A limited partnership for collective investment (LPCI) is a Swiss collective investment scheme which is suitable for investments in real estate and infrastructure assets. After its introduction into Swiss law on 1 January 2007 it was actually used for some real estate projects to begin with, but at times it hardly ever came into use for such projects. With the adjustments made to the collective investment law on 1 January 2020, LPCIs could now become more attractive for investments in real estate and infrastructure assets.
Investment vehicle for construction, real estate and infrastructure assets
An LPCI is a closed-end, FINMA-regulated investment vehicle which enables investments in construction, real estate and infrastructure assets. Closed-end means that investors do not have the right to redeem their shares for the net asset value at any time. Meanwhile the duration of an LPCI has to be limited – it usually has a fixed duration with various options for extension. An LPCI comprises a Swiss corporation as the general partner and the investors as the limited partners. The general partner is responsible for managing the LPCI and basically bears unlimited liability. On the other hand, the limited partners or investors have a largely passive role. Their liability is limited to their total contribution. Unlike the more common real estate fund, the LPCI is subject to very few investment restrictions. In particular, there are no diversification requirements.
If the investment decisions are not delegated, the general partner makes such decisions itself. Nevertheless, the general partner is not subject to a separate licence requirement under the Financial Institutions Act (FinIA). So, for a Swiss start-up an LPCI can be beneficial compared to a foreign collective investment scheme. If it were to opt for a foreign collective investment scheme, with the delegation of investment decisions to a Swiss delegatee, the latter would require a licence under the FinIA, irrespective of the volume of the assets under management and the regulation of the vehicle abroad.
From a tax point of view, an LPCI is treated the same way as the open-ended collective investment schemes (contractual investment funds and SICAVs). This means that the LPCI is basically fiscally transparent and profit is not taxed at LPCI level. Profit and earnings are attributed directly to the investors who must pay tax on them (no double taxation). But, if the LPCI has direct ownership of property, its earnings and profit from this property ownership are subject to corporate income tax, although at a reduced rate of 4.25%. In the event of dividend payments to Swiss investors, the earnings and profit from direct property ownership taxed at LPCI level are no longer taxable for the investors.
Changes as of 1 January 2020
With the entry into force of the Financial Institutions Act (FinIA) and the Financial Services Act (FinSA), various amendments have also been made to the Collective Investment Schemes Act (CISA) and the Collective Investment Schemes Ordinance (CISO). Most of these amendments are directly connected to the FinIA and the FinSA. Some of the changes affecting LPCIs on the other hand have no direct relation to the FinIA and FinSA, and have so far been given little attention:
- Investments in real estate and infrastructure
Up to now, an LPCI was permitted to invest in construction, real estate and infrastructure projects in particular. Due to the nature of the LPCI as a closed-end investment vehicle with limited duration, it could include only real estate and infrastructure assets that were developed and liquidated following completion, i.e. usually sold (project nature). The holding of real estate, as is usually intended with a real estate fund, was not possible without (further) development intention.
Art. 121 (1) (d) of the CISO now also declares other investments, particularly investments in real estate and infrastructure, to be permissible. And so it will probably no longer be necessary for the assets to be of a project nature. Nevertheless, it should be noted that an LPCI is still a closed-end collective investment scheme. As compensation for the lack of permission to redeem shares for the net asset value, a limited duration is defined as a matter of principle (with corresponding options for extension). - Acquisition and assignment of real estate and infrastructure assets
As of 1 March 2013 various provisions were included in the CISO which were intended to prevent construction companies from forming an LPCI for the sole purpose of financing their own construction and real estate projects via the LPCI, instead of implementing profitable construction and real estate projects for the LPCI’s investors. One of these provisions stipulates that the general partner, the persons responsible for management and administration and related natural persons and legal entities as well as the investors may neither acquire real estate and infrastructure assets from the LPCI nor assign such assets to it.
The ban on the acquisition and assignment of real estate and infrastructure assets was abolished on 1 January 2020. Acquisition or assignment is now permitted if the market conformity of the purchase and selling price of the real estate and infrastructure assets and the transaction costs is confirmed by an independent evaluation expert and the partners’ meeting has approved the transaction (Art. 121 (4) CISO). On the other hand, the financing of projects that are directly or indirectly associated with the general partner, the persons responsible for management and administration and the investors remains prohibited (Art. 121 (3) CISO).
The lifting of the ban on acquisition and assignment from and to related parties now permits, for example, completed construction and real estate projects of an LPCI to be assigned to another investment vehicle (e.g. an investment fund) as a long-term investment. - One general partner for several LPCIs
Until now, a general partner corporation could only be the general partner of one single LPCI. The law now permits a general partner corporation to take on the role of general partner for several LPCIs, provided that it is licensed as a manager of collective assets (Art. 98 (2) CISA). This amendment means that the LPCI can be scaled better depending on its structure. For example, it is possible to set up one initial LPCI. This requires a product approval and financial institution licence from FINMA for the LPCI, but no separate licence under the FinIA for the general partner corporation. If additional LPCIs are set up at a later date, there is the option to either set up a new general partner corporation for each additional LPCI as before, or to obtain a licence as a manager of collective assets for the general partner and to use this regulated financial institution as the general partner for all LPCIs. The latter has the advantage that the internal organisation of the LPCIs does not need to be mirrored multiple times.
To sum up, LPCIs are more attractive due to the amendments that came into force on 1 January 2020 and taking into account the changes introduced with the FinIA, and for this reason should be increasingly considered as a possible option when structuring collective investment schemes in the real estate and infrastructure sector.
We will gladly help you evaluate the structuring options for collective investment schemes which invest in real estate and infrastructure assets, from both a regulatory and a taxation point of view.
