AGEFI Luxembourg - septembre 2025

AGEFI Luxembourg 20 Septembre 2025 Fonds d’investissement ByGuilhèmBECVORT,PartnerWhite&CaseS.àr.l. C ircular L.I.R. n°168quater/2 clarifies the CIV carve-out, bringing long-awaited cer- tainty to RAIFs, SIFs and other Luxembourg funds. Janus and theDouble Face of Transparency The Roman god Janus, guardian of transitions and thresholds, is tradi- tionally depicted with two faces: one turned toward the past, the other to- wardthefuture.Hisambivalenceem- bodies the complexity of beginnings andendings,ofopennessandclosure. The same image has haunted the re- verse hybrid rule since its introduction under Luxembourg tax law and entry into force in 2022: depending on the angle of analysis, an entity could appear tax transparent under domestic lawyettaxopaqueundertheperspectiveofaforeign jurisdiction.Thisdualityriskedcreatingpotentialsit- uations of double non-taxation, precisely the out- come targeted by the OECD’s Base Erosion and Profit Shifting ( BEPS ) project and the EU’s second Anti-Tax Avoidance Directive (Council Directive (EU) 2017/952, ATAD2 ). Forafundcaughtbythereversehybridrule,thepor- tion of its income attributable to “bad” ATAD 2 in- vestors could be taxed in Luxembourg directly at fund level, rather thanflowing through ina tax-neu- tral fashion to investors. On 22August 2025, the Luxembourg tax authorities issuedCircularL.I.R.n°168quater/2(dated12August 2025) (the “ Circular ”), finallyoffering the clarity that Janusnevercould.Bysheddinglightonhowthecol- lective investment vehicle (“ CIV ”) carve-out should applyinpractice,thistaxcirculargivesLuxembourg’s fundsindustrysomethingithaslonglacked:theabil- itytolookforwardwithlegalcertainty,nolongertorn between two irreconcilable perspectives. Origins of the ReverseHybridRule The reverse hybrid provisions trace their origins to Action2oftheOECD’sBEPSproject,whichtargeted hybrid mismatch arrangements. ATAD 2 translated theseconceptsintoEUlaw,requiringMemberStates to neutralizemismatches arising fromdifferences in legal characterizationof entities or instruments. Lux- embourgimplementedthisDirective,introducingthe reversehybridruleinArticle168quateroftheIncome TaxLaw( Loi concernant l’impôt sur le revenu , “ LITL ”). ThisruletookeffectonJanuary1,2022,followingthe lawofDecember 20, 2019,whichwas later amended by the lawof December 23, 2022. A“reversehybrid”ariseswhenanentity is regarded astaxtransparentbyitscountryofestablishment(e.g. Luxembourg for partnerships such as the société en commandite simple ( SCS ), société en commandite spéciale ( SCSp )or fondscommundeplacement ( FCP ))butastax opaque by one or more foreign jurisdictions where its associated investors are located. If 50%ormore of the voting rights, capital, or profit entitlement of the Luxembourg entity is held by such investors - alone or “acting together” - the entity’s net income, other- wise untaxed, becomes subject to Luxembourg cor- porate income tax at 17% plus the 7% em- ployment fund surcharge (17.12% in 2025). Luxembourg lawmakers, following ATAD 2, exemptedCIVs fromthe scopeof the rule if theywere (i)widelyheld, (ii) invested in a diversified portfolio of securities, and (iii) subject to investor-protection regulation. Yet these statutory conditions lacked precise interpretation. Although Luxem- bourg’s parliamentary works suggested that specialised in- vestmentfunds( SIFs ,under the law of 13 February 2007) and reservedalterna- tive investment funds ( RAIFs ,underthelawof23 July 2016)were intended to fall within the carve-out, neither the Directive itself nor the Luxembourg transpo- sitionprovideddefinitive confirmation. As a result, key questions remained: at what point, andunderwhat circumstances, couldaCIVbe con- sidered widely held? Should “diversification” be tested formally or by reference to economic expo- sure? And could the concept of “significant influ- ence” be stretched to broaden the scope of associated enterprises? This uncertainty had tangible effects. Some man- agers resorted to using corporate, tax-opaque vehi- cles - corporate RAIFs or SIFs - to sidestep reverse hybrid concerns, despite a strategic preference for more flexible and cost-efficient transparent (unreg- ulated) partnerships. TheCircular’s Long-AwaitedClarification The newCircular addresses these concerns head-on. Three clarifications standout. UCITS, Part IIUCIs, SIFs andRAIFsAutomatically Treated asCIVs The Circular confirms that UCITS and Part II UCIs under the law of 17 December 2010, SIFs under the 2007 law, and RAIFs under the 2016 law all qualify automatically as CIVs. These vehicles are therefore outside the scope ofArticle 168quater LITLwithout needing to demonstrate compliance with the “widelyheld”, “diversification”, or “investorprotec- tion” conditions. What ItMeans toBe “WidelyHeld” For other fund types, such as unregulated partner- ships, theCircular devotes significant attention to the “widelyheld”condition.Thecorerequirementisthat thefundbemarketedtomultipleunrelatedinvestors. Onlyoncethisisestablisheddoesthepresumptionin- troduced by the Circular apply: the condition is pre- sumedsatisfiedwherenoindividualultimatelyowns orcontrolsmorethan25%ofthefund’scapitalorvot- ingrights.Thispresumptionseemssecondaryandre- buttable. It cannot override the primary test: that a fundmust genuinely be marketed to, and held by, a plurality of unrelated investors. The tax authoritiesmay consult the Register of Ben- eficial Ownership ( Registre des Bénéficiaires Effectifs , RBE ) to verify the absence of a controlling investor. Yet this is a delicate approach. The RBEwas created for anti-money laundering purposes under the law of 13 January 2019, not as a tax enforcement tool. Moreover, in practice, RBE entries often designate managers rather than actual investors, raising ques- tions about whether “control by other means” can really be inferred. The Circular also introduces tolerances during a fund’s lifecycle: a 36-month launching phase, during which a temporary concentration of investors is per- mitted, and the liquidationphase. Both tolerances re- mainsubjecttoLuxembourg’sgeneralanti-abuserule (Article 6 of the Tax Adaptation Law, Steueranpas- sungsgesetz , of 16October 1934, as amended). TheLuxembourgtaxauthoritiesmayalsocross-check Form205filings,whichdisclosealldirectstakeholders of the partnership and, where relevant, indirect in- vestors through transparent vehicles. Defining a “DiversifiedPortfolio” - Loans Included TheCircular interprets “diversifiedportfolio of secu- rities”broadly. Securities include equity instruments, beneficiaryshares,bonds,fundunits,deposits,deriva- tives-andloans.Theexplicitinclusionofloansispar- ticularlynotable.Whileitreflectstheeconomicreality of private credit funds and is consistent with diversi- ficationprinciplesunderCSSFCircular07/309forSIFs, itraisesquestionsundertheSICARtaxregime,which hastraditionallyexcludedpuredebtfromthecategory of eligible securities.Although theCircular states that its definitions apply only toArticle 168quater, its rea- soningcouldinvitequestionsaboutthescopeofother tax regimes in the future. Practically,theCircularadoptsthe30%concentration rule familiar from the SIF framework: a fund is not considered diversified if more than 30% of its assets or commitments are invested in securities of a single issuer, unless justified. For private equity, this allows concentrated holdings where properly documented. For debt funds, the explicit recognition of loans pro- vides welcome certainty, though repeated bilateral loanstoasingleborrowermaychallengethecap.Real estate and infrastructure funds facemore ambiguity: direct property is not a security, but a look-through approachtoprojectcompaniesorREIT-likestructures could bring such assets within scope. The Circular stops short of clarifying this. InvestorProtection:SupervisionandSubstanceOver Form Finally,theCircularconfirmsthattheinvestor-protec- tionconditionissatisfiedwherefundsaresupervised by the CSSF or managed by an authorized AIFM under theAIFMDirective (Directive 2011/61/EU). Market Impact - HowReverseHybrid Uncertainty Shaped FundStructures Statistics from the CSSF and the Association of the LuxembourgFundIndustry( ALFI )illustratehowre- verse hybriduncertainty has shapedbehaviour. The number of Luxembourg-domiciled funds - whether FCPs,SICAVs,SICARs,orotherUCIs-increasedfrom around4,000in2015tomorethan5,900in2024.RAIFs alone grew exponentially, from only a few dozen at their launch in 2016 tonearly 3,000 today. When considering unregulated partnerships along- sideRAIFs andSIFs,most of these vehicles tradition- allyadoptedtax-transparentformssuchastheSCSor SCSp.YetfocusingspecificallyonRAIFsandSIFs,the CSSF’sofficiallistsindicatethattax-opaquecorporate formshaveconsistentlymaintainedaslightnumerical advantage over transparent partnerships, albeit with only a modest gap in earlier years. That gap, how- ever, has steadilywidened. Key inflectionpoints ap- pear in 2017 (the year ATAD 2 was adopted at the EU level, introducing the reverse hybrid concept), in 2019 (its formal transposition into Luxembourg law), and in 2022 (the year the reverse hybrid rule entered into force). Thetimingsuggestsmorethancoincidence:lingering uncertainties around the interpretation and scope of the reverse hybrid provisions clearly shaped spon- sors’ conduct. Many opted for tax opaque corporate RAIFs (or SIFs) to shield themselves from potential reclassification risk - even if that choice meant fore- going the relative cost-efficiency and flexibility of lighter, partnership-style regulation. In some cases, managers appear to have accepted higher compli- ance costs as the price of legal certainty. Indexing 2015 as 100, transparent vehicles climbed to an index of about 290 by 2022, but opaque vehicles rose faster, reaching nearly 350. Both categories dipped after 2022 amidglobal economic uncertainty, butby2024opaquestructures-particularlycorporate RAIFs - still outpacedpartnerships, indexed at about 295 compared with 250. This suggests the turn to opacitywas not accidental but a deliberate defensive strategy topre-empt reverse hybrid exposure. The Circularmay nowrebalance the field. By explic- itlyconfirmingthatRAIFsandSIFsqualifyfortheCIV carve-outandbyclarifyingthe“widelyheld”,“diver- sifiedportfolio”,and“investorprotection”conditions forotherfunds,itreducesthecomplianceriskthathas drivenopacity.Ifappliedconsistently,itmayencour- age managers to return to transparent partnerships, reassuredthatstructuringdecisionswillnotbedesta- bilizedby interpretative uncertainty. Indexed growth of tax-opaque vs. tax-transparent RAIF/SIF vehicles,2015–2024(Index100=2015).Source:CSSFStatistics Conclusion - Janus Faces the Future Like Janus, Luxembourg’s reverse hybrid rule once forced funds to look in two directions at once: trans- parent at home, potentially opaque abroad. The Cir- cular resolves thisduality, providing themarketwith the clarity to face forward. For sponsors, the message is clear: Luxembourg re- mains committed to international standards while preserving its position as Europe’s pre-eminent fund domicile. Janus could never escape the backward glance. Thanks to this Circular, Luxembourg funds cannowface the futurewith confidence. Luxembourg Puts Reverse Hybrid Doubts to Rest with NewTax Circular L uxembourg continues to solidify its position as a leading hub for real es- tate investment funds (REIFs), ac- cording to the latest edition of the ALFI Real Estate Investment Funds Survey. The survey provides insights into how the market is adapting to shifting investor demands, regulatory evolution and broa- der macroeconomic trends. Key takeaways from the 2024 survey include: Lighter structures gaining ground The survey confirms a strong shift toward lightly regulated fund structures. RAIFs, manager-regu- latedAIFs and non-regulated vehicles now repre- sent 69.5% of the market — with the significant evolution from just one RAIF in 2016 to 226 in 2024. The SCS/SCSp legal form continues to dom- inate, used by 59% of surveyed funds, reflecting preferences for tax transparency and structural simplicity. Institutional focus with broad strategies REIFs remain primarily institutional with an EU base of investors: 80.4% of investors come from Europe, and 83% of funds serve 25 or fewer in- vestors. Multi-sector strategies are now the norm, followed by targeted allocations to residential, of- fice and retail. This diversification reflects growing demand for flexibility and stability. Resilience under pressure Despite market headwinds, Luxembourg REIFs showed notable resilience. Over 80% of funds chose to hold their investments during challeng- ing conditions rather than liquidating or reinvest- ing. The use of liquidity management tools such as redemption gates remains limited, underscor- ing the long-term nature of the strategies em- ployed. Only 4.5% of funds suspended redemp- tions, while 16% processed redemptions in kind, indicating that most managers rely on strong gov- ernance rather than reactive measures. Commenting on the findings, ChristopheMasset, Partner at Deloitte, Cross-Border Tax stated: “The latest ALFI survey highlights the rising impor- tance of liquidity management for Luxembourg real estate funds amid market stress driven by geopolitical shifts and monetary policy changes. Among funds using liquiditymanagement tools, nearly 5% have suspended redemptions. As regulators finaliseAIFMD and UCITS standards, Luxembourg remains at the forefront, providing a robust framework for managers to navigate these challenges”. This cautious but steady approach reflects the long-term nature of REIF strategies and under- lines investor confidence, even during volatile conditions. Trends in size, fees and leverage Smaller funds continue tomake up the bulk of the market, but larger vehicles are gaining ground. Fee structures remain largely based on NAV, while performance fees are in decline. Use of leverage is becoming more conservative, aligned with a cautious view on debt in a higher-rate en- vironment. The survey confirms Luxembourg’s continued rel- evance as a jurisdiction of choice for global real es- tate strategies. The adoption of ELTIF 2.0 and growing openness to retail participation point to a sector that is not only evolving, but expanding. “ELTIF 2.0 tackles several challenges raised under ELTIF 1.0, through both enhanced product design and improved distribution,” said Britta Borneff, ALFI CMO. In this context, the design of current and future product launches should carefully consider all key elements, including liquiditymanagement programmes, distribution capacity, and the deployment of appropriate transfer agent technology, among others. Despite these complexities, the rapid growth of ELTIF 2.0 may well position it as a strong future counter- part to UCITS or AIFs.” Concluding, she added “ with its flexibility, expe- rience, and international reach, Luxembourg re- mains a reliable platform for real estate fund managers to innovate and grow.” Survey :https://lc.cx/N_nBXt Luxembourg REIFs evolve to meet a changing market em Lux g bour eal Esta R et SURVEY ALFI est Inv 4202 Fu ment nds 2024