The Luxembourg Tax Authorities issued on 9 January 2015 a Circular Letter n°14/4 which provides guidance on the tax treatment of limited partnerships used as investments vehicles and in particular for limited partnerships set-up as alternative investment funds (AIFs) which encompass private equity, real estate, infrastructure and hedge funds vehicles.
As a reminder, Luxembourg has transposed the Alternative Investment Fund Management Directive (“AIFMD”) in July 2013 and took at this occasion the opportunity to completely modernize the law regarding the common limited partnership (“CLP”) by also introducing a new vehicle, the special limited partnership (“SLP”). CLPs and SLPs are very flexible vehicles primarily governed by the agreements concluded between the General Partners and the Limited Partners, with only few legal constraints.
In a nutshell, non-regulated CLPs and SLPs are tax transparent for corporate income tax and net wealth tax purposes, and the non-resident investors are not subject to corporate income tax and net wealth tax in Luxembourg, unless CLPs and SLPs are to be considered as constituting a permanent establishment and realizing commercial profits. Nevertheless, they may be subject to municipal business tax, in certain cases, if they realize business income. The purpose of the Circular is to provide some clarifications regarding the conditions according to which a commercial activity may be characterized or not in practice.
In order to analyze whether the activity performed by a CLP / SLP is commercial or not, reference is made to Luxembourg law, parliamentary comments and case law, based on which a commercial activity is traditionally opposed to private wealth management.
In this respect, the Circular recalls that, whether a CLP or SLP is carrying out “private wealth management” activities, must be determined based on a bundle of signs. However, the Circular expressly confirms, in line with existing case law, that the importance of the assets owned by CLPs or SLPs respectively the disposal of certain assets by them within a short time period does not trigger as such the realization of commercial operations.
Furthermore, the Circular expressly mentions that (non-regulated) CLPs / SLPs, which are AIFs within the meaning of the Luxembourg law of July 2013 are, in principle, not considered as carrying out a commercial activity as they have not, by definition, a commercial purpose but instead an investment purpose.
This Circular is thus most welcomed as it confirms that AIFs set-up as CLPs / SLPs can be fully tax transparent in Luxembourg provided that certain conditions are met and are thus an attractive vehicle for alternative investment funds.
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