Luxembourg’s financial sector offers a unique legal structure designed to meet the needs of private equity and investment funds: the Special Limited Partnership (SCSp) and the Limited Partnership (SCS). These partnership structures are particularly popular in Luxembourg for their flexibility, tax advantages, and investor appeal. Although they share some similarities, they also have distinct features, particularly regarding legal personality, tax treatment, and disclosure requirements. Damalion provides an in-depth analysis of both structures to help investors, fund managers, and business owners understand their differences and determine which may best suit their needs.
1. Legal Regime: Special Limited Partnership (SCSp) Vs. the Limited Partnership (SCS)
The SCSp and SCS are governed by Luxembourg’s 1915 Company Law, specifically tailored to meet the needs of modern fund structures. However, they fall under different regulatory scopes:
- SCSp: The SCSp is highly flexible, governed mainly by the terms of the Limited Partnership Agreement (LPA). Since it does not have a legal personality, its operations are predominantly dictated by contractual arrangements. This flexibility makes it especially attractive for private equity, venture capital, and real estate investment funds, as it allows investors to structure investments with fewer regulatory constraints.
- SCS: While also flexible, the SCS possesses a legal personality under Luxembourg law, giving it additional formal requirements. The legal personality impacts the partnership’s capacity to enter into contracts, hold assets, and incur liabilities in its name, and also subjects it to more regulatory oversight compared to the SCSp.
Summary:
- SCSp: Primarily governed by contractual terms, fewer regulations.
- SCS: Legal personality with additional regulatory requirements.
2. Legal Personality: Special Limited Partnership (SCSp) Vs. the Limited Partnership (SCS)
One of the primary distinctions between the SCSp and SCS lies in legal personality.
- SCSp: The SCSp lacks legal personality. As a result, it operates solely through its general partners, who represent and manage the partnership. This means the SCSp cannot hold assets or enter into contracts in its own name; rather, its activities are conducted through the partners.
- SCS: In contrast, the SCS has legal personality, similar to English partnerships. This allows the SCS to own assets, enter into agreements, and be directly liable for debts in its own name, providing more independence and an established legal identity.
Summary:
- SCSp: No legal personality, represented by general partners.
- SCS: Has legal personality, can operate independently as an entity.
3. Formation – Limited Partnership Agreement (LPA): Special Limited Partnership (SCSp) Vs. the Limited Partnership (SCS)
Both the SCSp and SCS require an LPA (Limited Partnership Agreement) to define their governance and operational structure.
- SCSp: Formation is straightforward, requiring an LPA between one or more general partners and one or more limited partners. The LPA for an SCSp allows significant customization, permitting partners to outline unique terms and conditions, including capital contributions, profit distribution, and governance.
- SCS: While the formation process also requires an LPA, the SCS may have more defined terms due to its legal personality. The LPA still provides room for customization, but some terms might be less flexible to accommodate the SCS’s legal obligations.
Summary:
- SCSp: High flexibility in LPA terms.
- SCS: LPA with slightly more formalized terms due to legal personality.
4. Governance
The governance of both structures is determined by the general partners, but the extent of control and structure varies.
- SCSp: Offers maximum flexibility. The general partners manage the SCSp, with governance largely determined by the LPA. This autonomy allows the SCSp to adapt governance structures suitable to private equity and venture capital needs, often limiting the role of limited partners in daily management.
- SCS: Also managed by general partners, but its legal personality may require more structured governance processes. This may involve more formalized roles for limited partners or require adherence to specific governance practices outlined in Luxembourg’s laws, though it remains relatively flexible compared to corporate entities.
Summary:
- SCSp: Flexible governance structure; general partners lead operations.
- SCS: Governed by general partners but with potential for formalized structure due to legal personality.
5. Register
Luxembourg requires both SCSp and SCS to be registered with the Trade and Companies Register (RCS), but the extent of public disclosure differs.
- SCSp: The registration for an SCSp includes limited information, typically only the name, registered office, and general partner details. Capital contributions and limited partner information can remain confidential, preserving the anonymity of investors.
- SCS: Registration with the RCS for an SCS involves similar disclosures but may include additional transparency due to its legal personality. Information about the legal representatives and, occasionally, financial details might be more accessible.
Summary:
- SCSp: Limited public disclosure, preserving partner anonymity.
- SCS: Slightly higher level of disclosure due to legal personality.
6. Annual Accounts
The requirement to maintain and publish annual accounts differs significantly between the SCSp and SCS.
- SCSp: Exempt from publishing annual accounts unless it qualifies as an alternative investment fund (AIF) or meets specific conditions under the AIFMD. This allows an SCSp to maintain a low profile, particularly attractive for private investors.
- SCS: Required to maintain annual accounts if it exceeds certain thresholds, aligning with general corporate transparency standards in Luxembourg. The obligation may increase the administrative burden but also enhances transparency.
Summary:
- SCSp: Generally exempt from publishing annual accounts.
- SCS: Required to maintain and potentially publish annual accounts.
7. Partnership Interest and Capital Accounts
Both structures offer flexibility in structuring partnership interests, but the approach to capital accounts varies.
- SCSp: Capital contributions are defined by the LPA, with minimal formal requirements. Capital accounts are flexible, allowing capital distribution without stringent regulatory requirements, making it appealing for private equity funds.
- SCS: Also offers flexibility, but capital management may be subject to more structured accounting practices due to its legal personality. Investors may have more defined capital account requirements, depending on the specific terms of the LPA.
Summary:
- SCSp: Highly flexible capital account structure.
- SCS: Flexible but potentially more formalized capital accounts.
8. Tax Aspects
The tax regime for SCSp and SCS primarily follows tax transparency principles, but their legal personality influences certain tax nuances.
- SCSp: The SCSp is tax transparent, meaning tax obligations pass directly to the partners. This is advantageous for investors as it avoids entity-level taxation. In specific cases, SCSp may qualify for tax exemptions, making it a favorable choice for private equity.
- SCS: Also tax transparent, but the presence of legal personality might affect tax treatment in certain jurisdictions. The limited partnership is subject to the following taxes:
- fixed registration duty;
- property tax;
- business tax;
- wealth tax;
- corporate income tax;
- VAT filing, with the frequency varying according to the following criteria:
- if the annual turnover excluding tax (net turnover) is below 112,000 euros, the VAT filing is annual;
- if the annual net turnover is between 112,000 euros and 620,000 euros, the VAT filing is quarterly;
- if the annual net turnover exceeds 620,000 euros, the VAT filing is monthly.
Summary:
- SCSp: Tax transparent, typically favorable for private equity.
- SCS: Tax transparent, with slight variations due to legal personality.
Both the SCSp and SCS provide Luxembourg-based investors and fund managers with highly flexible, investor-friendly structures. The SCSp is often chosen for its flexibility and limited disclosure, making it ideal for private equity and venture capital funds. Meanwhile, the SCS is favored for structures that benefit from having a legal personality, such as certain types of holding companies or investment partnerships where entity-level recognition is advantageous.
Each structure serves distinct purposes within Luxembourg’s financial landscape, and the choice between them depends on the specific needs regarding regulatory requirements, legal personality, tax treatment, and confidentiality. By understanding these differences, investors can better navigate the complexities of Luxembourg’s partnership landscape to make informed investment decisions.
Damalion supports international investors, investment groups and families who register their Luxembourg holding company. We provide local resident directors. Please contact your Damalion expert now.
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.
