To accommodate EU capital raising, US fund managers (USFM) usually set up their investor-facing fund vehicle in Luxembourg, typically in the form of a Luxembourg special limited partnership (SCSp).

Investors that can provide large tickets, usually well above USD 100 million, may want a bespoke relationship with the USFM and may require a separately managed account (SMA).

SMAs comes in two variations:

  • A co-investment SMA invests alongside the main fund and ensures that any required co-investment funding is readily available rather than needing to be secured in the heat of the deal closing process. The co-investment SMA is on stand-by to support the main fund with deals of a size that would e.g. conflict with the main fund’s diversification rules. As the SMA is supportive to the main fund and thus to the USFM, it often operates on more favorable fee and carried interest terms than the main fund.
  • A stand-alone SMA is essentially a fund of one whereby the LP gives discretionary investment mandate to the USFM. For a stand-alone SMA, the fee and carried interest terms are usually similar to those of a regular investment fund.

Depending on the fact pattern, the SMA may qualify as an alternative investment fund (AIF). In case of AIF status, an EU or non-EU AIF manager must be appointed by the SMA.

The default Luxembourg SMA vehicle is an SCSp (same as the typical Lux fund vehicle). The following specific Luxembourg tax attention points must be kept in mind for an SMA-SCSp:

  1. If the SMA-SCSp is not an AIF, it may be subject to Luxembourg municipal business taxpayer (6.75%) if it conducts a business. An SMA-SCSp often does not conduct a business for that purpose, but it depends on the fact pattern.
  2. An SMA usually has a single investor (group). If that investor is a company that is not tax exempt and views the SCSp as tax opaque, the SMA-SCSp may become subject to Luxembourg corporate income tax at 17.12%. It is key to get clarity on those facts in the early stages of the structuring since tax leakage at SMA level is a showstopper.
  3. An SMA is often charged a management fee. Such fee is VAT exempt if the SMA is an AIF. If the SMA is not an AIF or if the SMA is charged a different type of fee, the fee may cause VAT leakage which is usually borne by the SMA investor.

The above tax attention points must be ironed out during the initial structuring phase. Getting clear grip on point 2 (i.e., whether an SCSp is treated as transparent or opaque under the SMA investor’s tax laws) is not always easy. For example, an SCSp may be treated as transparent under the investor’s tax laws only if the SCSp is not subject to Luxembourg tax. This can lead to a ‘chicken and egg’ situation because, as explained under 2 above, the question whether the SCSp is taxable in Luxembourg depends on the investor’s tax treatment of the SCSp.

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