The special partnership, ideal for its legal flexibility and efficient taxation.
A lot has already been said and written about the numerous opportunities in investing in art and why to use Luxembourg for that. Luxembourg is now known for favourable logistics, the Free Port, its different vehicles and the favourable tax treatment of these or at least certain of these vehicles.
Before saying that Luxembourg is the perfect place to use, one should first consider the needs of any person having a particular project. You do not kill a fly with a bazooka. One should therefore consider the aims and the particular situation of that person. The use of a vehicle or the need of a structure will obviously depend, among others, on different elements: the country of residence of a person, whether the investment is purely speculative, is to be done with friends or relatives or third parties, if any income or capital gains are expected in a close or a distant future, if the person wishes to have the art of work exposed in his living room or not, if discretion is a key element or if there is any succession or gift planning to be taken into account, etc.
Let’s assume that a vehicle, located in Luxembourg, is the path to follow. We can proceed by elimination: the popular SOPARFI (the Luxembourg usual holding and finance company): very flexible in several ways, it fits well to hold participation or organising financing but less to hold works of art: it will be subject to net worth tax (even the minimum net worth tax to which the SOPARFI may be subject could be quite high) and will be taxable on realised capital gains.
The SICAR (the venture capital fund) should not be eligible given that it should hold, as a principle, securities (representing risk capital).
The securitisation vehicle, although enjoying an interesting tax treatment (all the commitments towards its shareholders and investors are deductible for tax purposes which should result broadly in a tax neutral situation), should also be subject to the minimum net worth tax which could also, like the SOPARFI, be quite important.
Finally the funds, such as the SIF or the RAIF (currently still a draft law) demonstrate great advantages but do they reach the target in the case at hand? How to deal with managers’ fees, custodian fees, auditor’s fees, valuation and certification expenses, insurance and storage expenses or the annual contribution tax to name a few, while the art market is relatively confident, and art works or art collection may not generate sufficient cash (if it generates cash at all)? The lack of liquidity of this kind of assets may endanger the financial situation of the fund (but also of any other structures mentioned above) and also trigger the liability of the managers.
What about the partnership?
The (non-regulated) partnership and in particular the special partnership (société en commandite spéciale – hereafter the “SCSp”) looks probably as the most suitable vehicle from a legal but also from a tax perspective. From a legal perspective it offers a great deal of flexibility since the relationship between the partners is organised through the partnership agreement. This concerns in particular the voting and majority rights or the profits distribution (except the forbidden leonine clause which excludes a partner from any profit). It does not have to be incorporated in front of a notary. No minimum share capital is legally required. It has limited publications and filing with the trade register requirements, i.e. only its denomination, object, details of the general partner and its address have to be published. It does not need to file any annual accounts or to have its accounts controlled or audited by a statutory or independent auditor. Its main “constraint” would be to keep at its registered office a register containing a copy of the partnership agreement, the details of the partners and the movements of the partners’ participation in the share capital of the SCSp.
From a tax perspective, the SCSp offers interesting features. It is transparent for corporate income tax and net worth tax purposes unless it performs a commercial activity or its general partner is a Luxembourg joint-stock company owning an interest of more than 5% in the SCSp. The distributions made by the SCSp are not subject to withholding tax and the SCSp is not subject to net worth tax. Non-resident partners should in principle not be subject to capital gain taxation.The tax transparency may add certainly additional complexity to the tax treatment of the SCSp and its partners.
An analysis should therefore be performed on a case by case basis but its great success since its launch in 2013 shows a vehicle with a huge potential, great flexibility and low functioning costs which is worth thinking about for art holding or investment.
For more information, contact David Maria, Partner at Wildgen.