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Luxembourg: Luxembourg tax authorities clarify the tax treatment of limited partnerships

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Samantha Schmitz-Merle

The Luxembourg tax authorities have recently released a Circular which provides guidance on the tax treatment of income derived by Luxembourg limited partnerships (LP). The Circular follows the changes introduced by the Alternative Investment Fund Managers (AIFM) Law of July 12 2013 which implemented the AIFM Directive (AIFMD) into Luxembourg Law, created the special limited partnership (société en commandite spéciale, SCSp), and changed both the corporate and tax rules applicable to the standard Limited Partnership (société en commandite simple, SCS).

Tax treatment of Luxembourg LPs

While SCS and SCSp are tax transparent entities and therefore not subject to corporate income tax (CIT) in Luxembourg, their business may be considered as commercial and thus subject to Luxembourg municipal business tax (MBT, at a rate of 6.75% in Luxembourg-city) if they effectively perform a commercial activity or if their activity is commercially tainted (that is, if the general partner of the SCS or SCSp is a joint stock company which owns a partnership interest of at least 5%).

In 2013, the AIFM Law relaxed the conditions of application of the commercial tainting of Luxembourg LPs. Before 2013, no minimum partnership interest was required so that the presence of a general partner set up as joint-stock company and holding one single share was sufficient to make the income of the SCS become commercial.

The change introduced by the AIFM Law was welcomed by the alternative investment fund industry as it made private equity funds, hedge funds and real estate funds set up as a Luxembourg LP more attractive, reducing the situations in which their income would be subject to MBT. Still, as their income could become subject to MBT if a commercial activity is effectively performed, it remained to be clarified whether this activity had to be considered as commercial activity or whether it had to be considered as a private wealth management activity not subject to MBT. This is what the Circular of the tax authorities clarifies.

Application to AIFs set up as Luxembourg LPs

The Circular explains, referring to Luxembourg and German case-law, the criteria to be used to make a distinction between a commercial activity and private wealth management. The Circular says that the question whether a SCS or SCSp performs (or not) a commercial activity has to be analysed on a case-by-case basis, based on the specific investment strategy of the fund. The size of the wealth managed by the fund and the fact that certain assets have only to be held during a rather short period of time before being sold are relevant criteria, but not the only criteria to take into account to assess whether the activity performed qualifies as a commercial activity or not within the meaning of the Luxembourg tax law.

As far as regulated AIFs, which are set up as a SICAR (investment company in risk capital) or as a SIF (specialised investment fund) or as a SICAV/SICAF within the meaning of the Law of December 17 2010 on undertakings for collective investment (UCI), are concerned, they are never subject to MBT given that their specific tax regime provides such exemption. The same applies to AIFs established outside of Luxembourg, which, based on the AIFM Law are not subject to Luxembourg CIT, MBT or net wealth tax.

As far as other AIFs are concerned, which fall within the meaning of the AIFM Law but which are not regulated under the SICAR, SIF or UCI Law, the tax authorities clarify that given the investment requirements they are subject to and the guidelines issued by the European Security and Market Authority, their activity is by definition not a commercial activity. It means that, except in the case of a general partner holding a minimum 5% partnership interest in the AIF, an AIF within the meaning of the AIFM Law is never subject to Luxembourg MBT, meaning the setting up of this type of investment vehicle is tax neutral.

Samantha Schmitz-Merle (samantha.merle@atoz.lu)

Atoz – Taxand Luxembourg

Tel: +352 26 940 235

Website: www.atoz.lu

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