#1M&A Setting up an investment vehicle in Belgium – An update Webinar - 28 April - pwc#2Speakers PwC Nancy De Beule Partner M&A Tax T: +32 473 91 02 90 E: [email protected] Hugues Lamon Partner M&A Tax T: +32 477 50 91 86 E: [email protected] Sarah Van Leynseele Director M&A Tax T: +32 476 29 96 59 E: [email protected] Maya Van Belleghem Counsel Investment Funds Legal T: +32 472 90 02 52 E: [email protected] 2#3Agenda 1. Introduction 2. Belgian regulatory framework 3. Tax treatment of funds and LPs 4. International tax implication of fund structuring PwC 3#4PwC 1 Introduction Nancy De Beule 4#5Investment funds in numbers Evolution of the number of funds and the investments in Belgium between 2015/2016 and 2020 Registered (sub-)funds and NAV of investment fund types in Belgium Public vs. closed investment between 2015/16 and 2020 Closed = 60 top family offices UCITS 2016 2017 2019 2020 627 688 777 740 200.000.000.000 Public open-ended AIF 540 370 76 नै 34 180.000.000.000 160.000.000.000 Public privak/pricaf 1 1 140.000.000.000 120.000.000.000 Institutional 145 165 110 114 100.000.000.000 open-ended AIF 80.000.000.000 Private privak/pricaf 41 62 52 86 114 60.000.000.000 127.000.000.00 0 40.000.000.000 Specialized 0 real estate fund 10 10 121 149 20.000.000.000 9.743.000.000 0 ELTIF 0 0 0 0 2015/2016 ■Closed ■ Public Total 1.354 1.286 1.171 1.152 PwC 172.000.000.00 0 12.863.000.000 2020 Sources: De Tijd, FSMA 5#6PwC Closed-Ended fund – Private equity investment Diversification and returns Target return: 25% to 30%. Risk profile/return by investments (total of K€1,000 invested): Key issues Diversification - You can afford to loose. Watch out for IRR in mid-course. Investment cycle - J-curve Bad Alive Ok Good Great Total € invested 200 400 200 100 100 1.000 Payout year 5 0 1x 5x 10x 20x Gross return 0 400 1.000 1.000 2.000 4.400 Net return (200) 0 800 900 1.900 3.400 Investor Cash Flows 1 Harvest Period Investment Period 2 3 4 5 6 7 8 9 10 Capital Calls Distributions Cumulative Cash Flows Years 6#7Open-ended fund - Corporate venturing Investors Corporation structure Third party investors Contribution to strategic objectives Corporation Equity Equity PwC OpCo 1 OpCo 2 Objectives New markets Culture Ecosystems & Image Internal optimization Becoming future proof CV vehicle External financing Key issues Equity Targets Value added Strategic link between the initial corporate structure and portfolio companies ⚫ Synergies • Integration Third party investors / external financing Governance 7#8Open-ended fund - Family offices PwC 000 000 000 ManCo Advisory company = Family Office Mgt. services Mgt. fees Family vehicle Funds and assets Private banks Insurance Family businesses Properties Key issues Legacy planning Wealth management Estate planning Asset structuring • Family governance Philanthropy 8#92 Belgian regulatory framework Maya Van Belleghem PwC 6#10Polling question Which vehicle(s) do you currently use for the set-up of your investments? • Holding Pricaf privée/private privak ELTIF • AIF Club deal • Family office Other PwC 10 10#11Strategic questions to set-up an investment vehicle Regulated vs. unregulated - is this a real choice? • • · • Catch all definition of Alternative Investment Fund (AIF): "any undertaking for collective investment which raises capital from a number of investors with a view to investing it in accordance with a defined investment policy for the benefit of those investors and which is not a UCITS". Club deals: day-to-day discretion or control : "a form of direct and on-going power of decision over operational matters relating to the daily management of the undertakings' assets and which extends substantially further than the ordinary exercise of decision or control through voting at shareholder meetings on matters such as mergers or liquidation, the election of shareholder representatives, the appointment of directors or auditors or the approval of annual accounts" Holding: "a company with shareholdings in one or more companies, which carries out a business strategy through its subsidiaries, associated companies or participations, in order to contribute to their long-term value, and which is (i) either a company whose shares are admitted to trading on a regulated market in the EU; or (ii) is not established for the main purpose of generating returns for its investors by means of divestment of its subsidiaries or associated companies”. Operational company having a commercial purpose: "the purpose of pursuing a business strategy which includes characteristics such as running predominantly (i) a commercial activity, involving the supply of non-financial services, or (ii) an industrial activity, involving the production of goods or construction of properties, or (iii) a combination thereof" "Family offices” s.s. : pre-existing group : "a group of family members, that may be put in place by them to invest in an undertaking and provided that the sole ultimate beneficiaries of such legal structure are family members, where the existence of the group pre-dates the establishment of the undertaking. This shall not prevent family members' joining the group after the undertaking has been established" ELTIF: new vehicle from a tax perspective (since tax regime has been adopted in January 2022). It is a fully regulated AIF with a long term duration and which is closed-ended or semi-open-ended What type of investments? What type of investors? How to target them? PwC 11#12What are the consequences to qualify as AIF? Flexibility? Set-up and running costs? PwC Harmonised EU provisions I Belgian provisions (non-public AlFs) I I Regulated AIF I Supervision of FSMA | Private privak Supervision of FSMA: Federal Public Service of Finance ** Instit. Sicav ** No authorisation process with the FSMA, only a light registration procedure with the Ministry of Finance. I FIIS Regulated Managers : | I | • Small-size (registered de Private starter funds minimis exemption) I ⚫ Full size (authorised*) I * Need to appoint a depositary bank for I the AIF the manager manages | I Specific tax regime Non regulated AIF No specific tax regime No supervision, no registration ELTIF Non AIF : Holding Club deal Family office 12#13Belgian vehicles: Non-AIF, Unregulated AIF, Private PRICAF & ELTIF No specific tax regime Non AIF (holding, club deal, family office s.s) Unregulated AIF Private PRICAF Specific tax regime ELTIF Eligible investments No restrictions (for holdings participations) No restrictions Diversification, concentration and leverage No restrictions Eligible investors Marketing and offer Term Professional investors, HNWI (min. 100k or 250k) Private placement and private offer only No restrictions Professional investors, HNWI (min. 100k or 250k). Min. 2 Private placement and private offer only Limited or unlimited Equity (quasi-equity) or debt instruments issued by unlisted companies, other funds (with same investment. objective) No quantitative limits but some diversification required Professional and private investors (25k). Min. 6 Private placement and private offer only 12 years, renewable 3 years x 2 Small-size AIFM Equity (quasi-equity) debt instruments issued by unlisted companies or small cap listed companies, real assets, Quantitative diversification, concentration and leverage requirements Professional and retail investors. Min. 2 European passport and public offer Long term Full AIFM (depositary bank) Limited or unlimited AIFM N/A Small-size AIFM Authority N/A No supervision Ministry of finance Compartments No No Yes Yes FSMA PwC 13#14PwC 3 Tax treatment of funds and LPs Sarah Van Leynseele 14#15Polling question Does tax play a role when you decide how to structure your investment vehicle? Yes No PwC 15#16Investment structure - overview of tax considerations 2 1 - 2 - At the level of investors / managers PwC Manager/ GP 1 Carry Investors / LPs . Taxation / WHT on dividend income or buy-back/liquidation proceeds Capital gain (CG) taxation upon exit • Tax treatment of the CI and taxation of co-investment 3 - At the level of the investment vehicle . Taxation / WHT on dividend income (PEX or credit regime) Equity · Taxation of CGs / deductibility of capital losses Loans Profits ! Equity • Carried interest Controlled Foreign Corporation legislation 3 Advisory company Management fees Bank debt Investment · vehicle 4 Loans • Dividends Equity Portfolio Stamp/capital duties upon capital contribution (in cash or in kind) Deductibility of interest expenses • Interest WHT leakage Deductibility of management fees and related input VAT 4 - At the level of the advisory company • Transfer pricing • VAT aspects . PE exposure • Tax treatment of management fees and/or fund commitments drawdown • Regulatory definition 16#17Overview of most common fund vehicles in Belgium, France, UK and Luxembourg Legal Form French FCPR UK LLP Jersey LP Luxembourg SICAR or SIF Luxembourg ScSp Belgian PRICAF privée Belgian ELTIF Belgian SC(A) No legal personality Co- ownership of securities Legal personality Limited liability No legal personality Limited liability • Legal personality No Legal personality Limited liability Limited liability Tax treatment Transparent for tax purposes • Transparent • for tax purposes Transparent • for tax purposes Subject to specific tax regime Transparent for tax purposes Legal personality Limited liability Limited liability Legal personality Legal personality Limited liability Subject to specific tax Subject to specific tax Subject to regime regime normal tax regime • Flow through • Flow through for DRD under conditions for DRD • under conditions Eligible for DRD Open/close- end • Open-end Open-end • Open-end Open-end Open-end or close-ended • Semi-Open- • Close-end end Open-end or close-ended Manager if Manager if Regulated • Yes • No • No • Yes • Yes • ☐ Yes AIF AIF PwC 17#18Investment vehicle – Pricaf privée PwC LP Belgian resident No-Belgian resident Foreign Co BelCo 1 BelCo 2 GP Pricaf Portfolio Custody principle enshrined in law ✓ tax neutrality achievable but subject to conditions (exemption of the vehicle and specific WHT exemption foreseen) × Tax exemption restricted by eligible investments Foreign investor: depends on local tax law- Pricaf is not a European vehicle No yearly tax on undertakings × Can be subject to asset net (not always) 18#19Investment vehicle - ELTIF · PwC ✓ / X Custody principle not (yet) fully enshrined in law LP Belgian resident No-Belgian resident Foreign Co BelCo 1 BelCo 2 ✓ Tax neutrality is achievable but subject to conditions (tax exemption of the vehicle, specific WHT exemption foreseen) ✓ Tax exemption is not limited by investments eligibility ✓ Foreign investor: local tax legislation: more likely as EU vehicle × Yearly tax on undertakings × Can be subject to asset net (not always) GP ELTIF ил Portfolio 19#20Investment vehicle - corporate/holding LP Belgian resident No-Belgian resident Foreign Co BelCo 1 BelCo 2 PwC GP Holding Portfolio No custody enshrined in law - but achievable under conditions ✓ Tax neutrality is achievable but subject to conditions (exemption of the vehicle and availability of general WHT exemptions) × Tax exemption is limited by eligible investment (eg. participation exemption regime) X / ✓ Foreign investor: depends on local tax law, but benefit of EU Directives ✓ No yearly tax on undertakings ✓ Not subject to asset test 20 20#21Investment vehicle – transparent partnership - LP No-Belgian ✓ custody principle "enshrined" in law ✓ X Tax neutrality can be achieved but depends on portfolio structuring and, for BE corporation, on the fulfillment of certain thresholds ✓ Tax exemption of vehicle not limited by eligible investments ✓/X Foreign investors: depends on local tax law ✓ No yearly tax on undertakings ✓ Not subject to asset test but ventilation obligations Belgian resident resident Foreign Co BelCo 1 BelCo 2 PwC GP Fund (scsp) Portfolio 21 21#224 International tax implication of fund structuring Hugues Lamon PwC 22 22#23Current hurdles in fund structuring Manager/ GP 4 • Investors Advisory Company Management fees Fund 1-2 HoldCo 1 HoldCo 2 3-4-6-7 HoldCo 3 BidCo Target Classic features of a fund structure • Fund & GP located in a low tax jurisdiction with flexible regulatory requirements. Tax neutral structure for investors. Key challenges in the current BEPS environment 1. PE exposure - Activities of the advisory company may give rise to a PE exposure for the fund or its investors. - 2. TP risk and regulatory constraints The remuneration model within a fund structure must be at arm's length while at the same time compliant with regulatory constraints. 3. Anti-treaty shopping measures - For non-CIV funds, DTT access for intermediary HoldCos is likely to be increasingly challenging under the contemplated anti-treaty shopping measures. 4. Hybrid mismatches - Current hybrid structures are likely to be caught by new anti-hybrid measures. 5. Transparency initiatives - Reporting requirements such as CbCR, FATCA and CRS will significantly increase the workload, staff and expertise of fund managers. 6. Danish Court Cases - Impact on holding locations needs for economic substance and purpose. 7. ATAD 3 - Impact of anti-shelf entities. PwC 23 23#24Transfer pricing and regulatory constraints Profit-split ? Provides: Manager / GP Investors • Management services • Technical Profits expertise Cost-plus ? Fund Provides: advisory services Advisory company Target Group PwC Context Transfer Pricing must be in line with the functions performed by each party as well as their control over risks. Impact for funds Remuneration of the GP and advisory company must be inline with those principles: • Remuneration of advisory companies: cost plus vs. profit split • Functions delegated by GP: must retain sufficient resources Regulatory constraints 24 24#25PE exposure PwC Context New stricter definition of Agent PE - increased risk that Fund manager/advisory company activities in the target state lead to a local taxable presence (PE) for the fund or its investors. Provides: Manager / GP Investors • Management • Dependent agent PE Provide: services • Technical Capital • Independent agent PE expertise Fund Provides: Capital Target Group Provides: advisory services Advisory company PE exposure Impact for funds • PE exposure is likely to result in double taxation Actual conduct prevails over contractual arrangements 25#26Anti-treaty shopping measures and hybrid mismatches Profit repatriation without WHT Profit repatriation without WHT PwC Investors Fund Context • Funds rely on DTT to secure a tax neutral repatriation of profits to investors Substance & beneficial ownership conditions to access the treaties are getting stricter A limitation on benefits (LOB) clause & principal purpose test (PPT) will likely be added to most treaties Impact for funds Access to DTT for holdings • TopCo Beneficial ownership Needs for true economic purpose, key substance and no legal obligation for redistribution Target Group 26 26#27ATAD III PwC ATAD III Shareholder Company B Source C Dividend Dividend Treaty relief? Reduction? I No WiT due to PSD • . What is it? Proposal for a directive to prevent the misuse of shell entities for improper tax purposes. When? Member states should apply the measures by January 1, 2024 with a two year "look back" period. Scope? All undertakings, being considered tax resident (tax residency certificate in a Member State). When is an undertaking potentially considered to be a shell? To determine this, the "gateways" and substance should be tested for the entity in the case at hand. Consequences? If not enough substance, benefits of tax treaties and EU directives can be denied (+ reporting obligation). 27 27#28Polling question Have you considered the impact of ATAD III for the set-up of your investments? Yes No PwC 28#29Belgian Tax on Savings Income – 19bis - PwC Fund LP > 10% / 25% Targets Debt-related assets Principles - Sale/redemption of shares or liquidation of undertakings for collective investment ("UCI") assets invested in debt-related assets exceed 10%/25% (shares acquired before 1 January 2018) · Aims only at capitalisation UCIS • . • Threshold: statutory or actual basis ("Asset Test"). Taxation: debt-related assets accumulated during the detention period (Belgian Taxable Income per Share - "BTIS”). Taxable basis: о Difference between the BTIS on the date of sale/redemption and on the date of acquisition. No BTIS calculated: Asset Test O No Asset Test feasible: taxation of the full CG. 30% WHT by the debtor on the qualifying debt-related investments. • Fund of funds: consideration of the indirect investments PE funds also in scope (shares acquired from 1 January 2018). 29#30PwC Management investment plan – Carried interest - Do ManCo Manager/ GP Investors / LPs Carry Dividends / liquidation proceeds Dividends / liquidation proceeds i I Fund LP Master HoldCo Targets Feeder Carried interest Typical management investment plan structuring Carried interest / Co-investment / Stock-options (difficult to apply) Carried interest . Main issue: tax qualification of Cl income No specific regime - General Belgian tax rules apply (employment income vs. investment income) Possibilities for structuring the Cl: Via a Master Holdco / via the Fund (transparency) Direct holding / holding through an intermediate carry vehicle O Direct holding by the Managers / indirect by their ManCos Generally, not considered as part of the normal management of private assets • Ruling practice: ManCo / opaque carry vehicle to be set up О • Initial investment at fair market value O 。 Recent developments: risk that part of the Cl will be taxed at progressive tax rates when structured on transparent fund 30#31Management investment plan - Co-investment PwC Managers, co-investors, family and friends Feeder Fund LP Master HoldCo BidCos Co-investment • • Investment of the Managers under the same terms as other investors Purpose: alignment of the Managers of the Fund with the risk profile of the investors Form: investment in a Partnership or a Holding O Co-investment at Fund level, O Co-investment at Master HoldCo level, ○ Co-investment at subholdings level (BidCos), • Co-investment at Targets level. Risk that the tax authorities consider that the structure of the co- investment does not meet the conditions for normal management of private assets Targets 31#32PwC Questions? 32 32#33Thank you! © 2022 PwC. All rights reserved. PwC refers to the PwC network and/or one or more of its member firms, each of which is a separate legal entity. Please see www.pwc.com/structure for further details. pwc www.pwc.be