The Luxembourg law implementing the Directive on hybrid mismatches (the "ATAD2 Law")1, targets – amongst other issues – mismatches in tax outcome arising from reverse hybrid entities ("RHE").
As a reminder, RHEs are Luxembourg tax transparent entities - such as SCS and SCSp - that are treated as tax opaque in the jurisdiction of the investor and which may, as a result thereof, become taxable in Luxembourg under certain conditions.
A carve out to the RHE rule is provided under the ATAD2 Law for collective investment vehicles ("CIV") that (i) are widely held, (ii) hold a diversified portfolio of securities and (iii) are subject to investor-protection regulation in the country in which they are established.
Until now, the lack of clarity around these criteria made the exemption difficult to rely on in practice.
The Luxembourg tax authorities have now issued a circular providing much-needed guidance (the "Circular")2, restoring confidence in the CIV exemption for the fund industry.
Below are the key takeaways of this Circular:
- qualify as CIV and are therefore exempt from the RHE rules, all
types of investment funds subject to a product law:
- Undertakings for Collective Investments (UCIs),
- specialised investment funds (SIF); and
- reserved alternative investment funds (RAIF).
- Other collective investment undertakings or funds qualify as
CIV to the extent that they feature the three related criteria
mentioned above (i.e. widely-held, diversified portfolio of
securities and investor protection rules). In this respect, the
Circular clarifies that:
- A collective investment undertakings or funds is considered as
"widely held" if it is distributed to many unconnected
investors. It is confirmed that:
- in master/feeder structures where a single feeder fund invests in a master undertaking, the "widely held" criteria should be met at the level of the feeder fund;
- a limited number of investors does not automatically disqualify the fund, especially during the launch phase (within 36 months of approval or formation) or during liquidation.
- Regarding the diversified portfolio of securities criteria:
- the term "securities" must be understood in its broadest sense according to the Circular, therefore encompassing shares and other similar securities, profit shares, bonds, fund units, deposits with credit institutions and derivatives (if based on securities).
- the risk-spreading requirements must be aligned with the SIF's. Some counter-examples are provided by the Circular, i.e. a portfolio is not – in principle- considered diversified if it invests more than 30% of assets in a single issuer unless justified.
- A fund is presumed to meet the investor protection requirement
if it is either:
- supervised by the Luxembourg Financial Sector Supervisory Commission (CSSF) such as SICARs; or
- an alternative investment fund (AIF) within the meaning of the AIFM Law of 12 July 2013, managed by a duly authorised Luxembourg AIF manager or AIF manager authorised in the EU/EEA.
- A collective investment undertakings or funds is considered as
"widely held" if it is distributed to many unconnected
investors. It is confirmed that:
Footnotes
1. Law of 20 December 2019 implementing the EU Council Directive 2017/952 of 29 May 2017 amending Directive (EU) 2016/1164 as regards hybrid mismatches with third countries.
3" valign="top" />2. Circulaire du directeur des contributions L.I.R. n° 168quater/2 du 12 août 2025.
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.
