Curated Content Luxembourg: Luxembourg Special Limited Partnership (SCSp) And Common Limited Partnership (SCS)

Introduction to the limited partnership

Luxembourg has enhanced its existing limited partnership regime, adding the special limited partnership to its range of investment vehicles designed for the alternative investment industry, including private equity. The authorities have adopted a pragmatic and business- friendly approach to meet the most stringent requirements of alternative fund managers. We summarise below the main legal and tax rules applicable to both regulated and unregulated Luxembourg common limited partnerships and special limited partnerships.

The Luxembourg limited partnership is an entity established for a limited or unlimited period of time either as a common limited partnership (société en commandite simple or SCS) or a special limited partnership (société en commandite spéciale or SCSp), by one or more unlimited partners with joint and unlimited liability, or by one or several limited partners liable up to the value of their contributions.

Contributions to the limited partnership may be made in cash, in kind or other means such as services under the terms and conditions of the limited partnership agreement, and may be freely determined by the partners. In contrast to other Luxembourg legal entities, contributions in the form of services do not require an external valuation report, and their value may be determined by private agreement.

In addition, unlike most common corporate structures under Luxembourg law, the limited partnership does not impose any minimum capital requirements.

Partnership interests, representing contributions to the limited partnership, may or may not be represented by securities. In a limited partnership that does not issue securities to its investors, each limited partner has a capital account, an equity account in the accounting records of the limited partnership. It typically varies according to the initial and subsequent contributions by partners, profits and losses recorded by the limited partnership and allocated to the partners under the LPA, and distributions to the partners.

The main difference between the common and special limited partnerships is that the former has a legal personality distinct from that of its partners, whereas the special limited partnership does not have legal personality, making it very similar to the limited partnership under English law.

Practical use of the limited partnership as an investment vehicle

The features of the limited partnership make this entity a very attractive new addition to the Luxembourg investment toolbox.

The limited partnership may be used for master-feeder structures, as an acquisition vehicle, or for joint ventures, but its most frequent use is for private equity, venture capital and real estate investments. The popularity of the limited partnership for private equity investments is down to the high level of contractual or corporate flexibility provided by its legal form, which is familiar to Anglo-Saxon investors and promoters due to its resemblance to the English limited partnership.

As a general rule, the limited partnership does not automatically fall under the definition of an alternative investment fund (AIF), but it may take the form of a collective investment undertaking with multiple compartments that raises capital from a number of investors, with a view to investing it in accordance with a defined investment policy for their benefit, and does not require authorisation under the UCITS regime.

Under these circumstances, the limited partnership qualifies as an AIF in accordance with  the  2013  legislation  on  alternative investment fund managers and may carry out its activity either as an entity regulated by the Financial Sector Supervisory Authority (CSSF) under the SIF or SICAR legal regime, or as an unregulated entity. Irrespective of whether it is regulated or unregulated, the AIF must appoint an alternative investment fund manager (AIFM) that may be registered or authorised depending on the value of its portfolio of AIF assets under management.

From a corporate structure perspective, if the SCS qualifies as an AIF and it is internally managed, the SCS itself will be authorised or registered as an AIFM. If, however, the SCS appoints an external AIFM, the general partner or third-party AIFM must be registered or authorised under the 2013 legislation.

The SCSp, on the other hand, may not be authorised as an internally managed AIF due to its lack of legal personality, so it must appoint an external entity (which may be its unlimited partner acting as the general partner or another company) as external AIFM.

Finally, unregulated special limited partnerships are often used to invest in private equity, venture capital and real estate assets and any other alternative assets.

Setting up an unregulated limited partnership investment vehicle

The main practical steps in establishing a limited partnership as an AIF are:

1. Incorporating the general partner.
2. Executing a limited partnership agreement by means of either a private or notarial deed.
3. Engaging the required service providers, subject to the regulated or unregulated status of the limited partnership.
4. Publishing the required extract from the LPA in the Luxembourg Trade and Companies Register.
5. Establishing a register of partnership interests.
6. Requesting the registration or authorisation of the AIFM by the CSSF.

Management of the limited partnership

The limited partnership is managed by one or more managers who do not necessarily have to be unlimited partners. In practice, however, the unlimited partner is often the manager of the limited partnership.

Where management of the limited partnership is not entrusted to the unlimited partner, the liability of the manager is governed by the general provisions applicable to board members provided by the 1915 law on commercial companies. These stipulate that the manager of the limited partnership is responsible for execution of the mandate and for any misconduct in the management of the limited partnership, and is jointly and severally liable toward the limited partnership and third parties for damages stemming from breach of the law or the LPA.

Subject to the provisions of the LPA, the manager of a limited partnership may delegate the management to a third party, which will be liable only for the performance of its own mandate.

Contractually agreed restrictions regarding the powers of managers cannot be applied in relation to third parties, even if published in the Luxembourg Trade and Companies Register. However, the LPA may authorise one or more managers to represent the limited partnership, either jointly or individually, and such a clause is valid with regard to third parties, subject to publication formalities.

The acts of the managers may bind the limited partnership even if they exceed the corporate purpose mentioned in the LPA, unless it can be proven that the third party was aware that the act was outside the scope of the corporate purpose or if, in the context, the third party could not have been unaware of such circumstance.

Legal regime regarding limited partners

Distributions

The limited partnership legal regime allows partners to tailor their participation in profits and losses, as well as distributions, as they deem appropriate in the LPA. If the constitutive deed of the limited partnership does not provide any rules in this respect, each limited partner shall participate proportionally to the subscription of its partnership interests.

The limited partnership may distribute profits or reimburse partnership interests, as contractually agreed in the LPA. The freedom provided by the legal provisions governing the LPA allow partners of private equity partnership agreements to structure any clawback provisions regarding the general partner or the limited partners in line with agreed commercial terms.

Voting rights

Unless provided otherwise in the LPA, as a general rule the voting rights of each partner are proportional to their partnership interests.

Decision-making process

The decision-making process may also be tailored by the provisions of the LPA and the agreement may list resolutions that do not require a decision by the partners. However, certain aspects must be decided upon by the partners, namely the corporate purpose, a change of nationality, conversion of legal form or liquidation of the limited partnership.

The formalities and conditions for passing resolutions should be determined in the LPA, otherwise the rules are as follows:

• Written consultations and vote in writing - resolutions of the partners shall be adopted at general meetings by means of consultation in writing; before such consultations, each partner shall receive the precise text of the resolutions and express their vote in writing.
• Majority of votes rule – decisions shall be validly adopted by a majority of votes expressed irrespective of the portion of partnership interests represented, except for amendments regarding the corporate purpose, change of nationality, conversion of legal form or the liquidation of the limited partnership, which require the consent of partners representing three-quarters of the partnership interests and of the unlimited partner.
• Partners representing more than half of the partnership interests may convene a meeting.

Transfer of partnership interests

Unless otherwise stated in the LPA, the transfer, dismemberment or pledge of limited partnership interests is subject to the approval of the unlimited partner. If the LPA does not contain any provisions in this regard, the transfer, dismemberment or pledge of partnership interests of the unlimited partner is subject to the consent of the limited partners, who shall deliberate according to the rules regarding amendment of the LPA. Transfers by cause of death do not require approval in either case.

The liability of limited partners

The unlimited partner has unlimited and joint liability for the obligations of the limited partnership, while limited partners' liability is restricted to the amount of their subscribed partnership interests.

In general, limited partners are forbidden to carry out any acts of external management – acts performed for the account of the limited partnership with third parties. However, it is not forbidden for the limited partner to perform acts of internal management that are internal to the limited partnership.

An act  of  external management triggers unlimited liability on the part of the limited partner toward  third  parties,  although not toward other members of the limited partnership. In these circumstances the limited partner in question may become jointly and severally liable toward third parties for any obligations of the limited partnership in which it was involved through acts of management.

The scope of the joint liability of the limited partner in these circumstances depends on its involvement in the management of the limited partnership. An isolated rather than regular act of external management will result in liability only for the commitments or obligations of the limited partnership in which it has taken part. A limited partner that has regularly performed acts of management involving third parties may be liable to those third parties even for commitments or obligations in which it did not take part.

Luxembourg's 1915 law on commercial companies provides a non-exhaustive list of actions that do not constitute acts of external management triggering a limited partner's liability towards third parties: exercising partner prerogatives; providing advice to affiliated entities, managers of the limited partnership or to the limited partnership itself; oversight or control functions; granting loans, guarantees or securities, or any other type of financial assistance; and approving acts outside the duties of the managers.

Limited partners may as a rule carry out any acts of internal management and in general any acts that would not mislead a reasonable third party regarding the scope of the involvement of the limited partner, including voting on any issues subject to their consent under the LPA such as amendments to the agreement, extension of the partnership's duration, winding up of the partnership or removal of a manager, or acting or being represented on any internal body of the limited partnership, such as an investment committee or advisory board, even if the body has a power of decision over actions taken by the partnership.

The commercial companies legislation also states that a limited partner will not lose its limited liability by acting as director or agent of a manager of the limited partnership, even if the manager is an unlimited partner, or may execute documents on behalf of a manager, in its capacity as a representative of the limited partnership. However, this safe harbour provision requires the capacity in which the limited partner is acting to be clearly indicated.

The 1915 law also authorises a limited partner to conduct transactions with the limited partnership without its rank as privileged or general creditor being affected by its capacity as a limited partner. For example, a limited partner lending money to the partnership will have the same ranking as a creditor of the limited partnership as external entities.

The tax regime for unregulated limited partnerships

Direct taxation

Unregulated SCS and SCSp are tax-transparent entities for corporate income tax and net worth tax purposes. The partnership should not be subject to corporate income tax, subject to the analysis of the application of the reverse hybrid rule. As from 1 January 2022, the scope of Luxembourg anti-hybrid rules will be extended to entities that are transparent for Luxembourg tax purposes, such as the special limited partnership.

Municipal business tax of 6.75% may become applicable in the event that the limited partnership carries out any commercial activity, or is deemed to be doing so. The limited partnership is deemed to be carrying out a commercial activity if its general partner is a Luxembourg public or private limited liability company holding at least 5% of the partnership interests. However, proper structuring of the general partner partnership interest should ensure the limited partnership will not be deemed to be carrying out a commercial activity.

The Luxembourg direct taxation authority has clarified in the circular of January 9, 2015 that unregulated SCS or SCSp qualifying as an AIF within the meaning of the law of 2013 on alternative investment fund managers are deemed not to be performing a commercial activity. Therefore, an unregulated SCS or SCSp that is an AIF will be completely tax-neutral, provided that no general partner is a Luxembourg company holding 5% or more of the partnership interests.

Finally, as tax-transparent entities, neither SCS nor SCSp benefit from Luxembourg's double taxation avoidance treaties, nor from the EU's Parent-Subsidiary Directive (2011/96/EU).

VAT

Management services provided to an SCS or SCSp that qualifies as an AIF are exempt from value-added tax.

Luxembourg withholding tax on dividends

Dividend distributions made by a SCS or SCSp to resident or non-resident partners are not subject to withholding tax in Luxembourg.

The main benefits of the Luxembourg limited partnership as an unregulated investment vehicle

Contractual flexibility

One of the main advantages offered by the limited partnership is the contractual freedom of the parties. Apart from a limited number of statutory provisions, there is great flexibility in determining the rules governing the functioning of the limited partnership.

Short time to market

The ability to incorporate the limited partnership under private deed and the absence of cumbersome registration formalities allows the investment vehicle to be brought to market in less than a month.

No minimum capital requirement, no minimum investment

The incorporation of the limited partnership does not impose any legal minimum capital, in contrast to Luxembourg private and public limited liability companies, making the limited partnership an attractive vehicle for venture capital investment. Furthermore, the LPA may permit subscriptions from all types of investor without minimum investment requirements.

Low launch costs

Unregulated status, the ability to incorporate the entity by private deed, and the absence of the requirement to appoint a depositary (except if the limited partnership qualifies as an AIF and is managed by an authorised or registered AIFM) make the limited partnership a less expensive option than other investment vehicles on the market.

Confidentiality

The information to be published in the Luxembourg Trade and Companies Register is limited to the name of the limited partnership, its duration, the unlimited partner and the managers, including their signatory powers. The identity of the limited partners does not have to be disclosed.

For an overall picture of the main provisions governing the LPA, please refer to the below table.

Olivier Sciales
Chevalier & Sciales
Partner
36-38, Grand-Rue,
L1660 Luxembourg
Office: + 352 26 25 90 30
Fax: +352 26 25 83 88
Email: oliviersciales@cs-avocats.lu
website: www.cs-avocats.lu
Linkedin: http://www.linkedin.com/in/oliviersciales
Twitter: @oliviersciales

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.