On 9 June 2023, the Luxembourg tax authorities issued guidance in the form of an administrative circular (Circulaire du directeur des contributions L.I.R. no. 168quater/1 (the "Circular")) and also issued some associated “frequently asked questions” (the "FAQs"), detailing their position on the specific rule covering "reverse hybrid entities". This rule, laid down in Article 168quater of the Luxembourg tax laws, was introduced in the Luxembourg Law of 20 December 2019 implementing the ATAD 2 EU directive and is applicable as from tax year 2022.
In a nutshell, Luxembourg entities that are treated as transparent for Luxembourg tax purposes (such as (special) limited partnerships (SCS or SCSp)) but as a taxable person for the purpose of the jurisdiction of any associated enterprise(s) holding in aggregate, directly or indirectly, at least 50% of the voting rights, capital interest or rights to profit in the entity, should be subject to Luxembourg corporate income tax on their portion of the net income that is not otherwise taxed under the laws of Luxembourg or any other jurisdiction.
This provision does not apply to collective investment vehicles, provided they are widely held, hold a diversified portfolio of securities and are subject to investor protection requirements in the country in which they are established (so-called “CIV exemption”). The CIV exemption will mainly apply to Luxembourg regulated investment funds (UCIs, SIFs, RAIFs), whilst alternative investment funds will require a case-by-case assessment.
The Circular has brought welcomed clarifications on the tax status of such reverse hybrid entities and the determination of their tax base. In this framework, it is important to point out that the Luxembourg tax authorities have confirmed that distributions by a reverse hybrid entity falling within the scope of this rule are not subject to withholding tax. Such reverse hybrid entities may also benefit from the 50% tax exemption on dividend income and could benefit from foreign tax credits under certain conditions.
The Circular was helpfully complemented by FAQs with a view to providing further practical guidance on any associated tax compliance formalities. All relevant entities must now prepare and electronically file tax form 205 ("Déclaration pour l’établissement en commun des revenus") if they derive the main part of their income from movable capital (such as dividends and certain forms of interest income), the disposal of real estate assets or substantial participations, carried interest shares and from certain restructuring operations of their subsidiaries, e.g. dissolutions, mergers or divisions, whether or not they qualify as reverse hybrids. Other Luxembourg tax transparent entities will stick to their former filing obligations, namely preparing and filing their usual tax form 200 ("Déclaration pour l’établissement en commun des revenus d’entreprises collectives et de copropriétés"). It is important to note that some entities which were previously required to file form 200 may now be required to file tax form 205 instead, meaning in practice that further information will need to be collected from direct and indirect limited partners investing in certain Luxembourg partnerships.
According to the FAQs, although the Luxembourg tax authorities have allegedly sent by post a request to file tax form 205, entities which have not received the request but which meet the relevant criteria should also file this tax form. Practically speaking, each Luxembourg tax transparent entity is bound to make its own assessments on its status under the reverse hybrid entity rules and determine the exact scope of its tax compliance obligations.
If you need assistance in performing such assessments and in preparing and filing the relevant forms, our team is available to help you comply with your tax filing obligations.