Taxation Of SCS And SCSp

The Luxembourg Tax Authorities (hereafter "LTA") have recently clarified the situation on taxation of income realised by Luxembourg partnerships, through the publication of Circular L.I.R. n°14/4 dated January 9th 2015, hereafter the "Circular".

The tax transparency for income tax purposes applicable to sociétés en commandite simple (hereafter "SCS") and société en commandite spéciale (hereafter "SCSp") is not applicable for municipal business tax purposes (which amounts to 6.75% in Luxembourg-City).

The Luxembourg tax authorities have confirmed the treatment of tax transparent Luxembourg limited partnerships in the form of a SCS or SCSp.

An SCS/SCSp whose activities extend beyond the mere management of its own wealth, the so-called Vermögensverwaltung, and thus are of a business nature, would be subject to municipal business tax, and its partners may be subject to income tax in Luxembourg on their portion of the profit derived from the partnership. An SCS/SCSp will also be deemed to conduct a business activity if its general partner is (i) incorporated in the form of a corporation and (ii) holds a participation in the SCS/SCSp of 5% or more.

A "business activity" is defined under Luxembourg tax law as (i) an independent activity with (ii) a lucrative intent that is exercised in (iii) a permanent manner and (iv) constitutes a participation in the general economic life. On the other hand, the management of personal wealth is deemed to take place if the purpose of the entity is to reap the fruits of its wealth as opposed to increasing its asset value through disposals. Further to calls from the financial sector for clearer guidelines and additional legal certainty, the Circular seeks to clarify the LTA's position in this regard.

Pursuant to the Circular, an alternative investment fund (hereafter "AIF")...