Unregulated AIF in Luxembourg: Why SCSp is the ideal structure for VC & PE funds

What is an SCSp?

The Société en Commandite Spéciale (SCSp) is a Luxembourg legal structure introduced in 2013 as part of the transposition of the AIFM Directive (AIFMD). It is a flexible and widely used limited partnership that resembles Anglo-Saxon limited partnership models, making it highly attractive to international investors.

The SCSp is composed of:

• One or more general partners (GPs) who have unlimited liability and manage the fund.

• One or more limited partners (LPs) whose liability is limited to their capital commitment.

Key benefits of SCSp for VC & PE funds

1. Regulatory flexibility

One of the most significant advantages of an SCSp is that it does not require CSSF (Commission de Surveillance du Secteur Financier) approval unless it is managed by an AIFM under the AIFMD framework. This provides fund managers with the flexibility to operate without the stringent regulatory burden of supervised AIFs.

An SCSp can function as:

• A fully unregulated AIF, requiring no specific regulatory oversight.

• A registered AIF under the Luxembourg RAIF (Reserved Alternative Investment Fund) regime, benefiting from a streamlined setup process.

2. Tax efficiency

Luxembourg’s SCSp offers multiple tax advantages that make it an ideal choice for private equity and venture capital funds:

• Tax Transparency: The SCSp itself is not subject to corporate income tax, municipal business tax, or net wealth tax in Luxembourg. Instead, taxation occurs at the investor level.

• No Withholding Tax on Distributions: Unlike some other fund structures, SCSp distributions to investors are generally not subject to Luxembourg withholding tax.

• VAT Exemption: Management services provided to the SCSp are exempt from VAT, reducing operational costs.

• Access to Luxembourg’s Double Tax Treaty Network: While the SCSp is typically tax-transparent, structuring through Luxembourg-based entities may allow investors to benefit from the country’s extensive double tax treaty network.

3. Flexible governance and structuring

SCSp offers fund managers significant flexibility in governance and investment strategy:

• No Minimum Capital Requirement: Unlike SICARs or SIFs, SCSps have no mandatory minimum capital, allowing fund managers to define contributions as they see fit.

• Bespoke Partnership Agreements: The SCSp allows extensive customization in the Limited Partnership Agreement (LPA), defining terms such as capital commitments, carried interest mechanisms, voting rights, and exit strategies.

• No obligation to publish financial statements: Private SCSps benefit from confidentiality, as they are not required to disclose financials publicly.

4. Limited Partner protection and appeal to international investors

• SCSp aligns with common law limited partnership models, making it familiar and attractive to Anglo-Saxon investors.

• Limited Liability: LPs are only liable up to their agreed contributions, reducing investment risks.

• Commitment Flexibility: The SCSp structure allows for capital calls, drawdowns, and staggered commitments, similar to Delaware LPs and UK LLPs.

When to choose an SCSp for your fund

An SCSp is particularly well-suited for:

• Venture Capital Funds seeking a flexible structure with limited regulatory oversight.

• Private Equity Buyout Funds requiring bespoke governance arrangements.

• Real Asset Funds (e.g., infrastructure, private debt) looking for tax transparency.

• Family Offices & Institutional Investors seeking a vehicle aligned with international best practices.

How to set up an SCSp in Luxembourg

1. Legal formation

• Draft and sign a Limited Partnership Agreement (LPA) defining governance and economics.

• Appoint at least one General Partner (GP) and one Limited Partner (LP).

• Register the SCSp with Luxembourg’s Trade and Companies Register (RCS).

2. Tax structuring & administration

• Establish a Luxembourg fund management company or appoint a third-party AIFM.

• Work with a fiduciary, tax advisor, and legal counsel to ensure compliance and tax efficiency.

• Consider fund domicile options (e.g., Luxembourg feeder structures for non-EU investors).

3. Investor onboarding & compliance

• Implement AML/KYC procedures to meet Luxembourg’s financial regulations.

• Set up fund administration, custodian banking, and reporting frameworks.

Use cases of SCSp for VC & PE funds

1. Early-stage Venture Capital fund

A European VC firm launched a €100 million SCSp in Luxembourg, allowing them to pool commitments from institutional and high-net-worth investors. By structuring as an SCSp, they could efficiently allocate capital to early-stage tech startups without incurring entity-level taxation. The SCSp’s tax transparency allowed LPs to benefit from direct pass-through taxation in their respective jurisdictions.

2. Private Equity buyout fund

A mid-market PE firm structured a €500 million SCSp to acquire and manage a portfolio of SMEs across Europe. The SCSp’s customizable governance structure enabled the GP to align carried interest terms with investor expectations. Additionally, the flexible capital commitment framework allowed LPs to participate in tranches, optimizing liquidity deployment while benefiting from Luxembourg’s extensive treaty network to minimize withholding tax on distributions.

3. Real Estate & Infrastructure fund

An infrastructure investment firm launched a €750 million SCSp dedicated to renewable energy projects. The SCSp’s pass-through taxation allowed LPs—mainly pension funds and sovereign wealth funds—to avoid tax leakage, maximizing post-tax returns. Additionally, the ability to quickly establish the SCSp without regulatory delays enabled the firm to seize time-sensitive investment opportunities in green energy developments across Europe.

Conclusion

The Luxembourg SCSp is a highly flexible, tax-efficient, and internationally recognized structure, making it the preferred choice for venture capital and private equity funds. Its unregulated nature allows for rapid setup and cost-effective fund operations, while still offering a robust legal framework for international investors.

For fund managers seeking an efficient and investor-friendly structure in Luxembourg, SCSp stands out as the ideal solution for alternative investments in VC and PE.

Need Assistance?

For guidance on setting up an SCSp fund, structuring investment vehicles, or ensuring compliance, contact Fundequate for expert advisory services tailored to your needs.