AUDIT - TAX - ADVISORY Luxembourg Real Estate Investment Vehicles 2012 pptx

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 trillio

Undertakings for Collective Investments

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 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

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

22 March 2004

Unregulated Securitization Vehicles (SVs) - law of

22 March 2004

SOPARFIs / Others

Investor Protection

-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

Accounting Standards

Source: ALFI: Luxembourg Real Estate Fund Survey 2011 - Direct Funds

0 5,000 10,000 15,000 20,000 25,000

14.746 14.83917.580

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)

Annual

Semi-Annual Quarterly

Frequency of NAV calculation

Source: ALFI: Luxembourg Real Estate Fund Survey 2011 - Direct Funds

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

contractual fund structure managed

they are shareholders of the company.

Investors are entitled to vote to the extent that the management regulations provide the possibility.

Responsibility of depositary Standard Additional oversight and control

responsibilities compared to a SICAV / SICAF

Decision to liquidate Annual or extraordinary general meeting Management company

Legal and regulatory requirements

The creation of a Part II fund is subject to prior approval by the CSSF

The fund promoter, required in order to ensure an appropriate level of

investor protection, must have sufficient financial resources and appropriate experience The promoter submits an application which includes the articles

of incorporation or management regulations (if an FCP), the prospectus and the principal agreements with service providers The application must also include the choice of depositary bank and auditor as well as details of the directors of the fund or of the Management Company and directors of the depositary bank

As part of the approval process, the CSSF validates the investment strategy and objectives which must comply with the risk diversification criteria outlined

in CSSF Circular 91/75 which specifically addresses real estate investments, and which requires real estate UCIs to invest no more than 20% of their net assets in one single property except during the start up phase

Other restrictions such as borrowing or other rules are specified inter alia in chapter I and III of the Circular

Reporting

Annual and semi-annual reports are required to be submitted to investors and the CSSF within 4 and 2 months of the year/period end respectively, with monthly statistical reporting to be submitted to the CSSF

The annual report must be audited by an approved statutory auditor (réviseur d’entreprises agréé) A long form analytical report must also be submitted

to the CSSF within 4 months of the year end

Appendix 1 provides a comparison of the requirements of Part II funds with other real estate investment vehicles

Please refer to our brochure “Undertakings for Collective Investment” for more detailed information on the legal framework of UCIs

by investment funds, except where the EU Savings Directive applies

In this case, withholding tax of 35% is levied unless information is exchanged

A distribution has to be made depending on the form of the investment fund and distribution notice (Distinction has to be made depending on the form of the investment fund and distribution nature) However, tax may be levied by the foreign unit holder’s country of residence or citizenship

Income earned by a Luxembourg investment fund may be subject to withholding tax in the country of source Tax treaties between Luxembourg and other countries may provide for partial exemption from or refund of any withholding tax levied

Given that the availability and application of treaty benefits varies between treaties, it is important to seek advice before undertaking these investments

> FCPs are generally excluded from tax treaty benefits because of their fiscal transparency (except for the treaty with Ireland) The treaty may be applied to an FCP unit holder according to the treaty that exists between the unit holder’s country of residence and the country where the FCP’s investments are located

> As a SICAV does not pay income tax, it is usually not entitled to obtain treaty benefits unless the contracting parties decide differently

SICAVs currently benefit from the following treaties: Armenia, Austria, Azerbaijan, Bahrein, China, Denmark, Finland, Georgia, Germany, Hong Kong, Indonesia, Ireland, Israel, Malaysia, Malta, Moldova, Monaco, Mongolia, Morocco, Poland, Portugal, Qatar, Romania, San Marino, Singapore, Slovak Republic, Slovenia, South Korea, Spain, Thailand, Trinidad and Tobago, Tunisia, Turkey, United Arab Emirates, Uzbekistan and Vietnam

An annual subscription tax (“taxe d’abonnement”) of 0.01% or 0.05% of the fund’s net worth is payable by the fund The rate at which the subscription tax

is levied depends on the type of investment carried out by the fund and on the type of investor in the fund The annual subscription tax has been set at one basis point (i.e 0.01%) for the SIF with certain exemptions being available

To avoid double taxation, funds that exclusively hold units in other investment funds already subject to subscription tax are exempt from the subscription tax Luxembourg UCIs qualify as taxable persons for VAT purposes A case-by-case analysis is required to assess whether this status should result in the registration for VAT Management services rendered to a UCI are, in principle, VAT exempt

The SIF was introduced by the law 13 February 2007, as subsequently amended It offers a flexible regime for “well-informed” investors (namely institutional, professionals and other investors under conditions) to undertake collective investments The SIF law is essentially characterized by flexibility in view of investment policy, the investor circle and a “lightly” regulatory regime

Legal and regulatory requirements

of the Management Company

The CSSF will grant authorisation subject to the approval of the constitutional documents and the choice of the custodian, of the persons in charge of the portfolio management and of the auditor

No promoter requirement

Unlike investment funds aimed at retail distribution, where investor protection

is the main concern, the SIF may not always be set up by an institutional promoter with significant financial resources

The CSSF will however require notification of the identity of the directors of the SIF or of the Management Company or of the general partner depending

on the legal form of the SIF The CSSF will ensure that they are of sufficiently good repute and have sufficient experience, related to the type of specialised investment fund concerned

Central administration

The SIF must have a Luxembourg central administration

Eligible assets and the principle of risk-spreading

In comparison to Part II funds, the SIF offers more flexibility with respect to the permitted investment assets

A SIF may invest in principle in any type of assets and may pursue any type

of investment strategy, i.e in traditional investments as well as alternative investments - for example transferable securities, money market instruments, real estate, hedge fund strategies and private equity

Specialised

Investment

Funds (SIFs)

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 of SIFs, which clarifies that not more than 30% of its assets can be in a single investment

Flexible corporate rules

Several legal and corporate forms

As per the SIF law, the fund may be established as a contractual fund (FCP)

or an investment company with variable share capital (SICAV) or fixed share capital (SICAF)

The SIF law offers several possible corporate forms for the SICAV and other incorporated entities:

> Public limited company (S.A.), > Private limited company (S.à r.l.),

> Partnership limited by shares (S.C.A.) or,

> Cooperative in the form of a public limited company (S.C.o.S.A.)

Availability of umbrella structures SIFs may be set up as an umbrella fund with multiple sub-funds and/or multiple share classes so as to accommodate investor needs

The “ring-fencing” rule applies to the various sub-funds so that the assets of one sub-fund are exclusively available to satisfy the rights of creditors and investors of that sub-fund

Shareholding

Well-informed investor The SIF law reserves the SIF for well-informed investors Within the meaning

of this law, a well-informed investor must be either:

> An institutional investor Undertakings or organizations, that manage an important amount of funds and assets This concept covers inter-alia credit institutions and other financial sector professionals, insurance and re-insurance undertakings, welfare institutions and pension funds, industrial and financial groups and structures put in place by these entities to manage an important amount of funds and assets; or

> A professional investor

Any professional investor within the meaning of Annex II of the Directive 2004/39/EC on markets in financial instruments; or

> An investor who has adhered in writing to the status of well-informed investor and complies with one of the following conditions:

- He invests at least EUR 125,000 in the fund; or

- His expertise, experience and knowledge are confirmed by a credit institution as defined in Directive 2006/48/EC, by an investment firm

as defined in Directive 2004/39/EC or by a management company as defined in Directive 2001/107/EC

In this respect, the SIF law enables access to a broad investor base to a range

of products, which were, before the SIF law, predominantly reserved for an institutional circle of investor base, such as insurance companies or banks

Flexible capital structure

The minimum share capital of a SIF amounts to EUR 1,250,000 to be reached within twelve months of authorisation by the CSSF

Capital calls may be made by way of capital commitments or through the issue of partly paid units or shares For FCPs, the law does not prescribe the percentage to which each unit must be paid up, but for SICAVs, at least 5%

of each share must be paid-up

Reporting

The offering document and the annual financial statements are the only mandatory documents prescribed by the SIF law The SIF has therefore no obligation to prepare a simplified prospectus, a semi-annual report nor a long-form report as is required for Part II funds

The SIF law does not prescribe a specific format for the offering document but indicates that it must include the information necessary for investors to

be able to make an informed judgment of the investment proposed to them and, in particular, the risk attached thereto An ongoing update of the offering document is not required but it must however be updated whenever new shares are issued to new investors

The annual financial statements must be available to investors within six months from the end of the period to which they relate This goes beyond the normal four month period for other fund types and thus accommodates investment strategies for which the compilation of the financial statements may be difficult within the regular four month period In addition, no detailed information on the investment portfolio must be disclosed; reduced

qualitative and/or quantitative information enabling the investors to make

an informed judgment on the development of the activities and the results

is required

Another interesting feature of the SIF is the exemption for the SIF and its subsidiaries from the obligation to consolidate the companies owned for investment purposes.

Flexible administrative requirements The SIF law provides a very flexible regime in terms of valuation of assets, frequency of NAV calculation and price of the shares/units issued or redeemed The minimum frequency of NAV calculation is annual in line with the

requirement to prepare annual financial statements

The valuation of the assets shall be based on fair value unless provided for differently in the documents constituting the SIF This allows SIFs holding more specific investment types to select a more appropriate valuation methodology

Furthermore, the issue and redemption of shares/units must not necessarily

be made at the NAV per share of the day but will follow the conditions and procedures set forth in the documents constituting the SIF thus allowing the issue and redemption process to meet the fund’s requirements

Risk Management

The SIF must implement an adequate risk management system in order to appropriately detect, measure and manage the risks associated with the positions taken and their contribution to the overall risk profile of the portfolio.The SIFs must communicate to the CSSF a concise description of the risk management systems implemented according to the proportionality principle

in order to appropriately identify, measure, manage and control all the material risks to which the fund or its compartments are or might be exposed to

in another Member State of the European Union

As it is the case for all Luxembourg regulated investment funds, the duties of the depositary shall be understood in the sense of “supervision” and not only

“safekeeping” This implies that the depositary must know at all times how the assets of the fund have been invested and where and how these assets are available The assets of the fund may be deposited with the depositary itself or with any professional designated by the fund in agreement with the depositary

The depositary is liable to the investors for any loss suffered by them as a result of its wrongful failure to perform its obligations or its wrongful improper performance thereof The liability of the depositary is not affected if it has entrusted all or some of the assets in its custody to a third party

Taxation of SIFs

The tax regime for UCIs (including SIFs) is described on page 9

(“Taxation of UCIs”)

The SICAR, a lightly regulated venture capital/private equity vehicle, was introduced in Luxembourg in 2004

The purpose of the SICAR law of 15 June 2004 is to facilitate fund raising and investment in risk-bearing capital SICARs represent around 12% of Luxembourg regulated real estate funds

The SICAR fills the gap between publicly financed vehicles qualifying as UCIs under the amended law of 17 December 2010 (which are strictly regulated) and the unregulated standard taxable companies investing in shares or financing (so called SOPARFIs)

275 SICARs had been set up by May 31st, 2012 demonstrating that the vehicle meets the needs and requirements of the market

A typical use of a SICAR structure is shown below:

or partnership)

Other Investors (management, etc)

High net worth Individuals

Investment in securitised loans

SICAR

Luxembourg SOPARFI

Legal and regulatory requirements

A SICAR is a vehicle with the principal object of investing in risk-bearing assets to the benefit of investors

Unlike investment funds subject to the law of 17 December 2010, SICARs are not subject to risk spreading obligations As a result, a SICAR may invest all of its funds or acquire the majority of voting power in a single company One reason for this flexibility is the limitation on investors discussed under the heading “well-informed investors” below Well-informed investors are assumed to be aware of the risks of their investments and to accept the SICAR’s proposed investment policy from the outset

Authorisation

A SICAR must be authorised by the CSSF prior to commencing its operations The CSSF is the relevant supervisory body for SICARs

In line with the semi-regulated nature of SICARs, the conditions for

authorisation are less stringent than for Part II funds There are no restrictions

on the SICAR’s investment policy However, the CSSF must approve:

> The SICAR’s incorporation documents;

> The choice of the Depositary and Auditor

The CSSF requires additionally notification of the identity, function and responsibility of the directors of the SICAR or of the general partner

depending on the legal form of the SICAR

initial public offer)

The above definition is broad and the classification of assets in “risk capital” is therefore somewhat subjective and will be a key discussion with the regulator

at the initiation of the project

Corporate rules

Legal forms

The law only applies to companies that elect in their bylaws to be governed by the SICAR law

A SICAR can be established in any of the following legal forms:

> A public limited liability company (S.A.);

> A private limited liability company (S.à r.l.);

> A partnership limited by shares (S.C.A.);

> A cooperative company organized as a public limited liability company (S.C.o.S.A.);

Shareholding

Well-informed investors The shares/units of a SICAR may only be issued/offered to investors with

a high level of expertise (well-informed investors), such as professional investors and institutional investors Directors and managers of a SICAR are deemed to be well-informed investors in the meaning of the SICAR law Other investors may be allowed provided they declare in writing that they adhere to the well-informed investor status and they invest at least EUR 125,000 or obtain confirmation of their capacity from a financial institution

Capital requirements

The minimum subscribed capital of a SICAR is EUR 1 million (share capital and share premium), which must be reached within 12 months of the company being authorized by the CSSF The share capital must be fully subscribed and each share must be paid up to at least 5% This facilitates successive drawing down of subscriptions once satisfactory investments are identified

No debt-to-equity ratio applies

There are no legal restrictions on capital repayments, share redemptions, dividends or interim dividends The only restrictions are those found in the SICAR’s articles of association A SICAR is not obliged to maintain a legal reserve

Reporting

The SICAR is required to prepare a prospectus and an annual report for each financial year The annual report must be audited by a Luxembourg approved statutory auditor (réviseur d’entreprise agréé) The audited annual report must

be made available to the investors within six months following the end of the financial period to which it relates

SICARs are resident companies fully liable to corporate and municipal

business tax at an aggregate tax rate of 28.80% (rate applicable in

Luxembourg city in 2012) Income derived from securities (see below for definition) held by a SICAR is exempt from Luxembourg income tax Income

on cash held by the SICAR for the purpose of a future investment is also tax exempt for a period of 12 months, provided that it can be proved that these funds have effectively been invested in risk bearing activities Other income

of a SICAR that is not connected 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

A SICAR established in the form of a limited partnership will be treated as a tax transparent entity for Luxembourg tax purposes These SICARs are not considered to have a commercial activity and consequently are not subject

to municipal business tax even if the unlimited partner or the majority of the limited partners are share capital companies

The Luxembourg fiscal consolidation rules do not apply to SICARs

Double Tax Treaty Protection and access to EU Parent-Subsidiary Directive

From a Luxembourg perspective, SICARs (except if established in the form

of a limited partnership) 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 on request certificates of Luxembourg tax residency for SICARs

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.

In 2004, Luxembourg introduced an attractive legal, regulatory and tax framework for Securitization Vehicles (SVs).

The purpose of the law is to facilitate (i) capital market securitization transactions, (ii) certain intra-group securitization transactions and (iii)

a combination of these two transaction types

The below chart summarises a typical securitization transaction:

In general terms, the law aims to:

> Allow a high degree of flexibility when structuring a securitization transaction through Luxembourg;

> Ensure a high level of investor protection and legal certainty; and

> Ensure a tax neutral treatment of securitization in Luxembourg

Securitization

Vehicles (SVs)

Final Client(Obligors)

SV

Originator

Investors

Goods / Services Payment over time(cash flow on assets)

AssetsCash

Cash

Securities

Legal and regulatory requirements

Inspired by Luxembourg’s well-known investment funds regime, the law permits SVs to be established as a corporation or as a fund The securities issued by a SV may, under certain conditions, be listed on a stock exchange Luxembourg SVs are flexible and can be used in a range of structures of varying complexity, both in an intra-group and a third party context

The SV law defines securitization as the transactions by which an SV acquires

or assumes, directly or through intermediary entities, the risks relating to:

> Holding of assets, whether movable or immovable, tangible or intangible;

> obligations assumed by third parties; or

> all or part of the activities of third parties and issues securities, whose value or yield depends on such risks

The risks may be held by the SV in a number of ways, for example by purchasing the relevant assets, by guaranteeing the relevant liabilities,

or by entering into any other form of obligation This allows for securitization transactions to be executed in one of two typical forms, i.e.:

> As a true sale transaction where the originator sells or contributes a pool

of assets to the SV; or

> As a synthetic transaction where the originator buys credit risk protection from the SV through a series of credit derivatives

Legal forms

The law allows the SV to take either the legal form of a company or that of

a fund run by a management company

The Securitization Company (SC) can take the following forms:

> A public limited liability company (S.A.);

> A private limited liability company (S.à r.l.);

> A partnership limited by shares (S.C.A.);

> A cooperative company organized as a public limited liability company (S.C.o.S.A.)

The securitization fund can be organized in the form of co-ownership or as fiduciary trust

Compartment segregation

An SV may comprise different compartments, each corresponding to a segregated part of its assets and liabilities

Shareholding

Enhanced investor protection

The SV law provides for a solid “bankruptcy remoteness feature” It permits certain contractual provisions and makes them enforceable to protect the securitised assets from any insolvency risk relating to the originator or the

SV itself

Fiduciary representative

To offer investors/creditors an instrument to which they can entrust the safeguard of their interests, the law provides the possibility (i.e not

an obligation) to elect a fiduciary representative that is qualified as a

“professional of the financial sector” under the law of 5 April 1993,

as amended

Risk Management

The risk management function is not regulated

Supervision

The law specifies that securitization activities in the sense of the law do not fall within the scope of legislation relating to the insurance sector

The SV may exist as:

> A non-regulated entity if the SV only carries out (i) private placement or (ii) public placement but on an irregular basis; or

> A regulated entity if the SV issues securities to the public on a regular (continuous) basis In this case, the SV must be authorised by the CSSF, the supervisory authority of the Luxembourg financial sector The procedure for applying for such authorisation is similar to the one applicable to undertakings for collective investment (UCIs)

Taxation of the Securitization Company (SC)

Income taxation

The following comments are only applicable to SVs incorporated under the legal form of a securitization company (SC) SCs are resident companies fully liable to corporate and municipal business tax at an aggregate tax rate of 28.80% (rate applicable in Luxembourg city in 2012) Commitments made to investors (mainly shareholders) and to other creditors (mainly bondholders), e.g preferred dividends and interest, are fully tax deductible As a result, it is possible to reduce the company’s taxable income to a minimum By reason of their specific purpose, SCs are not subject to any thin capitalisation rules The law prohibits the SV from being a member of a fiscal consolidation group

Withholding tax

Shareholders of the SC are treated like bondholders Distributions and interest payments made by SCs are not subject to domestic withholding tax (except where required by EU Savings Directive) Under Luxembourg domestic tax law, the liquidation of a SC, regardless of its legal form, does not trigger any withholding tax at the level of the SC

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 of a SC is the fixed registration duty of EUR 75 SCs are generally not subject to variable registration duties unless real estate located in Luxembourg, or aircraft or vessels recorded on a Luxembourg public register are involved

Luxembourg SCs qualify as taxable persons for VAT purposes It needs to be analyzed on a case-by–case basis whether this status should also result in the registration for VAT purposes

Management services rendered to SCs within the scope of the securitization law are in principle VAT exempt

Net wealth tax

SCs are exempt from net wealth tax

Capital gains realized by non-resident investors

Capital gains realized by non-resident investors upon sale of bonds or shares

in a SC are in general not subject to Luxembourg tax However, a potential tax

of 22.05% (rate applicable in 2012) may apply if a non-resident and non-treaty protected corporate shareholder holds more than 10% of the share capital

of the SC and realizes a capital gain on shares within six months following their acquisition

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 less than 5 years before the disposal operation

The most common unregulated real estate vehicle set up in Luxembourg

is the SOPARFI which is very often used in combination with the other Luxembourg investment vehicles

Legal and regulatory requirements

Under company and tax law SOPARFIs are “usual” commercial companies most commonly represented by S.A or

S.à r.l., amongst other forms, and to be distinguished to investment funds

or other specific vehicles such as SIFs, SICARs, etc SOPARFIs may also exercise finance or other activities in addition to holding or trading in equity investments

Luxembourg corporations (SOPARFI included) are in principle subject to income tax at 28.80% in 2012 in the City of Luxembourg (this includes corporate income tax, municipal business tax at the rate of Luxembourg city and the contribution to the employment fund) and to net wealth tax of 0.5%

on their fair value of their non exempt net assets as at January 1st of each year

As from tax year 2011, SOPARFIs may be subject to a minimum corporate income tax of EUR 1,575 depending on the structure of their balance sheet.Upon incorporation of a SOPARFI there is a fixed registration duty of EUR 75

to be paid

Taxation of SOPARFIs

Fully taxable corporations with equity investments may however benefit from the Luxembourg participation exemption regime2 providing for an exemption from income, dividend withholding and net wealth tax for qualifying

investments held by qualifying entities The exemption from income tax is extensive, covering dividends, capital gains and liquidation proceeds

In addition, no withholding tax on dividend distributions applies if the conditions for the participation exemption are fulfilled Finally the net asset value of participations qualifying for the participation exemption is exempt from net wealth tax

The conditions that must be met to qualify for the exemptions are summarised below In some cases, tax treaties may provide for even more favourable rules It must be determined on a case-by-case basis whether the exemptions apply to a particular set of circumstances

SOPARFIs

2 Articles 147 and 166 of the Luxembourg

income tax law (LIR) and paragraph 60 of the

valuation law of 16 October 1934 (BewG)

Tax exemption for dividends, capital gains and liquidation proceeds received - participation exemption

Status of Luxembourg entity

> Fully taxable resident collective entity listed in article 166 LIR paragraph 103; or

> Fully taxable resident corporation not listed in article 166 LIR paragraph 104; or

> Luxembourg permanent establishment of either:

- A collective entity that is covered by the Parent-Subsidiary Directive; or

- A corporation resident in a country with which Luxembourg has signed a tax treaty; or

- A corporation or a co-operative company that is resident in an EEA country other than a member state of the European Union5

Status of subsidiary

> Collective entity listed and covered by the Parent-Subsidiary Directive; or

> Fully taxable resident corporation not listed in article 166 LIR paragraph 10;

or

> Non-resident corporation fully subject to income tax comparable to the Luxembourg corporate income tax A minimum income tax rate of 10.5% generally satisfies this requirement as long as the taxable basis

is determined according to rules and criteria similar to those applicable

in Luxembourg The exemption also applies to participations held in a qualifying company through tax transparent entities

3 These are basically entities with a legal form

as listed in the Parent-Subsidiary Directive

4 These are corporations set up in a non

European Union country.

5 Luxembourg permanent establishment of a

corporation or a co-operative company that is

resident in Liechtenstein, Iceland or Norway

Minimum retention period

The participation must have been held for at least 12 months on the date the income is allocated or realized for tax purposes A commitment to hold the minimum shareholding for an uninterrupted period of at least 12 months satisfies this condition The test applies to the participation in general and not

on a share-by-share basis

Deduction of expenses

Expenses directly related to a participation that qualifies for the exemption (e.g interest expenses) are only deductible for the amount exceeding exempt income arising from the relevant participation in a given year Decreases in the acquisition cost of a participation that qualifies for the exemption are deductible The exempt amount of a capital gain realized on a qualifying participation is however reduced by the amount of any expenses related

to the participation, including decreases in the acquisition cost, that have previously reduced the company’s Luxembourg taxable income

However, decreases in the acquisition cost that result from dividend distributions are not tax deductible to the extent the dividends are tax exempt

If a parent company writes off part or all of a loan to its subsidiary, the value adjustment is treated in the same way as decreases in the acquisition cost

of the participation, i.e this is taken into account when calculating the exempt capital gain

Dividends received - not qualifying for participation exemption

Dividends received by a Luxembourg entity that do not qualify for the participation exemption are taxed at the full rate of 28.80% in 2012, being the sum of the corporate income tax, municipal business tax and the employment fund levy, for companies established in Luxembourg city 50% of these dividends are exempt from taxation, i.e they will be subject

to a 14.40% in 2012 effective tax rate, if they are paid by:

> A fully taxable resident corporation; or

> A corporation resident in a country with which Luxembourg has signed

a tax treaty and that is fully subject to income tax comparable to the Luxembourg corporate income tax; or

> A company that is covered by the Parent-Subsidiary Directive

Exemption from withholding tax on dividends - participation exemption

Status of recipient

> Collective entity listed and covered by the Parent-Subsidiary Directive; or

> Fully taxable resident corporation not listed in article 166 LIR paragraph 10;

or

> Permanent establishment of one of the above qualifying entities; or

> Collective entity resident in a treaty country and fully subject to income tax comparable to the Luxembourg corporate income tax as well as a Luxembourg permanent establishment of such a collective entity; or

> Corporation that is resident in and subject to taxation in Switzerland without benefiting from an exemption; or

> Corporation or co-operative company resident in a Member State of the EEA other than an EU Member State and fully subject to income tax comparable to the Luxembourg corporate income tax; or

> Permanent establishment of a corporation or of a co-operative company resident in an EEA Member State other than an EU Member State

Size of participation

The minimum participation that qualifies for the dividend withholding tax exemption is:

> 10% participation; or

> An acquisition price of a minimum of EUR 1,200,000

Minimum retention period

The participation must have been held for at least 12 months on the date that the dividend is allocated or realized for tax purposes The test applies to the participation in general and not on a share-by-share basis

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

No withholding tax on liquidation proceeds

No withholding tax is levied on the remittance of liquidation proceeds, regardless of the tax status of the liquidated company and the recipient

Exemption from net wealth tax - participation exemption

Status of parent entity, of subsidiary and size of participation

The conditions to be fulfilled for the exemption of qualifying participations from net wealth tax are the same as for the exemption from income tax of dividends received by Luxembourg resident parent companies

Minimum retention period

> None Debts relating to the acquisition of exempt participations are not deductible from the total assets for net wealth tax purposes

Capital gains taxation for non-residents

If a non-resident shareholder is tax resident in a country that has a double tax treaty with Luxembourg, the treaty generally allocates the taxation right to the country of residence of the shareholder

If a non-resident shareholder is tax resident in a country that has no such double tax treaty with Luxembourg, capital gains on sale of shares in a Luxembourg company are taxable in Luxembourg if:

> The non-resident shareholder has held directly or indirectly a stake of more than 10% of the shares in the Luxembourg company; and

> Has disposed of such shares within a period of 6 months following the acquisition

A taxable gain is subject to 22.05% corporate income tax in 2012 if realized by

a non-resident corporate shareholder