How to set up unregulated VC fund in Luxembourg

Choosing the Right Legal Structure

Unregulated venture capital funds in Luxembourg can be structured in various ways, depending on investor needs, risk appetite, and tax considerations. The most common structures include:

• Société en Commandite Spéciale (SCSp): A Special Limited Partnership that does not have legal personality, making it highly flexible in terms of governance and profit-sharing arrangements. This structure is widely used by private equity and venture capital funds due to its ease of implementation and tax transparency.

• Société en Commandite Simple (SCS): A standard limited partnership, similar to the SCSp, but subject to slightly different legal nuances. It offers investors limited liability while allowing fund managers to retain control over decision-making processes.

• Société à Responsabilité Limitée (S.à r.l.): A private limited liability company that can serve as a fund vehicle, offering a corporate structure but being subject to corporate taxation. While it provides a more structured governance model, it may not offer the same tax benefits as the partnership structures.

Choosing the right structure depends on the nature of the investments, the expectations of investors, and the operational flexibility desired by the fund managers. Legal and tax advisors should be consulted to ensure that the chosen structure aligns with the fund’s objectives. Platforms such as Fundequate provide advisory services that help fund managers assess and choose the optimal legal structure based on their specific investment strategy.

Fund Management and Governance

An unregulated VC fund does not require an Alternative Investment Fund Manager (AIFM) unless it surpasses the thresholds set by the Alternative Investment Fund Managers Directive (AIFMD). However, even in the absence of mandatory AIFM registration, fund managers must establish a governance framework to ensure efficient decision-making and compliance with relevant laws.

A common approach is appointing a General Partner (GP) responsible for the overall management of the fund. The GP can be an individual or a management company and typically oversees investment decisions, capital allocations, and risk management. Limited Partners (LPs), on the other hand, contribute capital but do not participate in day-to-day operations. The governance framework should also outline key operational processes, including reporting obligations, capital call procedures, and exit strategies to ensure transparency and alignment with investor expectations. 

Fundraising and Private Placement

Marketing and fundraising for an unregulated fund must comply with the private placement rules in Luxembourg and other jurisdictions where the fund seeks investors. Private placement allows fund sponsors to raise capital from professional and qualified investors without the need for full regulatory authorization, making it a cost-effective way to attract investors.

The success of a fundraising campaign depends on the clarity of the fund’s investment strategy, the credibility of its management team, and the strength of its network. A well-prepared private placement memorandum (PPM) should outline the investment objectives, risk factors, fee structures, and exit strategies to ensure transparency. Additionally, fund sponsors should consider leveraging Luxembourg’s extensive financial ecosystem, including third-party distributors and institutional investors, to enhance capital-raising efforts. Fundequate provides investor-matching services and capital introduction solutions to help VC funds connect with potential backers in the Luxembourg market.

Tax Considerations

Luxembourg provides a favorable tax regime for investment funds, making it an attractive jurisdiction for VC fund managers. The SCSp and SCS are tax-transparent entities, meaning they do not pay corporate taxes at the fund level. Instead, investors are taxed based on their respective jurisdictions, which can lead to significant tax efficiencies.

Key tax advantages include:

• No withholding tax on distributions, ensuring smooth repatriation of profits to investors.

• No subscription tax (except for certain investment structures), reducing operational costs.

• Access to Luxembourg’s extensive double tax treaty network, which helps minimize withholding taxes on international investments.

Proper tax structuring is crucial for optimizing returns, and fund managers should work closely with tax advisors to ensure compliance with both Luxembourg and international tax regulations. 

Compliance and Reporting

Even though the fund is unregulated, it must still comply with anti-money laundering (AML) and know-your-customer (KYC) requirements. Investors must undergo due diligence checks, and the fund must maintain proper records for tax and regulatory compliance.

Compliance obligations include maintaining records of investor transactions, ensuring transparency in fund operations, and filing any necessary disclosures with the relevant authorities. Fund managers should implement robust AML/KYC procedures to mitigate risks associated with financial crime and regulatory breaches. Working with experienced compliance professionals or outsourcing compliance functions to specialized firms can streamline these processes and enhance investor confidence. Fundequate offers automated AML/KYC compliance tools and regulatory reporting solutions that help fund managers meet Luxembourg’s financial regulations efficiently.

Setting Up the Fund

To establish an unregulated VC fund in Luxembourg, follow these steps:

1. Choose the legal structure: Decide between SCSp, SCS, or S.à r.l. based on the fund’s operational needs and investor preferences.

2. Draft fund documentation: This includes the Limited Partnership Agreement (LPA), offering memorandum, and subscription agreements, which set out the rights and obligations of all parties involved.

3. Appoint service providers: Engage legal advisors, fund administrators, and accountants to ensure compliance with regulatory and operational requirements.

4. Register the entity: Incorporate the fund with the Luxembourg Business Registers (RCS) if applicable, ensuring all legal formalities are met.

5. Open a bank account: Necessary for capital contributions, fund operations, and investor transactions.

6. Start fundraising: Conduct a private placement and onboard investors, ensuring that marketing efforts comply with applicable private placement rules.

Conclusion

Setting up an unregulated VC fund in Luxembourg is an attractive option for fund managers seeking flexibility, cost efficiency, and tax advantages. While it avoids the complexities of full CSSF regulation, compliance with AML/KYC requirements, investor protection measures, and tax laws remains crucial. Establishing a clear governance framework, maintaining transparency with investors, and leveraging Luxembourg’s extensive financial ecosystem can enhance the fund’s credibility and operational success. Fundequate serves as a valuable partner by providing governance support, compliance solutions and investor connectivity to streamline fund setup and ongoing management. 

Read more about: 

• What are Luxembourg funds?
• SCSp vs. SCA: A comparison for unregulated AIFs in Luxembourg