LuxCo typically takes the form of Luxembourg private limited liability company (S.à r.l.), while the Fund typically takes the form of a limited partnership formed under the laws of the relevant jurisdiction. LuxCo often hosts a range of people functions relevant for the management of LuxCo’s (indirect) assets.

Following the sale of an investment, LuxCo must usually repatriate the sales proceeds to the Fund’s investors. The various considerations that come into play when deciding how such cash repatriation will occur include Luxembourg withholding tax (“𝐖𝐇𝐓”).

Ordinary (non-liquidating) dividend distributions made by LuxCo are generally subject to 15% Luxembourg WHT. An exemption or reduction of WHT under a tax treaty or the Luxembourg tax rules is rarely available in a Fund context, which would not be in line with the generally accepted idea that investment funds should be tax neutral.

If the cash repatriation occurs towards the end of the Fund’s life cycle, LuxCo can be put into liquidation as part of the winding up process of the Fund structure as a whole. While in liquidation, LuxCo can make one or more advance liquidation distributions which are not subject to WHT. However, during the life of the Fund, that possibility is not available as LuxCo usually holds a variety of assets. In that case, cash repatriation by LuxCo often occurs under shareholder debt and/or in the form of a ‘partial liquidation’ (“𝐏𝐋”). Both options are discussed below.

The Fund routinely funds LuxCo with a combination of equity and a shareholder loan (“𝐒𝐇 𝐋𝐨𝐚𝐧”). Payments made by LuxCo to the Fund under the SH Loan are not subject to WHT, as long as the debt-to-equity ratio of LuxCo and the interest rate on the SH Loan are at arm’s length. It is recommended to perform a transfer pricing analysis in that respect.

LuxCo may also repatriate in the form of a PL. In order to allow one or more PLs, LuxCo’s capital is divided into several classes of shares. Each class tracks the performance of a specific asset or has a specific profit allocation. Following the exit of an investment, the relevant share class is redeemed and cancelled, which should not be subject to WHT. Such share classes are often implemented in combination with a SH Loan. This provides flexibility as PL(s) can occur e.g. when the SH Loan is repaid. The tax framework for PL is currently to a large extent defined by Luxembourg case law, which confirms the absence of WHT save for abusive situations.

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