Reverse Hybrid Mismatches: Is The CIV Carve-out Finally Decoded?

In this episode, Johanna Tschurtschenthaler (counsel, Tax) and Chiara Wolf (associate, Tax) return to one of Luxembourg's most puzzling tax topics: the reverse hybrid mismatch rule under ATAD 2. And yes, it's back—with clarity.

Since ATAD 2 came into force in Luxembourg in 2022, certain tax-transparent entities may become subject to corporate income tax if they're treated as opaque in an investor's jurisdiction and the income goes untaxed elsewhere.

But what about the carve-out for collective investment vehicles (CIVs)? Until now, its application remained elusive.

The Luxembourg tax administration's latest circular (published August 22, 2025) finally sheds light on the CIV carve-out. For years, fund managers have tiptoed around it, opting for costly structural workarounds or investor monitoring. But now? We've got clarity.

Johanna and Chiara break down:

• what qualifies as a CIV
• the three golden conditions—spoiler: being widely held, investing in a diversified portfolio of securities, and under investor protection regulation
• how "widely held" is now defined, including control relationships and family ties
• why using a master holding company doesn't break the diversification test
• and what counts as investor protection (hint: Commission de Surveillance du Secteur Financier (CSSF) supervision or authorized alternative investment fund managers (AIFMs), not just Alternative Investment Fund Managers Directive (AIFMD) registration).

Packed with practical examples, this episode answers the market's most common questions from Luxembourg fund entities navigating ATAD 2.

Watch or Listen in for best practices on tax structuring, risk management, and how to stay confidently within the carve-out.

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.