Private equity funds provide investors with unique investment alternatives. However, before investing, it is important to understand more about what private equity funds are, the structure of the fund, and their benefits and shortcomings. In this Portugal private equity funds article, we’ll provide you with everything you need to know on the topic, including the amount of time and money that will be needed to contribute to the funds, management and performance fees and responsibilities, plus much more.
In this Portugal private equity funds article, we’ll delve into the following:
- What is a private equity fund?
- Portugal private equity funds
- Differences between private equity and venture capital
- Portugal Golden Visa investment funds
- Benefits of investment funds
- Plus much more!
What is a private equity fund?
So, first things first, what is a private equity fund? Private equity funds are private closed-end funds. Their capital is not listed on a public exchange and investors, high net-worth individuals, and a variety of institutions can invest directly into the fund and get equity ownership in firms through the funds.
When the private equity fund reaches a certain level of commitment, then it is normally closed to additional investments. In the bullet points below we’ll inform you of some of the most important things to know about private equity funds so that you are ready to find the best private equity fund for you.
- Private equity funds are private, closed-end funds that are not traded on stock exchanges.
- Both management and performance fees are included in the fees of the private equity fund.
- The two types of private equity funds are general partners and limited partners.
- The limited partnership agreement establishes the amount of risk that each party carries and they also specify the lifespan of the fund.
- Limited partners are responsible for the amount that they invest.
- General partners are entirely liable to the market.
Portugal private equity funds
Portugal private equity funds or PE funds are managed by Portuguese-based management firms, who dominate the Portuguese private equity sector in the country. Nonetheless, the thriving real estate market, particularly in Lisbon and the second-largest city, Porto, alongside the tourist boom and some other factors, have been catching the attention of yield-seeking international private equity fund managers.
Another incentive was that the government has changed the criteria for granting “Golden Visas” to €350,000, again increasing interest. While the required investment increased to €500,000 on 1 January 2022, new types of investors have prompted innovation with fund structuring.
Fundraising for a private enquiry funds in Portugal are on the up after a couple of slow years. The following factors could have an impact on the increased interest:
- The Golden Visa program
- The booming tourist sector
- The overall growth of the Portuguese economy
Portugal private equity funds usually obtain their funding through investment banks in Portugal. Retail investors from outside of the European Union or the European Economic Area (EEA) who subscribe to private equity funds for a Portugal Golden Visa are another major funding source.
Portugal private equity funds are exempt from taxes. The tax framework for participants in a private equity fund will depend on whether they are a tax resident or entity, non-resident individuals, or non-resident entities.
Tax residents individuals that invest in private equity funds
Tax resident individuals that invest in private equity funds are usually not liable to pay the following:
- 10% final withholding tax rate on income
- 10% tax rate on capital gains
Non-resident individuals that invest in private equity funds
Non-resident individuals that invest in private equity funds:
- Tax exemption on income
- Tax exemption on capital gains
While it can vary considerably from fund to fund, the typical fund duration is normally for a ten-year period. It is also common to extend the initial duration of private equity funds by one to two years. Typically, the investment period is about half of the funds initial duration.
The objectives of private equity funds are usually the following:
- Growth transactions in small and medium-sized businesses with the aim to scale up or internationalization.
- Funding for starts-ups at any stage.
- Investment in real estate properties through the use of special purpose vehicles (SPVs).
Under Portuguese law, private equity managers must obtain permission from the securities market regulator (CMVM) before they are able to operate.
Private equity fund management can be carried out in the following ways:
- By private equity companies.
- Through private equity fund management firms that are AIFM Directive compliant.
- By regional development companies.
Note that investors do not need any special authorization or license to subscribe to units in a private equity fund.
Private equity funds and companies are subject to regulations under Portuguese law. The Portuguese Securities Markert Commission (CMVM), as previously mentioned, also supervises the fund. Private equity vehicles in Portugal are subject to the Portuguese Securities Code’s general limits on the marketing and advertisement of securities.
Differences between private equity and venture capital
Private equity and venture capital (VCs) invest in companies of various types and sizes, from startups to SMEs. They both commit varying amounts of capital and can differ in the percentages of ownership in the companies that they invest in.
Funds dedicated to venture capital investment are frequently smaller and state or public investors are more common. Venture capital investments are typically made with equity and quasi-equity convertible instruments, as opposed to debt, which is more common in buyout and growth investments of start-up companies.
Portugal Golden Visa Investment Funds
Private equity funds and venture capital funds are quickly gaining ground to become one of the most popular ways for individuals seeking to obtain a Portugal Golden Visa. For a minimum investment of €500,000 investors qualify for a Portugal Golden Visa.
Benefits of Investment Funds
The benefits of private equity funds are the following:
Higher potential yield
Capital gains yield can be significantly greater than other Portugal Golden Visa investment options, depending on your investment profile and the policy and targeted risk/return of the fund that you opt for. Researching the best private equity fund for you will help to secure a high potential yield.
Lower Costs Than Real Estate Acquisition
Buying real estate assets involves paying a tax of roughly 7% on the transaction amount. Also, Portugal private equity funds do not require you to hire a property management company to manage your property, so there are no costs on this front.
Funds Are Strictly Regulated
As mentioned previously private equity funds in Portugal are well regulated. The Portuguese Securities Market Commission regulates and supervises funds that are eligible for the Portugal Golden Visa program.
Working With Experts
Each private equity fund is tailored toward the client’s needs, and each has its own objectives and risk tolerances. Fund managers are professionals whose full-time responsibility and duty is to ensure that the private equity fund performs well.
Any investment, including an investment into one of the Portuguese Golden Visa funds, carries some level of risk. You can analyze this risk on your own, but getting advice from professionals is a good idea, particularly if you do not speak Portuguese and are unfamiliar with Portuguese bureaucracy.
Feel free to get in touch with us so that we can help discuss your options and answer any pressing questions that you may have.
For some extra information you can check out our following articles:
Frequently asked questions about Portugal private equity funds:
Are private equity funds open ended?
Private equity funds are private, closed-end funds that are not traded on stock exchanges.
Why are private equity funds not perpetual?
Private equity funds typically exit each deal within a set time period because of the incentive structure.
What are the types of private equity funds?
The two types of private equity funds are general partners and limited partners. The limited partnership agreement establishes the amount of risk that each party carries and they also specify the lifespan of the fund. Limited partners are also responsible for the amount that they invest. General partners are entirely liable to the market.
What are the benefits of investment funds?
Two of the main benefits of Portugal private equity funds are higher potential yields than other investment routes and the funds are strictly regulated.
Who is considered a U.S. Person?
According to the Internal Revenue Service or IRS, the term “United States Person” means:
- A citizen or resident of the United States
- A U.S. based partnership
- A U.S. based corporation
- Any U.S. estate other than a foreign estate
- Any U.S. based trust if:
- A court in the USA is able to display primary supervision over the trust’s administration, and
- One or more US persons have the authority to control the substantial decision making processes of the trust
- Any other person that is not a foreign person.
What is a PFIC (Passive Foreign Investment Company or Qualifying Electing Fund)?
The Passive Foreign Investment Company (PFIC) rules are designed to prevent United States Persons from deferring tax on passive income earned through non- U.S. corporations. Also PFIC rules are in place to prevent converting this income into capital gains that will then be taxed at preferential rates.
A foreign corporation is a PFIC if it meets either:
- Passive Income Test – a foreign corporation is a PFIC if greater than or equal to 75% of its gross income is passive income, for example, dividends, payment in lieu of dividends, interest, rents, royalties, annuities.
- Passive Asset Test – a foreign corporation is a PFIC if the average annual percentage of the fair market value of all passive income producing assets is greater than or equal to 50% of the value of the entity’s assets. This is determined on a quarterly basis, And, it is considered passive if it generates passive income or is reasonably expected to generate passive income in the foreseeable future.
Almost all foreign mutual funds are PFICs. In other cases possible examples of PFICs include:
- Passive investments in offshore Mutual Funds, Hedge Funds, including Venture Capital Funds, Stocks, Annuities, or Income Producing Property;
- Foreign Brokerage Accounts with Mutual Funds, Bond Funds, Equity Funds;
- Foreign Retirement Accounts;
- Foreign Cash Value Life Insurance Policies.
What is Form 8621?
Form 8621 is the form that a U.S. person must file if they are a direct or indirect shareholder of a passive foreign investment company (PFIC) under some specific criteria.
Who must file Form 8621?
According to the IRS, any U.S. person that is a direct or indirect shareholder of a “PFIC” must file Form 8621 for each tax year if they:
- Receive certain direct/ indirect distributions from a Passive Foreign Investment Company or Qualifying Electing Fund (PFIC).
- Recognize a gain on a direct/indirect disposition of PFIC stock.
- Are reporting information with regards to section 1296 mark-to-market election or a QEF.
- In Part II of the form are making an election reportable.
- Will need to file an annual report pursuant to section 1298(f).
Each PFIC must have a separate Form 8621 in which stock is held. All interests in PFIC’s must be reported annually.
When must Form 8621 be filed?
The investor must calculate annually their pro rate share of the earnings of their investment, regardless of having received or not any distribution, as it will be considered taxable income for that year.
By doing this, you will maintain the beneficial capital gain rate, otherwise, you would be subject to a considerable higher capital gain tax rate.
Nonetheless, one must be aware that you can only make this selection in the first year of holding. It is highly complex to retroactively make a QEF election.
Portuguese Investment Funds and PFIC
Most Portuguese Investment funds have until the end of April to report accounts, whilst U.S. tax filling is due until the 15th of April.
This means that, due to the schedule difference between the date by which investment funds in Portugal issue their reporting and U.S’ date of submission of tax return, US investors may consider filing for a tax extension deadline for October 15th in order to secure enough time to be able to appropriately file their taxes.
Any information contained in this communication is not intended as, or to be construed as tax advice. We advise our clients and readers to seek professional tax consultancy from a trusted partner in their jurisdiction.