Luxembourg tax authorities clarify CIV Exemption under the reverse hybrid mismatch rule (ATAD 2)

Background

The Luxembourg tax authorities have issued a long-awaited circular (L.I.R. n° 168quater/2, 12 August 2025 – the "Circular") providing detailed guidance on the definition and scope of the “collective investment vehicle” (CIV) exemption under the reverse hybrid mismatch rule.

Under the reverse hybrid mismatch rule, Luxembourg tax transparent entities (e.g. SCS(p) or FCP) are subject to Luxembourg corporate income tax if (a) 50% or more of its non-resident associated enterprises holding in aggregate, directly or indirectly 50% or more of the voting, capital or profits rights in said Luxembourg tax transparent entity (b) consider it as tax opaque from the perspective of their residence country and (c) the net income of said Luxembourg tax transparent entity is not otherwise taxed in Luxembourg or elsewhere as a result solely of this mismatch.

However, a specific exemption from the reverse hybrid mismatch rule applies for CIVs, that are (i) widely held, (ii) hold a diversified portfolio of securities, and (iii) are subject to investor-protection regulation in their country of establishment (the "CIV Exemption").

The new circular brings much-needed clarity with respect to the application of CIV Exemption as the different criteria to qualify as a CIV were not defined by the law.

Key Clarifications from the Circular

Based on the Circular, the following Luxembourg investment fund vehicles should be considered as a CIV and hence benefit from the CIV Exemption:

• undertakings for collective investment (UCIs) governed by the amended law of 17 December 2010;
• specialized investment funds (SIFs) governed by the amended law of 13 February 2007; and,
• reserved alternative investment funds (RAIFs) governed by the amended law of 23 July 2016.

For these vehicles, there is no need to assess the three conditions individually. However, for any other vehicle the three conditions have to be assessed and the circular has provided the following clarifications in this respect:

1. Widely Held

This condition is met if the fund’s shares or units are marketed with the intention of attracting multiple unrelated investors. To perform such assessment all facts and circumstances should be taken into account. Further, in the presence of a master-feeder fund structure, this criteria is assessed at the level of the feeder fund.

The widely held condition is presumed to be satisfied if no individual investor (directly or indirectly) holds or controls more than 25% of the fund’s capital or voting rights, or otherwise controls the fund. This threshold can be verified by the tax authorities based on information available on the Luxembourg Register of Beneficial Owners, but taxpayers are still by law obliged to provide any relevant information to the Luxembourg tax authorities upon request that justify the non-application of the reverse hybrid mismatch rule.

Based on the Circular, investors would be considered as being related (i) if one holds, directly or indirectly, at least 50% of the voting rights or capital of the other, (ii) the same individual or entity holds, directly or indirectly, at least 50% of the voting rights or capital in both investors, (iii) investors with family ties (e.g. siblings, parents, kids, spouses, civil partners) and (iv) if, based on all relevant facts and circumstances, one controls the other or both are controlled by the same individual or entity.

A limited number of investors during (i) a fund’s ramp-up phase (up to 36 months from launch) or (ii) during liquidation phase does not necessarily disqualify a fund from being a CIV.

2. Diversified Portfolio of Securities

The term “securities” is interpreted broadly, encompassing shares, bonds, beneficiary units, fund units, deposits with credit institutions, and derivatives (where the underlying is a security). The diversification requirement is assessed in line with the rules applicable to SIFs: generally, a fund should not invest more than 30% of its assets or commitments in a single issuer, unless there is adequate justification. The use of derivatives must also reflect appropriate risk diversification.

3. Investor Protection

An investment fund is deemed to meet this condition if it is subject to the prudential supervision of the Luxembourg Financial Sector Supervisory Commission (CSSF) or, in the case of alternative investment funds (AIFs), if it is managed by an AIFM authorised under the AIFMD (Directive 2011/61/EU), whether the manager is established in Luxembourg or another EU/EEA Member State.

Conclusion

This circular provides certainty for the Luxembourg fund industry. Most Luxembourg investment funds especially those structured as UCIs, SIFs, or RAIFs will fall within the CIV Exemption and remain outside the scope of the reverse hybrid mismatch rule. For other funds, the clarified criteria and practical presumptions should facilitate compliance and reduce the risk of unexpected tax exposure.
Fund managers and advisers should review their fund structures in light of these clarifications to ensure continued eligibility for the CIV Exemption and to document compliance with the relevant conditions.

Any question?

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