30 September 2025 Luxembourg tax authority clarifies treatment of collective investment vehicles under Reverse Hybrid Entity Rules
A circular that the Luxembourg tax authority released on 22 August 2025, regarding the application of the Reverse Hybrid Entity Rules to investment funds, provides welcome clarifications to the definition of collective investment vehicle (CIV). The Reverse Hybrid Entity Rules do not apply to Luxembourg entities that are CIVs. The law defines a CIV as an investment fund or vehicle that (1) is widely held, (2) holds a diversified portfolio of securities and (3) is subject to investor-protection regulations in the country in which it is established. The circular provides details on the interpretation of these three criteria. Under the Reverse Hybrid Entity Rules of ATAD 2, which implement in Luxembourg law European Union (EU) rules for hybrid mismatches with third countries, transparent entities or arrangements that are incorporated or established in Luxembourg are, under certain conditions, treated as corporate taxpayers subject to Luxembourg corporate income tax (CIT). The Reverse Hybrid Entity Rules only apply to an entity or arrangement (e.g., a partnership such as a limited partnership (société en commandite simple; SCS) or a special limited partnership (société en commandite spéciale; SCSp) if (1) one or more nonresident associated enterprises holding in aggregate a direct or indirect interest of at least 50% of the voting rights, capital interests or rights to profit in the entity or arrangement are located in one or several jurisdictions that regard the entity or arrangement as opaque (Reverse Hybrid Entity), and (2) the non-taxation of the net income of the associated enterprise(s) must result from a difference of classification of the Luxembourg tax-transparent entity or arrangement. If these conditions are met, the Reverse Hybrid Entity is subject to CIT, but only for the portion of its income that is not otherwise taxed in Luxembourg or in another jurisdiction (including that of the investor). The Reverse Hybrid Entity Rules do not apply to Luxembourg entities that are CIVs. The law defines CIV as an investment fund or vehicle that is widely held, holds a diversified portfolio of securities and is subject to investor-protection regulations in the country in which it is established. In line with the explanatory notes to the law that introduced the Reverse Entity Hybrid Rules, the circular states that the term "CIV" includes, in particular:
To determine whether any other entity or arrangement qualifies as CIV, according to the circular, the three cumulative conditions should be interpreted as follows: An entity or investment fund is considered "widely held" if its shares or units are marketed for distribution to multiple unrelated investors. This will be analyzed based on circumstantial elements that may be factual or intentional. The circular states that a limited circle of investors does not automatically result in the condition's not being met. For example, a fund may only have a limited number of investors during the launch phase even though it is designed for multiple unrelated investors (if it is reasonable to expect to have multiple unrelated investors within 36 months of authorization or establishment) or during liquidation (if the reduction in investors is due to the liquidation process). The circular indicates that, in the case of master entity or fund held by one or more feeder funds, the criterion is assessed in relation to the number of investors in the feeder fund(s). Two investors are considered related if: (1) one holds, directly or indirectly, a participation of 50% or more of the voting rights or capital of the other; (2) if an individual or entity holds, directly or indirectly, a participation of 50% or more of the voting rights or capital of both investors: (3) if they are close family members; or (4) if they are under common control of the same person or if they control each other. The term "securities" should be understood in its broadest sense and includes shares, equity interests and similar securities giving access to the capital of the legal entity, beneficiary units, bonds or other receivables, units of CIVs, deposits with credit institutions and derivative financial instruments, provided that the underlying asset consists of securities. Whether a portfolio of securities is sufficiently diversified will be analyzed by considering the fund's investment policy as per its management regulations or constitutive documents, and exposure to market risk (including direct and indirect counterparty risk), taking into account the investment policy followed. An entity or investment fund will not be regarded as holding a diversified securities portfolio if its risk distribution fails to meet the criteria set out under the SIF Law 2007. Specifically, an entity or investment fund is typically not considered diversified if it:
This requirement is considered fulfilled by entities or investment funds subject to supervision by the Commission de Surveillance du Secteur Financier (CSSF)and alternative investment funds (AIFs) managed by an Alternative Investment Fund Manager authorized under the Directive 2011/61/EU. The circular provides welcome confirmations and guidance for investors and asset managers on the application of the Reverse Hybrid Entity Rules and is expected to result in more SCSp AIFs meeting the criteria for exclusion from the scope of the Reverse Hybrid Entity Rules. Taxpayers that may be affected should consult their tax advisors to evaluate the implications of the clarifications provided in the circular with regard to their investment structure.
Document ID: 2025-1965 | ||||||
