Would a private equity fund vehicle formed in your jurisdiction be subject to taxation there with respect to its income or gains? Would the fund be required to withhold taxes with respect to distributions to investors? Describe what conditions, if any, apply to a private equity fund to qualify for applicable tax exemptions.
The analysis of the tax features of Luxembourg private equity investment vehicles requires a schematic approach. By and large, the available investment vehicles can be divided into vehicles that are in principle (if they are considered opaque) subject to general taxation rules on the one hand (Soparfi, SICAR or RAIF SICAR, as referred to below) and vehicles that are generally exempt from tax on the other hand (SIF or the standard RAIF). Within each category, we furthermore need to distinguish between entities that are fiscally opaque (SARL, SA and SCA) and those that are fiscally transparent (eg, SCS, SCSp or FCP).Soparfi
A Soparfi, whether in the form of an SA, SARL or SCA, is an ordinary fully taxable commercial Luxembourg resident company subject to income taxation (namely, corporate income tax plus an employment fund surcharge and municipal business tax) on its worldwide income (combined rate for the city of Luxembourg in 2020 is 24.94 per cent), subject to specific domestic or treaty exemptions, and indirect taxation (eg, VAT). However, exemptions apply as regards income and capital gains derived from qualifying participations (the participation exemption).
A Soparfi is also subject to a 0.5 per cent net wealth tax on its net asset value as of 1 January of each year (0.05 per cent tax rate for net assets exceeding €500 million). Exemptions apply as regards, inter alia, qualifying participations. Soparfis are subject to a minimum net wealth tax ranging from €535 to €32,100 (depending on the size of their balance sheet). A Soparfi whose assets comprise at least 90 per cent of financial assets and which has a total balance sheet exceeding €350,000 is subject to a minimum net wealth tax €4,815.
Dividend distributions by a Soparfi are generally subject to Luxembourg dividend withholding tax at a rate of 15 per cent, although this rate may often be reduced to zero by the application of Luxembourg double tax treaties or the exemptions provided under Luxembourg tax law (notably, Luxembourg’s implementation of the Parent-Subsidiary Directive or the withholding tax exemption available for certain shareholders that are resident in a country with which Luxembourg has a tax treaty in force and are subject to a corporate income tax considered as comparable to the Luxembourg one).
Liquidation surpluses distributed by a Soparfi to its shareholders are not subject to withholding tax in Luxembourg. Capital gains realised by non-resident shareholders (who were not Luxembourg residents for more than 15 years in Luxembourg and then non-residents in Luxembourg for less than five years before the sale of the Luxembourg participation) are taxable only if they have held a significant shareholding (at least 10 per cent) in a Luxembourg company for less than six months.SICAR
The SICAR can, generally speaking, be described as a tax-neutral vehicle for private equity investments.Taxation of the SICAR - fiscally opaque
The SICAR regime for fiscally opaque entities (such as SA, SARL or SCA) follows the ordinary income tax regime of the Soparfi with a few risk capital-specific adjustments. The SICAR is thus also subject to corporate income taxes and to specific domestic or treaty exemptions, and should qualify as a resident company for domestic and Luxembourg tax-treaty purposes. However, such type of SICAR benefits from a specific, objective, unconditional risk capital exemption to the extent that income from securities (namely, bonds, shares, other transferable securities as well as negotiable instruments giving the right to acquire the aforementioned risk capital securities) as well as income derived from the transfer, contribution or liquidation thereof is exempt. Temporarily invested idle funds may also benefit from this exemption, provided that these funds are effectively invested in risk capital investments within a 12-month period.
All other income is fully subject to ordinary Luxembourg direct taxation rules.
Fiscally opaque SICARs are exempt from net wealth tax. However, they are subject to a minimum net wealth tax in the same way as Soparfis.Taxation of the SICAR - fiscally transparent
A SICAR formed as a fiscally transparent SCS allows for the replication of a common law-type limited partnership vehicle. Although the limited partnership has its own legal personality separate from that of its partners, it is itself not liable for direct taxation or net wealth tax in Luxembourg and cannot benefit from double tax treaties concluded by Luxembourg. The same applies to the SICAR formed as an SCSp with the difference that the SCSp has no legal personality of its own.Taxation of distributions by the SICAR
The SICAR regime distinguishes itself from the rules applicable to Soparfis in that it always permits fiscally neutral (namely, without source taxation) profit repatriations: neither dividends nor liquidation proceeds distributed by a SICAR to investors are subject to withholding tax.SIF
Generally speaking, the SIF is characterised by its tax neutrality:
- it is exempt from to tax on income or capital gains;
- it is also exempt from net wealth tax; and
- distributions (including dividends and liquidation surpluses) made by a SIF to investors are not subject to withholding tax in Luxembourg.
However, the SIF is subject to an annual subscription tax of 0.01 per cent. The taxable basis of the subscription tax is the aggregate net assets of the specialised investment fund as valued on the last day of each quarter. Certain money markets and pension funds or SIFs investing in other funds, which are already subject to subscription tax, are exempt from subscription tax.RAIF
RAIFs are also characterised by their tax neutrality. The default tax regime applicable to RAIFs mirrors the SIF regime. This means that the RAIF will only be subject, at fund level, to an annual subscription tax levied at a rate of 0.01 per cent of its net assets calculated on the last day of each quarter. Depending on the investment assets, some exemptions from subscription tax apply in order to avoid a duplication of this tax. Irrespective of the legal form chosen for the RAIF, it is wholly exempted from corporate income tax, municipal business tax and net wealth tax, and distributions of profits by the RAIF do not give rise to a withholding tax.
However, RAIFs whose constitutive documents provide that their sole object is the investment in risk capital assets (the RAIF SICAR) are taxed according to the same tax rules as those applicable to SICARs.
Under these SICAR-mirroring tax rules, a RAIF SICAR that takes a corporate legal form (like the SA, SARL or SCA) is fiscally opaque and is a normally taxable entity for corporate income tax purposes, but with an exemption for any profits and gains derived from securities (see above). Fiscally opaque RAIF SICARs are also exempt from net wealth tax but subject to a minimum net wealth tax (as SICARs).
Likewise, a RAIF SICAR that takes the form of a partnership (the SCS or SCSp) is tax transparent (see above).Local taxation of non-resident investors
Would non-resident investors in a private equity fund be subject to taxation or return-filing requirements in your jurisdiction?
The answers below are given for non-resident investors that do not have a permanent establishment or representative in Luxembourg to which their holding in the respective fund is attributedSoparfi
Unless a reduced rate under a double tax treaty or an exemption (either domestic or under a tax treaty) applies, dividends distributed by a Soparfi are subject to 15 per cent withholding tax. A non-resident investor is not subject to any tax reporting formality in this respect - it is the company that has to file a withholding tax return - unless the investor wants to effect any entitlement to a (partial or total) reimbursement of the withholding tax on dividends.
Non-resident investors are taxed in Luxembourg for the capital gains realised upon the alienation of their shares in a Soparfi only if the investor has not held the shares in the Soparfi for more than six months and disposes of a participation representing more than 10 per cent of the share capital of the Soparfi. In all other cases, the capital gain is not taxable unless the non-resident investor has not been Luxembourg-resident for more than 15 years in Luxembourg and then non-resident in Luxembourg for less than five years before the sale of the Luxembourg participation. Liquidation surpluses distributed by Soparfis are not subject to withholding tax in Luxembourg.
It is important to note that in most cases, if a double tax treaty concluded by Luxembourg is applicable, the non-resident investor could benefit from treaty protection (most of the double tax treaties concluded by Luxembourg stipulate that such capital gains are not taxable in Luxembourg, but in the country of residence of the foreign investor).SIF
As a general rule, non-resident investors in a SIF or RAIF are not subject to Luxembourg income tax unless they invest in an FCP, SIF or RAIF and derive capital gains taxable in Luxembourg (a rare scenario, as explained below).SIF and RAIF - fiscally transparent
Generally, non-resident investors are not taxed in Luxembourg on the income (dividends, liquidation surplus and capital gains) derived from a SIF incorporated under the form of an FCP, SCS or SCSp. However, if an FCP, SIF or RAIF holds a shareholding in a Soparfi, the non-resident investor would be deemed to hold directly the shares in the Soparfi owing to the tax transparency of the FCP, SIF or RAIF. In this case, the non-resident investor could be taxed on the capital gain realised on the alienation of its units only if the investor has not held the shares in the Soparfi for more than six months and has a participation representing more than 10 per cent of the share capital of the Soparfi via the fiscally transparent FCP, SIF or RAIF taxable in Luxembourg. It should be noted that such taxation could be mitigated if a double tax treaty concluded by Luxembourg (with the country of residence of the investor) was applicable and stipulated that such capital gain is not taxable in Luxembourg.SIF and RAIF - fiscally opaque
Distributions made by a fiscally opaque SIF or RAIF (including dividends and liquidation surpluses) are not subject to taxation in Luxembourg in the hands of a non-resident investor.
Non-resident investors are not taxed in Luxembourg for the capital gains realised upon the alienation of their shares in a fiscally opaque SIF or RAIF.SICAR and RAIF SICAR
Dividends and liquidation surpluses distributed by any type of SICAR or by a RAIF SICAR are not subject to Luxembourg taxation in the hands of non-resident investors (either fiscally opaque or transparent). The same rule applies for capital gains deriving from the sale of shares in the SICAR.Local tax authority ruling
Is it necessary or desirable to obtain a ruling from local tax authorities with respect to the tax treatment of a private equity fund vehicle formed in your jurisdiction? Are there any special tax rules relating to investors that are residents of your jurisdiction?
The tax exemption applicable to SIFs and RAIFs does not need to be confirmed by way of tax ruling. The same is generally true for SICARs. It may be desirable to obtain tax clearance from the tax authorities for the tax treatment of a Soparfi - whether the fund is a Soparfi itself of Soparfis are used by SIFs, RAIFs or SICAR as an investment vehicle - in order to get five years of certainty regarding certain tax matters. It should be noted that the tax authorities will charge an administrative fee ranging from €3,000 to €10,000 for the treatment of each tax ruling request. For ruling requests that meet the requirements (basically, a detailed description of the applicable facts and circumstances and a sufficiently detailed tax analysis), the responsible tax office will have to provide an answer. As of 1 January 2017, certain pieces of information on cross-border tax rulings and advanced pricing agreements have been subject to automatic and spontaneous exchange of information obligations with jurisdictions affected by the cross-border tax ruling or advanced pricing agreement. A ruling is in general valid for a period of at most five years.Organisational taxes
Must any significant organisational taxes be paid with respect to private equity funds organised in your jurisdiction?
RAIFs, SICARs, SIFs and Soparfis are subject to an annual fee due to the Chamber of Commerce. SICARs and SIFs, given that they are regulated vehicles and supervised by the CSSF, have to pay certain fees to the CSSF.Special tax considerations
Describe briefly what special tax considerations, if any, apply with respect to a private equity fund’s sponsor.
The initiators, to the extent that they are not residing in Luxembourg, of a RAIF, SICAR, SIF or Soparfi will generally be able to structure their management fees and any carried interest or incentive fee payments in a fiscally neutral manner in Luxembourg, most notably through the application of the VAT exemption for investment management services.Tax treaties
List any relevant tax treaties to which your jurisdiction is a party and how such treaties apply to the fund vehicle.
Luxembourg is currently party to 84 tax treaties covering most industrialised nations, according to data provided by the Luxembourg tax authorities, with some 18 additional treaties (including new treaties with countries having an existing treaty with Luxembourg) under negotiation or pending entry into force. Soparfis and fiscally opaque SICARs should be entitled to benefit from all the treaties currently in force. Insofar as SIFs are concerned, they might be able to do so for those countries for which the Luxembourg tax authorities state that investment companies with variable capital and investment companies with fixed capital can benefit from the respective tax treaty, which are the treaties with Andorra, Armenia, Austria, Azerbaijan, Bahrain, Barbados, Brunei, China, Croatia, the Czech Republic, Cyprus, Denmark, Estonia, Finland, France, Georgia, Germany, Guernsey, Hong Kong, Isle of Man, Indonesia, Ireland, Israel, Jersey, Kazakhstan, Kosovo, Laos, Liechtenstein, Macedonia, Malaysia, Malta, Moldova, Monaco, Morocco, Panama, Poland, Portugal, Qatar, Romania, San Marino, Saudi Arabia, Serbia, Seychelles, Singapore, Slovakia, Slovenia, Spain, Sri Lanka, Tajikistan, Taiwan, Thailand, Trinidad and Tobago, Tunisia, Turkey, United Arab Emirates, Uruguay, Uzbekistan and Vietnam. For Bulgaria, Greece, Italy and Korea, the applicability of the tax treaty is not clearly derived from its wording.
In June 2017, Luxembourg formally signed the OECD’s Multilateral Instrument (MLI) developed as part of BEPS Action 15. The MLI will implement in the tax treaties (between its signatories) certain recommendations arising from the BEPS project, for example, the prevention of treaty abuse and anti-hybrid rules. Luxembourg has not excluded any of its bilateral tax treaties from the scope of the MLI, but made a series of reservations regarding specific provisions. The Luxembourg parliament approved the ratification of the MLI on 7 March 2019. With respect to many double tax treaties, the MLI has been in force as of January 2020.Other significant tax issues
Are there any other significant tax issues relating to private equity funds organised in your jurisdiction?
To the extent that SICARs, SIFs or any kind of AIFs (including RAIFs) typically rely on the services of specialist investment managers or advisers, a specific VAT exemption applies to fund management services in accordance with article 44.1.d) of the Luxembourg VAT Law implementing article 135.1.g) of the VAT Directive 2006/112/EU. This exemption also covers some of the administrative services generally provided to funds. The case law of the Court of Justice of the European Union confirmed that fund investment advisory services can be covered by the exemption, even when delegated to a third party, and irrespective of whether the fund investment adviser has a power of decision for the investment fund.
Still based on the EU case law, funds benefiting from the VAT exemption for fund management services qualify as VAT taxable persons. Although this does not per se trigger an obligation for the SICARs, SIFs, RAIFs or other AIFs to register for VAT, the latter may have to do so, should they receive VAT-taxable services from suppliers located outside Luxembourg. This is often the case, as the investment funds generally have to reimburse different parties for specific expenses.
SICARs, SIFs, RAIFs and other AIFs are generally not able to recover VAT incurred on their costs. However, thanks to the broad application of the VAT exemption of article 44.1.d) of the Luxembourg VAT Law, the VAT leakage is in practice limited to the VAT due on services such as custodian notary, auditor or lawyer services. Moreover, the Luxembourg VAT rate is the lowest in the EU (17 per cent as of 1 January 2015, compared with an average of 21 per cent in the EU (20 per cent in the UK and 23 per cent in Ireland)).
In 2018, Luxembourg implemented the VAT grouping mechanism, in order to replace the no-longer available cost-sharing agreements. The VAT grouping mechanism allows for savings of VAT costs and may therefore be beneficial for Luxembourg private equity structures.