Answer ... Alternative investment funds (AIFs) set up under the legal form of a limited partnership or a special limited partnership and that do not carry out (or are not deemed to carry out) a commercial activity should be considered as tax-transparent entities. In such case, income (and wealth) received (and held) by tax-transparent AIFs are taxable at the level of the investors.
The direct tax treatment applicable to AIFs structured as tax-opaque entities (ie, under the legal form of a joint stock company, private limited company or corporate partnership limited by shares) depends on the legal regime to which they are subject. Undertakings for collective investment (UCIs), specialised investment funds (SIFs) and reserved alternative investment funds (RAIFs) are exempt from corporate income tax, municipal business tax and net wealth tax. Sociétés d’investissement en capital à risque (SICARs) and RAIFs that opted for the SICAR regime are subject:
- to corporate income tax and municipal business tax, but are exempt on their profits derived from securities; and
- to a minimum net wealth tax of €4,815.
Sociétés de participations financiéres (SOPARFIs) are subject to corporate income tax, municipal business tax and net wealth tax. For companies located in Luxembourg City, the aggregate corporate income tax and municipal business tax rate ranges from 22.80% to 24.94%. The net wealth tax rate is 0.5% on that part of the net asset value which is lower or equal to €500 million and 0.05% on that part of the net wealth exceeding €500 million, with a flat minimum net wealth tax of €4,815 for qualifying SOPARFIs (ie, a SOPARFI with financial assets, transferable securities, bank deposits and receivables against related parties representing more than 90% of its balance sheet and exceeding €350,000) or a minimum net wealth tax ranging from €535 to €32,100 for non-qualifying SOPARFIs.
UCIs, SIFs and RAIF are subject to an annual subscription tax ranging from 0.01% to 0.05% (exemptions available), which is levied quarterly on the net asset value as of the last day of each quarter.
From a Luxembourg value added tax (VAT) perspective, AIFs are considered as VAT taxable persons and must register for VAT purposes under certain conditions. As per the Luxembourg VAT law, management services provided to AIFs benefit from a specific VAT exemption.
Answer ... Luxembourg managers and advisers structured as a SOPARFI under the legal form of a tax-opaque entity (ie, a joint stock company, private limited company or corporate partnership limited by shares) are subject to corporate income tax, municipal business tax and net wealth tax at the standard rates as described in question 8.1.
Individual managers and advisers that are Luxembourg tax residents are subject to Luxembourg personal income tax on their worldwide income (subject to tax treaty provisions). The Luxembourg income tax liability is based on the individual’s personal situation and takes into consideration various personal tax allowances and deductions. Management and advisory fees qualify as income from independent activities. The Luxembourg personal income tax is calculated in accordance with a progressive rate ranging from 8.56% on taxable income in excess of €11,265 to 45.78% on income in excess of €200,004 for singles. The beneficiaries of the management and advisory fees should also be liable for social security for self-employed persons at a rate of 24.68% up to an annual ceiling of €128,519.64 (ie, a dependent contribution of 1.40% will be due above the ceiling). Social security contributions are deductible for personal income tax purposes (except for the dependent contribution).
Carried interest paid to qualifying employees as an incentive for the AIF’s performance can be taxed at the maximum progressive rate of 11.44%. However, qualifying employees can benefit from such tax incentive only for a maximum of 10 years and to the extent that they transferred their tax residence to Luxembourg before 31 December 2018.
Answer ... Individuals that are Luxembourg tax residents and that invest in AIFs structured as tax-transparent entities (ie, limited partnership or special limited partnership) are directly subject to personal income tax (under the rules described in question 8.2) on their respective share in the profits realised by the AIF (irrespective of any actual distribution).
Luxembourg tax resident individuals investing in SIFs, SICARs, RAIFs and SOPARFIs structured as tax-opaque entities (ie, joint stock company, private limited company or corporate partnership limited by shares) are subject to personal income tax on income and gain received and realised from these entities (under the rules described in question 8.2). Capital gains and liquidation proceeds received by individuals acting in the course of the management of their private wealth are exempt from personal income tax if there are realised on a non-substantial participation (ie, below 10%) and at least six months after their acquisition. Individuals can claim a 50% exemption on dividends distributed by SICARs, RAIFs (that opted for the SICAR regime) and SOPARFIs.
Investors structured as standard Luxembourg companies (eg, SOPARFIs) are subject to corporate income tax, municipal business tax and net wealth tax at the standard rates as described in question 8.1. However, dividends, liquidation proceeds and capital gains received by such investors from SICARs, RAIFs (that opted for the SICAR regime) and SOPARFIs can benefit from an exemption from corporate income tax and municipal business tax (and from a net wealth tax exemption on qualifying shareholding) under certain conditions.
Answer ... Luxembourg enacted Foreign Account Tax Compliance Act (FATCA) regulations in a law dated 24 July 2015, based on the Intergovernmental Agreement (IGA) Model 1 dated 28 March 2014. Luxembourg also enacted the Common Reporting Standard (CRS) and Directive 2014/107/EU in a law dated 18 December 2015.
These two sets of law share similar goals and concepts, as they create specific due diligence and reporting obligations for financial intermediaries based in Luxembourg. Investment funds are within the scope of these rules, except for certain exemptions provided by IGA Model 1 (among others, Luxembourg retirement funds and local banks).
Based on these rules, Luxembourg-based investment funds must collect self-certification forms from their investors in order to evidence the tax residence of the individuals who invest directly or indirectly in them. Furthermore, Luxembourg-based investment funds must report, on an annual basis, the amounts of their interests in the funds, as well as any type of income deriving from the funds for these investors.
Besides these obligations, funds must provide their own FATCA/CRS qualification to their financial counterparts. This qualification is based on a tax analysis of the activity of the fund and will usually involve acting as a financial institution (a FATCA/CRS status which involves the maximum level of due diligence and reporting obligations according to FATCA and CRS), and registering with the Internal Revenue Service in order to obtain a global intermediary identification number (ie, a FATCA tax code issued for each reporting entity).
Answer ... The international and European tax landscape for AIFs has been significantly reshaped since 2013. In Luxembourg, several measures have been implemented to adapt the country tax toolkit in accordance with international and European tax changes. The measures that affect tax strategies for AIFs include:
- the implementation of the anti-tax avoidance Directives 2016/1164 (ATAD 1) and 2017/952 (ATAD 2) into Luxembourg law, with effect as at 1 January 2019 (for most of the ATAD 1 measures dealing notably with interest limitation, general anti-abuse rule and hybrid mismatch within the European Union) and 1 January 2020 (for most of the ATAD 2 measures extending hybrid mismatch rules to relations between EU and non-EU countries);
- the entry into force on 1 August 2019 of the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (BEPS), allowing a relatively rapid inclusion in existing bilateral tax treaties of measures against BEPS (introducing notably the principal purposes test); and
- the so-called ‘Danish case’ jurisprudence of the Court of Justice of the European Union relating to beneficial ownership.
Therefore, tax strategies for AIFs have focused on maximising interest deductibility and cash-flow efficiency while reinforcing the substance and beneficial ownership by using, notably, regulated structures with a mix of tax-transparent and tax-opaque vehicles.
AIFs investing in real estate could be structured with a RAIF having the legal form of a special limited partnership or a joint stock company with variable capital. The RAIF holds a Luxembourg master holding SOPARFI set up as a private limited company, which then holds various local property companies. The investment funding is done with a mix of equity and third party/intra-group loans