www.pwc.lu/tax
Flash News
Luxembourg – Circular on
Luxembourg limited partnerships
13 January 2015
On 9 January 2015, the Luxembourg tax authorities released a Circular on
the taxation of the Luxembourg limited partnership (Société en
Commandite Simple – SCS) and of the Luxembourg special limited
partnership (Société en Commandite Spéciale – SCSp). This Flash News
summarises the main principles outlined in the Circular.
PwC welcomes this administrative guidance, which clarifies the
interpretation of the Luxembourg tax authorities on the tax regime of these
two types of entity. The Circular is general in nature, and concerns all SCSs
and SCSps, although more specific comments are provided in relation to
entities used in the Alternative Funds industry.
Background
SCSs and SCSps are tax transparent entities, and thus not themselves subject to
Luxembourg corporate income tax. Given this transparent character, their partners are
treated as carrying out, individually, the activities of the SCS or SCSp. As such, insofar
as business profits are considered, foreign partners will only be taxed in Luxembourg if
they derive profits from a commercial activity as defined in article 14 of the
Luxembourg Income Tax law (LITL), and that such commercial activity is carried on
through a permanent establishment (cumulative conditions) – although this point is
not specifically addressed by the Circular.
The activity of an SCS or SCSp may however be subject to municipal business tax (a tax
which has a separate but very similar regime to corporate income tax) on profits, in
either of two cases:
o
Where there is no general partner that is a joint stock company
owning more than 5% of the interest in the SCS or SCSp, the activity of
the SCS or SCSp may be subject to municipal business tax in any
situation where the SCS or SCSp is carrying on a “commercial
activity”, the general definition of which is set out in article 14 (1) LITL
o
When the general partner (GP) of a SCS or SCSp is a joint stock
company owning more than 5% of the SCS or SCSp, the activities of
the SCS or SCSp are de facto deemed to be commercial activities
(“Geprägetheorie”), triggering in such a situation a potential liability
to municipal business tax on the profits of the SCS or SCSp.
The Circular confirms that SCSs or SCSps set up as SICARs are, by law, not considered
as carrying on a commercial activity. Similarly, SCSs or SCSps set up as SIFs or Part II
Funds are, by law, outside the scope of income taxes and are only subject to
subscription tax. This Flash News thus does not consider the situation of these types of
vehicle further, although it does consider the situation of other alternative investment
fund vehicles.
Clarification given by the Circular
Definition of commercial activity
In order to reduce uncertainty for taxpayers, the Circular seeks to provide guidelines
on how to assess whether an entity, where there is no GP set up as a joint stock
company and owning at least 5% of the SCS/SCSp, carries out a “commercial activity”.
The Circular first confirms that the four criteria listed in article 14 (1) LITL for
determining whether there is a commercial activity (i.e. permanency, independence,
intention to realise profits, and participation in the general economic environment) are
cumulative.
In addition the Circular summarises the interpretation of these criteria as they have in
the past been decided by Luxembourg courts or stated in parliamentary briefing
documents.
Finally the Circular expressly states that the activity of a SCS or SCSp should be
evaluated in the light of all the facts specific to each particular case. An important
confirmation in the Circular is that neither the importance of the holdings or other
assets, nor the sale(s) of some assets within a relatively short period of time, is in itself
sufficient to cause characterisation as a commercial activity.
Alternative Investment Funds (AIFs)
Another important clarification in the Circular relates to the nature of the activity
performed by SCSs or SCSps that fall within the definition of AIFs as set out in the
Luxembourg law dated 12 July 2013 (the “AIFM Law”), which transposed the EU
Alternative Investment Fund Managers Directive into Luxembourg law and made
various changes to other legislation, including some concerning tax.
The Circular explicitly confirms that where an AIF is established as an SCS or SCSp, so
long as there is no GP set up as a joint stock company and owning at least 5% of the
SCS/SCSp, the AIF is deemed to not carry out any commercial activity. As a result, the
activities of such SCSs or SCSps should never be subject to municipal business tax.
For AIFs established outside Luxembourg but having an AIFM in Luxembourg, the
Circular reconfirms that the AIFM Law provides for a complete Luxembourg tax
exemption (i.e. corporate income tax, municipal business tax and net wealth tax) for
the AIF.
Impact of the Circular
Although no novel concepts are included in the Circular, it is very helpful in clarifying
how the exposure to Luxembourg taxes for Luxembourg limited partnerships, notably
those that are used as non-CSSF regulated fund vehicles by alternative investment
fund managers, is bounded and restricted.
Get more information, contact your local PwC tax service provider or one of our experts below :
…………………………………………………………………………………………………………………….
Vincent Lebrun
Partner
+352 49 48 48 3193
[email protected]
Fabien Hautier
Partner
+352 49 48 48 3004
[email protected]
Christine Casanova
Director
+352 49 48 48 3054
[email protected]
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