A new hobby horse
The Luxembourg limited partnership regime is being modernised to become more attractive for private equity, venture capital and real estate transactions. The bill of law which implements Directive 2011/61/ EU on Alternative Investment Fund (AIF) Managers into Luxembourg domestic law is about to be adopted. Hence, the Luxembourg authorities are killing two birds with one stone, seizing the opportunity to introduce special limited partnership (société en commandite spéciale, SCSp or SLP), which can be set up as regulated or unregulated vehicls. The SLPs have no reason to envy the legal framework of the UK limited partnership (UKLP), as both companies are like two peas in a pod.
An SLP is established by a contract – or ‘partnership agreement’ – between at least one general partner who is liable for the SLP’s obligations on an unlimited basis, and another or more limited partners whose liability is limited to their contribution. As with a UKLP, there is no upper limit on the number of partners. A partner can be a limited and general partner at the same time. But unlike with UKLPs, in SLPs the limited partners can also make contributions in industry.
SLPs do not have separate legal entities for their partners, allowing a high level of flexibility when structuring the partnership agreement. For example, the partnership agreement can provide an exception from the basic Luxembourg ‘one share one vote’ principle. In addition, the bill does not provide a prohibition on return of capital. Capital returned to partners by way of distribution of dividends or reimbursement of equity interests cannot be recalled, which is not the case with the limited partners. Except for some public rules, everything may be governed freely in accordance with the partnership agreement as distribution of profits or clawbacks without any restrictions.
The SLP ensures confidentiality regarding the identity of the limited partners, and the partnership agreement must not be fully published in the official Luxembourg gazette, whereas the UKLP registration involves giving full names of each partner with separate lists for general and limited partners.
Basically, the management of a limited partnership is entrusted to one or more general partners who can be authorised to delegate its powers. If the limited partners participate in the management other than under the form of internal management’s acts, the latter forfeit their limited liability. Defining the border between the acts of internal and external management is sometimes sensitive. Hence, the Luxembourg bill includes a non-exhaustive and vast list of acts in order to ensure a high degree of legal certainty to the limited partners.
Favourable tax treatment
The SLP is similar to the tax-transparent companies located in England, Jersey, Guernsey, the Cayman Islands and the State of Delaware. An SLP used as a regulated vehicle is not subject to corporate income tax, municipal business tax (MBT) and wealth tax. An SLP used as an unregulated vehicle is fully tax transparent without giving rise to any Luxembourg tax exposure for its foreign limited partners and is subject to MBT in limited cases only. Under the proposal’s provisions, it should be easy to achieve exemptions for SLPs from any Luxembourg income taxes. SLPs are allowed to obtain advance tax clearance from the tax authorities on a case-by-case basis like the so called “Soparfi” for instance. The bill also gives a favourable tax treatment to the carried interest regime. Profits paid to employees of a company managing an AIF and gains realised by them on the sale of equity interests will be subject to a reduced rate of approximately 10 per cent under conditions. Finally, the management fees provided to a regulated or unregulated SLP will be exempt from Luxembourg VAT. Also, investment advisory services have always been regarded in Luxembourg as part of management services, which is not the case for some EU member states. Luxembourg is the European leader regarding the regulated investment funds.
The government hopes that its new limited partnership will bolster its position in the private equity industry. Luxembourg plans now more than ever to make ‘onshore’ investment funds its hobby horse.