When structuring a Luxembourg- domiciled closed-ended credit fund, managers often face the choice between using a Luxembourg special limited partnership (Société en Commandite Spéciale (SCSp)) or a Luxembourg partnership limited by shares (Société en Commandite par Actions (SCA)) as the fund vehicle. While the SCSp has been the default choice in recent years, the SCA (qualifying as a RAIF) is becoming increasingly popular. But should all credit managers follow suit? This article explores some considerations associated with an SCA to help managers make an informed choice.
Tax Benefits
In terms of potential advantages, an SCA RAIF as a master fund:
a) may directly benefit from interest withholding tax exemptions under the domestic law of the relevant investing jurisdiction or certain double tax treaties which may eliminate the need for a downstream investment holding vehicle; and
b) acts as a corporate blocker vis-à-vis the anti-hybrid rules set out in ATAD2 and may check the box to be treated as a disregarded/transparent entity from a US federal income tax perspective to assist investment from US taxpayer investors if required.
Unitised Structure
Whilst both the SCA and the SCSp operate similar management structures and offer limited liability to their investors, an SCA is by default tax opaque and unitised, which means that (a) investors do not own the underlying assets directly, and (b) an SCA cannot support a capital accounting model. As such, there is (theoretically) less flexibility to make allocations or adjustments compared to a traditional partnership structure. For example, it may be more challenging to allocate certain costs, implement deemed distributions to a single investor or amongst particular investors, or to make discretionary adjustments amongst investors. In addition, though it is possible to recreate certain mechanisms in an SCA that are commonly used in partnerships, such as equalisation, cost allocation and excuse rights, there may be added complications as a result that will need additional attention to ensure the arrangements are efficient operationally.
Carried Interest
For UK tax purposes, extracting carried interest directly from an SCA can be problematic if the fund strategy is classified as a “direct lending fund” for income-based carried interest purposes. This is due to a technical quirk in the applicable tax rules, which could turn all carried interest receipts into trading income (rather than capital gains) in the hands of self-employed LLP member recipients even if the 40-month average holding period is satisfied (although from April 2026, the income-based carried interest rules will also apply to employees/directors on the abolishment of the employment-related security exclusion from the income-based carried interest rules). Broadly speaking, a “direct lending fund” is a fund that has made a majority of its investments in “direct loans” (i.e., loans that are originated by the fund or which are acquired by the fund within a 120-day period of the loan being made). It may be that this technical quirk is resolved when the UK government consults further on the relevant income-based carried interest rules over the course of 2025.
Investor Familiarity
Though the SCA is becoming increasingly commonplace and popular amongst certain investor groups, especially European institutional investors, other investors that are accustomed to investing in SCSps may find an SCA’s fund documentation (a set of publicly available articles and a private offering memorandum rather than a private limited partnership agreement) and its nuances unfamiliar. A fund manager may need to invest time and resources in familiarising themselves and investors with an SCA’s nature, its core documents and how the manager’s prior fund documents have been adapted to an SCA structure.
Corporate Law
An SCA is subject to more mandatory rules under Luxembourg law which can reduce the flexibility of operations. For example, there is a requirement to hold an annual general meeting within six months of the financial year-end, where investors approve, amongst other matters, the annual accounts. This meeting is subject to quorum and voting majority requirements. The law also has more rigid thresholds on voting rights and majority/quorum requirements and affords investors certain other rights (for example, a right for investors holding at least 10 percent of the SCA’s shares to call a general meeting).
Final Remarks
The choice of credit fund vehicle is ultimately driven by the specific circumstances, including investor preferences, operational costs and the location of the target borrowers. Generally speaking, however, though an SCA can feel more operationally challenging and cumbersome compared with an SCSp, the tax benefits offered by an SCA can make it an attractive choice of fund vehicle for credit managers seeking to invest in certain European jurisdictions, particularly for larger fundraises where multiple feeder fund vehicles (which would offer investors tax transparent and tax opaque entry points) or fundraises targeting certain European institutional investors.
