The countdown has started. As from 1 January 2022, the last anti-hybrid mismatch provision related to reverse hybrid rule will enter into force. Under Luxembourg law, a reverse hybrid is characterized when Luxembourg tax transparent entities (such as Luxembourg partnerships, including a SCS or a SCSp) are viewed as taxable persons under the tax laws of one or more non-resident “associated enterprises” holding, directly or indirectly, globally at least 50% of the voting rights, capital ownership or profit entitlement over such entity. It is to be noted that for the determination of the associated enterprises threshold, the interest held by parties “acting together” (in accordance with OECD guidelines) may be aggregated, but only in relation to voting rights and capital ownership. However, under Luxembourg law an investor holding directly or indirectly less than 10% of the fund’s interests and who/which is entitled to less than 10% of the fund’s profits will not be considered as acting together unless proven otherwise.
In practice, if the reverse hybrid rule applies, Luxembourg tax transparent entities will become liable to corporate income tax and employment fund’s contribution at the aggregate rate of 18,19% to the extent income derived by such reverse hybrid entity is not taxed elsewhere. The characterization into a reverse hybrid entity should not have an impact on the municipal business tax nor the net wealth tax position of such entity.
Luxembourg law provides for an exemption for collective investment vehicles (CIV(s)). CIVs are defined as an investment fund or vehicle that (i) is widely held, (ii) holds a diversified portfolio of securities (“titres”) and (iii) is subject to investor protection regulations in the country in which it is established. According to the commentaries of the articles of the bill (n°7466/00) introducing the reverse hybrid provision, “UCIs” covered by the law dated 17 December 2010, “SIFs” subject to the law of 13 February of 2007 as amended, and “RAIFs” subject to the law of 23 July 2016, as amended, should benefit from such exemption as well as any “AIF” covered by the law dated 12 July 2013 related to alternative investment fund managers, as amended, provided that they meet the above conditions to be considered as a CIV.
Considering the foregoing, we recommend reviewing any of your structures involving a Luxembourg tax transparent entity to ensure that the new reverse hybrid provision will not trigger Luxembourg corporate income tax liability. We also recommend reviewing fund documentation (including subscription documents, limited partnership agreements and prospectuses) to assess the way investors’ jurisdictions treat the Luxembourg fund and ensure that any tax liability arising from such reverse hybrid characterization is properly covered and or that any tax cost resulting from the application of the reverse anti-hybrid rule is borne by the investor(s) causing the issue.
Feel free to reach out to our tax team should you have any question or require any assistance.
Frédéric Feyten, Luxembourg Managing Partner | Avocat
Alejandro Dominguez, Luxembourg, Senior Associate
Delphine Danhoui, Luxembourg, Knowledge Lawyer
