New Circular clarifying reverse hybrid rules released by the ACD

On 12 August 2025, the Luxembourg Direct Tax Administration ("ACD") published a new Circular - Circulaire du directeur des contributions, L.I.R. n° 168quater/2 - clarifying the tax treatment of collective investment vehicles ("CIVs") under the reverse hybrid rules set out in Article 168quater, paragraph 2 of the Luxembourg Income Tax Law ("LITL").

The Circular confirms that the following fund types qualify by nature as CIVs under this provision:

• Luxembourg collective investment undertakings under the amended law of December 17, 2010 ("UCITS/UCI");
• Specialized investment funds under the amended law of February 13, 2007 ("SIF"); and
• Reserved alternative investment funds under the amended law of July 23, 2016 ("RAIFs").

According to the Circular, these vehicles are deemed to meet the three conditions required for the CIV exemption under the reverse hybrid rules:

• Broad Investor Participation: as a reminder, investment funds must be marketed to multiple unrelated investors. The ACD however clarified that a participation restrained to a limited number of investors does not jeopardise per se the availability of the exemption, especially if this occurs during launch or liquidation phases and it is only temporary. The Circular provides that the condition can be met if the broad investor participation is rectified within a period of 36 months The Circular also offers a presumption that the broad participation condition is met if no individual investor holds or controls more than 25% in the fund.

• Diversified Securities Portfolio: The fund must maintain a diversified portfolio of securities, including shares, bonds, derivatives, and deposits. References are made to the SIF law risk-spreading criteria. In particular, concentration of investments exceeding 30% in a single issuer are generally not permitted unless adequately justified.

• Investor Protection Regulation: The fund must be subject to investor protection rules in its jurisdiction of establishment. This condition is presumed to be met for Alternative Investment Funds ("AIFs") under the law of 12 July 2013 managed by authorized AIFMs under Directive 2011/61/EU.

In summary, the ACD has clearly stated that certain types of funds (such as RAIFs) can be automatically considered to meet the exemption criteria under Article 168quater paragraph 2 of the LITL, provided they operate within their regulatory framework. For non-regulated funds such as AIFs, the Circular offers more clarity and guidance on the criteria to meet to benefit from the CIV exemption, in particular with regard to concentration and broad participation thresholds.

The content of this Circular is a welcome development, as it provides greater clarity and legal certainty regarding the application of the CIV exemption to various investment vehicles in Luxembourg.

For official text of the Circular, please click here