LUXEMBOURG. Luxembourg Limited Partnership Regime

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1 LUXEMBOURG Luxembourg Limited Partnership Regime July 2016

2 Profile Loyens & Loeff Independent and international As a fully independent law firm, Loyens & Loeff is excellently positioned to coordinate international tax and legal matters. We have our own network of offices in major financial centres, staffed with specialists in Dutch, Belgian, Luxembourg and Swiss law. Through these offices, our clients have access to Loyens & Loeff s full-service legal expertise in their own time zone. Our office network is complemented by our several country desks all of which are experienced in structuring investments all over the world. It s a winning combination that enables us to assist international clients in a very effective way. Moreover, we are on excellent terms with other leading independent law firms and tax consultants. That way, we can guarantee you top-level advice in every part of the world. Full-service practice Innovative and Pragmatic As a leading firm, Loyens & Loeff is the natural choice for a legal and tax partner if you do business in or from Luxembourg, Belgium, the Netherlands and Switzerland, our home markets. You can count on personal advice from any of our 820 advisers based in one of our offices in the Benelux, Switzerland, or in key financial centres around the world. Thanks to our full-service practice, specific sector experience and thorough understanding of the market, our advisers comprehend exactly what you need. Each problem requires a customised solution. Our pragmatic approach and drive to devise innovative solutions allow us to effectively address the demands of our clients domestic and international businesses. Thanks to the broad range of our legal experience, know-how and the size of our practices, we can offer you top-level advice, locally and internationally. We are committed to meeting your needs at the highest quality level in the most efficient way. Although great care has been taken when compiling this overview, Loyens & Loeff Luxembourg S.à r.l. does not accept any responsibility whatsoever for any consequences arising from the information in this publication being used without its consent. The information provided in the publication is intended for general informational purposes and can not be considered as advice.

3 Luxembourg Limited Partnership Regime 3 Luxembourg Limited Partnership Regime Efficiency opportunities for structuring investment funds The limited partnership legislation in Luxembourg has been modernised by the Luxembourg law dated 10 July 2013 (the Law) in ways that assist the establishment of vehicles suitable for structuring liquid or illiquid funds and unregulated and regulated funds. The Law also transposed Directive 2011/61/EU on Alternative Investment Fund Managers (the AIFMD) into Luxembourg domestic law. The Law sets the stage for the use of Luxembourg unregulated limited partnerships as fund vehicles. As the investment platform which such vehicles use is often already based in Luxembourg, the whole fund structure can be efficiently set up in Luxembourg, i.e. in a single jurisdiction (with a Luxembourg AIFM if needed). This may result in operational, tax substance and cost advantages. Main Legal Characteristics The Law (i) modernised the legal framework of the existing Luxembourg limited partnership (société en commandite simple, SCS) which has legal personality; and (ii) introduced the new special limited partnership (société en commandite spéciale, SCSp) without legal personality. The modernised provisions for the SCS are substantially applicable to the SCSp as well. The key characteristics, changes and implications are described below. Establishment a simple formality An SCS is established by contract (notarised or under private seal) between at least one partner who is jointly liable for the SCS s obligations on an unlimited basis and usually has control over its management (i.e. the General Partner), and one or more partners who have limited liability (a Limited Partner). As stated above, an SCS has legal personality, whereas an SCSp does not. There is no upper limit on the number of eligible partners in an SCS. The identity of Limited Partners is not publicly available. Management The Law enables the governance of an SCS to be organised flexibly. Managers of an SCS may be appointed and removed under the rules established by the limited partnership agreement. The management of an SCS may be entrusted to one or more General Partners, or to persons who are not partners. Only General Partners are liable without limit; managers who are not General Partners

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5 Luxembourg Limited Partnership Regime 5 are liable only in cases of negligence. General Partners and other managers may be either natural persons or any Luxembourg legal entity. 1 An SCS is bound by any of its managers acts towards third parties, even in principle if those acts exceed the SCS s object. not be able to force Limited Partners to repay dividends distributed to them incorrectly by the managers. Transfer restrictions for partnership interests Participation by Limited Partners in management Limited Partners are prohibited from carrying out any acts of management other than internal management acts. They may be held jointly and severally liable towards third parties for any commitments by the Limited Partners in which they have participated contrary to this prohibition. The Law treats internal acts of management as permissible. It also gives a list of permitted acts: (i) exercising partners rights, (ii) providing advice to the LP, its affiliated entities or their respective managers, (iii) performing acts of control and supervision, (iv) granting loans, guarantees, securities or any other type of assistance to the SCS or its affiliated entities, and (v) granting authorisations to the managers as provided by the limited partnership agreement for acts exceeding the manager s powers. In addition, the Law makes it possible for a Limited Partner to act as manager of a legal entity which in turn acts as manager of the SCS. Voting rights Luxembourg companies traditionally have to apply the one share one vote principle. The Law allows for a derogation from this in the limited partnership agreement. In the absence of specific provisions in the limited partnership agreement, each partner s voting rights are in proportion to its interest. In other words, flexibility is created to allow restrictions on (or an increase in) Limited Partners voting rights, or grant veto rights to General Partners. Distributions The Law relaxes transfer restrictions with respect to both General Partner and Limited Partner interests, which may be freely defined in the limited partnership agreement. If the limited partnership agreement does not contain any restriction, the Law provides that transfers of General Partner interests are subject to the majority requirements applicable to amendments to the limited partnership agreement, whereas for Limited Partners interests, the consent of any General Partner is required. 2 What the modernisation entails in fiscal terms Full tax neutrality Luxembourg limited partnerships are transparent for Luxembourg corporate income tax purposes. However, if they conduct or are deemed to conduct a commercial enterprise, the enterprise is subject to municipal business tax. Furthermore, in that case, non-resident partners would have a permanent establishment in Luxembourg and be subject to corporate or personal income tax for their share in the partnership income. Fund initiators regularly use Luxembourg partnerships, whether in the form of the société en commandite simple (SCS) or of the société en commandite spéciale (SCSp), as fund vehicles for AIFs. Typically, they file a ruling with the Luxembourg tax authorities in advance to seek confirmation that the AIF s investment activity is not a commercial enterprise. However, on 9 January 2015, the Luxembourg tax authorities issued circular n 14/4 (the Circular) which now provides guidance in this respect: Distributions may be freely arranged in the limited partnership agreement, provided that no Limited Partner is entirely excluded from any participation in the profits or losses. Distributed capital may only be clawed back if the limited partnership agreement so provides. Creditors will It gives legal certainty for SCSs and SCSps that are AIFs in the sense of the Luxembourg law of 12 July 2013 implementing the AIFMD: they are considered not to have a commercial enterprise. As a general rule, it states that the nature of the 1 Note in this regard that recent case law makes the migration of foreign entities to Luxembourg with continuance of legal personality even easier than before. 2 Note that the same principle would apply to the pledging of partnership interests.

6 6 activities of an SCS or an SCSp should be determined in light of all circumstances on a case by case basis, notably the investment policy of the Luxembourg partnership. The Circular explicitly states that a commercial nature is neither concluded just from the volume of the assets held by the SCS or SCSp, nor from the sale of part of those assets in a relatively short period. However, as the Circular points out, any limited partnership will still be deemed to have a commercial enterprise if the General Partner is a capital company and has a stake of at least 5% in the partnership. It also states that the specific exemptions from Luxembourg taxation in the investment fund laws applicable to SICAFs, SIFs, SICARs and foreign AIFs effectively managed in Luxembourg prevail. No VAT on fund management and on investment advisory fees qualifying as either tax-transparent or opaque may now generally be structured as desired The result of the modernisation The legal modernisation of the Luxembourg partnership regime in 2013, together with the realisation of its full tax neutrality and the VAT exemption for fund management services provided to unregulated Luxembourg funds, makes these entities very efficient fund vehicles for unregulated alternative investment funds. Very often such alternative investment funds already have their main investment company in Luxembourg, and thus benefit from Luxembourg s efficient holding company regime and gain access to its extensive tax treaty network and EU Directives. Combining the two in Luxembourg, i.e. in a single jurisdiction, allows for increased efficiency and sustainability in setting up and operating an unregulated investment fund. Fund management services provided to Luxembourg regulated funds such as SIFs, SICARs or UCITS do not incur a VAT burden, as a VAT exemption applies. The Law extends this VAT exemption to all alternative investment funds, whether regulated or not. Fund management fees, including fees for investment advisory services 3 provided to an SCS or SCSp, would therefore not trigger VAT, irrespective of whether the service provider was located in Luxembourg or abroad. This puts the SCS or SCSp in an equivalent VAT position to limited partnerships located in, for instance, an offshore jurisdiction. Possibility to structure preferred cross-border classification of the SCS The Law provides for structuring opportunities depending on whether the SCS is classified as tax-transparent or opaque from a foreign perspective. Although tax transparency would be the likely default, in some cases tax opaqueness for foreign purposes may be preferred. With the modernised legal framework, the specific requirements (e.g. legal personality, transferability of SCS interests) for 3 Note that a case is currently pending before the European Court of Justice on whether fund management services which are VAT-exempt as per the EU VAT directives include investment advice. Currently this differs from Member State to Member State. In Luxembourg investment advice has always been understood as part of fund management services, and so is VAT-exempt.

7 Contact information Loyens & Loeff Luxembourg S.à r.l. Avocats à la Cour 18-20, rue Edward Steichen L-2540 Luxembourg T F Marc Meyers Partner T M E marc.meyers@loyensloeff.com Thibaut Partsch Partner T M E thibaut.partsch@loyensloeff.com Max Welbes Partner T M E max.welbes@loyensloeff.com Christophe Boyer Counsel T M E christophe.boyer@loyensloeff.com Pieter Leguit Counsel T M E pieter.leguit@loyensloeff.com Jérôme Mullmaier Counsel T M E jérôme.mullmaier@loyensloeff.com Tobias Niehl Counsel T M E tobias.niehl@loyensloeff.com Marjorie André Senior Associate T M E marjorie.andre@loyensloeff.com Laure Mersch Senior Associate T M E laure.mersch@loyensloeff.com Jevgeniy Nesch Senior Associate T M E jevgeniy.nesch@loyensloeff.com

8 LOYENSLOEFF.COM As a leading firm, Loyens & Loeff is the logical choice as a legal and tax partner if you do business in or from the Netherlands, Belgium, Luxembourg or Switzerland, our home markets. You can count on personal advice from any of our 900 advisers based in one of our offices in the Benelux and Switzerland or in key financial centres around the world. Thanks to our full-service practice, specific sector experience and thorough understanding of the market, our advisers comprehend exactly what you need. Amsterdam, Arnhem, Brussels, Hong Kong, London, Luxembourg, New York, Paris, Rotterdam, Singapore, Tokyo, Zurich.