Belgian Finance Minister
Initiates Consultation on Investment Fund Legislation
22 July 2005
In 2003, Belgium introduced a new tax-beneficial
investment vehicle, the private PRICAF. Two
years later, the private PRICAF has not been
as successful as expected, with only two such
investment funds having been approved. Consequently,
Finance Minister Didier Reynders has now started
a round of consultation to revise the private
In a consultation note, Reynders explained that
the revisions are needed because of changes
in other Belgian legislation, the pending implementation
of the new EU Prospectus Directive, and experience
that has been gathered in the two years since
the private PRICAF legislation entered into
Belgiums Law of 4 December 1990, on financial
transactions and financial markets implemented
the original EU Directive on Undertakings for
Collective Investment in Transferable Securities
(85/611/EEC) (also known as the UCITS I Directive).
The objective of that directive was to harmonize
the various European laws on UCITS. It initiated
the idea of the European passport,
which allows UCITS that are approved in one
member state to sell their units in other EU
member states after notifying the relevant authorities.
However, the UCITS I Directive granted the European
passport only to UCIs (Undertakings for Collective
Investment) that invested in transferable securities.
UCITS III consists of two EU directives2 that
grant the European passport to previously ineligible
investment funds, and to fund management companies.
At the same time, it strengthens investor protection
while widening the field of competence of the
fund management companies. When transposing
the UCITS III directives, Belgium modernized
its regulatory framework for UCIs. To that end,
it passed the Law of 20 July 2004, relating
to certain forms of collective management of
investment portfolios, and a Royal Decree of
4 March 2005, relating to certain public UCIs;
both the law and decree were published in the
official gazette on 9 March 2005.
The purpose of the EU Prospectus Directive is
to make it easier and less expensive for companies
to raise capital throughout the European Union,
and at the same time, to reinforce protection
for investors by guaranteeing that all prospectuses
provide clear and comprehensive information,
wherever in the European Union they are issued.
Although the directive was to enter into force
on July 1, Belgium has not yet implemented it.
However, Belgium's Banking, Finance and Insurance
Commission has indicated it acknowledges the
direct effect of the UCITS and prospectus directives
and will adapt its policy to the text of the
Prospectus Directive when dealing with new applications
for public offers of securities, or applications
for securities to be admitted to trading.
When they were first introduced, private PRICAFs
were expected to meet the requirements and expectations
of fund managers and investors -- namely, fiscal
transparency and the VAT exemption of management
fees and profit distribution. Moreover, they
compared quite favorably to similar vehicles
in Europe. Therefore, their lack of success
likely is attributable to limitations in the
rules for their establishment, which is what
Reynders is trying to address. Most of the modifications
proposed by Reynders are designed to make private
PRICAFs even more accessible.
The private PRICAF is a closed-end investment
fund for venture capital that offers investors
the benefit of limited liability, is limited
in time, and does not require a prior listing.
It is flexible and, most important, is transparent
for tax purposes.
It can be incorporated as a limited company
for a limited time (a maximum of 12 years) in
the form of a public limited company, a limited
partnership with shares, or a limited partnership.
Its object must be limited to investing in authorized
financial instruments issued by nonlisted companies.
The private PRICAF is set up with a number of
restrictions to ensure that it is a private
fund, so it does not have to get around rules
related to the public offering of securities.
At least 80 percent of the voting stock of the
private PRICAF must be held by private investors
(individuals or corporate entities), established
in Belgium or abroad, who undertake to invest
at least €250,000 in cash in their own
name. (That is the minimum necessary to get
around the rules related to the public offering
Other private PRICAFs can subscribe a maximum
of 20 percent of the stock of the fund. Moreover,
transfers of participations in a private PRICAF
are restricted, and investors can recover their
initial investments only by exiting at the end
of the duration of the PRICAF (at the latest,
12 years later). Reynders proposes to refer
to the definition of article 3 of the Prospectus
Directive to drastically reduce many of those
To prevent the use of the private PRICAF as
a holding company, each investor can hold between
4 percent and 16 percent of its voting stock.
And to ensure that the fiscal benefits of the
private PRICAF are not used for a family holding
or for a holding company for a multinational
group, the investors cannot be related either
as members of the same family or as companies
of the same group. Those limitations are too
restrictive and should be relaxed, according
Currently, the day-to-day management of the
private PRICAF must be conferred to a management
company that has been incorporated separately.
This is a restriction that Reynders proposes
to revoke, so that an individual can act as
manager of the fund.
The private PRICAF can invest only in the following
financial instruments issued by nonlisted Belgian
and non-Belgian companies:
shares and securities assimilated to
shares, bonds, and other debt instruments;
participations in other investment institutions
that have an investment policy that corresponds
with the object of the private PRICAF; and
any other securities that allow the holder
to acquire any of these securities by means
of subscription, purchase, or exchange.
To enable the private PRICAF to go into mezzanine
financing (a hybrid of debt and equity financing
generally used to finance the expansion of existing
companies), it is proposed that it also be allowed
to invest in simple loans issued by nonlisted
A private PRICAF does not need to be listed
to benefit from the tax incentives available
to investment funds in Belgium. As mentioned
earlier, the private PRICAF has been designed
as a private fund placing its shares with a
limited number of investors so that it does
not come under the control of the Banking, Finance
and Insurance Commission. That allows the private
PRICAF to save on annual administration fees.
Instead, the private PRICAF must be recognized
by and registered with the Ministry of Finance.
Because investors and management like to have
the certainty that their investment fund will
be recognized as a private PRICAF, Reynders
intends to recognize private PRICAF status before
incorporation of the company. Belgiums
private PRICAF is a flexible, tax-efficient,
and cost- effective vehicle for both Belgian
and foreign investors who seek to invest private
equity in Belgian and foreign companies. As
a closed- end investment company, the private
PRICAF enjoys the same favorable tax regime
as a listed collective investment company. That
means it is exempt from registration tax on
its share capital, is entitled to an exemption
from withholding tax on most types of investment
income received, and is eligible for the reduced
withholding tax rates provided for in Belgiums
The private PRICAF is subject to corporate income
tax at a rate of 33.99 percent. However, that
tax is based on a low lump sum basis (disallowed
expenses plus any abnormal or gratuitous advantages
received). Moreover, capital gains on participations
are, in principle, exempt from the corporate
income tax. When distributing its profits, the
private PRICAF must withhold tax at source,
except when it distributes the capital gains
realized on its participations.
Interested parties must submit their comments
by July 22. However, the proposed changes --
in the form of a draft Royal Decree to be signed
by the king -- are not expected to enter into
force before September.
The private PRICAF has the potential to become
a real investment vehicle in Europe, and the
proposed modifications can only make it more
attractive for private investors, pension funds,
and venture capital funds.