorization by the CSSF.
• No requirement to publish the NAV
Under the initial SICAR Law it was required
to provide the net asset value to the investors
every 6 months. This provision has been
abolished.
• Valuation of assets
The valuation of the assets of the SICAR must
be based on the fair market value (rather than
the foreseeable sales price estimated in good
faith).
• Reduction of the duties of the custodian
The SICAR Law has reduced substantially the
duties of the custodian. More in particular, the
following duties do not need to be fulfilled by
the custodian under the new SICAR Law:
- control that the subscription price for the
securities of the SICAR has been received
within the time limits set forth in the constitutive
documents;
- control that in transactions involving the
assets of the SICAR, a consideration is paid or
delivered to it within the customary time limits;
- control that the income of the SICAR is applied
in accordance with its constitutive documents.
The abolition of the above control duties
previously imposed on the SICAR will certainly
reduce the annual costs charged by the
custodian of a SICAR.
• Annual report
The annual report must be provided to investors
© 2010 Chevalier & Sciales
sicar
within a period of 6 months after the end of the
financial year rather than be “published” as was
required under the initial SICAR Law.
• Limited partnership (société en commandite
simple)
The SICAR can now be set up as a société en
commandite simple (limited partnership) with a
variable share capital.
v. pratical relevance
• Used as holding company for repatriation
of profits as there is an exemption of capital
gains realized by non-resident investors on the
shares of the SICAR;
• Used as holding company for subsidiaries
to which the participation exemption does
not apply. Based on the SICAR Law, there
will always be an exemption of income from
transferable securities (even if the conditions
of the participation exemption have not been
fulfilled);
7
• Used as draw-down structure (intermediary
financing equity company) in order to
downstream cash for investments in risk
capital, as there is no wealth tax of 0,5% on the
net asset value;
• Used for private equity structures (as
alternative to other vehicles such as the Soparfi
or the SIF (specialized investment fund)).
vi. conclusion
The SICAR offers in a market place renowned
the world over an attractive new vehicle which
also ensures that, from a Luxembourg tax
point of view the vehicle is totally neutral for
the investors and which reduces the regulatory
burden while ensuring a minimum of protection
from investors. The SICAR may become the
vehicle of choice for private equity and venture
capital investors. It is important in each project
to carefully examine which vehicle would suit
the best (Soparfi, SICAR, SIF or a securitization
vehicle). The number of SICARs registered on
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the official list of the CSSF amounted to 237

entities as at 7 January 2010.

© 2010 Chevalier & Sciales

 client memorandum sicar

for further information please contact:

olivier sciales , partner

Email: oliviersciales@cs-avocats.lu

rémi chevalier , partner

Email: remichevalier@cs-avocats.lu

www.cs-avocats.lu

CHEVALIER & SCIALES

LUXEMBOURG DUBAI
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P.O. Box 4404, Office
Tel : +352 26 25 90 30 #217, 2nd Floor,
Fax : +352 26 25 83 88 United Arab Emirates

Tel: +971 4 2937033

Fax: +971 4 2088699

www.cs-avocats.lu

© 2010 Chevalier & Sciales