Useful clarification of the Luxembourg tax treatment of a SCS/SCSp

On 9 January 2015, the Luxembourg tax authorities published Tax Circular L.I.R. n° 14/4 (the “Circular”) on the Luxembourg tax treatment of income realised by Luxembourg law limited partnerships set up as société en commandite simple (“SCS”) or as société en commandite spéciale (“SCSp”).

The Circular discusses principally the question of the commerciality of an SCS/SPSp. Indeed, the tax transparency applicable to the SCS/SCSp for Luxembourg income tax law does not apply for the municipal business tax (impôt commercial communal) which is thus due at the level of the SCS/SCSp insofar as the SCS/SCSp is considered to be carrying on a trade or business in Luxembourg. The municipal business tax rates vary depending on the municipality in which the SCS/SCSp is established. In Luxembourg-City, municipal business tax is due at a rate of 6.75%.

The Circular aims at clarifying the situation in which a SCS/SCSp could be considered as carrying on a trade or business.

In relation thereto, the most important confirmation of the Circular is that an SCS/SCSp that is an alternative investment fund (“AIF”) is deemed never to carry on such a trade or business and is therefore never subject to Luxembourg municipal business tax, to the extent that the GP holds an interest of less than 5% in the SCS/SCSp. 

The same holds true, for different reasons though, for SIFs, SICARs and Part II SICAVs set up as SCS/SCSp and also for foreign AIFs that are managed by a Luxembourg-based AIFM.

For an SCS/SCSp that does not have AIF status¹ , the Circular sets out a series of tests and examples in the form of published court precedents that give useful guidance to taxpayers as to when, how and why an activity is deemed commercial and the SCS/SCSp subject to municipal business tax (e.g., numerous and quick sales with the purpose of enhancing the value of the estate). The Circular correctly points out that the sole fact that an SCS/SCSp holds an important estate or realises assets after short holding periods does not in itself amount to a commercial activity. 

For any questions, please contact: 

Yves Prussen, Partner

Elisabeth Adam, Partner