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Private Equity Funds in Belgium: the Case of the Private Privak/Pricaf Privée

Private equity funds, or so called Private Privaks/Pricafs Privées, have gained enormous popularity in Belgium during the last couple of years. The Private Privak/Pricaf Privée was introduced in 2003 under a very rigid and complex regulatory framework. Amendments in 2007 and especially in 2018 have since made the Private Privak/Pricaf Privée a very interesting vehicle. No wonder then that not less than 87 Private Privaks/Pricafs Privées out of a total of 136 currently registered Private Privaks/Pricafs Privées were established after the reform of 2018, and the number is growing every month. At the same time, the Private Privak/Pricaf Privée enjoys a very favourable tax regime as a result of its high degree of tax transparency.

In this e-zine, we explain what a Private Privak/Pricaf Privée is and what the reasons for their success are.

1.    What is a Private Privak/Pricaf Privée?

A Private Privak/Pricaf Privée is a type of private Alternative Investment Fund (AIF), regulated by Belgian law, and which can only invest in private equity, i.e. financial instruments issued by unlisted companies. Unlisted companies are companies whose shares are not admitted to trading on a regulated market such as Euronext Brussels. They therefore encompass not only companies whose shares are not traded on any trading venue, but also companies whose shares are traded on a Multilateral Trading Facility such as Euronext Growth or Euronext Access, or companies who only list their bonds or other debt instruments, but not their shares, on a regulated market.

The financial instruments of unlisted companies in which a Private Privak/Pricaf Privée can invest are very broad: shares, participation certificates, bonds, warrants, units in other private equity funds and even secured or unsecured loans in order to allow the fund to participate in mezzanine financing. Under certain conditions, the fund may additionally or temporary hold securities and liquid assets.

The Private Privak/Pricaf Privée must be established as an investment company with legal personality and cannot take the form of a common fund. This is not much of an issue, however, because investment companies have the advantage that, other than giving certainty to the investors that their liability is limited to their contribution, the investment company can remain self-managed and does not necessarily need to appoint a management company.

Because the Private Privak/Pricaf Privée qualifies as an AIF, their management is in principle regulated by the AIFMD. The self-managed Private Privak/Pricaf Privée in its capacity as an AIFM can, subject to certain conditions being met, opt for the small-scale registration regime. The AIFM then does not need a license and will only have limited reporting duties. Further, Belgian law allows certain entities which do not qualify as an AIFM and are hence not subject to the AIFMD, to establish a Private Privak/Pricaf privée.

The Private Privak/Pricaf Privée must also have at least six shareholders and shareholder meetings require special majorities, although important exceptions to these rules exist. The fund can take different company forms according to the needs of the founders. In practice, we see Private Privaks/Pricafs Privées being established as either a public limited liability company or a limited partnership. A private limited liability company is also allowed. General partnerships do not as such exist anymore under the Belgian Code of Companies and Associations, but the same result can be obtained by modulating a public limited liability company. The Private Privak/Pricaf Privée may also create sub-funds. Further, the Private Privak/Pricaf Privée has a limited term of twelve years, with a renewal of maximum two terms of maximum three years.

The minimum ticket size for investors is in any case EUR 25,000. For reasons to do with the private nature of the fund, this minimum will usually be raised to EUR 100,000. Investors can only transfer their shares to other private investors paying at least EUR 25,000.

Finally, one important reason that explains the current success of Private Privak/Pricaf Privée has to do with recent reforms which give the vehicle a considerable degree of flexibility. For example, the fund can now acquire controlling stakes in other private companies, or it can define an investment policy that limits the interests it can take in the companies in which it invests. The Private Privak/Pricaf Privée is therefore not only an ideal vehicle for investing in risk bearing capital of SMEs and start-ups, but can also be used in acquisition deals while at the same time diversifying both the investor base and the investee companies.

2.    A favourable tax regime – tax transparency

A major advantage of the Private Privak/Pricaf Privée is its very favourable tax regime, where the quasi-transparent status of the Private Privak/Pricaf Privée is particularly beneficial for the Belgian private investors. Although the Private Privak/Pricaf Privée is subject to corporate income tax at the standard corporate income tax rate, it will only be taxed on a limited corporate tax base, i.e. on the total of abnormal or benevolent advantages received and disallowed expenses, other than depreciations and capital losses on shares and the financing cost surplus not classified as professional cost and the secret commissions tax. The taxation on this limited taxable base, however, only applies if the Private Privak/Pricaf Privée invests in certain specified shares and other assets. In practice, such a Private Privak/Pricaf Privée will in principle be subject to an effective tax rate of 0%. This favourable tax regime applies per tax year.

Dividend and interest distributions to individual investors in a Private Privak/Pricaf Privée will normally be subject to the standard withholding tax rate of 30%, although various exceptions and reductions may apply. Share capital reductions/reimbursements will, in principle, not be taxable, unless the Private Privak/Pricaf Privée has retained earnings or reserves, in which case the reimbursement will partially be requalified as a dividend distribution. Capital gains on shares are not taxable if they are realized in the normal management of the private estate, although an exception to this rule exists. Liquidation and redemption bonuses are not taxable, although an exception to this rule exists as well.

All income received by companies investing in a Private Privak/Pricaf Privée will be subject to corporate income tax at the standard rate. As a general rule, the income received from such an investment company cannot benefit from the participation exemption on dividends (dividend received deduction), unless such dividends stem from specific investments made by the Private Privak/Pricaf Privée. Finally, the Private Privak/Pricaf Privée can benefit from the tax treaties concluded by Belgium.