Following the submission to the Luxembourg Parliament of the Bill (Bill of law n° 6471) implementing the alternative investments fund managers’ directive 2011/61/EU (AIFMD) into national law in August, this alert focuses on this supplemental piece of regulation intended to strengthen the attractiveness of Luxembourg as an alternative fund centre through (i) the creation of a new vehicle based on the common limited partnership called the “Specialised Limited Partnership” (Société en Commandite Spéciale - SLP), and (ii) the overhaul of the tax regime of carried interest which will impact fund remuneration policies, particularly at the level of the alternative investment funds employees.
A new Limited Partnership regime
The Bill introduces a PE/VC well-designed legal form of company available as investment vehicle, the SLP, which is already regarded as one of the three core innovations of the Bill.
The SLP is created to address the expectations of alternative fund managers who are looking for structures similar to the Anglo-Saxon type limited partnership structures and would be available both for regulated funds (AIFMD compliant or not) and non-regulated entities.
The SLP is a partnership formed by one or more general partners (GP) with one or more limited partners (LP). The SLP has no legal personality, (it does not constitute a legal person separated from its partners) and the liability of the LPs is limited to their contribution. It distinguishes from other available company types by its great flexibility which allows fund managers to customise their vehicle to their very specific needs.
The rules binding the partners of the SLP will have to be laid down under a limited partnership agreement (LPA). Only a few provisions are mandatory (identify the partnership estate and the partners via a non-public partnership register) while all other rules, notably profit sharing rules, contribution/redemption process and governance (appointment of the manager), will be freely determined by the partners.
From a Luxembourg tax perspective, another interesting provision of the Bill is that the SLP will be regarded as fully tax transparent, thanks to amendments of existing provisions under the Luxembourg income tax law (LITL) that will offer more flexibility regarding the potential application of the Luxembourg “tainting theory.” Indeed, with the former tax provision of LITL, the SLP would have been considered as tax transparent for Corporate Income Tax (CIT) and Net Worth Tax (NWT) purposes, but would have still been potentially subject to Municipal Business Tax (MBT) because of the Luxembourg tainting theory. Under this tainting theory, if a Luxembourg share capital company (S.à r.l., S.A. or S.C.A.) acted as GP of the SLP, the said SLP would have been deemed to realise commercial profit due to the commercial form of the GP tainting the nature of the SLP's profits regardless of the SLP's actual activities. Such provision would result in a situation where the SLP would be subject to MBT at a rate of 6.32 percent (for Luxembourg City and MBT being tax deductible for partnerships). The new provision under the Bill will therefore limit the scope of this tainting theory but to the extent that:
- the SLP would have a Luxembourg corporate GP owning less than 5 percent of the partnership interests in the SLP; and
- the SLP (except for the SICAR taking the form of an SLP) does not actually carry out an activity of a commercial nature (i.e., active trading) that should not be the case for most AIFs.
The Bill also introduces a new rule under which an AIF established outside Luxembourg and having its effective place of management or central administration in Luxembourg will be explicitly exempt from Luxembourg CIT, MBT and NWT.
Regarding VAT, the Bill extends the scope of the vehicles that are eligible to the exemption applicable to management services. According to the Bill, article 44, 1, d) of the Luxembourg VAT law which contains the abovementioned VAT exemption, will also apply to AIFs as defined by the Bill, notably AIFs organised as an SLP.
The Bill will also improve the existing Sociéte en commandite Simple, i.e., common limited partnership under a corporate form (CLP) where (a) the creativity of the LPA will be unlimited as regards the profit and loss sharing rules, (b) the voting powers which will no longer need to be commensurate with the number of shares, and (c) the identity of the limited partners will no longer need to be published.
The new tax regime for Carried Interests
The Bill introduces a beneficial temporary special regime of taxation of carried interests income realised by individuals who are AIF employees or employees of management companies of AIFs (AIF employees), being defined as employees performing management functions in the investment vehicles.
Said carried interests’ income derived by the employees should be subject to a maximum flat rate of around 10 percent (i.e., 1/4t of the average rate of taxation) under the below cumulative conditions:
- AIF employees should transfer their residence in the same year the law enters into force or within the succeeding five years following the implementation of the law.
- AIF employees should neither have been resident in Luxembourg nor subject to taxation of professional income in Luxembourg as non-resident taxpayers within the five years preceding the law's entry into force.
- AIF employees should not have benefitted from advance payments of their carried interests.
- Evidence that the other investors in the AIFs have been able to recover their initial investments in the AIF would need to be provided.
The Bill also proposes that AIF employees could only enjoy this beneficial special regime of taxation for a maximum period of 11 years starting on the day of assumption of duties in Luxembourg.
In addition, the Bill also foresees the tax regime applicable to capital gains derived from the sale of investments in an SLP (i.e., shares or equivalent) by AIF employees. Capital gains derived from the sale or redemption of their shares/units in an SLP by AIF employees are not taxable to the extent that said investment has been held for more than six months and that said investment does not qualify as a substantial participation (i.e., not exceeding 10 percent of the partnership interest at any time during a five-year period preceding the sale or redemption of the shares or units). In a situation where AIF employees would derive capital gains on a substantial participation after a six-month holding period, then said capital gains would be subject to half of the average rate (i.e., a maximum of around 20 percent).
A new depositary category created for regulated private equity funds
A brand-new category of depositary would be created for the safekeeping of close-ended SIFs, SICARs and more generally AIF (as defined under AIFMD) assets “other than financial instruments (e.g., private equity-like or real estate assets)".
This new depositary PFS will be exempted from the need of applying under a credit institution or a “MiFID-investment firm” status, and hence should benefit from a lighter regulatory regime.
The funds authorised to use such a category of depositary must fulfill the cumulative conditions listed below:
- Redemption rights cannot be exercised during a period of five years from the date of the initial investment.
- According to their investment policy, either they generally do not invest in assets subject to custody or invest in issuers of non-listed companies to acquire a controlling stake over said companies.