In 2013, Luxembourg reformed its partnership laws while implementing the EU’s Alternative Investment Fund Managers Directive (AIFMD). This overhaul introduced the Special Limited Partnership (Société en Commandite Spéciale, or SCSp).
Now one of three partnership structures available in Luxembourg, the SCSp has become a popular choice for international investors thanks to its flexibility and adaptability.
In this comprehensive guide, we’ll explore the key features, advantages and legal considerations that fund managers, investors and businesses should understand before deciding if the SCSp is right for them.
What is an SCSp?
The SCSp is an unregulated vehicle introduced in 2013 as part of Luxembourg’s push to modernize its investment framework. Unlike traditional limited partnerships, the SCSp does not have a legal personality distinct from its partners, making it easier to structure and customize agreements based on the needs of investors, and ensuring its tax transparent status in many foreign jurisdictions.
The SCSp operates under a minimal legal framework, with very few provisions governing its formation and function. This simplicity has made it an ideal choice for investors who want more control over how their partnerships are structured, compared to corporate entities that must meet additional regulatory requirements.
As an investment vehicle, the SCSp has proven especially useful in real estate and alternative investments thanks to its multiple structuring possibilities. For example:
When regulated, e.g. as an RAIF, SCSps can be set up as umbrella fund vehicles, allowing for multiple distinct compartments under a single entity. Feeder fund vehicles, on the other hand, cater to fund investors (LPs) with specific needs or obligations not shared by all other LPs of the fund. Special purpose vehicles provide flexibility for those looking to invest on a deal-by-deal basis.
Key Features of an SCSp:
Let’s take a closer look at some of the key features of the SCSp.
Structure and Formation:
An SCSp consists of two types of partners: a general partner (GP) and limited partners (LPs). GPs have joint, unlimited liability for the partnership’s obligations, while LPs are only liable up to their contributions.
Forming an SCSp is a relatively simple process. It involves drafting a limited partnership agreement (LPA), which does not require a notary’s involvement. Only an extract of the contract needs to be filed with public authorities, keeping the limited partners’ identities confidential.
To meet legal requirements, the SCSp must file an extract of its private agreement with Luxembourg's trade and companies register (RCS) within one month of its establishment. However, there are no legal obligations for an SCSp to prepare or file annual accounts, offering significant flexibility compared to other business structures.
Flexibility:
SCSps offer customizable terms and conditions, making them attractive to fund managers, investors and businesses with different needs and goals. This flexibility allows the SCSp to be used in various ways.
For example, an investor seeking diversification may opt for an umbrella fund structure with multiple segregated portfolios. Alternatively, an investor interested in a specific deal might use a co-investment vehicle to focus solely on that opportunity.
Furthermore, there is also no minimum capital requirement for an SCSp. Investors aren’t required to commit a fixed amount of capital, making it easier to structure partnerships with various levels of commitment.
Tax Treatment:
One of the key advantages of the SCSp is its tax transparency, as it is not subject to corporate income tax in Luxembourg. This status allows the partnership to pass profits directly to its partners without incurring tax at the entity level.
Advantages of Using an SCSp:
Now, what are the specific benefits for fund managers, investors and startups/businesses?
For Fund Managers:
- Simplified Administrative Processes: The SCSp has very few mandatory requirements, meaning nearly all aspects of the partnership can be tailored through the LPA. This reduces the administrative burden on fund managers, who can customize the terms without rigid legal constraints.
- Flexibility in Fund Management and Operations: Being able to easily adjust terms allows fund managers to respond quickly to changes, ensuring the partnership operates smoothly and that it can adapt as needed to maximize performance.
For Investors:
- Limited Liability for Limited Partners: In an SCSp, LPs are only liable for the amount they commit, reducing their financial risk compared to other structures. This makes them an attractive option for investors seeking controlled exposure without being responsible for the partnership’s broader obligations.
- Transparency and Potential Tax Benefits: The SCSp’s tax transparency means that investors are treated as if they had invested directly in the underlying assets. But note, while this avoids taxation at the partnership level, it also means the SCSp is not eligible for certain tax benefits, such as treaty protection.
Comparing SCSps to Other Structures:
That's all well and good, but how does the SCSp compare to other structures?
SCSp vs. Société en Commandite Simple (SCS):
- Legal Personality: The main difference between an SCSp and an SCS is that the SCSp does not have a separate legal personality, meaning it exists as a contractual agreement between partners.
- Taxation: SCSps are not subject to corporate income tax, net wealth tax, municipal business tax, or withholding tax. Similarly, Luxembourg's traditional limited partnership (SCS) is also not subject to these taxes. Because the SCSp lacks legal personality, it is more easily recognized as tax transparent in foreign jurisdictions. However, in Luxembourg, this distinction does not result in significant differences from a tax perspective.
- Exemptions: Special Limited Partnerships (SCSp) typically are exempt from the need to prepare annual financial statements if they submit trial balances according to Luxembourg’s Standard Chart of Accounts, but certain SCSp entities may need to meet extra requirements, with filings kept private from the public eye.[6]
SCSps vs. Corporate Structures (e.g. SàRL):
- Legal Personality: An SàRL has a separate legal personality, distinct from its members, while an SCSp exists solely through its partners’ contractual agreement.
- Liability: SàRL members typically have limited liability for the company's debts. In an SCSp, limited partners also have limited liability, while general partners bear unlimited liability.
- Management: SàRLs allow for flexibility in management, where members can directly manage or appoint managers. In an SCSp, only GPs manage the partnership.
- Taxation: SàRLs are generally subject to taxation at the entity level, while the SCSp offers tax transparency, ensuring profits flow directly to partners without taxation at the entity level.
Legal and Regulatory Considerations:
Now, let’s explore the key legal and regulatory aspects that apply to SCSps.
Key Regulations Governing the SCSp:
The SCSp itself is subject to very few provisions under Luxembourg law. However, if the SCSp falls under a specific category – such as a regulated Alternative Investment Fund (AIF) like a SIF, RAIF or SICAR – it must adhere to those specific regulations.
To name a few, but not all, of those regulations: SIFs cannot invest more than 30% of their assets in securities of the same type from a single issuer.[2] SICARs must invest in risky assets[3], and RAIFs must maintain a minimum net asset base of EUR 1,250,000[4].
Compliance Requirements for Fund Managers and Investors:
Fund Managers: If the SCSp is unregulated, it falls under Luxembourg company law, with AIFM regulation applying if it's considered an AIF.
Investors: Investors in SCSps should be aware of their due diligence obligations, especially when investing in regulated vehicles. Then, they must ensure that their needs align with the investment thesis of the SCSp.
Jurisdictional Considerations:
To be clear, Luxembourg is the global hub for fund administration (as well as asset management and cross-border investments) for a reason: it has an extremely favorable regulatory environment.
However, fund managers and investors should be aware of how their home country’s tax laws and regulations interact with Luxembourg’s legal framework. Regulatory and tax implications can differ significantly depending on the home country of investors or the location of underlying assets.
Examples and Use Cases:
Last, let’s explore some real-world examples and use cases of SCSps.
Real-World Applications of SCSps:
The SCSp is predominantly used as a fund vehicle. Due to its flexibility, SCSps are appropriate for various fund structures, including master funds, feeder funds, parallel funds, carry vehicles and special purpose vehicles, allowing tailored approaches for different investment strategies.
For example, in real estate, an SCSp might be used to hold a large commercial property with multiple investors. A traditional corporate structure would require public reporting, but the SCSp provides confidentiality and tax transparency, making it better suited for such high-value, multi-investor real estate deals.
Industries and Sectors Where SCSps Are Commonly Used:
- Private Equity: SCSps’ ability to handle co-investment structures makes them suitable for private equity funds, which require flexible agreements and tailored governance to meet the needs of different investors.
- Venture Capital: Confidentiality and flexible structures attract venture capitalists investing in emerging industries, providing the privacy needed to operate discreetly and protect early-stage innovations.
- Infrastructure Projects: The SCSp enables the pooling of capital for large infrastructure investments, often involving complex ownership models.
The SCSp’s Value for Fund Managers, Investors and Businesses
The SCSp offers a flexible, tax-transparent investment structure that is ideal for private equity, real estate, and venture capital funds. Its unique ability to be both regulated and unregulated makes it a versatile choice for a variety of sectors.
Understanding the SCSp is crucial for anyone looking to navigate complex investment scenarios. With limited liability for investors and simplified administrative processes, it’s a standout option for fund managers seeking customizable solutions.
For fund managers, investors and businesses, the SCSp’s flexibility makes it an attractive option for cross-border investments, co-investment vehicles, asset management, and more.
Book a demo to start investing with Roundtable!
References
[1] https://cms.law/en/gbr/publication/cms-funds-group-back-to-basics-briefings/unregulated-special-limited-partnership/unregulated-special-limited-partnership
[2] https://www.cliffordchance.com/content/dam/cliffordchance/PDFDocuments/aif-the-luxembourg-toolbox-2022.pdf
[3] https://www.creatrust.com/investment-funds/capital-risk-fund-sicar
[4] https://www.alfi.lu/en-gb/pages/setting-up-in-luxembourg/alternative-investment-funds-legal-vehicles/
[5] https://www.caficointernational.com/f/110648/x/4332d53784/cafico-international-scsp.pdf
[6]
{{learn_banner}}
