Early in January 2015, the Luxembourg Tax Authorities issued a Circular Letter which provides guidance on the tax treatment of limited partnerships (SCS and SCSp), in particular for limited partnerships set-up as Alternative Investment Funds.
In a nutshell, non-regulated SCS and SCSp are tax transparent for corporate income tax and net wealth tax purposes. It does not mean that they are tax exempt, but rather that the tax burden belongs to their partners. Non-Luxembourg resident investors are, however, not subject to corporate income tax and net wealth tax in Luxembourg, unless the SCS or SCSp is considered as constituting a permanent establishment and realizing commercial profits. SCS and SCSp may, however, be subject to municipal business tax in their own name if they realize business income.
The purpose of the Circular is to provide some clarifications regarding the conditions according to which a commercial activity may arise.
In order to analyze whether the activity performed by a SCS or SCSp is commercial or not, reference is made to Luxembourg law, parliamentary comments and case law, where a commercial activity is traditionally opposed to private wealth management.
Whether or not a partnership carries out “private wealth management” activities must be determined based on a bundle of signs. The Circular mentions a certain number of case law that give indications on how to interpret the criteria set forth by the law with respect to the characterization of a commercial activity. This case law were rendered in the context of the realization of real estate activities by individuals, but their principles can be extended to investments activities made by SCS and SCSp.
Based on these case law (and in particular a case law rendered in 2014), the Circular thus confirms that the importance of the assets and the disposal of certain assets within a short time period does not trigger as such the realization of commercial operations.
The Circular expressly mentions that (non-regulated) partnerships which are AIFs within the meaning of the Luxembourg law of July 2013 are not considered as carrying out a commercial activity as they have not, by definition, a commercial purpose but instead an investment purpose.
This Circular is thus most welcomed as it confirms that AIFs set-up as partnerships can be fully tax transparent in Luxembourg provided that certain conditions are met and are thus an attractive vehicle for alternative investment funds.