Luxembourg Real Estate Investment Vehicles KPMG AUDIT - TAX - ADVISORY Luxembourg Real Estate Investment Vehicles 2012 kpmg.lu Luxembourg Real Estate Investment Vehicles 2012 | 1 Table of contents Luxembourg Real Estate Investment Vehicles 2 Introduction 2 Overview 3 Undertakings for Collective Investments (UCIs) 8 Specialised Investment Funds (SIFs) 11 Luxembourg Risk Capital Companies (SICARs) 16 Securitization Vehicles (SVs) 21 SOPARFIs 26 Appendix 1 - Comparison of Real Estate Vehicles 34 Appendix 2 - The most popular forms of legal entities 50 Appendix 3 - Glossary of terms 54 2 | Luxembourg Real Estate Investment Vehicles 2012 KPMG is pleased to present its new edition of the Luxembourg Real Estate Investment Vehicles. Over the years, Luxembourg has developed a strong reputation as a centre of excellence for a large variety of investment vehicles and with fund assets under management over EUR 2 trillion, Luxembourg is the largest fund center in the European Union and second worldwide. Luxembourg has also been a pioneer in the structuring of real estate investments and it has emerged as the leading domicile in Europe for vehicles investing directly or indirectly in internationally diversified real estate portfolios. Next to offering fund vehicles which are supervised by the Commission de Surveillance du Secteur Financier (CSSF), Luxembourg also offers unregulated vehicles using a wide variety of legal forms. It has developed a flexible, predictable and efficient legal and tax system to offer tax neutral & tailor-made solutions to investors. Luxembourg is a sound market place with a longstanding experience which benefits from strong investor recognition, efficient investment products, a qualified multi-lingual workforce and dedicated service providers involved in industry associations aimed at constantly improving the overall Luxembourg experience. This brochure aims at giving you an overview for setting up real estate investment vehicles but it does not address all possible structuring opportunities. For further information please do not hesitate to contact any of our senior specialists listed at the back of the brochure. KPMG differentiates and can help you across audit, tax, accounting and advisory services from project inception through an integrated approach to the investment life cycle. A description of our services and approach can be found at the end of this document. Yours faithfully, Stéphane Haot Head of Real Estate & Infrastructure, Luxembourg Introduction Luxembourg Real Estate Investment Vehicles Luxembourg Real Estate Investment Vehicles 2012 | 3 Luxembourg offers a full range of vehicles relevant for real estate investments which may be either unregulated investment vehicles or regulated vehicles which are subject to registration and ongoing prudential supervision by the CSSF. Overview 10 30 50 70 90 110 130 150 170 190 210 2005 2006 2007 2008 2009 2010 2011 5% Growth in number of Luxembourg regulated real estate fund units Source: CSSF Annual Report 2011 Part II Institutional Funds/SIF 4 | Luxembourg Real Estate Investment Vehicles 2012 Regulated real estate investment vehicles The types of regulated vehicles that do not benefit from the UCITS directive provisions but may be used in different circumstances depending upon investor requirements are as follows: > Part II Fund, under the law of 17 December 2010; > SIF, under the law of 13 February 2007; as subsequently amended > SICAR, under the law of 15 June 2004; as subsequently amended > Regulated SVs, under the law of 22 March 2004. Unregulated real estate investment vehicles The most common unregulated real estate investment vehicle is the SOPARFI. SOPARFIs are fully taxable companies that may benefit from the participation exemption regime on equity investments in both domestic and foreign companies. The securitization vehicles (SV) can also exist as non-regulated entities if they only carry out (i) private placements or (ii) public placements but on an irregular basis. Undertakings for Collective Investment (UCIs) - law of 20 December 2002 Undertakings for Collective Investments (UCIs) – Part II law of 17 December 2010 Undertakings for Collective Investments (UCIs) – Part II law of 17 December 2010 Specialised Investment Funds (SIFs) - law of 13 February 2007 as amended Risk Capital Companies (SICARs) - law of 15 June 2004 as amended Regulated Securitization Vehicles (SVs) - law of 22 March 2004 Unregulated Securitization Vehicles (SVs) - law of 22 March 2004 SOPARFIs / Others Investor Protection + - Luxembourg Real Estate Investment Vehicles 2012 | 5 SIF (2007 law) SICAV-SA SIF (2007 law) FCP SICAR-SA SIF (2007 law) SICAV-SCA SIF (2007 law) SICAF-SA SIF (2007 law) SICAV-S.à r.l. Part II (2010 law) FCP Legal regime and structure combined Source: ALFI: Luxembourg Real Estate Fund Survey 2011, Data as of 31 December 2010 Part II (2010 law) SICAF SICAR-SCA etc SICAR-S.à r.l. Popular regulated real estate vehicles and features The majority of real estate funds fall under the SIF law. This reflects the popularity of this regime for real estate fund promoters for a flexible onshore investment fund vehicle for all types of alternative investment fund products including direct real estate funds and funds of real estate funds. 6 | Luxembourg Real Estate Investment Vehicles 2012 Core Value-Added Opportunity Investment Style Source: ALFI: Luxembourg Real Estate Fund Survey 2011 - Direct Funds IFRS LUXGAAP Accounting Standards Source: ALFI: Luxembourg Real Estate Fund Survey 2011 - Direct Funds 0 5,000 10,000 15,000 20,000 25,000 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 3.235 469 1.927 2.343 2.280 3.730 4.705 7.315 6.180 4.126 3.846 3.047 280 146 369 522 850 1.557 3.307 8.131 14.746 14.839 17.580 20.036 Net assets under management in Luxembourg real estate funds Source: ALFI: Luxembourg Real Estate Fund Survey 2011 Part II (2002 Law / 2010 Law) Institutional Funds / SIF (Law of 13 February 2007) Luxembourg Real Estate Investment Vehicles 2012 | 7 Monthly Annual Semi-Annual Quarterly Frequency of NAV calculation Source: ALFI: Luxembourg Real Estate Fund Survey 2011 - Direct Funds 8 | Luxembourg Real Estate Investment Vehicles 2012 Undertakings for collective investment, established in accordance with Part II of the law of 17 December 2010 are those destined to the retail market. Following the introduction of the specialised investment fund regime, the Part II fund as a real estate vehicle has significantly declined. Further details relating to Part II funds are outlined below. Part II UCIs may take the form of a SICAV, SICAF or FCP, certain characteristics being outlined in the table below. Undertakings for Collective Investments (UCIs) Under Part II of the law of 17 December 2010 SICAV / SICAF FCP Legal structure Legal entity Not a legal entity. The FCP is a contractual fund structure managed by a management company. Legal requirement for Management Company No Ye s Governance body Board of directors of SICAV / SICAF Board of directors of the management company Voting rights Investors are always entitled to vote as they are shareholders of the company. Investors are entitled to vote to the extent that the management regulations provide the possibility. Annual general meetings Ye s For management company only Tax transparency Not tax transparent Tax transparent Responsibility of depositary Standard Additional oversight and control responsibilities compared to a SICAV / SICAF Decision to liquidate Annual or extraordinary general meeting Management company [...]... being exempt (e.g in the context of reorganizations) The transfer tax is payable by the buyer of the Luxembourg real estate property 32 | Luxembourg Real Estate Investment Vehicles 2012 Luxembourg Real Estate Investment Vehicles 2012 | 33 Appendix 34 | Luxembourg Real Estate Investment Vehicles 2012 Appendix 1 Comparison of Real Estate Vehicles Legal and regulatory requirements Part II Fund Applicable... the disposal operation Direct real estate investments Luxembourg companies are also often used for direct real estate investments The Luxembourg transfer tax on the acquisition of real estate located in Luxembourg amounts to 7% or 10% (6% registration duty, 3% surcharge for real estate situated in Luxembourg City, 1% transcription duty), the contribution of Luxembourg real estate being either subject... acquisition A taxable gain is subject to 22.05% corporate income tax in 2012 if realized by a non-resident corporate shareholder Luxembourg Real Estate Investment Vehicles 2012 | 31 The capital gain on sale of shares in a Luxembourg company may also be taxable in Luxembourg if the non-resident shareholder has been resident in Luxembourg during more than 15 years and has become non-resident in Luxembourg. .. Net wealth tax SICARs are exempt from the annual 0.5% wealth tax Capital gains realized by non-residents Non-residents are exempt from Luxembourg income tax on capital gains realized on the disposal of shares of a SICAR 1 Bill N°5201, p22 Luxembourg Real Estate Investment Vehicles 2012 | 21 Securitization Vehicles (SVs) In 2004, Luxembourg introduced an attractive legal, regulatory and tax framework... basically treated as resident taxpayers, they are specifically exempt from income and net wealth tax While investors resident in Luxembourg are subject to normal income tax on their income from investment funds, there is usually no Luxembourg tax on foreign investors Luxembourg levies no withholding tax on distributions paid 10 | Luxembourg Real Estate Investment Vehicles 2012 by investment funds, except... share-by-share basis 30 | Luxembourg Real Estate Investment Vehicles 2012 Exemption from withholding tax on dividends - no participation exemption applies Where the conditions of the Luxembourg participation exemption are not met, 15% withholding tax is levied on dividends distributed by a Luxembourg resident and fully taxable corporation This rate may be reduced even to 0% under applicable tax treaties... a 14.40% in 2012 effective tax rate, if they are paid by: >  fully taxable resident corporation; or A >  corporation resident in a country with which Luxembourg has signed A a tax treaty and that is fully subject to income tax comparable to the Luxembourg corporate income tax; or >  company that is covered by the Parent-Subsidiary Directive A Luxembourg Real Estate Investment Vehicles 2012 | 29 Exemption... with investments in risk-bearing capital (e.g interest earned after 12 months, management fees, etc.) is subject to normal income tax Losses and deductions relating to tax exempt income may not be offset against taxable income 20 | Luxembourg Real Estate Investment Vehicles 2012 A SICAR established in the form of a limited partnership will be treated as a tax transparent entity for Luxembourg tax purposes... well as alternative investments - for example transferable securities, money market instruments, real estate, hedge fund strategies and private equity 12 | Luxembourg Real Estate Investment Vehicles 2012 The SIF law does not provide for investment restrictions but refers to the concept of risk-spreading This concept is more fully described in CSSF Circular 07/309 relating to risk-spreading in the context... 2012 | 25 Double tax treaty protection and access to EU Parent-Subsidiary Directive From a Luxembourg perspective, SCs benefit from the EU Parent-Subsidiary Directive and the double tax treaties concluded by Luxembourg as they are fully taxable corporations The Luxembourg tax authorities issue certificates of Luxembourg tax residency for SCs upon request Indirect taxes The only indirect tax due on incorporation . Luxembourg Real Estate Investment Vehicles KPMG AUDIT - TAX - ADVISORY Luxembourg Real Estate Investment Vehicles 2012 kpmg.lu Luxembourg Real Estate Investment Vehicles 2012 | 1 Table. of Real Estate & Infrastructure, Luxembourg Introduction Luxembourg Real Estate Investment Vehicles Luxembourg Real Estate Investment Vehicles 2012 | 3 Luxembourg offers a full range of vehicles. number of Luxembourg regulated real estate fund units Source: CSSF Annual Report 2011 Part II Institutional Funds/SIF 4 | Luxembourg Real Estate Investment Vehicles 2012 Regulated real estate investment