Due to the absence of any international or domestic guidance, the interpretation of the CIV carve-out has so far been uncertain. A circular dated 12 August 2025 and published on August 22, 2025 (circular n° L.I.R. n° 168quater/2) finally brings welcome clarifications for Luxembourg investment funds regarding the key questions surrounding this carve-out. In light thereof, we expect that Luxembourg investment funds should in most circumstances fall within the definition of CIV and therefore remain out of the scope of the reverse hybrid mismatch rule.
Key clarifications
- UCITS, Part II UCIs, SIFs and RAIFs are always considered CIVs. As a consequence, there is no need to assess if the three conditions are met.
- A vehicle is considered to be widely held if its shares, interests or units are marketed in view of their distribution to multiple unrelated investors. While the circular does not set a minimum number of investors, it clarifies that a temporary restricted circle of investors, for instance during the ramp-up phase (36 months) or liquidation of the fund, does not necessarily disqualify the vehicle from the CIV carve-out. In master-feeder structures, the condition should be assessed at the level of the feeder fund. Most notably, the circular creates a general assumption that the “widely held” condition is met in the absence of an individual holding, directly or indirectly, more than 25% of the capital or voting rights in the fund or controlling the vehicle by other means.
- Besides clarifying the notion of “securities”, the circular states that the diversification requirement should be assessed based on the diversification rules applicable to SIFs.
- Funds subject to prudential supervision of the CSSF as well as AIFs managed by AIFMs authorized under the AIFMD are considered as being subject to investor-protection regulation.
1. Context
Introduced in the context of the implementation of EU Directive 2017/952 of 29 May 2017 (ATAD 2), the reverse hybrid mismatch rule under article 168quater of the Luxembourg income tax law aims to neutralize situations of double non-taxation that can arise when Luxembourg tax transparent entities (e.g. common limited partnerships, special limited partnerships, mutual funds) are treated as tax opaque in the jurisdictions of their investors. The rule applies if one or more associated enterprises holding, directly or indirectly, at least 50% of the Luxembourg tax transparent entity (in terms of voting rights, capital ownership or profit distribution rights) are resident in jurisdictions that regard the Luxembourg entity as tax opaque and do not tax the underlying income as a result thereof.
If the rule applies, the Luxembourg tax transparent entity becomes subject to Luxembourg corporate income tax on its net income that is not otherwise subject to taxation in Luxembourg or in another jurisdiction. Collective investment vehicles (CIVs) are, however, not subject to the reverse hybrid mismatch rule. CIVs are defined as investment funds or vehicles that are widely held, hold a diversified portfolio of securities and are subject to investor-protection regulation in the country in which they established (the CIV carve-out).
Unfortunately, the conditions of the CIV carve-out are not explained in more detail in the law or the related parliamentary works. Nor do the ATAD 2 or the OECD report under BEPS action n° 2 on which it is based provide any guidance in this regard. As a result, the CIV carve-out has been shrouded in uncertainty, leading to divergent interpretations in the market.
Circular n° L.I.R. n° 168quater/2 dated 12 August 2025 and published on 22 August 2025 finally brings welcome clarifications regarding the conditions of the CIV carve-out. It is the second circular released by the Luxembourg tax administration regarding the reverse hybrid mismatch rule (see our eAlert on the first one). In light of these clarifications, we would expect that Luxembourg funds should, in most circumstances, qualify for the CIV carve-out.
2. UCITS, Part II UCIs, SIFs and RAIFs are always CIVs
First and foremost, the circular starts off by confirming that the following should always qualify as CIVs under the reverse hybrid mismatch rule:
- undertakings for collective investment governed by the Luxembourg law of 17 December 2010 on undertakings for collective investment, as amended;
- specialized investment funds (SIFs) governed by the Luxembourg law of 13 February 2007 on specialized investment funds, as amended; and
- reserved alternative investment funds governed by the Luxembourg law of 23 July 2016 on reserved alternative investment funds, as amended.
Accordingly, for these funds, it is not necessary to determine if the three conditions for the CIV carve-out are met. The clarifications contained in the circular regarding these conditions are thus only relevant to vehicles that are not governed by any of these regimes.
While the parliamentary works relating to the reverse hybrid mismatch rule already pointed to this interpretation, the fact that the Luxembourg tax administration has now explicitly confirmed that it interprets the rule in the same way is a welcomed development.
3. Clarifications regarding the “widely held” requirement
According to the circular, a vehicle is considered to be widely held if its shares, interests or units are marketed in view of being distributed to multiple unrelated investors. Regarding master-feeder structures, the circular clarifies that investors at the level of the feeder fund may be taken into account to determine if the master fund is widely held.
3.1 A temporary restricted circle of investors is not an issue
Whether or not a vehicle is widely held needs to be assessed based on all the facts and circumstances. The presence of a limited number of investors does not automatically disqualify a vehicle that is designed to raise capital from several unrelated parties. In this regard, the circular acknowledges in particular the following circumstances where a vehicle may continue to satisfy the “widely held” condition:
- during the ramp-up phase, provided it is reasonable to expect that the vehicle will be “widely held” within 36 months of its approval or constitution; or
- during the liquidation phase, provided the absence of multiple unrelated investors is due to the liquidation of the vehicle.
3.2 Clarification regarding the notion of "unrelated" investors
According to the circular, the following are to be considered as related investors:
- an investor holding, directly or indirectly, at least 50% of the capital or voting rights in the other investor;
- if a person holds, directly, or indirectly, at least 50% of the capital or voting rights of the two investors;
- members of the same family: spouses, siblings, grandparents, children and grandchildren, etc.; and
- if, based on all the facts and circumstances, one controls the other or if both are under the control of the same person(s).
3.3 General assumption that condition is met if no beneficial owner for AML purposes
The circular sets out a general assumption that the “widely held” condition is met if there is no individual holding, directly or indirectly, more than 25% of the capital or voting rights of the vehicle or controlling the vehicle through other means. Essentially, these are the same criteria used for identifying beneficial owners for anti-money laundering purposes. While the circular does not refer to the Luxembourg law on the fight against money laundering and terrorist financing, it does state that the tax administration may consult the Luxembourg Register of Beneficial Owners to check the absence of beneficial owners owning more than 25% of capital or voting rights or controlling the vehicle.
4. Clarifications regarding the “diversified securities portfolio” requirement
4.1 The notion of "Securities" is to be interpreted broadly
According to the circular, the notion of “securities” is to be interpreted broadly and encompasses in particular the following:
- shares and similar securities giving rights to the capital of an entity;
- beneficiary shares;
- bonds and other receivables;
- shares or units in funds;
- deposits with credit institutions; and
- derivatives if the underlying assets are securities
4.2 Application of SIF diversification rules applicable to SIFs
The diversification requirement should be assessed based on the fund’s investment policy and its exposure to market and counterparty risks.
More importantly, the circular clarifies that the diversification requirement should be construed in line with the diversification rules applicable to SIFs. In this regard, the circular mentions in particular the following situations where the “diversification” condition would not be met:
- if the vehicle invests more than 30% of its assets or commitments in the same issuer, unless there are adequate justifications for investing more in a single issuer;
- if the use of derivatives does not reflect a comparable risk diversification.
The reference to the diversification requirements applicable to SIFs is a very welcomed clarification. Indeed, a restrictive reading of the CIV carve-out could imply that a fund using a master holding company to structure its investments would fail the “diversification” condition. Under the diversification requirements for SIFs, however, a look-through approach is generally applied, meaning that this would not jeopardize the CIV carve-out.
5. Clarifications regarding the "investor-protection regulation" requirement
The circular clarifies that the following are considered to be subject to investor-protection regulation:
- funds that are subject to the prudential supervision of the CSSF; and
- alternative investment funds (AIFs) within the meaning of the Luxembourg law of 12 July 2013 on alternative investment funds, as amended, that are managed by a manager approved in accordance with Directive 2011/61/EU on alternative investment fund managers (AIFMD). Implicitly, this means that an AIF managed by a manager that is merely registered pursuant to the AIFMD does not meet this condition. We further understand that this implies that the manager may be established and authorized in another EU Member State.
Please feel free to reach out to our experts if you wish to discuss in more detail the new circular clarifying the CIV carve-out under the Luxembourg reverse hybrid mismatch rule.
