When setting up a fund in Luxembourg, understanding the nuances of investment company structures and company legal forms is paramount. The choices between SICAV vs. SICAF and capital company vs. partnership not only have implications for the fund's operational flexibility and governance but also affect tax considerations and investor appeal. Here’s a guide to making informed decisions in these critical areas.

Investment Company Type: Flexibility vs. Stability

Investment Company with Variable Capital (SICAV)

SICAVs are highly popular in Luxembourg due to their variable capital structure, which allows them to easily issue and redeem shares based on investor demand and linked to the latest net asset value. This flexibility makes SICAVs particularly attractive for open-ended funds, where the investment volume can fluctuate significantly and no formalities to increase or decrease are required to adjust the capital.

Investment Company with Fixed Capital (SICAF)

On the other hand, SICAFs offer a fixed capital structure, making them operationally simpler to operate. However, should the Investment Company require to adjust its capital for any reason, typically a shareholder meeting needs to be held and notarisation and publication requirements need to be fulfilled.

Prior to the recent Luxembourg modernisation law having become effective, the SICAF had further flexibilities in legal forms compared to certain fund regimes adopted by the SICAV. This has however been harmonised now.

Capital Company vs. Partnership

Capital Company: Legal and Financial Separation

Capital companies, such as Société Anonyme (S.A.), Société à responsabilité limitée (S.à r.l.),  European Company (S.E.), Société en commandite par action (S.C.A.) or Société coopérative organisée sous forme de société anonyme (SS.A.), are characterised by their distinct legal personality, which separates the fund's liabilities from its investors. This separation provides a layer of financial protection for investors, making capital companies an appealing choice for those looking for a structured governance framework and limited liability. Capital companies are subject to corporate law, offering a familiar structure for international investors and facilitating broader appeal. These corporate structures are governed typically by a Board of Directors.

Partnership: Flexibility and Tax Transparency

Partnerships, such as Special Limited Partnership (SCSp) or Common Limited Partnership (SCS), offer an alternative with greater flexibility in terms of governance and profit distribution. Partnerships are governed by a General Partner or Managers (typically consisting of some of the Partners). Partnerships are often chosen for their tax transparency, where the fund itself is typically not taxed at the entity level, but profits are passed through to investors who are then taxed according to their individual tax situations (including being able to benefit from double taxation treaties as applicable). These structure are particularly attractive in the institutional private market space, where investors value the ability to structure their investments in a tax-efficient manner.

Navigating Luxembourg Fund Regimes

When deciding on the Luxembourg fund regime, fund initiators should consider the fund's target investor base, desired level of regulatory oversight, and specific investment focus. Each regime offers a unique blend of regulatory flexibility, tax considerations, and investor appeal, making it essential to align the choice with the fund's strategic goals and operational preferences.

Check out my other post where I go into details on specific Lux Fund Regimes.

On a Side Note: Common Funds

The Fonds Commun de Placement (FCP or Common Fund) is another alternative in Luxembourg, a contractual fund without legal personality, meaning it does not exist as a separate legal entity. Unlike its counterparts structured as investment companies (SICAVs and SICAFs), the FCP is an unincorporated fund structure, making it a tax-transparent co-ownership of assets managed by a management company. The FCP’s assets are managed on behalf of its unit holders by (most commonly) a licensed management company without need for periodic unitholder meetings.

The FCP structure is governed by a fund contract, laying out the rights and obligations of all parties involved, including the management company, custodian, and investors.

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