Luxembourg SCSps
Since its introduction in 2013, the Luxembourg special limited partnership (SCSp) has become a vehicle of choice for private equity, venture capital, real estate, infrastructure and debt funds, as well as for joint ventures, co-investments and carried interest arrangements. This article looks at its main benefits, how it is governed and the structuring opportunities it opens.
Key benefits of the SCSp
Contractual freedom: The limited partnership agreement (LPA) sets commitments, distribution waterfalls, hurdles, carried interest, governance and transfers. The law prescribes few mandatory bodies.
Tax transparency: The SCSp is generally transparent for corporate income tax and net wealth tax, pays no subscription tax and makes distributions free of Luxembourg withholding tax.
No minimum capital: There is no legal minimum, and contributions can be made in cash, assets or services.
Confidentiality: The LPA is a private document, and only an extract is published at the trade register.
Speed and cost: The SCSp can be formed by private agreement and needs no CSSF approval of the vehicle.
Separate estate: The partnership's assets are held separately and are not available to the personal creditors of its partners.
Familiar model: The general partner and limited partner structure is well known to international investors, and LPA terms can follow market practice.
Versatility: The SCSp can be an unregulated vehicle or the legal form of a regulated fund such as a SIF or RAIF.
Governance: how an SCSp is run
Luxembourg law leaves most governance questions to the LPA, which is why careful drafting matters.
General partner: The GP manages the SCSp, represents it towards third parties and is liable without limit. It is typically an S.à r.l. or S.A., although several GPs or a management committee are possible. The GP's own governance, qualified managers and decision-making in Luxembourg should be planned from the start.
Limited partners: LPs are liable only up to their commitment, provided they do not act in the external management of the partnership. The law lists safe harbour activities, such as advising, supervising, granting loans or guarantees and approving decisions of the GP, which do not endanger this protection.
Advisory committee: Investor representatives commonly sit on a committee that deals with conflicts of interest, valuation questions and waivers of investment restrictions.
Reserved matters: Amendments to the LPA, a change of investment policy, an extension of the term or the removal of the GP are usually put to a vote of the limited partners with defined majorities.
GP removal and replacement: The LPA can provide for removal for cause or without cause, and a replacement mechanism so that the SCSp continues if the GP is replaced.
Key person and investment period: Provisions can suspend new investments if key individuals leave or the manager's conduct raises concerns.
Transfers and defaults: Transfers of interests normally need the GP's consent, and the LPA sets remedies for investors that fail to meet a capital call.
Information and reporting: A register of partners is kept, annual accounts are prepared, and the LPA defines the reports and information rights of investors.
Structuring opportunities
The SCSp is rarely used alone. Sponsors combine it with other partnerships and companies to match the needs of different investors, managers and assets. The chart shows a typical set-up.
Feeder and master: Investors with a particular tax or regulatory profile, such as a group of families, invest through a feeder SCSp that commits to a master SCSp.
Parallel funds: A Luxembourg SCSp can run alongside a fund in another jurisdiction, for example for European capital next to a US or offshore vehicle.
Co-investment vehicles: A separate SCSp pools investors for a single deal, often on different fee and carry terms.
Carried interest vehicle: The management team holds its share of profits through a dedicated SCSp, which allows individual allocations, vesting and tax planning.
Family and wealth investors: An SPF, SOPARFI or family office can invest as a limited partner, subject to the conditions of the relevant regime.
Holding companies below the SCSp: SOPARFIs or other companies can hold the investments, for example to improve treaty access, to ring-fence liabilities or to finance acquisitions.
Joint ventures: Two or more sponsors can use an SCSp to share control and economics of a single asset, with reserved matters and exit rights set in the LPA.
Regulated forms: The SCSp can be the legal form of a SIF, RAIF or SICAR where regulated status or a product label is wanted.
Separate strategies are usually housed in separate partnerships, with a dedicated LPA for each.
Illustrative examples
The figures below are simplified, assume the SCSp qualifies as an AIF and the conditions described are met, and are for illustration only.
Example 1: Feeder and master
A master SCSp raises EUR 50 million: EUR 25 million from institutional investors and EUR 25 million from a feeder SCSp that pools a group of families. Neither the feeder nor the master pays corporate income tax or net wealth tax in Luxembourg, and each family is taxed in its own country of residence. A RAIF or SIF of the same size would pay a 0.01% subscription tax of EUR 20,000 a year, while the unregulated SCSp pays none.
Example 2: Co-investment on different terms
A EUR 200 million main fund charges a 20% carried interest. For a EUR 60 million deal, it invests EUR 40 million and a co-investment SCSp raises the other EUR 20 million from five investors. The co-investment is later sold for EUR 30 million, a EUR 10 million gain. At a 10% carry agreed for co-investors, the carry is EUR 1 million, compared with EUR 2 million at the main fund's 20% rate.
Example 3: Carried interest vehicle
The fund invests EUR 50 million and exits for EUR 110 million, a EUR 60 million profit. With a 20% carried interest and the hurdle met, EUR 12 million is allocated to the carry SCSp. Six team members hold it equally, so each receives EUR 2 million, taxed under the rules that apply to them. A favourable regime for qualifying carried interest may be available.
Points to watch
The GP's interest: A GP that is a capital company holding 5% or more of the partnership makes the SCSp a business for municipal business tax purposes (6.75% in Luxembourg City).
Investment-only activity: A business activity brings municipal business tax and can change the tax position of the partners.
No treaty access of its own: Treaty relief is assessed partner by partner, and holding companies are sometimes added to improve the position.
Reverse hybrid rule: It can apply where most investors treat the SCSp as opaque and the income is taxed nowhere.
AIF and AIFM analysis: Whether an AIFM is needed depends on how the SCSp raises and invests capital.
Limited partner involvement: Activities beyond the safe harbours risk the limited liability of the investor.
Substance of the GP: The GP should be managed and administered in Luxembourg in practice, not only on paper.
Carried interest: Its tax treatment depends on how the right is structured and on the conditions of the applicable rules.
Setting up in five steps
Define the structure: investors, strategy, sponsor and manager, economics (fees, hurdle and carry) and the tax position of the main investors.
Set up the general partner: usually an S.à r.l. with qualified managers and governance in Luxembourg, planned so that its interest stays below 5%.
Draft the LPA: commitments, waterfall, governance, advisory committee, reserved matters, GP removal, transfers and limited partner safe harbours.
Constitute and register: sign the partnership agreement, then complete the RCS and RBE registrations, and set up any feeder, co-investment or carry vehicles.
Appoint the manager and service providers: an authorised AIFM or a documented exemption, an administrator, an auditor where applicable, and a bank account.
Is an SCSp right for you?
The SCSp suits sponsors and managers of private equity, venture capital, real estate, infrastructure and debt funds, groups running joint ventures or co-investments, and families or institutions investing alongside them. If investors or banks need a regulated fund status, a SIF or RAIF, which can also take the SCSp form, may be preferable. If you need treaty access or a corporate holding platform, a SOPARFI is usually better suited.
How we can help
We advise fund sponsors, asset managers, family offices and institutional investors on Luxembourg partnership and fund structuring. Our services cover vehicle selection, AIF and AIFM analysis, general partner set-up, limited partnership agreements, governance and advisory committee arrangements, feeder, co-investment and carry structures, registration formalities, coordination with AIFMs, administrators and tax advisers, and ongoing corporate support.
Considering a Luxembourg SCSp? Contact our team to discuss the structure that fits your fund or transaction.
Disclaimer: This article is provided for general information purposes only and does not constitute legal, tax or investment advice. The examples are illustrative and simplified. Luxembourg laws, tax rates and regulatory requirements are subject to change, and their application depends on individual circumstances. You should obtain specific professional advice before taking any decision or action based on its content. No lawyer-client relationship is created by reading this article.
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