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Investing In Luxembourg Real Estate

by | Apr 26, 2022 | Investment funds, Real estate

Luxembourg real estate property functions as an invaluable store of value for investors. It is an essential foundation for income and capital growth due to its appreciating value over time, proving long-term returns; hence many foreign investors expand by including real estate properties in Luxembourg a critical element of their portfolios. 

The Grand Duchy offers a favorable environment amid global economic unrest. The real estate industry’s most recent fluidity is proof that the country presents rewarding business opportunities in the long run. In fact, growth in this specific sector is continuously improving as a result of the introduction of major corporations from other economic powerhouses, including the United States, Germany, and France into the market. More private investors find the current real estate market trend in Luxembourg appealing, with the influx of new projects revealing a bright and profitable future ahead. 

Due to the recent improvements and trends in the real estate investment market, Luxembourg has adapted new strategies to meet the regulatory requirements of the real estate industry, with the end goal of achieving a sustainable growth. Luxembourg has developed various investment vehicles to diversify the portfolios of local and foreign investors alike. Additionally, the government continuously promotes and enhances its already flexible fiscal and legal landscape to attract cross-border investments. 

The Different Types of Real Estate Investment Vehicles in Luxembourg

Real Estate Funds

1. Investment company in variable capital (SICAV)

2. Investment company in fixed capital (SICAF)

3. Common investment fund (CFP)

4. Limited partnership (SCS)

5. Special limited partnership (SCSp)

  • Real estate funds under the Law on Undertakings for Collective Investment may be sold to any type of investors. 
  • Funds under the Part I Undertakings for Collective Investment Law may be sold to any type of investor across the EU, given they adhere to certain investment procedures and investments. 
  • Funds under the Part II Undertakings for Collective Investment Law must comply with local regulations of the respective member, in addition to prevailing investment restrictions. 
  • Funds under the Specialized Investment Funds Law can only be sold to well-informed investors, such as high-net-worth individuals to benefit from the specialized investment fund (SIF) structure. 
  • Real estate vehicles structured as Specialized Investment Funds (SIFs) are not subject to general investment restrictions, given risk dispersals are made at an adequate level. 

Real Estate Investments in the Form of an Investment Company in Risk Capital (SICAR)

1. Private Limited Liability Company (S.A.R.L.)

2. Limited partnership (SCS)

3. Partnership limited by shares (S.C.A.)

Real Estate Company or Partnership

1. Special limited partnership (SCSp)

2. Limited partnership (SCS)

3. Partnership limited by shares (S.C.A.)

  • Can be established by a small group of investors and simple capital structure. 
  • Real estate company in the form of a Soparfi or Luxembourg Financial Holding Company. 
  • Real estate company in the form of a Soparfi may take advantage from the participation exemption regime for eligible participations. 
  • Real estate companies and partnerships enjoy greater flexibility, less incorporation requirements, and operational costs. 

Real Estate Investment as an Alternative Investment Fund (AIF)

  • Governed by the EU Directive 2011/61 on Alternative Investment Fund Mangers (AIFM) in Luxembourg, as per AIFM Law dated 12 July 2013. 
  • Real estate investments formed under the UCI, SIF, SICAR, and Commercial Companies Laws. 
  • Does not require the approval of the Commission for the Supervision of the Financial Sector (CSSF). 
  • Operate a fund strategy within an Alternative Investment Fund (AIF). 
  • Not required to have a resident manager, as it can be managed by an alternative investment fund managers authorized in EU and EEU member nations. 

Real Estate Investments Investing in Other Real Estate Funds

  • Also called indirect real estate funds. 
  • Can invest in listed property-related securities in the form of portfolio investments. 
  • Can be listed among other real estate investment types, all carried out in Luxembourg. 

Real Estate Investing in the Form of SICAR

  • By rule, an Investment Company in Risk Capital (SICAR) does not have the ability to hold real estate. Indirect investments however through legal entities that hold or invest in real estate that carry risk capital characteristics and capital contributions to real estate companies can be held by an Investment Company in Risk Capital (SICAR).
  • Indirect investments refer to investments made by an Investment Company in Risk Capital (SICAR) contributing to changes in a real estate’s condition, resulting in its value appreciation.
  • Value creation of a real estate takes in various forms, such as improving real estate by way of renovation, contract negotiation, tenant renewal, and portfolio restructuring, among many others.
  • Real estate in the form of an Investment Company in Risk Capital (SICAR) may potentially present risks that are above normal real estate development on a given market.
  • The geographical location of a real estate presenting certain political risks is insufficient to meet required risk capital characteristics of an investment, especially when it does not present any significant element of development.
  • Requirements of a real estate to qualify as an Investment Company in Risk Capital (SICAR) is governed by Circular CSSF 06/241 delineating the fundamental concept of risk capital.

Consider applicable tax regimes when choosing a business structure for Luxembourg real estate investments. Real estate investments in the form of common investment fund (FCP) and limited partnerships (SCS) are tax transparent in nature. Soparfis, SICAVs, and SICAFs are non-transparent in nature in terms of taxation. 

Real estate investments in the form of Undertakings for Collective, Special Investment Fund, and Investment Company in Risk Capital (SICAR) can create umbrella structures, with multiple sub-funds having distinct features. An umbrella fund is classified as a single entity in legal terms. On the other hand, sub-funds will be responsible for their own assets and liabilities. 

Majority of real estate funds in Luxembourg are governed by the Law on Specialized Investment Funds and under the SIF regime. Foreign investors choose regulated investment fund over other forms of investments. 

As an independent business consulting firm, Damalion offers expert solutions helping cross-border investors in the company and funds formation process in Luxembourg. We guide investors in choosing a fund or company structure, as well as manage active real estate portfolios on behalf of investors. Leveraging our extensive global service network consisting of layers, accountants, auditors, and consultants, you can rest assured that your investment strategy will grow and thrive in the long run. From company or fund formation, bank account opening, accounting, bookkeeping, and many more, our Damalion experts will help you at every turn. Reach out to a Damalion expert today to learn more. 

This information is not intended to be a substitute for specific individualized tax or legal advice. We suggest that you discuss your specific situation with a qualified tax or legal advisor.