The Luxembourg tax authorities have confirmed, by means of the long-expected Circular Letter L.I.R. nº 14/4 (the “Circular”), the treatment of tax transparent Luxembourg limited partnerships in the form of asociété en commandite simple (SCS) or société en commandite spéciale (SCSp) (each a “Partnership”) in which the general partner (in the form of a capital company) does not own an interest of 5% or more in the Partnership.
It states that those Partnerships which qualify as alternative investment funds (“AIFs”) under the Luxembourg law of 12 July 2013 on alternative investment fund managers (the “AIFM Law”) are never considered as carrying on a business activity in Luxembourg and are therefore not subject to income taxes levied in Luxembourg. The Circular further states that those Partnerships which are not AIFs as defined in the AIFM Law but which are subject to a specific regulatory regime in Luxembourg (i.e. SIFs, SICARs and Part II UCIs) and those foreign alternative investment funds managed by Luxembourg-based AIFM are, on the same condition regarding the general partner’s interest in the relevant partnership, not subject to Luxembourg income taxes either (albeit for different reasons). Finally, with respect to Partnerships which are not “alternative investment funds” under the AIFM Law, which are not subject to a Luxembourg regulatory regime and in which the general partner does not hold an interest of 5% or more of the Partnership, the Circular sets out a series of tests and examples, including published case law, in order to determine whether the activity of the Partnership is deemed to be a commercial activity.
The Circular has been widely welcomed by the marketplace as it provides legal certainty (and broadly avoids the need for confirmatory rulings in relation to the tax treatment of Luxembourg limited partnerships) as it:
Confirms the tax treatment of Luxembourg limited partnerships which qualify as AIFs.
- Confirms the tax treatment of those Partnerships which are subject to Luxembourg regulatory regimes.
- Confirms the tax treatment of those foreign AIFs which are managed by Luxembourg regulated alternative investment fund managers.
- Provides Partnerships which are not AIFs and which are not regulated under a specific regulatory regime with the base information which allows them (and their advisors) to conduct an analysis to determine whether or not their activity could lead to taxation in Luxembourg.