Flash News: Luxembourg - Circular on Luxembourg limited ...

1 Flash News Luxembourg Circular on Luxembourg limited partnerships 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.

2 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 ( Gepr getheorie ), triggering in such a situation a potential liability to municipal business tax on the profits of the SCS or SCSp. 13 January 2015 On 9 January 2015, the Luxembourg tax authorities released a Circular on the taxation of the Luxembourg limited partnership (Soci t en Commandite Simple SCS) and of the Luxembourg special limited partnership (Soci t en Commandite Sp ciale SCSp).

3 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. 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.

4 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 ( 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.

5 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.

6 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 ( 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.

7 Get more information, contact your local PwC tax service provider or one of our experts below : PwC Luxembourg ( ) is the largest professional services firm in Luxembourg with 2,450 people employed from 55 different countries. It provides audit, tax and advisory services including management consulting, transaction, financing and regulatory advice to a wide variety of clients from local and middle market entrepreneurs to large multinational companies operating from Luxembourg and the Greater Region. It helps its clients create the value they are looking for by giving comfort to the capital markets and providing advice through an industry focused approach. The global PwC network is the largest provider of professional services in audit, tax and advisory.

8 We re a network of independent firms in 157 countries and employ more than 195,000 people. Tell us what matters to you and find out more by visiting us at and 2015 PricewaterhouseCoopers, Soci t coop rative. All rights reserved. In this document, PwC Luxembourg refers to PricewaterhouseCoopers, Soci t coop rative ( Luxembourg ) which is a member firm of PricewaterhouseCoopers International limited ( PwC IL ), each member firm of which is a separate and independent legal entity. PwC IL cannot be held liable in any way for the acts or omissions of its member firms.. Vincent Lebrun Partner +352 49 48 48 3193 .. Fabien Hautier Partner +352 49 48 48 3004.

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