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”) within the meaning of the Luxembourg law on alternative investment fund managers dated 12 July 2013 (the “AIFM Law”) incorporated in the form of an SCS/SCSp shall not, as a rule, be deemed to be engaged in a business activity given that its purpose is one of “investment” rather than “business”. This position is based on the fact that an SCS/SCSp which qualifies as an AIF follows an investment policy in compliance with the AIFM Law and with the guidelines issued by the European Securities and Markets Authority (ESMA).
With regards to SIFs, SICARs, Part II SICAFs and non-resident AIFs managed from Luxembourg exemptions from Luxembourg taxation also apply, but such exemptions derive from the specific Luxembourg legislation applicable to those vehicles
Finally, a non-AIF SCS/SCSp will still have to consider the nature of its activities (i.e. whether or not it exercises a commercial activity) on the basis of the individual facts and circumstances and with reference to the criteria set out under Luxembourg law and any relevant case-law. The Circular nonetheless confirms that the amount of assets held by an SCS/SCSp or the fact that the disposal of some of the assets held by the SCS/SCSp takes place within a short-period, shall not be decisive factors in order to assess whether the partnership is carrying out a commercial activity or not.