As defined by Luxembourg’s Company Law, a special limited partnership (SCSp) is a form of partnership entered by two or more partners for a limited or unlimited period. In a special limited partnership, partners share several liabilities for all obligations or contribute a specific amount, which may consist of partnership interests as stipulated in a partnership agreement.
What is the Legal Basis of a Luxembourg Special Limited Partnership (SCSp)?
The special limited partnership (SCSp) structure is governed by the Law of 12 July 2013 on Alternative Investment Fund Managers Law (AIFM Law).
What are the Objectives of a Special Limited Partnership (SCSp)?
The main aim in developing the special limited partnership structure is to make Luxembourg a highly competitive market for foreign investors looking to build alternative investment vehicles in the European Union. With the addition of special limited partnership and other alternative investment vehicles, Luxembourg has succeeded in building an attractive common law legal structure.
A special limited partnership (SCSp) was designed to be very appealing to investors and fund initiators in the realm of private equity, hedge funds, and real estate funding. This legal form combines the high contractual freedom in private equity placement and favorable tax treatment for EU and non-EU managers alike.
How Can You Form a Special Limited Partnership (SCSp) in Luxembourg?
A special limited partnership (SCSp) may be created with at least two partners; one of whom will assume the role of general partner and at least one limited partner, for a limited or unlimited period.
There is no minimum legal capital required in the formation of a special limited partnership in Luxembourg. Contributions from partnerships can be made in either cash or kind. Valuations by an external auditor is not a requirement for contributions in kind.
A special limited partnership (SCSp) must be registered before the Luxembourg Trade and Companies Registry. Privacy and confidentiality are afforded to partners and shareholders in a special limited partnership, therefore, there is no need for publishing names, financial statements, and share capital to be published altogether.
What is the Scope of Management of a Special Limited Partnership (SCSp) in Luxembourg?
A special limited partnership (SCSp) has no legal personality. The liability of general partnerships is unlimited. On the other hand, the liability of limited partnerships is limited to their contributions.
The flexibility of a special limited partnership (SCSp) lies in its ability to be used for both regulated and unregulated investments. Unregulated special limited partnerships (SCSps) will be governed by the rules and conditions of the Companies Act. In case an investment vehicle falls under the Alternative Investment Fund Managers Law (AIFM Law), partners are deemed to comply with its provisions.
On the other hand, regulated special limited partnerships (SCSps) are subject to specific rules applicable to regular regulated investment vehicles. For instance, an investment company in risk capital (SICAR) or a specialized investment fund (SIF) in the form of a special limited partnership (SCSp) will be regulated and supervised by the Commission for the Supervision of the Financial Sector (CSSF).
How Flexible is the Luxembourg Special Limited Partnership (SCSp) Structure?
- Special limited partnerships (SCSps) do not have separate legal entities for their respective partners. This allows the investment vehicle greater flexibility when developing the partnership agreement.
- There are no prohibitions when it comes to the return of capital.
- Capital returned to partners by way of dividends distribution or reimbursement of equity interests cannot be recalled, such as is the case with limited partners.
- Except for certain cases, everything is freely governed by the partnership agreement, including distribution of profits and clawbacks without restrictions.
Who Manages a Luxembourg Special Limited Partnership (SCSp)?
The management of a special limited partnership is delegated to one or more general partnership, who may also delegate management to third parties.
In case a limited partner engages in the management of a special limited partnership (SCSp), they automatically forfeit their limited liability. It is therefore crucial to define and distinguish between internal and external management.
What is the Taxation Regime for a Luxembourg Special Limited Partnership?
As per Circular L.I.R no. 14/4 of 9 January 2015, special limited partnerships (SCSps) in Luxembourg enjoys full tax transparency and tax neutrality.
A Luxembourg special limited partnership is similar to those established in other premier investment vehicle jurisdictions, including Guernsey, England, Jersey, and the Cayman Islands.
As a regulated vehicle, a special limited partnership (SCSp) is not subject to the following:
- corporate income tax
- municipal business tax
- wealth tax
When used as an unregulated vehicle, a special limited partnership (SCSp) must be fully tax transparent while ensuring confidentiality of its foreign partnerships. In some cases, an unregulated special limited partnership (SCSp) may be subject to municipal business tax.
Under the Companies Act, it is relatively easy for a Luxembourg special limited partnership (SCSp) to get exempted from income tax assessments. Additionally, a special limited partnership (SCSp) is allowed to obtain special advance tax clearances from the tax authority on a case-to-case basis.
Special limited partnerships (SCSps) in Luxembourg are also granted favorable tax treatment to the carried interest regime. This means that profits paid to employees of a company managing an alternative investment fund, as well as gains realized on the sale of equity interests are assessed with a reduced rate of up to 10% under certain instances.
Management fees provided to a regulated or unregulated special limited partnership (SCSp) will be exempt from paying value added tax (VAT).
As a premier, independent consulting firm, Damalion provides expert advice on Luxembourg special limited partnership formation with the help of our global service network spanning across European, Asian, and Atlantic timezones. We offer practical and sound advice in the company set up process and ongoing structuring, governance, and operational advice for clients looking to establish an unregulated or regulated special limited partnership (SCSp) and other forms of alternative investment funds in Luxembourg. To learn more, reach out to a Damalion expert today.
