Welcome clarifications on the CIV Exemption for Luxembourg’s ATAD 2 reverse-hybrid rules

The Luxembourg tax authorities have released a new tax circular (L.I.R. No. 168quater/2 dated 12 August 2025, the "Circular") that provides long-awaited, welcome clarification on the Exemption from Luxembourg's reverse-hybrid rules (the "CIV Exemption"). As part of the EU anti-hybrid rules known as ATAD2, specific rules target the hybrid mismatch outcome arising from reverse-hybrid entities. Reverse-hybrid entities are Luxembourg entities treated as transparent for Luxembourg direct tax purposes such as a société en commandite simple (SCS) or a société en commandite spéciale (SCSp), but treated as fiscally opaque by investors in other jurisdictions. As a result, they may become subject to Luxembourg corporate income tax.

The CIV Exemption can apply to exclude the adverse application of the reverse-hybrid mismatch outcome to collective investment vehicles (CIVs) that meet the following criteria: (i) They are widely held. (ii) They hold a diversified portfolio of securities. (iii) They are subject to investor-protection regulation in Luxembourg.

First, the Circular clarifies that the following investment funds benefit from the CIV Exemption automatically, without needing to assess the three criteria above:

• Luxembourg funds subject to the law of 17 December 2010 law on undertakings for collective investment;
• Specialized Investment Funds (SIFs) subject to the law of 13 February 2007 law on SIFs; and
• Reserved Alternative Investment Funds (RAIFs) subject to the law of 23 July 2016 law on RAIFs.

Second, for other funds, the Circular provides additional detail to interpret the three criteria:

1. Broad participation (i.e. "widely held")
   A collective investment undertaking or fund is considered as "widely held" if it is distributed to many unconnected investors. A limited number of investors does not automatically mean the criterion is not met, especially during the fund's launch (with a ramp-up period of up to 36 months) or during liquidation. For institutional funds or master-feeder structures, the widely held criterion will be tested at the level of the feeder or institutional investor, so that no single individual investor holds (directly or indirectly) more than 25% of the capital or voting rights in the fund as a whole
2. Diversified portfolio of securities
   "Securities" should be understood broadly, including shares, partnership interests, units in other funds, beneficiary shares, bonds and other debt claims, bank deposits, and even certain derivatives (only if the underlying instruments are securities).
   The diversification criterion aligns with the regulatory requirements for SIFs (and thus RAIFs), i.e. an investment policy set out in the fund's constitutive documents and actual exposure to market risk (including direct and indirect counterparty risk) with concentration limits generally no more than 30% of the vehicle's assets in securities of any one issuer.
3. Subject to investor-protection rules in Luxembourg
   This condition should be met for:
   • Undertakings/funds subject to Commission de Surveillance du Secteur Financier / CSSF prudential supervision; and
   • Alternative Investment Funds (AIFs) managed by an Alternative Investment Fund Manager (AIFM) authorized under AIFMD (Directive 2011/61/EU).