Luxembourg: An introduction to Luxembourg limited partnerships

Luxembourg have got in on the act by launching two limited partnerships based on the Anglo-Saxon limited partnerships: the société en commandite simple, otherwise known as a common limited partnership or “SCS”; and the société en commandite spéciale, otherwise known as a special limited partnership, or “SCSp”. These two Lux LPs are very similar and most of the legal regime which governs them is the same. The one major difference between the two vehicles is that the SCSp does not have legal personality (like an English limited partnership) and the SCS does have legal personality (like a Scottish limited partnership). We are increasingly seeing them being used as onshore fund vehicles, segregated account vehicles, co-investment vehicles and carry vehicles primarily for the reasons described below.

Contractual freedom and flexibility

The Luxembourg law of 10 August 1915 on commercial companies, as amended (the 1915 Law) contains a very limited set of mandatory provisions and leaves significant flexibility for the partners to determine the constitutional rules of the Lux LP in its governing document (i.e. in the limited partnership agreement). Unlike the société en commandite par actions (the SCA, which is generally called a corporate partnership limited by shares in English), for example, Lux LPs are not subject to the legal constraints and formalities applicable to Luxembourg corporate entities. The principle which underpins Lux LPs is one of contractual freedom and the parties are free to contract on whatever terms suit them best from a commercial perspective. Accordingly, while there are some default provisions set out in the 1915 Law, these are usually always overridden by more bespoke terms in the limited partnership agreement.

Lux LPs are subject to the requirements of the Alternative Investment Fund Managers Directive if, of course, they constitute “alternative investment funds” and fall within the scope of AIFMD. Except in narrow circumstances, the regulatory burdens this Directive imposes are unavoidable nowadays for multi-investor fund vehicles established or marketed into the EU (whatever fund vehicle is chosen). In addition, Lux LPs can be used as regulated and unregulated investment fund vehicles. There are a number of drivers and advantages and disadvantages which determine whether a fund vehicle should be subject to regulation over and above the regulation imposed by AIFMD, with investor preference high on the list.

What you need to know

• Limited partnerships have long been the “go to” vehicle for closed-ended private fund structures.
• Luxembourg has recently launched two of them: the common limited partnership (SCS) and the special limited partnership (SCSp).
• These Lux LPs are increasingly being used and have widened the onshore options available to fund managers when structuring funds.

Where a regulated vehicle is chosen, the “specialised investment fund” (fonds d’investissement spécialisé or SIF) regime is often used (rather than the SICAR regime (société d’investissement en capital à risque, i.e. an investment company in risk capital)), largely for its relative simplicity.Whichever regime is chosen, both SIFs and SICARs must be approved by, and are subject to the supervision of, the CSSF (Commission de Surveillance de Secteur Financier, i.e. the Luxembourg supervisory authority) which may be cumbersome, time-consuming and add extra cost.

In acknowledgement of this, the Luxembourg Parliament is currently in the process of approving a new law introducing “reserved alternative investment funds” or RAIFs. RAIFs will be flexible and quick-to-market investment vehicles which are regulated under law in a way that is comparable to a specialised investment fund but, unlike a specialised investment fund, will be supervised not directly by the CSSF but indirectly through the RAIF’s alternative investment fund manager. RAIFs (like SIFs and SICARs) may be structured as Lux LPs.

One benefit of establishing a regulated Lux LP (whether as a SIF, SICAR or, in the near future, a RAIF) is that it can be operated as an umbrella fund (or a platform) with compartments or sub-funds whose assets and liabilities are segregated from other compartments or sub-funds under Luxembourg law. These umbrella funds or platforms are being used increasingly by fund managers as an efficient way of structuring a series of funds and/or a series of managed accounts.

Liability and management

A Lux LP must at all times have at least one partner called the “unlimited or general partner” which has unlimited liability for the debts and obligations of the Lux LP. The general partner has to carry out, as a minimum, certain corporate functions in respect of its Lux LP but can delegate many of its obligations to a third party (which may be the Lux LP’s AIFM). A Lux LP must also at all times have at least one “limited partner” whose liability is limited to the amount that it has agreed to contribute to the Lux LP. Limited partners are generally prohibited from carrying out external management activities (i.e. vis-à-vis third parties). If they do so, they may be jointly and severally liable to such third parties for the debts and obligations of the Lux LP incurred in relation to such external management activities (and if they do so on a regular basis they will be treated as if they are a general partner of the Lux LP). However, a limited partner is expressly permitted to be involved in internal acts of management without forfeiting its limited liability status. The 1915 law sets out a nonexhaustive list of the actions which constitute “internal acts of management” and these include the exercise of their rights as limited partners, providing advice or opinions to the Lux LP, exercising control or supervision actions over the business of the Lux LP and providing loans, guarantees or security or any other type of assistance to the Lux LP. Limited partners are also provided with the certainty that they will not lose their limited liability status as a result of being a member of an internal committee (such as the investor advisory committee) whose approval must be sought prior to the Lux LP taking certain actions.

Speed of establishment and confidentiality

Lux LPs are also quick to establish and are confidential vehicles. There is no requirement for the limited partnership agreement to be made publicly available or for a notary to be involved in its signing, although certain limited information must be published in the Official Gazette (Mémorial C) on the formation of the Lux LP (e.g. the identity of the general partner, the identity of the managers (i.e. the general partner’s directors), and the Lux LP’s objects). Importantly, the identity of the limited partners and their respective contributions can be kept confidential. Although there are currently certain limited circumstances where an SCS has to file its accounts on the public register at the Registre de Commerce et des Sociétés, these circumstances are unlikely to apply where the SCS is being used as a fund vehicle. An SCSp does not currently have to publicly file its accounts. Accordingly, the accounts of Lux LPs used in fund structures are generally confidential documents too.

Tax treatment – Investors

Limited partners which are not resident in Luxembourg should not themselves be subject to any Luxembourg taxes merely by reason of investing in a Lux LP. Rather they would need to consider how they are taxed on the amounts allocated to them by the Lux LP in their home jurisdictions. We would generally expect those tax authorities that treat English, Scottish and Channel Island limited partnerships as tax transparent to treat Lux LPs in the same way – although as Lux LPs have only recently been introduced in their present form, this has not been tested.

Tax treatment – Lux LP

The Lux LP should not be subject to any Luxembourg taxes, save that: (i) an unregulated Lux LP (i.e. not a SIF, SICAR or RAIF) may suffer municipal business tax where it does not satisfy the conditions of a relevant exemption; and (ii) in certain circumstances a regulated Lux LP may have to pay an annual taxe d’abonnement equal to 1 basis point per annum on the net assets of that Lux LP. In addition, while there may be some VAT leakage in relation to, for example, set-up costs or other costs that do not constitute “management” for VAT purposes, the VAT treatment of a Lux LP and its general partner generally compares well against other onshore structures.

Conclusion

Lux LPs replicate many of the features that have made Anglo-Saxon limited partnerships so popular as fund vehicles and their introduction has certainly widened the onshore options for fund managers when they are structuring new funds, segregated accounts, co-investments and carry arrangements.

_{This article is part of our latest edition of Credit Funds INSIGHT. To download a PDF of the full publication, please click here.}