Thinking Outside The Box With The New Luxembourg Limited Partnership

In a nutshell

The new Luxembourg Limited Partnership (Société en Commandite Simple – SCS) and Luxembourg Special Limited Partnership (Société en Commandite Spéciale – SCSp) regime, introduced in 2013 and clarified in January 2015, combines a competitive tax environment with little regulation and great corporate flexibility.

In detail

Prior to the 12 July 2013 Luxembourg Law (“the Law”), Delaware, Jersey and Guernsey Limited Partnership structures were amongst the most common vehicles for investment structures worldwide for two reasons:
historical: the first private equity fund was first set up in the US and the US template then spread through Europe[1].
structural: the equilibrium of liability between the General Partner (GP) and Limited Partners (LP), together with a flexible contractual regime allowed for a unequaled investment medium.

New Luxembourg Limited Partnership | Hance Law Firm

By dusting off its antiquated legal framework, Luxembourg introduced a sizable twin rival on the stage: the Luxembourg Limited Partnership.
Via the Law of 12 July 2013[2], Luxembourg transposed the European Directive AIMFD[3] into national law, which modernized its previous SCS regime and introduced the SCSp.

[1] R. Pearce & S. Barnes, Raising Venture Capital, 2006, p.15

[2] Loi du 12 juillet 2013 relative aux gestionnaires de fonds d’investissement alternatifs, Memorial A n°119

[3] Alternative Investment Fund Manager Directive 2011/61/UE

1. Key legal features
Confidential and prompt set-up
An SCS/SCSp may be set up with only two partners: at least one GP and at least one LP, for a limited or unlimited duration.
The LPA (Limited Partnership Agreement) does not require the intervention of a notary and can be set up as a private deed. It is effective at the date of signature. The global anti-money laundering and KYC requirements must be fulfilled.

The SCS/SCSp must be registered at the Luxembourg Trade and Companies Registry (RCS).
Confidentiality is guaranteed as there is no Memorial C publication requirement (excerpts of the LPA must be published) and the share capital, names and contributions of LPs, as well as financial statements are not subject to publication.
Broad management scope for LPs
The GPs’ liability is indefinite, joint and several while the LP’s liability is limited to their contribution to the partnership. To remain under this shield, the LPs must not undertake any management acts which would appear as such towards third parties.
Inspired by the English Limited Partnership, the Law lays out an exhaustive list of permitted acts (Article 18 of the Law: such as ‘advice and supervision to management, loans, guarantees and other assistance provided to the partnership and its affiliates’…).

Additionally, a limited partner can act as a manager or attorney of the manager of the partnership without losing their limited liability providing that the capacity in which they act is clearly set forth.
Contractual freedom
A large flexibility is granted to the partners.
The SCS/SCSp may be unregulated, and as such fall under the Company Act[1] (the default rules listed in the Act will apply where the LPA is silent), or regulated, and as such be governed by the regulations applicable to the SIF[2] (Specialized Investment Fund) or SICAR[3] (Risk Capital Investment Company – Société d’Investissement en Capital Risque) law (if the SIF or SICAR are structured under an SCS/SCSp). A SICAR or SIF established under the form of an SCS/SCSp is regulated and supervised by the CSSF.

The quorum and partnership rules, admission of new partners, issue of new partnership interests as well as rules pertaining to dividend payment, repayment of partnership interests, voting rights (the traditional principle of one share – one vote does not apply) etc can be decided freely by the partners.

There is no minimum capital requirement. Contributions may be made in cash, industry or in kind, and contributions in kind are not subject to a valuation report from an independent auditor.
Partnership interests can be represented by securities.
The SCSp : ground-breaking particularities
While the SCS and SCSp benefit from the same legal aforementioned regime, there is a major difference to be noted between the two structures: the SCSp is deprived from legal personality.

However, by derogation provided for in the Law, the SCSp kills two birds with one stone, as it still has its domicile at the place of its central administration (deemed to be in Luxembourg), making it a Luxembourg-based vehicle and as any property or asset of the SCSp will be registered directly in its name. The SCSp assets are not available to the personal creditors of the SCSp partners either.

[1] Loi du 10 août 1915 concernant les sociétés commerciales
[2] Loi du 13 février 2007 relative aux fonds d’investissement spécialisés
[3] Loi du 15 juin 2004 relative à la Société d’investissement en capital à risque (SICAR)

2. Tax features

The Luxembourg tax authorities confirmed the treatment of SCS/SCSp in a Circular L.I.R. n° 14/4 dated January 9th 2015:

Both the SCS and SCSp enjoy a full tax transparency and tax neutrality.
The SCS/SCSp is exempt from corporate income tax, as well as net wealth tax.
The profits of an SCS/SCSp are exempt from municipal business tax[1] unless its GP holds a participation of 5% or more, or if the SCS/SCSp carries out a business activity (business income theory). As such, an SCS/SCSp which qualifies as an Alternative Investment Fund (AIF) is deemed not to be conducted a business activity.

The unregulated SCSp does not need to prepare annual accounts, unless it is provided so in its LPA.

[1] The Municipal Business Tax currently amounts to 6,75% in Luxembourg City.

By | 2017-07-20T15:11:13+00:00 August 4th, 2015|News|