The various advantages French residents may enjoy from the Luxembourg Special Limited Partnership (Société en Commandite Spéciale – SCSp) can only be fully appreciated by comparing this company to similar French vehicles, that is, vehicles deprived of legal capacity. As such, we shall expose the main features of these vehicles (I), and display the various corporate advantages of the SCSp (II). We shall then say a word about the easing of its accounting requirements (III) as well as its tax regime (IV), which both render this vehicle perfectly suitable to structure Private Equity operations. Actually, the launch of this new company by the Law of July 12th 2013 (Loi du 12 juillet 2013 sur les gestionnaires des fonds d’investissement alternatifs) is the result of the lobbying of Private Equity sector, eager to introduce in Luxembourg a vehicle enjoying the same characteristics as the Anglo-Saxon limited partnership.
I. French vehicles without legal capacity
French companies deprived of legal capacity can be counted on the fingers of one hand: they are the Société en Participation and the Société créée de fait. Both companies do not have their own asset base, distinct from that of their shareholders or partners. Consequently, the ownership of the partners’ contributions is not transferred to the company. Several options are left to the partners: either they remain owners of those assets, or the Articles of Incorporation may set forward that the manager is the owner of the assets, or it is can be decided that the assets will be owned jointly by all partners.
Similarly, since these companies have no share capital, they cannot be debtors (the partners remain liable), and the companies’ creditors will not benefit from the priority rules in case of bankruptcy. As such, they will be treated as ordinary unsecured creditors. Furthermore, many non asset-base consequences may be derived from the lack of legal personality of these vehicles. First, they can have neither their own registered office nor nationality. Likewise, due to the lack of legal capacity, they cannot bring an action before a court.
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In consideration of the above, the SCSp circumvents those drawbacks and offers a large flexibility for corporate as well as tax issues.
II. Flexibility of the SCSp: corporate features
A. Setting up the SCSp as a private deed
The incorporation of a company in Luxembourg is an undertaking which requires several formalities to be completed, amongst which is the approval of the Articles of Incorporation. In this regard, different rules apply depending on whether the partners’ liability is limited to their contribution or not. When the partners enjoy a limited liability (in an SARL, SA), the intervention of a notary is required to approve the Articles of Incorporation. On the opposite, when the liability of the partners is unlimited, the founders can either have the Articles approved by a notary or adopt them in a simple private deed.
This is not an issue for the Luxembourg Special Limited Partnership as it is exempted from such a formality, which enables the partners to save both time and money.
B. Legal capacity of the SCSp
Like the Société créée de fait and the Société en Participation, the SCSp is deprived of legal capacity. Nevertheless, its legal regime is the complete opposite of theirs in all respects, as in spite of its similar lack of legal personality, it still enjoys most of the advantages attached to it. Indeed, the SCSp has its own legal capacity, distinct from that of its partners. Consequently, it may be held liable when a General Partner acts beyond the objects of the company, but its lack of legal capacity enables it to avoid the applicability of the legal regime of criminal liability of legal persons. A contrario, the SCSp may bring an action before a court in order to defend its interests.
Likewise, the SCSp has its own asset base and it may be creditor or debtor, which affords it financial autonomy.
The domicile and nationality of the company constitute other well-known characteristics of legal capacity. The domicile of a company is located at its place of central administration which is assumed to be its registered office. Article 22-1 of the Law of August 10th 1915, states in its paragraph 7 on the Société En Commandite Spéciale that “any company which has its registered office located in Luxembourg is subject to the Laws of Luxembourg”. Thus, when the registered office of an SCSp is located in Luxembourg, the Laws of Luxembourg shall be applicable, allowing the SCSp to benefit from favorable its favourable tax provisions.
C. Nullity of the company: narrow grounds
There are very limited grounds for nullity of the SCSp. Indeed, it may be established for a limited or unlimited duration, and the grounds for nullity are exhaustively listed by the law and restrictive. The four grounds are the lack of corporate or business name of the company (i), the absence of corporate objects in the Articles of Incorporation (ii), illegal or corporate objects contrary to public order (iii) or when there is less than one General Partner and one Limited Partner distinct and validly committed (iv).
Likewise, when the SCSp is transformed into a SIF or SICAR (which are both suitable vehicles to structure private equity operations), this does not entail the liquidation of the company.
D. Financing: a large flexibility
In terms of financing, the law of July 12th 2013 offers a very flexible regime and leaves a large ground to contractual freedom. Indeed, within the limits set in the Articles of Incorporation, the founders may grant distributions and repayment of partnership interests in spite of the principle of capital maintenance (“principe de l’intangibilité du capital”). Regarding contributions, there is no minimum share capital, contributions in kind (“apports en industrie”) are authorized and there is no mandatory control by an external auditor. The shares may also be listed on a market.
III. Reduction of the accounting requirements
The accounting requirements of the SCSp are greatly reduced as compared to other companies. Every company incorporated in Luxembourg has to follow a standardized chart of accounts when drawing up its financial accounts.
Here again, this is not an issue as the SCSp is exempted from such formalities. Furthermore, there is no duty to submit annual accounts. Similarly, the publication of annual accounts is not mandatory nor is their revision by an independent auditor.
Additionally, the SCSp does not have to attach its annual management report to its annual financial statements. Additionally, they may be submitted in either French, English or German.
The procedure of approval of the annual accounts has been greatly simplified. The holding of an annual general meeting (AGM) is not compulsory to approve the financial statements. Even if the shareholders decide to hold an AGM, the presence of an external auditor or of the supervisory board is not mandatory.
Finally, if the SCSp belongs to a corporate group, it is not necessary to draw up consolidated accounts.
IV. Tax flexibility of the SCP
Furthermore, limiting the “commercial” qualification of the company to the sole definition provided by the “théorie d’emprunt” would be too restrictive. Indeed, while the commercial qualification is defined according to this theory, the company profits also have to be considered as business profits and the activity has to be carried within a commercial company.
The company will be subject to the municipal business tax only if the criterion of independence, profit, permanence and participation in the economic life are fulfilled.
The company is exempted of wealth tax as it has no legal personality.
Another tax advantage of the SCSp lies in the VAT exemption on management fees provided to an SCSp, if the Private Equity fund is an alternative investment fund (AIF). Management fees include the implementation of the investment policy, financial advisory services or portfolio asset management etc. If those services are subcontracted to a third party, they can only benefit from the exemption provided that those services form a global and distinct ensemble and that they are essential for the management of the fund.
Finally, the carried-interest of the managers’ benefits from a tax relief as well. Carried interest is a share of excess profits that the employees of alternative fund managers or of alternative investment fund management companies receive as compensation. However, this applies only to natural persons, namely employees who transferred their fiscal residency in the Grand-Duchy of Luxembourg during the year or 5 subsequent years of the entry into force of 12th July 2013 law. If all those conditions are met, the manager will benefit from a tax rate of ¼ of the rate normally applicable