US fund managers raising capital in the EU often set up a Luxembourg special limited partnership (SCSp) qualifying as an alternative investment fund (AIF). An SCSp is transparent for Luxembourg tax purposes, unless the reverse hybrid rules (RH Rules) apply.
On August 22, 2025, the Luxembourg tax authorities issued welcome guidance clarifying the so-called 'CIV carveout' from the RH Rules, offering greater certainty and tax compliance relief for US fund managers.
RH Rules - general
The RH Rules apply to an SCSp if (i) it has 'associated' taxable investors located in a jurisdiction that treats the SCSp as tax opaque and does not tax the SCSp's income due to the SCSp's hybrid treatment and (ii) those investors jointly hold at least 50% of the SCSp's capital, voting rights or profit entitlements.
CIV Carveout - general
The RH Rules do not apply to an SCSp that is (i) widely held, (ii) holds a diversified portfolio of securities and (iii) is subject to investor-protection regulation in the country in which it is established (CIV Carveout). So far, the application of these conditions was unclear, making the CIV Carveout rarely relied upon in practice. The new guidance addresses this by clarifying each of the 3 criteria.
Widely held criterion
This criterion is presumed met if no individual person holds or controls, directly or indirectly, more than 25% of the capital or voting rights of the SCSp or controls the SCSp by other means. The SCSp must be designed to attract multiple unrelated investors, but there may be legitimate cases in which there is only a restricted number of investors, notably the ramp-up phase (36 months) and the liquidation phase. In master-feeder structures, the criterion is assessed at the level of the feeder vehicle(s).
Diversified portfolio criterion
Diversification is assessed based on the SCSp's investment policy and market risk exposure. This criterion is met if risk diversification is in line with the requirements imposed on Luxembourg SIFs (Specialized Investment Funds). Accordingly, an SCSp's portfolio is not considered diversified if it invests more than 30% of its assets or commitments in a single issuer, unless there is adequate justification.
Investor protection criterion
This criterion is presumed met if the SCSp is supervised by the Luxembourg regulator or qualifies as an AIF managed by an EU authorized AIF manager.
Practical relevance
The new guidance will substantially ease Luxembourg tax compliance burdens for USFMs with SCSp-funds qualifying for the CIV Carveout by reducing the need to monitor investor profiles for RH Rules exposure and providing greater certainty when structuring or marketing such funds.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
