Loyens & Loeff New York regularly posts 'Snippets' on a range of EU tax and legal topics. This Snippet focuses on Luxembourg Value Added Tax ("𝐕𝐀𝐓") attention points when US fund sponsors ("𝐔𝐒𝐅𝐒") launch a Luxembourg private fund.
A Luxembourg private fund is designated as an alternative investment fund ("𝐀𝐈𝐅") from a regulatory perspective and usually takes the legal form of a Luxembourg special limited partnership ("S𝐒𝐂𝐒𝐩") with a Luxembourg limited liability company ("𝐒𝐚𝐫𝐥") as its general partner ("𝐆𝐏"). Especially when the AIF conducts a European investment strategy, the SCSp often invests through several Luxembourg asset acquisition vehicles that take the form of Sarls ("𝐇𝐨𝐥𝐝𝐂𝐨𝐬").
The SCSp, the GP and the HoldCos ("𝐋𝐮𝐱𝐂𝐨𝐬") need services from several service providers. Luxembourg VAT (currently, 17%) is generally due on their fees. If the services are provided by a Luxembourg counterparty, VAT is included in the invoice (in which case the LuxCo pays it to the service provider, which in turn pays it to the Luxembourg VAT authorities; the "𝐋𝐕𝐓"). If the services are provided by a non-Luxembourg counterparty, the Luxembourg recipient may have to pay VAT on the fees to the LVT on a self-assessment basis. Any VAT due is usually non-refundable and therefore a final cost for the LuxCos and thus, indirectly, the investors in the SCSp. Apart from cost, VAT gives rise to a compliance burden since the LuxCos must usually be registered with the LVT and file (periodic) VAT returns.
VAT is not always due. If certain non-EU service providers (e.g. lawyers) issue an invoice to a HoldCo that is a pure holding company, no VAT is due thereon. If the HoldCo is not a pure holding company (e.g. it grants loans), VAT may be applicable. Services rendered to AIFs trigger VAT unless an exemption applies. The main costs incurred by an AIF relate to its management. Importantly, a VAT exemption applies for services rendered to the AIF and the GP that are specific and essential for the management of the AIF. This exemption also covers fees charged by placement agents, administrators and depositaries.
The AIF's limited partnership agreement typically designates expenses as either organizational expenses or fund expenses. Generally, organizational expenses cover all costs related to the AIF's launch and investor onboarding, and fund expenses cover the ongoing management and maintenance of the AIF. The fund expenses are usually borne in full by the AIF while organizational costs are borne by the AIF only up to a certain cap (and the USFS bears the excess). That cap is usually exclusive of VAT.
When setting up a Luxembourg AIF structure, a thorough VAT analysis of the fund documentation is required to manage any VAT leakage and to allocate it between the AIF and the USFS.
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