On 22nd August, the Luxembourg Tax Authorities have released a circular, regarding the interpretation and concepts of the ‘Collective Investment Vehicle’ (“CIV”) definition under Article 168quater (2) of the Luxembourg income tax law (“LITL”).
Although the current market practice already seems to reflect the authorities' point of view, this circular is to be warmly welcomed not just because it provides useful guidance on the specific carve-out under the "reverse hybrid rules", but also because it supports the authorities' ongoing efforts to clarify increasingly complex tax rules.
As a reminder, Article 168quater (2) LITL defines2 a CIV as an investment fund or vehicle that is widely held, holds a diversified portfolio of securities and is subject to investor-protection regulation in the country in which it is established. Luxembourg entities which do not meet such definition and fall in scope of the so-called “reverse hybrid rules” should become subject to corporate income tax.
The circular outlines that the CIV concept includes Luxembourg-based Undertakings for Collective Investment (UCI), Specialized Investment Funds (SIF), and Reserved Alternative Investment Funds (RAIF).
For the other investment entities or funds that need to assess whether they qualify as CIV or not, the circular details the interpretation of the three cumulative conditions to be met:
Widely held:
This condition targets entities whose shares or units are marketed to a diverse group of unrelated investors. The circular usefully confirms that in the case of a master-feeder structure, the feeder vehicle can be looked through to assess the widely held criterion.
This criterion should be assessed on a factual and intentional basis. This means that the presence of a limited number of investors should not automatically disqualify an entity from fulfilling this requirement. For instance, this could be the case when the widely held condition is assessed during the launch or liquidation phases. For the launch phase, the circular allows a period of 36 months from the date of approval or incorporation of the investment entity to fulfill the widely held criterion.
The circular details cases in which two investors must be considered ‘related’, notably in the presence of a direct or indirect 50% ownership threshold, when they are part of the same family, when they control each other or are under the common control of the same individuals or entities.
Generally, the widely held criterion is deemed to be met if no individual holds or controls directly or indirectly more than 25% of the capital or voting rights of the entity, or if such an individual does not control the entity by any other means.
Diversified portfolio of securities
For this purpose, the definition of ‘securities’ should be understood in the broadest sense to include: shares and other similar securities giving or potentially giving access to the capital of a legal entity, beneficiary shares, bonds and other receivables, units in collective investment undertakings or funds, deposits with credit institutions and derivative financial instruments (provided that the underlying asset of such derivatives consists of securities).
As for the ‘diversification’, the circular refers to the investment policy of the Luxembourg entity and to its direct and indirect market risk exposure. It further clarifies that the diversification criterion is not met if it does not comply with the diversification requirement outlined in the SIF law, which permits a maximum investment of 30% in the securities of a single issuer (except if an adequate justification can be provided to exceed this threshold).
Investor protection:
Based on the circular, this condition may equally be fulfilled by entities supervised by the Commission for the Supervision of the Financial Sector (CSSF) or alternative investment funds (AIF) managed by an AIFM duly approved in compliance with the AIFMD.
Through the new circular, the approach of the Luxembourg tax authorities on the CIV concept has been clarified to allow economic criteria and circumstances to be factored into the assessment of the requirements of Article 168quater (2) LITL.
KPMG Luxembourg’s dedicated tax professionals can help you in assessing any potential impacts of this new guidance on your organization.
Footnotes
1. Circulaire du directeur des contributions L.I.R. n° 168quater/2 du 12 août 2025
2. Article 168quater (2) LITL : « […] Aux fins du présent article, on entend par « organisme de placement collectif », un organisme ou fonds de placement à participation large, doté d’un portefeuille de titres diversifié et soumis aux règles de protection des investisseurs dans l’État où il est établi. »
