Luxembourg Tax Authorities Clarify Reverse Hybrid Entity Rules

New Guidance Brings Legal Certainty for Investment Funds

Luxembourg City, August 22, 2025 — Luxembourg’s tax authorities have issued a new circular clarifying the application of the reverse hybrid entity rules, bringing long-awaited clarity to a complex aspect of international taxation. The move is expected to ease compliance for investors and strengthen Luxembourg’s standing as a transparent and reliable financial hub.

What Are Reverse Hybrid Rules?
Reverse hybrid rules were introduced in 2022 to prevent situations of double non-taxation in cross-border structures. They apply to tax-transparent entities in Luxembourg, such as special limited partnerships (SCS and SCSp), which may be treated as fully taxable in the jurisdictions of their investors.

If investors representing 50% or more of an entity’s capital, voting rights, or profit shares view the Luxembourg partnership as opaque, the entity itself becomes taxable in Luxembourg on otherwise untaxed income.

Focus on Investment Funds
The latest guidance, released on August 22, addresses long-standing questions around the Collective Investment Vehicle (CIV) exemption, a carve-out designed to ensure that legitimate investment funds are not unintentionally caught by the rules.

According to the circular:

• To qualify as a CIV, an entity must have a broad investor base, hold a diversified portfolio of securities, and be regulated to safeguard investors in its home jurisdiction.
• The entity must pursue a pure investment purpose and cannot engage in active business activities.
• Regulated Luxembourg funds such as UCITS, SIFs, and RAIFs generally meet the exemption requirements.

These clarifications, tax experts note, provide a much clearer compliance framework for fund managers, reducing the risk of unexpected tax exposure.

Implications for the Market
The guidance is expected to significantly reduce uncertainty for Luxembourg’s investment fund sector, which is central to the country’s financial industry. It also ensures alignment with the EU’s Anti-Tax Avoidance Directive (ATAD 2), reinforcing Luxembourg’s commitment to fair and transparent taxation.

By clarifying how the 50% threshold is assessed — including how tax-exempt investors across jurisdictions are treated — the circular also gives funds greater certainty in evaluating their tax status.

Strengthening Luxembourg’s Position
The clarification represents a critical step in refining Luxembourg’s tax framework, balancing investor protection with international anti-avoidance standards. For fund managers and multinational investors alike, the new rules enhance predictability and underscore Luxembourg’s reputation as a jurisdiction where clarity, compliance, and competitiveness go hand in hand.

Know Here: Luxembourg reverse hybrid entity rules: clarifications regarding the CIV Exemption | Herbert Smith Freehills Kramer | Global law firm

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