Its efficient tax environment and economic and political stability make Luxembourg ideal for VCs, write EY's Olivier Coekelbergs and Farhan Ahmed
For the past 20 years, Luxembourg has been a major hub in the Private Equity (PE) and Venture Capital (VC) industry, both in regards to the location of PE and VC funds and the structuring and financing of international PE and VC transactions.
There are a number of features that attract VC houses from all over the globe to Luxembourg, for example:
> Stable political, social and economic environment;
> Modern legal and regulatory framework that is updated on a continuous basis, owing to the business-orientated approach of the authorities, which are accessible and pragmatic;
> Stable, rewarding and efficient tax environment;
> Unique concentration of investment fund industry professionals in all aspects of product development, administration and distribution; and
> Strong market infrastructure with straightforward, inexpensive and short-time listing formalities at Luxembourg Stock Exchange, which helps VC funds taking an exit route through an IPO or trade sale.
With its variety of business models, the availability of an experienced, skilled and multilingual workforce, tax-efficient solutions and its political and economic stability, Luxembourg is attracting investment fund managers from all over the world and is a perfect match for the varying needs of private equity and VC houses.
Political and economic stability
The political stability of Luxembourg is marked by a political culture of consensus where the traditional parties coexist within the context of broad agreement on key issues. The business-friendly political environment is supportive of decision makers and entrepreneurs. Attracting international players is considered paramount in building an efficient business framework and economic growth, and this has helped to establish a permanent and innovative business community. This provides a stable ground for the VC houses to operate in and out of Luxembourg.
Legal and regulatory environment
The legal environment is constantly providing new features. In addition to regulated VC vehicles, Luxembourg enables VC sponsors to use a range of entities for their deals, from unregulated holding companies to the tax-transparent partnerships, with or without legal personality.
The Société en Commandite Spéciale (SCSp) - special limited partnership - is an example of the modernisation of the legal environment in Luxembourg, which aims to accommodate VC sponsors in structuring their funds and transactions.
Under the SCSp regime there is a large degree of flexibility in drafting the limited partnership agreement and tax transparency that adds to the country's competitiveness. This clearly gives a boost to the fundraising activities of the VC managers as they now have a range of options when choosing to establish either regulated or unregulated investment vehicles. Furthermore, the SCSp is a highly efficient and competitive vehicle to be considered when structuring carried interest schemes.
The SCSp regime, in conjunction with the Alternative Investment Fund Managers Directive (AIFMD), has enabled Luxembourg to simultaneously address two key issues: structuring the legal entity and manager regulation.
Luxembourg was among the first countries to implement the AIFMD and is continually working on enhancing its footprint in the global VC landscape. With the passport for the marketing of AIFs to professional investors within the EU, the directive offered Luxembourg an opportunity to promote itself as an alternative investment fund pan-European and global distribution platform. This is attracting more VC houses and gives them the opportunity to locate and develop their activities in and from the country.
One of the key features of operating from Luxembourg remains its stable tax environment. The country currently has 76 treaties in force, including bilateral tax treaties with most EU member states, as well as a number of other countries, including almost all OECD member states. This extensive and continuously expanding treaty network, coupled with the tax framework and its tax regime, has helped establish the country as one of Europe's most attractive jurisdictions for VC operations and investments.
The Luxembourg market offers a pool of highly skilled and multilingual resources. With more than 150 nationalities represented, the workforce is truly international, which allows it to respond to the requirements of its multilingual and multicultural investors.
Furthermore, the availability of a range of specialised service providers enables VC houses to sub-contract non-core activities, thereby taking advantage of cost and revenue synergies leading to increased focus on the core business.
Supportive exit strategy for VC
The exit strategy is the VC's way of cashing out on its investment in a portfolio company. VCs' fund investment in a successful company can be realised through an initial public offering (IPO), trade sale or roll over (the creation of a new fund to take over old investments, while keeping the investor base).
Companies in Luxembourg are regularly used for IPOs and listing on foreign markets.
The Luxembourg Stock Exchange also boasts vast experience in listing offshore vehicles, as well as Luxembourg-domiciled vehicles. It is straightforward, inexpensive and has short-time listing formalities. Listing in Luxembourg offers a stable and secure public finance and tax environment and a confirmed AAA long-term credit rating and high level of reputation.
Exiting the VC investment via selling the Luxembourg top holding company also provides a swift and tax-efficient exit to the venture capitalist.
According to the latest Global Financial Centres Index, published in September 2014, Luxembourg ranks as the leading financial centre in the eurozone. It represents a recognised hub for private equity and VC investments within Europe and worldwide. Nine out of ten of the world's largest fund managers are operating from Luxembourg. There is a range of VC funds using and benefiting from the country's special-purpose vehicle structure and double-taxation treaty for their cross-border investments.
With its comprehensive toolbox available to the fund managers, Luxembourg has developed into an international hub for innovation. Its regulatory and tax regime has enhanced the country's reputation as being attractive for VC for non-resident investors.
The Luxembourg office of EY welcomes you to discover more about venture capital in Luxembourg and how we can help you gain perspectives on issues and trends affecting the venture capital industry.
Olivier Coekelbergs is Private Equity Leader, EY Luxembourg and Farhan Ahmed is Senior Manager, Private Equity, EY Luxembourg.
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