On 22 August 2025, the Luxembourg Tax Authorities (hereafter the “LTA”) published the administrative circular L.I.R. n°168 quater/2 (the “Circular”) clarifying the requirements to be met by collective investment vehicles (“CIV”) to benefit from the exemption from the reverse hybrid rule.
Background
Since fiscal year 2022, under Article 168quater of the Luxembourg Income Tax Law (“LITL”), Luxembourg tax transparent entities (e.g., limited partnerships, special limited partnerships, mutual funds) may become liable to corporate income tax (“CIT”) in relation to their net income which is not otherwise taxed under Luxembourg domestic tax law or the law of any other jurisdiction, provided one or more non-resident associated enterprises (i) are holding in aggregate a direct or indirect interest of 50% or more of the voting rights, capital interests or profit entitlements in the Luxembourg partnership and (ii) are established in a jurisdiction that considers the Luxembourg entity as a taxable person and does not tax the income attributable to its partners solely because of such difference in qualification.
Please see our previous newsflash on the reverse hybrid rule and the 2023 circular issued on the taxation of a reverse hybrid.
Collective investment vehicles (“CIV”) benefit from an exclusion from the rule. For this purpose, CIV are defined as vehicles that are (i) 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. Article 168quater LITL was introduced during the transposition of Council Directive 2017/952 (“ATAD 2”) and the terms of the CIV exemption were neither defined by the Directive nor by the LITL. The Circular provides helpful clarification on the scope and relevant conditions bringing further legal certainty to taxpayers.
Scope and eligible collective investment vehicles
The Circular recalls that the CIV must have an investment purpose excluding any commercial activity as defined under the LITL (i.e., a for-profit activity pursued permanently, independently and with a participation in the general economy).
According to the LTA, the following are notably considered as CIV: (i) UCIs subject to the law of 17 December 2010, (ii) specialised investment funds subject to the law of 13 February 2007 and (iii) reserved alternative investment funds subject to the law of 23 July 2016. This position is in line with commentaries provided in the parliamentary works leading to Article 168quater LIR.
For other types of CIV, the Circular clarifies the applicable conditions.
Widely held
This condition requires the distribution of the CIV’s interest to multiple unrelated investors. Whether the CIV is widely held should be assessed based on overall circumstances including facts and intentions.
According to the Circular, the following investors are considered as related among each other: (i) if one holds, directly or indirectly, at least 50% of the voting rights or capital of the other, (ii) the same individual or entity holds, directly or indirectly, at least 50% of the voting rights or capital in both investors, (iii) investors with family relationships include spouses, civil partners and close relatives and (iv) if, based on all relevant facts and circumstances, one controls the other or both are controlled by the same individual or entity.
In presence of a master-feeder fund structure, the widely held criteria should be assessed with respect to investors in the feeder fund.
The presence of a limited circle of investors does not automatically exclude the CIV from being considered as widely held. A limited number of investors is notably acceptable (i) during the launching phase when it can reasonably be expected that the requirement will be met within a 36-month period post formation or obtention of the regulatory agreement or (ii) during the liquidation phase as a result of the liquidation.
A CIV is presumed widely held where no individual investor holds or controls, directly or indirectly, more than 25% of the CIV’s interest or voting rights or controls such interest or voting rights.
Article 168quater LITL already provides that the LTA can request relevant information to the taxpayer to prove the absence of reverse hybrid. The Circular adds that the LTA can, through the review of declaration made in the beneficial ownership register, verify this condition.
Holding a diversified portfolio of securities
The Circular defines the terms of securities and diversification. Securities should be interpreted broadly and a broad range of assets are listed in the Circular, i.e., shares, equity interests, and other similar instruments granting or potentially granting access to the capital of a legal entity, beneficiary shares, bonds and other receivables, units in other CIV, deposits with credit institutions, as well as derivative financial instruments, provided the underlying asset consists of securities. Regarding the diversification requirement, the diversified nature of the securities portfolio is assessed based on (i) the investment policy as set out in the management regulations or constitutive documents and (ii) the exposure to market risk (including direct and indirect counterparty risk), taking into account the investment policy pursued. As per the Circular, this requirement should be analysed according to the law of 13 February 2007 on specialised investment funds. Accordingly, the CIV is, in principle, not considered as having a diversified securities portfolio if: (i) it invests more than 30% of its assets or commitments in securities issued by a single issuer, unless there is adequate justification or (ii) the use of derivative instruments does not result in a comparable risk allocation (i.e., an appropriate diversification of the underlying assets).
Subject to investor-protection regulation
According to the Circular, a CIV will be deemed compliant with this requirement if it is (i) an authorized investment fund under the CSSF’s prudential supervision or (ii) an AIF managed by an AIFM authorized under the AIFMD.
Conclusion
The Circular brings long awaited clarifications for the Luxembourg investment funds industry.
The LTA adopts a flexible approach for the requirements of the CIV to be widely held and hold a diversified portfolio of securities. Taxpayers should review their structures and fund documentation against these requirements.
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