US fund managers ("USFM") usually rely on the Luxembourg special limited partnership ("SLP") to raise capital in the EU.
The SLP's limited partnership agreement ("LPA") includes wording driven by Luxembourg tax rules, specifically those relating to municipal business tax ("MBT"), the EU anti-hybrid rules ("AHR"), Pillar 2 ("P2"), value added tax ("VAT"), FATCA/CRS and the EU mandatory disclosure rules ("DAC6").
An SLP that acts as a fund is only subject to MBT (6.75% rate) if its Luxembourg general partner ("GP") has an interest of at least 5% in the SLP. LPAs usually hardwire that this threshold cannot be exceeded.
The AHR can cause tax leakage at SLP level or down in the investment structure depending on the investors' tax status and/or their tax treatment of the SLP. Typically, the LPA includes a tax information clause ("TIC") that requires the investors to provide information relevant for the AHR and the subscription documents ("SubDocs") require the LPs to disclose that information - pursuant to a questionnaire - prior to onboarding.
P2 aims to secure a global minimum tax of 15% on all accounting profits of groups with consolidated revenues exceeding €750M, irrespective of the place where the profits are generated. A potential P2 trigger is the consolidation by an investor of the Luxembourg entities that are part of the fund structure. The SubDocs inquire the investors on a potential consolidation. The AHR and P2 questionnaire is detailed and answers should be carefully reviewed by the GP to avoid inaccuracies as the burden of proof for the AHR and P2 rests with the GP.
Fund management fees usually do not attract Luxembourg VAT, but payments to e.g. lawyers or accountants do. The LPA's organizational expense clause usually allocates expenses to the fund up to a certain cap. It is key to detail whether that cap will include or exclude VAT.
An SLP may be obliged to collect and report certain investor information to the Luxembourg tax authorities ("LTA") under the FATCA and CRS frameworks. This information, which includes certain information regarding the interests in the SLP owned by the LPs, is then remitted to the relevant foreign tax authorities. The TIC, together with the SubDocs, should allow the SLP to gather the necessary data.
DAC6 requires the SLP or the GP to disclose certain potentially aggressive cross-border tax-planning arrangements to the LTA. Disclosure may encompass LP details. DAC6 disclosures are unusual in fund structures especially if the SLP does not invest through Luxembourg asset acquisition vehicles. DAC 6 disclosures cannot be prohibited under the LPA.
The LPA and SubDocs should be meticulously crafted to navigate the Luxembourg tax landscape. The relevant LPA wording is often integrated in the clauses originally driven by US tax rules.
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.