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Implementation of AIFM Directive: Opportunities for Investors


While Luxembourg is one of the privileged hubs for hedge and Private Equity Real Estate ("PERE") funds in structuring their investments, the most favoured structure for the PE/PERE or hedge funds industries remains the Anglo-Saxon limited partnership, due to its great legal flexibility and to its tax transparency. The absence of corresponding vehicles under Luxembourg law is about to be solved. Taxand Luxembourg explores this solution and its impact on hedge funds, private equity and real estate investment funds.

The bill implementing the Alternative Investment Fund Managers Directive (AIFMD) does not only implement the EU AIFM rules into Luxembourg law, it also introduces a new investment vehicle allowing the fund management industry to continue using limited partnerships in a post AIFMD environment: the special limited partnership (in French, "soci?t? en commandite sp?ciale", - the "SCSp"). The bill also designs a more flexible regime for existing Luxembourg limited partnerships (in French, "soci?t?s en commandite simple" or "SCS") and offers more clarity on the tax regime applicable to Luxembourg limited partnerships. Finally, it defines an attractive tax regime applicable to the carried interest for employees of AIFMs to be established in Luxembourg. PERE and hedge funds however, should be mindful that at this stage all of these are proposals which must still be discussed and finally passed by the parliament. During this process, the proposals may evolve.

The rise of the Luxembourg partnerships?
Anglo Saxon limited partnerships provide for flexibility, confidentiality, manageability, limited liability and tax transparency. They are, subject to few regulations in their home jurisdiction and benefit from light reporting requirements and obligations. This explains their success with the fund management industry. In the context of the AIFMD, Luxembourg seeks to offer to the hedge & PERE fund industry obliged to migrate onshore their activities, a comparable solution by creating the SCSp.

The SCSp is formed through a partnership agreement to be entered into by the General Partner (GP), and one or more limited partners (the Limited Partners or "LPs"), whose liability is in principle limited to the amount of their contribution in the SCSp. From a Luxembourg legal perspective, the innovation brought by the SCSp consists in the absence of legal personality distinct from that of its partners. Consequently, an SCSp will not be subject to the legal obligations applicable to Luxembourg commercial companies. This translates into the fact that reporting obligations towards its partners are freely determined in the partnership agreement forming the SCSp, and the SCSp will not be subject to keeping, registering nor filing its annual accounts with the Luxembourg Trade and Companies Register. Greater confidentiality is also provided by the SCSp which is not subject to any public disclosure requirement relating to investors' identities or contributions to the partnership.

From a tax point of view, the bill introduces an amendment to the so-called Gepr?getheorie. So far, according to this theory, where the GP of a Luxembourg partnership was a Luxembourg joint-stock company (which is per se commercial by reason of its legal form), the whole activity of the Luxembourg SCS was deemed to be commercial. The quality and status of the GP commercially tainted all the activities and revenues of the partnership, resulting in the LP becoming subject to Luxembourg Municipal Business Tax and the partners to Corporate Income Tax and Net Wealth Tax in Luxembourg.

The bill relaxes the conditions for the application of the Gepr?getheorie and provides that the income realised by SCS and SCSp will now be considered as commercial income only to the extent the GP is a joint-stock company, holding at least a 5% interest in the SCS or in the SCSp. In the future, as long as the GP holds less than 5% interest in the SCS or in the SCSp - which is generally the case in hedge funds or PE/PERE structures - the Gepr?getheorie will not apply, so no taxation will arise in Luxembourg.

In addition to avoiding any tax burden in Luxembourg for the vehicle and its partners, the full tax transparency of the SCS and SCSp would also mean that investors are no longer subject to tax reporting in Luxembourg, making the tax regime burden free to the GPs and LPs.

No adverse tax consequences for using a Luxembourg AIFM
The bill expressly exempts from Luxembourg taxes AIFs established outside of Luxembourg and having their AIFM or central administration in Luxembourg. This provisions aims at making sure that using a Luxembourg AIFM will not have any adverse tax consequences for foreign AIFs.

Management of AIFs VAT exempt
The bill amends the Luxembourg VAT law so as to include the management of AIFs in the scope of the VAT exemption applicable to the management of special investment funds.

Attractive carried interest regime for AIFM employees
Under certain limited conditions, Luxembourg resident employees of AIFMs will be taxed on the carried interest they earn at a reduced rate of 1/4 of the average personal income tax rate, meaning a taxation of approximately 10%.


Taxand's Take

The AIFMD is seen by many fund management industry professionals as creating an adverse environment in an industry that is struggling on many fronts. The initiative taken by the Luxembourg legislator to introduce a new form of partnership in Luxembourg law, to amend the existing framework of Luxembourg limited partnerships and to attract AIFMs to Luxembourg (thanks to a favourable carried interest regime), should be viewed as a steady and consistent approach of the Grand Duchy towards the fund management industry. It provides for a flexible, while secure and safe, environment allowing managers to focus their attention on core issues. In an AIFMD as well as in a non-AIFMD context, there is no doubt that the amended SCS regime and the new SCSp regime will create opportunities for foreign investors.

Your Taxand contacts for further queries are:
Jamal Afakir
T. +352 26 940 640

Pierre-R?gis Dukmedjian
T. +352 26 940 241

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