LUXEMBOURG Trends and Developments Contributed by: Romain Tiffon and Marie Bentley, ATOZ Tax Advisers
ticularly for large multinational groups with complex cross-border structures. New LTA Circular Clarifying the Reverse Hybrid Mismatch Carve-Out for Collective Investment Vehicles Background to the reverse hybrid rule Luxembourg’s reverse hybrid mismatch rules, intro - duced under ATAD 2 and effective since tax year 2022, may treat otherwise tax transparent entities as tax - able when certain foreign investors treat the entity as opaque. This rule aims to address hybrid mismatches caused by divergent classifications between jurisdic - tions. Given Luxembourg’s large investment fund sec - tor, clarity on how these rules apply to fund structures is essential. In August 2025, the Luxembourg direct tax authori - ties issued a dedicated circular providing detailed guidance on which investment vehicles qualify as collective investment vehicles (CIVs) under Article 168quater, paragraph 2 LITL. CIVs benefit from a full carve-out from the reverse hybrid mismatch rule. Automatic qualification of UCIs, SIFs and RAIFs The circular confirms that the following are automati - cally treated as CIVs: • UCIs (including UCITS and non-UCITS funds); • SIFs; and • RAIFs. This presumption reflects the legislator’s intention and provides welcome certainty for the vast major - ity of regulated and semi-regulated Luxembourg fund structures. CIV qualification for other investment vehicles For investment vehicles that are not UCIs, SIFs or RAIFs, the circular clarifies the following three key conditions. Broad investor participation The fund must be marketed to multiple unrelated investors. The analysis considers: • the number of investors; • relationships between investors;
• beneficial ownership; and • master feeder structures. A single investor at launch (up to 36 months) does not automatically disqualify the fund. Diversified securities portfolio Diversification must be assessed based on investment policy and market risk exposure. A fund is not consid - ered diversified if it (for example): • invests more than 30% in securities issued by the same issuer without justification; or • uses derivatives without appropriate diversification. Investor protection rules The fund must be subject to meaningful investor pro - tection regulation in its jurisdiction of establishment. Luxembourg supervised funds (CSSF regulated UCIs or AIFs managed by authorised AIFMs) are presumed to satisfy this requirement. Practical implications The circular increases legal certainty for fund man - agers structuring vehicles that fall outside traditional regulatory categories – particularly bespoke AIFs and privately placed investment partnerships. It also ensures that Luxembourg’s implementation of ATAD 2 remains aligned with international tax policy while protecting the neutrality of the fund sector. Conclusion: A Transformative Year With Strategic Long-Term Effects 2025 was a year of substantial legislative and regula - tory advancement in Luxembourg. The reforms intro - duced or clarified during the year – spanning carried interest, start-up incentives, Pillar Two reporting and hybrid mismatch rules – reflect the country’s strategic commitment to maintaining a competitive yet compli - ant environment for investment and business. For asset managers, new opportunities arise from the improved carried interest regime and clearer hybrid mismatch rules. For early-stage investors and entre - preneurs, the Start-Up Tax Credit provides a mean - ingful incentive to fuel national innovation. For large multinational groups, DAC9 marks a shift towards
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