New Tax Circular Clarifies Reverse Hybrid Exemptions for Investment Funds
Brouillon -The Tax Administration for Direct Taxes (ACD) has issued Circular L.I.R. No. 168quarter/2. The Circular clarifies the scope of article 168quater/2 of the Income Tax Law (L.I.R), in particular focusing on the concept of collective investment vehicles (CIVs) to determine which investment vehicles may be excluded from the scope of the reverse hybrid entity taxation regime. The Circular specifies that funds governed by the Law on Undertakings for Collective Investments (UCIs) of 17 December 2010, specialized investment funds (SIFs) under the law of 13 February 2007 and reserved alternative investment funds (RAIFs) under the law of 23 July 2016 are classified as CIVs. For other vehicles, the following criteria must be met:
the first criterion concerns broad participation. Funds must distribute shares or units among multiple unrelated investors. The Circular allows limited investor participation during the launch phase (up to 36 months to expand the base) or the liquidation phase. Investors qualify as related if they hold or control at least 50% of the rights or belong to the same family circle or the same controlling group. A vehicle meets the broad participation requirement if no single investor directly or indirectly holds or controls more than 25% of the capital or voting rights. This can be verified using information from the Register of Beneficial Owners;
the second criterion refers to portfolio diversification. The concept of securities is broad and includes shares, bonds, fund units, bank deposits and derivatives, provided that the underlying consists of securities. The Circular specifies that a portfolio is not diversified if more than 30% of the assets are invested in a single issuer or if the use of derivatives does not allow for adequate risk diversification; and
the third criterion requires submission to investor protection, a condition presumed to be met if the fund is authorized and supervised by the Commission de surveillance du secteur financier (CSSF), the main financial regulatory authority in Luxembourg, managed by a manager authorized under the Alternative Investment Fund Managers Directive (2011/61).
For additional insights and access to my in-depth analysis, please refer to my contribution published on the IBFD via the link provided below.
