Circular of the Luxembourg tax authorities on the CIV carve-out of the reverse hybrid rules

On 12 August 2025, the Luxembourg tax authorities issued an administrative circular (the Circular – Circular L.I.R n°168quater/2) providing some guidance on their interpretation of the Collective Investment Vehicle carve-out of the reverse hybrid rules provided for by article 168quater, paragraph 2 of the Luxembourg Income Tax Law (LITL).

Following the implementation of the reverse hybrid rules of ATAD 2 in Luxembourg tax law, Luxembourg transparent partnerships may become liable, since tax year 2022, to corporate income tax in relation to their net income, to the extent that it is not otherwise taxed under Luxembourg domestic tax law or the law of any other jurisdiction, provided one or more associated non-resident entities (i) are holding in aggregate a direct or indirect interest in 50% or more of the voting rights, capital interests or profit entitlements in the Luxembourg partnership and (ii) consider the latter as a taxable person (article 168quater LITL).

In line with the exclusion provided for in ATAD 2, Collective Investment Vehicles (CIVs) are out of the scope of this provision. For the purpose of this rule, a CIV is defined as an investment fund or vehicle that is widely held, holds a diversified portfolio of securities and is subject to investor-protection regulation in the country in which it is established.

The Circular confirms that the term refers to entities whose activities are strictly limited to investment purposes, excluding any commercial activity as defined under article 14 LITL. The following entities are mentioned to be covered:

• Luxembourg Undertakings for Collective Investments (UCIs) under the amended law of 17 December 2010;
• Specialised Investment Funds (SIFs) under the amended law of 13 February 2007;
• Reserved Alternative Investment Funds (RAIFs) under the amended law of 23 July 2016.

For other investment vehicles of funds, the following interpretative criteria cumulatively apply:

1. Broad investor participation

This condition is met when the fund’s shares or units are marketed to several unrelated investors.

To determine whether this condition is met, the Circular clarifies that a range of circumstantial elements must be taken into account, which may be either factual or intentional in nature. As such, the Circular provides flexibility in assessing this criterion, allowing notably for:

• A limited number of investors during the launch phase, provided broader participation is expected within 36 months;
• Exceptions during the liquidation phase, if the absence of a broad participation is due to the liquidation process.

The Circular further clarifies that a transparency approach is to be applied in the case of master investment vehicles held by one or more feeder funds (i.e., in this case, the criterion is assessed with reference to the number of investors in the feeder fund(s)).

Related investors are defined based on ownership thresholds (≥50%), family relationships, or control structures.

A fund is presumed to meet the condition of a broad investor participation if no individual investor ultimately holds or controls, directly or indirectly, more than 25% of the capital or voting rights. Verification may rely on data from the Register of Beneficial Owners (RBO).

2. Diversified securities portfolio

The term “securities” is interpreted broadly to include:

• Equity instruments, beneficiary shares, bonds and other debt instruments;
• Units in other CIVs;
• Bank deposits and derivatives (with securities as underlying assets).

Diversification is assessed based on:

• The fund’s investment policy;
• Market risk exposure, including counterparty risk, depending on the investment policy.

A fund is not considered diversified if:

• It invests more than 30% of assets in securities from a single issuer without adequate justification;
• Derivative use lacks appropriate risk diversification.

The diversification condition is to be aligned with the diversification requirements for SIFs under the 2007 Law.

3. Investor protection compliance

This condition is presumed fulfilled for:

• Funds under prudential supervision by the CSSF;
• Alternative investment funds managed by AIFMs authorised under Directive 2011/61/EU.

Finally, the Circular emphasises that these clarifications apply solely for the purposes of article 168quater(2) LITL, and do not affect interpretations under other regulatory frameworks.

These clarifications are welcome confirmations offering practical guidance for assessing the eligibility of CIVs to the carve-out rule of article 168quater(2) LITL. They contribute to greater certainty and consistency in the application of Luxembourg tax law.