Largely inspired by the Anglo-Saxon limited partnership regimes, the special limited partnership (SLP) has been designed to bolster Luxembourg’s position as the main alternative investment fund structuring hub in the EU at a time when the manager regulation is seen as a potential substitute for product regulation. Structuring flexibility and tax transparency are the key features of the SLP.
The Luxembourg environment
Luxembourg is the world’s second largest investment funds domicile, and is the prime location for the pan-European and global distribution of investment funds under the UCITS brand. Initially designed as a global retail funds hub under the sole UCITS brand, Luxembourg has gradually opened up to the alternative asset classes, offering bespoke structuring solutions through the investment company in risk capital (SICAR), the specialized investment fund (SIF) and the regular Luxembourg commercial company forms often designated under the ‘SOPARFI’ acronym and typically used as acquisition or financing vehicles.
Structuring flexibility, investor protection and tax efficiency are key elements of the Luxembourg investment fund offering. These are the core features that have helped persuade international managers and investors to shift their fund platforms, operations and investments to Luxembourg.
The introduction of the SLP and the complete overhaul of the common limited partnership (CLP) two years ago coincided with the Luxembourg implementation of Directive 2011/61/EU on alternative investment fund managers (AIFMD), but it clearly aimed to go further.
Legal framework and features
The SLP is defined as a partnership established for a limited or unlimited duration, between one or more general partners jointly and severally liable for the partnership's commitments, and one or more limited partners whose liability does not extend beyond their partnership interest, in unitized form or not, pursuant to the provisions set forth in the limited partnership agreement.
The absence of legal personality of the SLP offers unprecedented structuring flexibility and the highest level of contractual freedom, while, at the same time, decreasing the scope of mandatory corporate law requirements otherwise applicable to commercial companies. The full terms and conditions of the SLP may thus be exclusively set in the limited partnership agreement, with a very limited impact of a few mandatory law provisions.
The SLP can be used as a regulated or non-regulated fund vehicle, as a special purpose vehicle and carry pool management, where unitized and non-unitized solutions can be offered in a confidential set-up.
Two further noteworthy features: the management function may either be entrusted to the general partner or to an external manager, and the SLP does not have to file its annual accounts with the Luxembourg trade register, hence preserving confidentiality.
The SLP is a transparent vehicle from a tax perspective. It is however subject to municipal business tax to the extent that it carries on trade or business activities on a permanent basis. On 9 January 2015, the Luxembourg tax administration issued a circular L.I.R. 14/4 on the tax treatment of incomes realised by SLP (the same applies to CLP) aiming at clarifying the situations pursuant to which they could be considered as carrying on a trade or business. The most relevant clarification derived from this circular is that an SLP considered as alternative investment fund (AIF) pursuant to the Luxembourg law implementing the AIFMD is deemed never to carrying on a trade or business and is therefore never subject to Luxembourg municipal business tax to the extent that its general partner holds less than 5% of the SLP. It is also worth mentioning that the same holds true (for different reasons though) for SIF and SICAR set up as SLP and also for foreign AIF managed by Luxembourg AIFM.
With respect to SLP that do not qualify as AIF, the circular sets out several criteria and examples that gives useful guidance to tax payers as to when, how and why an activity is deemed commercial resulting in the SLP being subject to Luxembourg municipal business tax.
The SLP has become the most successful and sought after structuring solutions within two years’ time. With this clarification from the tax administration confirming the so-called tax neutrality, the Luxembourg partnerships have been confirmed as the products of choice for alternative investment management purposes.