The Luxembourg special limited partnership (SCSp) is a useful tool in structuring private equity businesses. Due to its effectiveness and popularity among foreign investors, the majority of private equity managers are using the special limited partnership to attract more business opportunities.
This structure was designed in the Law of 12 July 2013 under the Alternative Investment Fund Managers Directive (AIFMD), with the aim to compete with its Anglo-Saxon counterparts while benefiting from an attractive tax regime. Special limited partnerships (SCSps) are used to serve co-investing vehicles as it effectively replicates various types of unregulated and regulated alternative investment strategies.
No Legal Personality and Confidentiality
Although the special limited partnership (SCSp) has no legal personality or capacity, all acquisitions, contributions, and disposition of assets are made in the name of a special limited partnership (SCSp) instead of the general partners’ or limited partners’ names. This is a practical resolution as partners are not obliged to disclose their identities to successful register an asset. Limited partners are given the opportunity to ring-fence their assets from external claims from creditors.
Contractual Freedom and Access to Internal Management
Partners in a special limited partnership structure in Luxembourg are allowed to be involved in internal management without losing their limited liability. This means that limited partners can provide advice or opinions to their partnership, as well as exercise control over supervisory tasks within their special limited partnership (SCSp) structure.
Other activities that limited partners are allowed to perform include providing loans, guarantees, and offering financial assistance to the partnership, when needed. They will not lose their limited liability as a result of being a critical member of a special limited partnership’s internal committee.
No Clawback in the Even of Insolvency
There is no mandatory provision that requires the allocation of profit shares to the general partner. Additionally, there are no clawbacks on capital returns if a special limited partnership becomes insolvent.
Superior Flexibility
A special limited partnership (SCSp), whether under the category of an alternative investment fund (AIF), falling with the scope of the Alternative Investment Fund Managers (AIFMD) or otherwise, can be established under a specific regulatory regime in Luxembourg. A special limited partnership can also be set up as an unregulated investment vehicle.
Unless a special limited partnership (SCSp) benefits from an exemption under the Alternative Investment Fund Managers (AIFMD), an unregulated special limited partnership categorized as an alternative investment fund (AIF) must be managed by an authorized alternative investment fund manager (AIFM). This means that a special limited partnership will be indirectly under the regulatory oversight through an alternative investment funds manager.
Umbrella Structure
The biggest advantage of establishing a special limited partnership as a Reserved Alternative Investment Fund rather than an unregulated limited partnership is that it can operate as an umbrella fund, with one or more sub-funds whose assets and liabilities are compartmentalized from other sub-funds.
Each sub-fund can accommodate various investment strategies. It can also be structured as a tax transparent entity and gain access to double taxation treaties. Because a Reserved Alternative Investment Fund replicates the specialized investment fund (SIF) and investment company in risk capital (SICAR) model, it can be structured as a close-ended or open-ended investment vehicle.
No Restrictions on Asset Classes
The Luxembourg special limited partnership (SCSp) structure has been modelled on partnerships that are established in other premier jurisdictions, such as the Cayman Islands, and the United Kingdom. A limited partnership agreement that governs a special limited partnership structure gives the fund superior contractual flexibility to organize the fund structure.
The strategies are usually illiquid, with common investments made in real estate, private equity, and debt markets. There are no restrictions on the asset classes or on fund strategies. Additionally, it is not subject to any risk diversification rules.
Favorable Tax Regime
- A special limited partnership is considered fiscally tax transparent for income tax and wealth tax purposes, as foreign investors are only subject to tax in Luxembourg if they facilitate commercial transactions through a permanent establishment. Withholding tax is not levied on payments whether a partner is located in Luxembourg or in other foreign jurisdictions. A special limited partnership is assessed with municipal business tax to the extent that it carries on its commercial activities on a long-term basis.
- A special limited partnership considered an alternative investment fund cannot carry commercial activities and will not be assessed of municipal business tax to the extent that its general partner holds less than 5% of the special limited partnership shares.
- For special limited partnerships that are not considered alternative investment funds (AIFs), Luxembourg circulars establish criteria and examples that functions as a useful guide on circumstances that are deemed to be commercial, resulting in a special limited partnership being subject to municipal business tax.
- For a special limited partnership that is set up as a specialized investment fund, the structure will not be assessed with corporate income tax, municipal business tax, or net wealth tax. It will be assessed with 0.01% subscription tax on a yearly basis and calculated based on its net asset value. Non-resident limited partnerships will not be assessed with income tax and gains arising from their interest in the special limited partnership.
- For a regulated special limited partnership set up as an investment company in risk capital, and does not conduct any commercial activity, it will not be assessed with corporate income tax, municipal business tax, or net wealth tax. Non-resident limited partners are not subject to Luxembourg income tax and gains arising from their interest in a special limited partnership in Luxembourg.
The special limited partnership structure that serves various investment funds and activities have made Luxembourg a premier investment destination, offering many possibilities and simple formalities for setting up a company in Luxembourg. As a premier business consulting firm, Damalion brings together a network of professional providers with the technical knowledge and industry experience to provide expert advice to foreign investors looking to set up a special limited partnership in Luxembourg. Our global service network consists of lawyers, accountants, and other experts who facilitate a smooth and flawless company formation. Our Damalion experts will also be your guide in various business-related activities, including bank account opening, as well as assistance in sourcing the right personnel needed to operate a successful special limited partnership in Luxembourg. Reach out to a Damalion expert today, should you wish to learn more about the benefits of setting up a special limited partnership (SCSp) structure.
This information is not intended to be a substitute for specific individualized tax or legal advice. We suggest that you discuss your specific situation with a qualified tax or legal advisor.
