The anti-hybrids rules and private equity fund structures

Ceinwen Rees

Richard Ward

Question

My client is a private equity fund that has debt funded a UK company (UKCo) through a Luxembourg holding company (LuxCo). LuxCo is funded using preferred equity certificates (PECs) interest will accrue under the PECs until the investment is disposed of. The fund is a Luxembourg SCSp the limited partners are a mixture of US taxable and tax exempt and UK taxable investors. I am concerned that the UK anti-hybrid rules may apply to this structure but I’m not sure where to start.

Answer

You are right to be concerned. A number of warning flags arise under this structure:

PECs may constitute a hybrid financial instrument because although classed as debt instruments for Luxembourg tax purposes can be structured to obtain equity...

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