Luxembourg Clarifies The Exclusion For Collective Investment Vehicles - Key Points For Investment Funds

On 22 August 2025, the Luxembourg tax authorities ("LTA") published a new Circular (L.I.R. nº 168quater/2, dated 12 August 2025) addressing certain aspects of the Luxembourg reverse hybrid mismatch rules ("RHMR")¹. This Circular provides much-needed clarifications for the investment funds' sector regarding the application of the exclusion for qualifying "collective investment vehicles" within the meaning of such rules ("CIVs").

Background

In January 2022, the final leg of the anti-hybrid mismatch rules under ATAD2² entered into force in Luxembourg domestic tax law.

Under Luxembourg tax law, a reverse hybrid mismatch arises when a Luxembourg tax-transparent entity - such as a partnership (including an SCS or SCSp) - is treated as a taxable person under the tax laws of one or more non-resident "associated enterprises" that, directly or indirectly, hold at least 50% of the voting rights, capital ownership, or profit entitlement in the entity and for that reason are not taxable on the net income of the entity in their home jurisdiction.

Where the RHMR applies, the Luxembourg tax-transparent entity becomes subject to corporate income tax and the employment fund contribution on its net income at an aggregate rate of 17.12% for tax year 2025, to the extent that such income, derived by the entity, is not taxed elsewhere.

However, Luxembourg tax law provides for an exemption for CIVs. A CIV is defined as a vehicle that (i) is widely held, (ii) holds a diversified portfolio of securities, and (iii) is subject to investor-protection regulations in its jurisdiction of establishment. Until now, there has been no official guidance from the LTA on the interpretation of these conditions. Now, the new Circular offers valuable clarification on their application.

Scope of the exemption - which investment funds qualify?

The Circular (seems to) confirm(s), in line with the related parliamentary works of the law implementing the RHMR, that the following categories of investment funds are within the scope of the exemption:

• Undertakings for collective investment (UCIs) governed by the Luxembourg law of 13 February 2010 on UCIs, as amended;
• Specialized investment funds (SIFs) governed by the Luxembourg law dated 13 February 2007 on SIFs, as amended; and
• Reserved alternative investment funds (RAIFs) governed by the Luxembourg law dated 23 July 2016 on RAIFs, as amended.

Other categories of investment funds may also qualify, provided they satisfy the following three criteria:

• "Widely held" requirement - The fund must be open to multiple unrelated investors. This condition is deemed satisfied if no single investor, whether directly or indirectly, holds or controls more than 25% of the fund's capital or voting rights, or otherwise exercises control over the fund by any other means (and all such investors are unrelated³). The Circular mentions that under circumstances a fund may have only a limited number of investors, even if it is conceived to raise capital amidst a multitude of unrelated investors and give as examples the possibility of having a limited number of investors at launch phase (if additional unrelated investors are expected within 36 months from the date of authorization or formation of the fund) or during the liquidation phase when the number of investors is expected to decrease. The Circular also specifies that for master-feeder-structures, this requirement must be assessed by taking into consideration the investors at the level of the feeder fund(s).
• "Diversified portfolio" requirement -The Circular adopts a broad interpretation of "securities," encompassing shares, units, beneficiary shares, bonds, derivative instruments on the above instruments, and similar assets. The requirement for diversification must be assessed in light of the fund's investment policy and risk profile. Generally, the condition is not met if the fund does not comply with the risk diversification requirements for SIFs, i.e. it invests more than 30% of its assets or commitments in securities issued by a single issuer, unless adequate justification exists or where the use of derivative financial instruments does not result in appropriate diversification of the underlying assets.
• "Investor protection" requirement -This requirement is fulfilled if (i) the fund is supervised by the Luxembourg Commission de Surveillance du Secteur Financier (CSSF), or (ii) is an alternative investment fund (AIF), as defined under the Luxembourg law of 12 July 2013 on alternative investment fund managers (AIFM), as amended, and is duly managed by an authorized AIFM in accordance with Directive 2011/61/EU (the "AIFM Directive"). This implies that an AIF managed by an AIFM that is merely registered (and not fully authorized) under the AIFM Directive should not meet this requirement.

Implications for the investment funds' sector

These clarifications suggest that the majority of Luxembourg investment funds' categories should benefit from the exclusion reserved for CIVs. However, it is worth noting that AIFs managed by AIFMs that are only registered, rather than authorized, under the AIFM Directive may remain outside the scope of the exclusion. Hence, existing funds established as a partnership sub-threshold AIF may need to review their position in view of the new guidance included in the Circular.

Such review is particularly key in view of the deadline to file the tax returns relevant for RHMR in Luxembourg (forms 205 which should be filed before 31 December 2025, in relation to fiscal year 2024).

Our tax team remains available to provide further guidance and support on the application of these rules and practical implementation.

Footnotes

1 With respect to the RMHR, a circular letter dated 9 June 2023 was issued by the LTA on the rules applicable for the determination of the taxable net income of a reverse hybrid entity having become subject to corporate income tax as result of the application of the RMHR. Please refer to our previous flashnews for further information.

2 Council Directive (EU) 2017/952 of 29 May 2017 amending Directive (EU) 2016/1164 as regards hybrid mismatches with third countries.

3 According to the Circular, two investors are considered to be related (i) if one holds, directly or indirectly, a participation of 50 percent or more of the voting rights or capital of the other, (ii) if an individual or another entity holds, directly or indirectly, a participation of 50 percent or more of the voting rights or capital of both investors, (iii) if they are members of the same family, such as a spouse or civil partner, a related person (for example, a brother, sister, child, parent, grandparent, or grandchild), the spouse or civil partner of a related person, a person related to the spouse or civil partner, or an adopted related person, or (iv) if, taking into account all relevant facts and circumstances, one controls the other or both are under the control of the same individual(s) or entities.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.