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Launch your special limited partnership in Luxembourg

by | Jun 7, 2022 | Investment funds

Luxembourg Special Limited Partnership (ScSp)

Luxembourg tax authorities have issued a circular issued on 9 January 2015 that clarifies the tax status of income earned by Luxembourg limited partnerships (LP). The Circular implements the AIFM Directive (AIFMD) into Luxembourg law, and by doing so, it creates the special limited partnership (société en commandite spéciale, SCSp), and changing the corporate and tax laws applicable to the normal Limited Partnership (société en commandite simple, SCS).

Tax treatment of Luxembourg Limited Partnerships (LPs)

While SCS and SCSp are tax transparent entities, they are not subject to Luxembourg corporate income tax (CIT). However, if they effectively perform a commercial activity or if their activity is commercially tainted, their business may be considered commercial and thus subject to Luxembourg municipal business tax (MBT), which is levied at a rate of 6.75 percent in Luxembourg-city) provided that the general partner of the SCS or SCSp is a joint stock company which owns a partnership interest of at least 5 percent ).

The AIFM Law, enacted in 2013, made it easier to apply commercial tainting to Luxembourg limited partnerships. Prior to 2013, the presence of a minimum partnership stake wasn’t a requirement. Thus, to make the SCS’s income commercial, the presence of a general partner established as a joint-stock company was enough. 

Promoting Luxembourg private equity, hedge funds and real estate investment funds

The AIFM Law’s modification was welcomed by the alternative investment fund industry since it made setting up private equity funds, hedge funds, and real estate funds as a Luxembourg Limited partnership more appealing, decreasing the number of instances when their income would be subject to MBT. Still, because their revenue could be subject to MBT if a commercial activity is successfully carried out, it was unclear whether this activity required to be classified as a commercial activity or as a private wealth management activity exempt from MBT.

Application to AIFs set up as Luxembourg LPs

The Circular discusses the criteria to be used to distinguish between management of  commercial activity and private wealth, citing Luxembourg and German case law. According to the Circular, whether a SCS or SCSp engages in commercial activity (or not) must be determined on a case-by-case basis, based on the fund’s individual investment strategy. The size of the fund’s assets and the fact that certain assets must only be held for a short period of time before being sold are important factors to consider, however it is important to note that these aren’t the only factors to consider while determining if the activity qualifies as commercial under Luxembourg tax law.

Regulated AIFs are never subject to MBT because their tax regime provides such exemptions, these includes AIFs that are established as SIF (specialised investment fund), SICAV/SICAF, or SICAR (risk capital investment company).

 This also applies to AIFs that are based outside of Luxembourg that are exempt from Luxembourg net wealth tax, MBT, and CIT under the AIFM Law.

In the case of other AIFs that fall under the AIFM Law but are not regulated under the SICAR, SIF, or UCI Law, the tax authorities clarify that their activity is not a commercial activity by definition, given the investment requirements they must meet and the guidelines issued by the European Security and Market Authority. It means that, with the exception of a general partner having a minimum 5% partnership stake in the AIF, an AIF as defined by the AIFM Law is never subject to Luxembourg MBT, implying that the establishment of this form of investment vehicle is tax-free.

Damalion may assist you to launch your alternative investment fund in Luxembourg. We articulate our competences with accredited experts and banks to help you set up your investment fund in a timely manner and at a reasonable cost. Contact a Damalion expert now to launch your SLP investment fund.

Last updated: 10 September 2025

Damalion – Luxembourg

This guide explains how to structure a Luxembourg SCSp, highlighting its legal framework, governance duties, investor rights, and corporate obligations.

Who should consider a Luxembourg SCSp?

The SCSp is an effective choice for entrepreneurs, private equity sponsors, and institutional investors who require contractual flexibility, limited liability for investors, and clear separation of risks between transactions.

  • Private equity and venture capital funds needing flexible investment terms
  • Real estate and infrastructure sponsors using dedicated SPVs for each deal
  • Private debt funds that must demonstrate transparent governance to lenders

What documents are required before the first closing?

Proper documentation ensures compliance with Luxembourg law and smooth onboarding with banks and service providers.

  • Limited Partnership Agreement (LPA) defining commitments, profit distribution, and governance rights
  • Statutes of the General Partner company, including decision-making rules and liability framework
  • Treasury policies, valuation methodology, and reporting schedules for investors

Key Features & Benefits: step-by-step launch

Follow these steps to establish your SCSp efficiently while meeting investor expectations and legal requirements.

  1. Define investment strategy. Identify the asset class, targeted jurisdictions, size of commitments, and reporting obligations.
  2. Select the regulatory regime. Decide between a fully regulated vehicle (RAIF, SIF, SICAR) or an unregulated SCSp.
  3. Draft the Limited Partnership Agreement. Set out capital calls, distribution waterfalls, management fees, carried interest, and governance rights.
  4. Incorporate the General Partner. Typically an S.à r.l. (limited liability company) with clear liability limits and management duties.
  5. Open a Luxembourg bank account. Provide UBO disclosures, source of funds documentation, and board-approved treasury policies.
  6. Conduct first closing. Admit limited partners, verify AML/KYC, call initial capital commitments, and authorize first investments.
  7. Use SPVs for each investment. Ring-fence legal and financial risks per transaction, improving financing and exit strategy.

How should governance be structured?

Transparent governance strengthens investor trust and banking relationships. At minimum, the SCSp should maintain:

  • Board-approved minutes and resolutions for all major decisions
  • Valuation policies consistent with international accounting standards
  • Capital account statements for each investor and timely distribution notices

Frequently Asked Questions about SCSp

What is a Luxembourg SCSp?
An SCSp is a contractual limited partnership formed under Luxembourg law. It has at least one general partner (with unlimited liability) and limited partners (liable up to their contributions). Its main rules are set out in the Limited Partnership Agreement.
How is an SCSp different from an SCS?
An SCSp has no separate legal personality and therefore functions purely as a contractual arrangement. This gives more flexibility in drafting rights and obligations compared to an SCS, which has its own legal personality.
Is the SCSp tax-transparent?
Yes. In most cases, the SCSp is tax-transparent for Luxembourg purposes. It is not subject to corporate income tax, and taxation applies at the level of the partners, unless it carries out commercial activities through a permanent establishment.
When is an AIFM or depositary required?
If the SCSp qualifies as an alternative investment fund (AIF) and exceeds thresholds under the AIFMD, an authorized AIFM and a Luxembourg depositary must be appointed.
Why use SPVs below the SCSp?
SPVs (special purpose vehicles) segregate liabilities per deal, improve access to financing, and simplify structuring of joint ventures or co-investments.
How should commitments and distributions be defined?
The LPA specifies investor commitments, the timing of capital calls, distribution rules, carried interest, and clawback provisions. This ensures predictable treatment for all investors.
What are common reasons banks delay onboarding?
Typical delays arise when ownership charts are incomplete, beneficial owner documentation is missing, or treasury policies are unclear. Providing these upfront accelerates the process.
Can an SCSp operate in a master-feeder structure?
Yes. An SCSp is often used as a master fund with feeder funds in other jurisdictions, or as a parallel vehicle to group investors by region or currency.
How fast can a first closing occur?
If documentation, banking, and provider appointments are ready, a first closing can take place in as little as four to six weeks.
What goes into investor side letters?
Side letters typically contain negotiated provisions on fees, reporting formats, or regulatory requirements. They must be consistent with the LPA to avoid conflicts, and investors are generally granted equal treatment through disclosure of material terms.
  • Graphic – Luxembourg
  • Graphic – Luxembourg

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