Vehicles. There are the ones made out of steel, fibreglass and plastic and the ones of the investment world.
« Seriously, why are there so many investment terms, mother? », asked the oldest son of the Krabbs, holding a pamphlet, uneager to take over the responsibility of the family’s patrimony.
Mrs Krabbs, well aware of her son’s detached attitude and the fact that he is everything but ready to take the helm of the new family investments she plans to make, searches willingly for someone who could guide them. Her old, trustworthy counsellor with whom she tied up a solid friendship retired some months ago by Christmas time.
In a way, his son has a point. The plethora of methods that investors use nowadays to grow their wealth has become more diverse and complex. And, risks and return, after all, have been all that has mattered to her in her fairly successful experience as an investor. Because she knows that the devil is in the details, however, her former counsellor was taking care of the « assets and investment vehicles » part, and digesting the information to her.
This blog entry uses fictional characters to revisit, in a convivial way, some of the most relevant investment vehicles for wealth management. Grab a coffee. It’s time to read.
At the counsellor’s bureau (failed visit)
Put that simply, please, counsellor, Mrs Krabb’s son asked, slightly impolitely. Rolling her eyes up, Mrs Krabbs wondered to herself, once again, what it would take for her son to be more interested in the family’s patrimony.
The young man got nervous after asking the (potentially new) counsellor a description of the different investment vehicles. The counsellor, almost like an encyclopaedia, recited a couple of those definitions that seem intelligent but clarify very little, in Mrs. Krabb’s own words.
Mrs Krabb’s doble goal, preparing the next generation to take over Krabb’s wealth and, at the same time, maintaining certain control and continuing to make some investments on her own, didn’t seem that easy when she and her son left the babbler counsellor’s bureau, searching for another one.
But, triggered by some interior force, Mrs Krabbs’ son, walking next to her silently, realised that he wanted to be like his mother, that he was longing for his parents to be proud of him. And this was the chance to start off and leave behind his, until then, aimless life. But he wanted that to happen on his own terms. He wanted to be Mr Krabbs.
The fifth one made it. Graceful, dark blond, dressed in shiny blue, the counsellor said, humbly, Have I been clear enough? Excuse me if I haven’t, Mr Krabbs.
Investment vehicles are methods that investors use to invest – please, allow me for this redundancy – to grow their money, the young counsellor had replied, right before, to Mr Krabbs’ question, the one he had been using to decide on the new counsellor. He seemed satisfied with the answer. Mrs Krabbs was pleased, and she felt some relief.
The Krabbs are ready to get back to the game, they want to invest! said Mrs Krabbs, using the third person, with a deep voice, to the counsellor. Over the week after the day the counsellor was hired, mother and son were exploring some investment opportunities for the family wealth. They both realised the news flashes they have been receiving six months ago were published by the company the new counsellor works for.
Dear Madam Krabbs, once again, thank you for having chosen us and for trusting our advice. Let’s explore the options you have.
You may know Luxembourg has a wide range of investment vehicles – taxable entities, SPF, SIF, RAIF, SCSp – and betting on one or the other depends on your objectives, the nature of the desired project and the family profile, explained the counsellor.
However, they are all beneficial when being well structured. Before investing in an asset, always consider the most appropriate investment structure i.e., how your investments are legally owned and which type of (family) governance and rules are you looking for. Legal entities can be partnerships, companies and trusts, Mrs Krabbs.
Fully taxable entities in a nutshell
And fully taxable entities, what’s the deal with them? Mr. Krabbs asked, interested, holding a tiny espresso cup? We’ve read about them on your website and, from what I understand, they could be an option for us.
Before addressing your question, I would like to explain what a tax opaque vehicle is, said the counsellor.
The profits of an opaque entity – a capital company or an investment vehicle, for instance – are treated as its own. The company itself is taxed and shareholders aren’t subject to personal income tax on the income realised by the company. Generally, they are only taxed in relation to any profits actually distributed to them by way of dividend for example.
Now, replying to your question, Mr Krabbs, a fully taxable entity is, in principle, a tax opaque vehicle for businesses and financial activities to hold transactions within the same investment structure.
Since they can hold direct assets, real estate, corporate or Special Purpose Vehicles – also called SPVs – fully taxable entities are particularly interesting for operational, financing (considering transfer pricing aspects) and holding activities notably in an international context, the counsellor went on.
Mrs Krabbs, a seasoned businesswoman, fired a key question, the one relating to taxation and any potential exemption.
Let’s start with the taxes fully taxable entities are subject to, Mrs Krabbs, the Corporate Income Tax (“CIT”) and the Municipal Business Tax (“MBT”), 24.94% in the case of Luxembourg-City for 2022.
However, the counsellor added, fully taxable entities can benefit from Double Tax Treaties (“DTTs”), something SPFs cannot. Also, dividends received may be tax exempt in Luxembourg, according to the so-called participation exemption regime (“PEX”).
Under PEX, there are exemptions for CIT and MBT on dividends received. The same goes for capital gains realised on qualified shareholdings in eligible subsidiaries. There can be a 15% exemption from withholding tax (“WHT”) dividends distributed to eligible parent companies and an exemption from Net Wealth Tax (“NWT”) qualified shareholdings in eligible subsidiaries.
Fully taxable entities adopt different legal forms such as a public limited company (société anonyme or “SA”), a private limited liability company (société à responsabilité limitée or “S.à r.l.”) and a partnership limited by shares (société en commandite par actions or “SCA”).
SPF, what’s the deal?
Please, Mrs and Mr Krabbs, don’t hesitate to stop me if what I’m telling you isn’t that clear went on the counsellor, knowing that both investment and tax terms may look fairly complex when explained all together to people who aren’t particularly involved in the field.
We can also consider a SPF (“Société de Gestion de patrimoine familial”) as the holding for families. Its main objective is to establish a legal framework for managing a person’s private assets. Consider, Mrs Krabbs, that it’s limited to the acquisition, holding, management and realisation of financial assets; it cannot carry out any commercial activity, including the ones holding directly real estate assets! Also, it can only be set-up by individual persons or patrimonial entities.
The counsellor went on, explaining that the tax regime is arguably SPFs’ most interesting aspect. Indeed, there is a full exemption of revenues derived by the SPF, and no withholding tax levied. Only a subscription tax is due on a quarterly basis capped at EUR 125,000. However, it doesn’t have access to DTTs.
Exploring other alternatives in Alternatives
Risk and return, son. All these paraphernalia of terminology come down to these two variables. Bear that always in mind, said Mrs Krabbs while taking a little break before the meeting’s second round somewhere in southern Luxembourg, a quartier called Cloche d’Or.
Back to the meeting room, the Krabbs found a nicely printed pamphlet on the table, an almost disappeared information material over the last two years due to the ups and downs of corona times.
“Alternative vehicles” was its title.
Have you thought of investing in Alternative types of assets? They bring a whole bunch of new opportunities depending on the flexibility you are looking for, said the counsellor. Let’s pay a visit to the pamphlet, added, gracefully.
Specialised Investment Fund (“SIF”) is a regulated alternative investment fund as its setting up and launching require the prior authorisation of the CSSF, the Commission de Surveillance du Secteur Financier. A SIF can invest in all types of assets but is reserved for “well-informed” investors.
There is also the Reserved Alternative Investment Fund (“RAIF”). Contrarily to a SIF, this is an unregulated vehicle, therefore, it isn’t directly subject to the control and supervision of the CSSF. Although it allows for some flexibility, it still must be managed by an Alternative Investment Fund Manager (“AIFM”) who is actually supervised by the CSSF. As in the case of a SIF, one needs to be categorised as a “well-informed” investor in order to set up a RAIF.
Slightly bored, Mr Krabbs said, assertively. Is there still more? Longing for a drink on a nice terrace under the Luxembourg sun that tends to be pretty scarce.
There is only one more I would like to introduce you too, replied the counsellor. It is the SCSp which stands for Société en Commandite Spéciale.
A SCSp is a very interesting vehicle if you and your mother want to invest together while maintaining a great contractual freedom, important flexibility, and confidentiality. This vehicle can also be used as a transmission instrument.
You could, thus, use this legal form to set up a regulated or unregulated investment fund. Note that a SCSp’s legal personality isn’t separate from the one of its partners and it is a tax transparent vehicle i.e., the taxation of its profit is in the hands of the partners. If for any reason you prefer the vehicle to have its own legal personality while remaining flexible, you can even opt for the SCS (“Société en Commandite Simple”) also tax transparent vehicle.
In the terrace
Grabbing a cold beer, Mr Krabbs felt relieved. Being Mr Krabbs, after all, was definitely more than holding, proudly, a name. He knew he had to upgrade his own game, and the counsellor could definitely help him to do that.
Mrs Krabbs, sipping a glass of white wine, broke her silence to thank the counsellor. The instruments we discussed are indeed very interesting since I plan to stay active for a few more years, together with my son and my daughter who’s still in the faculty.
The counsellor, trying to seal the conversation, added: any recommendation from us considers each family’s situation and investment appetite. It can only be done on a case-by-case basis.
We’re pleased to team up with you, and eager to learn more about your project. Feel free to reach out to the PwC Luxembourg’s Wealth Management Team to move forward.
What we think
Setting up your own family wealth management vehicle is about more than just choices. It’s about making the right decision to ensure the long term family wealth growth and preservation, notably in turbulent times. It should therefore be a step-by-step process, where all family members are involved and during which crucial factors are considered, including legal and regulatory framework, family’s specific governance needs and wishes, number of partners, stability of the vehicle’s place of location, access to skilled professionals.
Historically, Luxembourg is a well-known jurisdiction for HNWIs wishing to preserve their assets in a stable financial and political environment. It’s also a world-class financial hub and a leader for investment funds. The combination of these two strengths has made it a privileged location for the use of wealthy clients’ investment vehicles. Thus, Luxembourg offers many instruments/investment vehicles to successfully organise private investments according to the desired investment strategy.