CHEVALIER & SCIALES l a w f i r m

P r i v a t e e q u i t y

t r a n s a c t i o n s

( S I C A R )

Member of the international legal network Worldlink for Law

This publication has been prepared by the law fi rm Chevalier & Sciales and is for general guidance only. Neither the authors nor the publisherscan accept any responsibility for any loss whatsoever occasioned to any person acting or refraining from acting as a result of any material in

this publication.

© 2007 Chevalier & Sciales

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Luxembourg

A new Luxembourg law of 15 June 2004

relating to the investment company in risk

capital (the “Law on SICAR”) has created a

new 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 Law on SICAR are its legal fl exibility

and interesting tax treatment. This new legal

framework for Luxembourg private equity and

venture capital funds is expected to have a

signifi cant impact in European private equity

deal structures.

(i) Key features

(a) Defi nition of “investment in

risk capital”

The Law on SICAR limits the object of a SICAR to investment in venture capital and private equity. Risk investments are defi ned in the Law on SICAR 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. 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.

(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.), the partnership limited by shares (S.C.A.), etc.

(c) Eligible investors

The shares in a SICAR can only be subscribed by qualifi ed investors who are:’

• Either an institutional investor ; or• A professional investor ; or• Any investor who (i) has confi rmed in writing that he adheres to the status of well-informed investor and (ii) invests a minimum of 125,000 Euro in the company or (iii) has obtained a certifi cate from a credit institution certifying his experience and his

knowledge in adequately appraising an investment in risk capital.

(d) Authorisation of 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 suffi cient experience (however, there is no requirement as to the fi nancial background or capital adequacy of the directors and shareholders of the SICAR);• The approval of the credit institution that will act as custodian.

(e) Light supervision during

the life of the SICAR

Any changes to the constitutional documents must be approved by the CSSF. Only annual accounts need to be issued (no semi-annual accounts). There are furthermore no risk diversifi cation rules and no restrictions as to the investment policy of the SICAR.

(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 the authorization of

the company.

(ii) Advantages

(a) From a corporate law

perspective

• No obligation to create a legal reserve. This allows investors to distribute the entirety of their profi t;• 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 profi ts on investments shortly after they have been made;• Subscribed capital needs only to be paid up to an amount of 5%. This gives the SICAR’s management enough fl exibility to make capital calls when new investment opportunities arise and require funding;• 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.

(b) From a tax perspective

(1) 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

C&S

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.

(2) At the SICAR level (with regard to the income received by the SICAR)

Fully taxable at a rate of 29,63%, 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 29,63% (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;• Fixed contribution duty of maximum 1.250 Euro (compared to the generally applicable rate of 1%);• No subscription tax (taxe d’abonnement).

(3) At investor level

Foreign investors are not subject to Luxembourg tax on any capital gain realized upon the sale of the shares of the SICAR.

(iii) Practical relevance (examples)

• Used as holding company for repatriation of profi ts 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 Law, there will always be an exemption of income from transferable securities (even if the conditions of the participation exemption have not been fulfi lled);• Used as draw-down structure (intermediary fi nancing 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.

(iv) Recently handled matters

We have recently been involved in the creation of a SICAR with an estimated value of 15 million Euro.

We have provided a centralized service (legal advice, domiciliation of the SICAR, contact with the CSSF, bank, auditors, expert accountant and notary). We have drafted and reviewed all documents in relation to the incorporation of the SICAR (prospectus (investment memorandum), articles of association of the SICAR, articles of association of the general partner of the SICAR, depositary agreement, central administrative agent agreement, etc.). We have been in contact with the Luxembourg regulator (CSSF) for the approval of the SICAR and with the different intermediaries (various banks, auditors and expert

accountants) in order to obtain the most competitive and suitable offers based on our contacts.

(v) Conclusion

The Law on 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.

© 2007 Chevalier & Sciales

CHEVALIER & SCIALES l a w f i r m

33, boulevard Grande Duchesse Charlotte BP 588

L-2015 LuxembourgTel : (+352) 26 25 90 30Fax : (+352) 26 25 83 88

www.cs-avocats.lu

For further information, please contact :

Rémi Chevalier, founding partner E-mail : remichevalier@cs-avocats.lu

Mobile : (+352) 621 50 46 35

Olivier Sciales, founding partner E-mail : oliviersciales@cs-avocats.lu

Mobile : (+352) 621 53 11 46

Member of the international legal network Worldlink for Law