Luxembourg tax authorities clarify CIV exemption criteria for investment funds

On 12 August 2025, the Luxembourg tax authorities issued Circular L.I.R. nº 168quater/2, providing detailed guidance on interpreting the definition of “collective investment vehicle” (CIV) for the purpose of benefitting from the CIV exemption in Article 168quater, §2 of the amended Luxembourg Income Tax Law (ITL) (Circular).

The Circular provides much needed clarity for investment fund structures seeking to rely on the CIV exemption from reverse hybrid taxation and applies with immediate effect.

Background

Under the Luxembourg ATAD 2 reverse hybrid rule (Article 168quater ITL), a Luxembourg tax transparent entity or arrangement that is treated as a taxable person in the jurisdiction(s) of its non-resident associated enterprises holding in aggregate, directly or indirectly, 50% or more of the voting rights, capital interests or rights to a share of profit in the Luxembourg reverse hybrid entity or arrangement, is subject to Luxembourg corporate income tax on the portion of its net income that is not otherwise taxed in Luxembourg or in any other jurisdiction as a result of this tax classification.

However, the reverse hybrid rule does not apply to CIVs (CIV exemption), i.e. 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 are established.

Until now, these three criteria lacked operational guidance, which created uncertainty for fund structuring.

Key clarifications

1. Fundamental investment objective

The Circular establishes that a CIV must, by definition, limit its activities to pursuing an investment objective and must not carry on any business activity within the meaning of Luxembourg tax law.

2. Entities covered by CIV exemption

The following Luxembourg-regulated investment vehicles are included in the definition of CIV and as such should a priori qualify for the CIV exemption:

• UCIs (undertakings for collective investment subject to the amended law of 17 December 2010);
• SIFs (specialised investment funds subject to the amended law of 13 February 2007);
• RAIFs (reserved alternative investment funds subject to the amended law of 23 July 2016).

This is in line with the parliamentary materials on the introduction of the CIV exemption and eliminates previous uncertainty for these vehicles.

3. Three-criteria test for other investment vehicles

For all other investment vehicles seeking the CIV exemption, the Circular clarifies the three criteria to be fulfilled.

Criterion 1: widely held

Core requirement: the units/shares of the relevant investment vehicle must be marketed for distribution to multiple unrelated investors.

The assessment considers both factual and intentional elements:

• 25% safe harbour threshold: the criterion is presumed to be met if no individual investor holds or controls (directly or indirectly) more than 25% of the capital, voting rights or other control mechanisms of the vehicle. The tax authorities may consult the Luxembourg Register of Beneficial Owners (RBE) for verification purposes.
• Master-Feeder structures: the criterion is assessed by reference to the investors in the feeder fund(s).
• Temporary flexibility: for example, a limited investor base does not automatically disqualify the vehicle. In particular, there is flexibility during:
  Launch phase: 36-month grace period from authorisation or incorporation;
  Liquidation phase: if limited participation results from the liquidation process.
• Related investors: two investors are related for the purpose of this criterion where:
  – 50% or more of voting rights or capital are held by one in the other (directly or indirectly);
  – They are both controlled by the same person or entity (directly or indirectly);
  – They are both members of the same family (spouse, civil partner, blood relative, relative by marriage or adoption);
  – Factual control exists.

Criterion 2: diversified portfolio of securities

Broad definition of “securities”: the term “securities” includes shares, equity interests and other similar instruments granting or capable of giving access to the capital of a legal entity, beneficiary shares (parts bénéficiaires), bonds and other receivables, units in CIVs, deposits with credit institutions, and financial derivatives (if the underlying consists of securities).

Clear diversification standards: the diversified nature of the securities portfolio is assessed having regard to:

– The investment policy as defined in the vehicle’s management regulations or constitutional documents;
– Market risk exposure (including direct/indirect counterparty risk);
– The 2007 SIF Law risk distribution requirements. A portfolio is NOT diversified if:
o More than 30% of its assets/commitments are invested in securities of a single issuer (absent adequate justification); or
o Derivatives are used without comparable risk-spreading, i.e. appropriate underlying asset diversification.

Criterion 3: investor protection requirements

There is a presumption of compliance with this criterion for:
– Investment vehicles subject to CSSF prudential supervision; and
– Alternative Investment Funds (AIFs) managed by an Alternative Investment Fund Manager (AIFM) duly authorised under the EU AIFMD[1].

The Circular specifies that its clarifications apply exclusively to Article 168quater, §2 ITL, and do not affect similar concepts under CSSF prudential or regulatory laws.

[1] Directive (EU) 2011/61 of 8 June 2011 on alternative investment fund managers.