Important regulation in the private equity industry in Luxembourg


Financier Worldwide Magazine

March 2013 Issue

March 2013 Issue

In 2013, the private equity industry in Luxembourg will be exposed to the most important regulation it has ever faced: the implementation of Directive 2011/61/EU of 8 June (the ‘AIFM Directive’).

The AIFM Directive was approved by the EU Parliament on 20 November 2010 after almost one and a half year of intense and controversial negotiations. It responded to a political will for more stringent regulation in the alternative investment sector and closer oversight of systemic risks. In addition, it should provide harmonised rules for management and marketing of alternative investment funds (AIF) in Europe and protect investors thanks to enhanced transparency and more stringent operational rules.

The current draft of the AIFM Directive is the result of more than 2000 amendments made to the initial draft proposed in 2009. The private equity industry, convinced it is part of the solution and not the problem, has been concerned from the beginning and contributed to the development of the initial draft by pursuing an appropriate and measured legal environment.

In short, the AIFM Directive aims to create a harmonised set of rules for fund marketing and the management of private equity, venture capital and other AIFs in Europe. The Directive imposes stringent requirements on the operations of alternative investment fund managers (AIFMs), including with regard to depositaries, valuation, capital requirements, disclosure and remuneration.

In this context, Luxembourg is in the countdown phase prior to the implementation of the AIFM Directive. The new bill implementing the AIFM Directive in Luxembourg (AIFM Law) was submitted to the Parliament on 24 August 2012. It is yet to be voted on by the Parliament and, therefore, may not be in its final shape. It is expected to be voted on by the end of the first half of 2013.

Out of the measures that the AIFM Law foresees, the following are particularly relevant with respect to taxation measures: (i) introduction of a new special limited partnership regime (société en commandite spéciale) modelled on the Anglo-Saxon common law concept of the limited partnership; (ii) modernisation of the regime of the existing société en commandite simple (common limited partnership) in order to adapt it to (i);  (iii) improvements to the société en commandite par actions(partnership limited by shares); and (iv) introduction of a new regime for carried interest (reduced tax rate).

New Luxembourg partnership vehicle

The provisions of the draft AIFM Law dealing with these matters focus on granting flexibility in setting up an SCS and are inspired by practice in the UK and US regimes. This modernisation of the structuring toolbox is aimed at eliminating onshore/offshore arbitrage by offering onshore equivalent structuring solutions that will fit into a post AIFMD environment. 

The modernisation of the SCS and the introduction of the SCSp will impact the 2004 SICAR and 2007 SIF regimes, as it is expected that these regimes will become increasingly relevant in the regulated investment fund environment.

The two main tax features of this new partnership are as follows. First, it is tax transparent and will have no legal personality (unlike the existing SCS and SCA). As a result, as the SCS, the SCSp will in general not be subject to Luxembourg corporate income tax and net wealth tax, the distributions will be free of withholding tax and the proceeds received from such vehicles are not taxable in Luxembourg in the hands of non-resident investors.

Second, the potential tax leakage generated by the municipal business tax is limited. SCSp, like any other Luxembourg partnership, can only be subject to municipal business tax if: (i) the SCSp performs a commercial activity; or (ii) its general partner is a capital company owning an interest of at least 5 percent in the partnership. Where the partnership itself performs a commercial activity, it will be in any case subject to municipal business tax.

Carried interest

Luxembourg, following the example of neighbour countries, intends to regulate carried interest, defined as a share in the profits of the AIF accrued to the AIFM as compensation for the management of the AIF but excluding any share in the profits of the AIF accrued to the AIFM as a return on any investment by the AIFM into the AIF.

As a result, carried interest in the hands of some qualifying individuals (employees of the AIF or their management company) will fall under a new category of ‘speculation income’ under Luxembourg’s Income Tax Law, providing a full tax exemption on the capital gain realised upon the sale or redemption of their interest in the AIF if: (i) the holding period exceeds six months; and (iii) the interest does not exceed 10 percent of the AIF.

A reduced tax rate of approximately 10 percent on the carried interest will be applicable under certain conditions and will be available for an expected maximum period of 10 years following the year the employee applied for the regime or started its functions in the AIF.

In cases where the qualifying individuals are paid in shares in the AIF against no or low consideration, contrary to the current general regulation, it is expected that the new draft will prevent any revenues out of the AIF shares so granted from being designated as salary.

Luxembourg is optimistic and sees the AIFM as a real opportunity.


Raquel Guevara is a partner and head of the tax department at MNKS. She can be contacted on +352 26 48 42 35 77 or by email:

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Raquel Guevara


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