15 tax reasons for choosing Luxembourg as an investment...

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15 tax reasons for choosingLuxembourg as an investment centreAugust 2014

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15 tax reasons for choosing Luxembourg as an investment

centre

August 2014

© Loyens & Loeff Luxembourg S.à r.l., 2014

All rights reserved. No part of this publication may be reproduced, stored in a retrieval system or in an automated database

or disclosed in any form or by any means (electronic, mechanical, photocopy, recording or otherwise) without prior written

permission.

Although this publication has been compiled with great care, Loyens & Loeff Luxembourg S.à r.l. and all other entities,

partnerships, persons and practices trading under the name ‘Loyens & Loeff’, cannot accept any liability for the consequences

of making use of this issue without their cooperation, including any errors or omissions. The information provided is intended as

general information and cannot be regarded as advice.

Since the early 1990’s Luxembourg, which is situated in the heart of Europe, has considerably enhanced its position on the international business scene by introducing a series of tax measures favouring inbound and outbound investments. As a result of these efforts Luxembourg has become the preferred European jurisdiction for investment management, and is high on the short list of jurisdictions for holding, financing, private wealth management and intellectual property activities.

This booklet sets out 15 reasons why a company planning to conduct any form of international business should consider choosing Luxembourg as preferred jurisdiction of establishment. Compared to the 2012 edition, this 2014 edition contains five additional reasons: Luxembourg’s fiscal unity regime, Luxembourg’s investment tax credits, Luxembourg’s unregulated funds structured as limited partnerships, Luxembourg’s carried interest regime and Luxembourg’s ATR and APA practice. The seminal number of ten used in the 2012 edition had therefore to be abandoned, but instead this booklet offers an even more complete view on the Luxembourg tax framework. Savings Directive considerations no longer form part of this 2014 edition, as the relevant withholding taxes are expected to be abolished from 1 January 2015.

The information given in this booklet is by no means exhaustive. Luxembourg offers many other attractive laws and regulations which make it worthwhile to consider establishing in Luxembourg. Moreover, its friendly corporate tax climate, its high standard of living, its safe and welcoming atmosphere and its location in the heart of Europe also make it a great country to live in!

The author thanks Kheira Mebrek and Eric Cayrel for their input on wage tax aspects and VAT.

Loyens & Loeff Luxembourg S.à r.l.

Frank van Kuijk August 2014

CONTENTS

Page

Abbreviations and definitions used in this booklet 5

Reason number 1: Luxembourg’s holding regime 8

Reason number 2: Luxembourg’s intra-group financing regime 14

Reason number 3: Luxembourg’s fiscal unity regime 17

Reason number 4: Luxembourg’s intellectual property regime 20

Reason number 5: Luxembourg’s investment tax credits 24

Reason number 6: Luxembourg’s company reorganization facilities 27

Reason number 7: Luxembourg’s SIF and SICAR regime 33

Reason number 8: Luxembourg’s SPF regime 35

Reason number 9: Luxembourg’s securitization regime 37

Reason number 10: Luxembourg’s unregulated funds structured as limited partnerships 39

Reason number 11: Luxembourg’s carried interest regime 42

Reason number 12: Luxembourg’s tax treaty network 44

Reason number 13: Luxembourg’s expatriate regime 45

Reason number 14: Luxembourg’s VAT regime 48

Reason number 15: Luxembourg’s APA/ATR practice 50

Contacts 52

5 loyens & loeff Fifteen tax reasons for choosing Luxembourg as an investment centre

Abbreviations and definitions used in this booklet

APA Advance pricing agreement.

ATR Advance tax agreement.

CIT Corporate income tax, levied at a general combined rate of 29.22% and composed of income tax at a rate of 21% (but 20% for taxable income not exceeding EUR 15,000), a 7% surcharge on the income tax rate and municipal business tax (MBT) levied at a rate of 6.75% for Luxembourg City in 2014.

ITA The Luxembourg income tax act of 1967 (Loi du 4 décembre 1967 concernant l’impôt sur le revenu).

COOP S.A. A Luxembourg cooperative organized as a public limited liability company, Société Coopérative organisée sous forme d’une société anonyme.

CSSF Commission de Surveillance du Secteur Financier, Luxembourg’s supervisory commission for the financial sector.

EU The European Union, which currently compromises the following 28 Member States: Austria, Belgium, Bulgaria, Croatia, Cyprus, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, Netherlands, Poland, Portugal, Romania, Slovakia, Slovenia, Spain, Sweden, United Kingdom.

EEA The European Economic Area, which consists of all 28 Member States plus Norway, Liechtenstein and Iceland.


Financing Circulars The circulars issued by the Director of the Luxembourg direct tax authorities on 28 January 2011 (164/2) and 8 April 2011 (164/2) on intra-group financing companies.

IP Intellectual property.

IP Circular The Circular issued by the Director of the Luxembourg direct tax authorities on 5 March 2009 (50bis/1).

Interest and Royalty Directive Directive 2003/49/EC on a common system of taxation applicable to interest and royalty payments made between associated companies of different Member States.

LTA The Luxembourg direct tax authorities (administration des contributions directes).

Member State A country belonging to the EU.

NWT Net wealth tax, levied at a rate of 0.5% on a Luxembourg company’s net wealth on 1 January of each year.

Parent-Subsidiary Directive Directive 90/435 EEC on the common system of taxation applicable in the case of parent companies and subsidiaries of different Member States, as amended.

S.C.A. Public partnership limited by shares, Société en Commandite par Actions.

S.A. A Luxembourg public limited liability company, Société Anonyme.

S.à r.l. A Luxembourg private limited liability company, Société à Responsabilité Limitée.


Savings Directive Directive of 2003/48/EC of 3 June 2003 on taxation of savings income in the form of interest payments, implemented in Luxembourg by the laws of 21 June 2005.

Treaty A treaty for the avoidance of double taxation concluded between Luxembourg and another state.


Reason 1: Luxembourg’s holding regime

I Introduction

“Soparfi” (Societé de Participations Financières) is the term used for a company incorporated under Luxembourg law whose corporate object is the holding of participations in other companies. A Soparfi is fully subject to CIT and NWT and may benefit from the participation exemption regime, which generally provides for a CIT exemption on income and capital gains derived from shares, and a NWT exemption on net wealth allocable to these shares. Shareholders of a Soparfi may benefit from a wide range of withholding tax exemptions for dividends distributed by the Soparfi.

II The participation exemption

Dividends received (including liquidation proceeds) and capital gains (including foreign exchange rate gains) derived from participations in the social capital of a subsidiary held by a Soparfi are fully exempt from CIT, provided that the following requirements are met:

a. the subsidiary is: (i) an entity covered by article 2 of the Parent-Subsidiary Directive, (ii) a fully taxable resident company, or (iii) a company subject to an income tax comparable with Luxembourg corporate income tax (in practice, a minimum rate of 10.5%, levied on a basis determined in accordance with Luxembourg standards, is required); and

b. at the time when the dividend or the capital gain is realized, the Soparfi has held for an uninterrupted period of at least 12 months (or undertakes to continue to hold for an uninterrupted period of at least 12 months), a participation of at least 10% in the subsidiary’s social capital, or alternatively, a direct participation having an acquisition price of at least EUR 1.2 million for dividends, or EUR 6 million for capital gains.

The 10% threshold should be assessed on the overall social capital and not on a share class per share class basis. The acquisition price is an off-balance sheet item and only recorded in the tax return of the shareholder. The acquisition price includes the expenses which are attributable to the acquisition (e.g. lawyers’ fees).

However, even if the above conditions are met, the participation exemption on the dividends and capital gains can be refused for a period of five years following acquisition


if a non-qualifying participation has been exchanged in a tax-neutral manner (see Reason 6) for a qualifying participation. The conditions for the participation exemption for dividends (not capital gains) are generally relaxed under the Treaties Luxembourg has concluded with other countries (see Reason 12).

III Deduction of costs and recapture rule and loss carry-forward

If a dividend is tax-exempt, the directly and economically related costs (typically interest costs on loans that finance the participation) are tax-deductible in a given year, but only insofar as they exceed the exempt dividends from the participation in the same year. An impairment of a participation in the tax books is tax-deductible. A later revaluation accounted for in the tax books is taxable. However, an impairment of a participation triggered by a distribution of exempt dividends is not tax deductible. A later revaluation of the participation is assimilated to a dividend up to the amount of the impairment triggered by the distribution of exempt dividends and is therefore tax-exempt. Such deductible costs and impairments, and also impairments on loans granted to the participation, may be offset against other income such as income from financing or commercial activities, or may result in tax losses that can be carried forward indefinitely. At the time when an exempt capital gain is realized on the relevant participation, the net negative revenues derived from the participation and loans granted to the participation in the year of realization and previous years reduce the exempt part of the capital gain (“recapture rule”). There should in fact be no effective taxation on the non-exempt part of the capital gain owing to the available losses and unlimited loss carry-forwards, provided the costs or losses were not set off against income from other activities.

Loss carry-forward can be refused in the case of abuse, i.e. when the purpose of a transaction is to avoid Luxembourg tax. In this context an abuse may arise if in case of the transfer of shares in a company with tax losses to a new shareholder, with the sole aim of the new shareolder is to take advantage of the losses. A circular issued by the LTA explains that the relevant circumstances indicating abuse are when the termination of the loss-generating activities by the former shareholder coincides with the share transfer, and the company possesses no real substantial assets at the time of the transfer.

IV Debt to equity ratios

As a matter of policy, the Luxembourg direct tax authorities apply a debt to equity ratio of 85/15 for holding activities. The return paid on excessive debt financing is re-qualified as a dividend distribution and is subject to withholding tax unless a withholding tax exemption applies. The excess interest which is re-qualified as a distribution is also considered as non-deductible. This should not trigger adverse tax effects if the Soparfi only has tax-


exempt income under the participation exemption regime and has a shareholder entitled to a dividend withholding tax exemption.

V Net wealth tax aspects

NWT is levied at a rate of 0.5% on January 1 of each year on a company’s net wealth (generally the fair market value of the assets minus the liabilities). The value of the participations meeting the requirements as set out under section II (except the minimum holding period) net of allocable liabilities, is exempt from NWT. The conditions for the participation exemption for net wealth tax purposes are generally relaxed under the Treaties Luxembourg has concluded with other countries, (see Reason 12). A reduction for NWT purposes can be claimed if: (i) an amount equal to five times the NWT due is allocated to a net wealth tax reserve as recorded in the commercial accounts, (ii) the reserve must be formed no later than the closing of the financial year following the year for which the reduction is claimed, (iii) the reserve must be maintained for five years, (iii) the reserve must be formed from the commercial profits for the relevant year; if there are insufficient profits for the relevant year, it can be formed from freely distributable reserves from prior years. The amount of the reduction is capped at the amount of the corporate income tax (calculated prior to any tax credits) for the relevant year, and is reduced by the amount of the minimum tax (see section VI) that would have been due for the relevant year.

VI Minimum taxation

A company with its central management or effective place of management in Luxembourg is subject to an annual minimum CIT levy. A Luxembourg permanent establishment of a foreign company is not subject to this levy. This minimum CIT levy (including the 7% surcharge for the unemployment fund) is EUR 3,210 for a company more than 90% of whose assets are composed of fixed financial assets, receivables on related parties, cash and cash equivalents as referred to in accounts 23, 41, 50 and 51 of the Luxembourg standard set of accounts (plan comptable normalisé), at the end of the relevant taxable year. Interest in Luxembourg and foreign partnerships are considered to qualify under account 23. Considering the nature of a Soparfi’s activities, it should normally be subject to this minimum tax. Companies which do not meet the above asset test are subject to a progressive minimum tax contingent on the balance sheet total. The lower minimum tax bracket amounts to EUR 535 for a balance sheet total of up to EUR 350,000 and the higher bracket amounts to EUR 21,400 for a balance sheet total of up to EUR 20,000,000. Assets which generate revenues that are exclusively taxable in a Treaty state (e.g. real estate situated in a Treaty country) are excluded when assessing the 90% threshold. Tax credits cannot reduce the minimum tax. The minimum tax itself reduces the CIT tax charge in a later year insofar as it exceeds the minimum tax charge of that later year.


The minimum tax thus functions as a non-reimbursable pre-levy. In the case of a fiscal unity (see Reason 3), the minimum tax liability levied from the head of the fiscal unity is determined on a company per company basis, but the aggregate amount may not exceed EUR 21.400. Minimum tax also applies to SICARs and SVs (see Reasons 7 & 9 respectively).

VII Taxation of a Soparfi’s shareholders

Dividends

Dividends paid by a company with its statutory seat or central administration in Luxembourg are subject to 15% withholding tax, unless a lower Treaty rate applies. An exemption however applies if the distributor is a Luxembourg company which is fully subject to tax in Luxembourg with either a Luxembourg legal form or a legal form of Member State or a fully taxable capital company which has a legal form of a non-Member State and the recipient is:

(i) a company covered by article 2 of the Parent-Subsidiary Directive or a permanent establishment thereof;

(ii) a fully taxable resident capital company with a legal form of a non-Member State or a permanent establishment thereof;

(iii) a company resident in a Treaty state and subject to a tax comparable to Luxembourg CIT, or a Luxembourg domestic permanent establishment thereof;

(iv) a Swiss company subject to tax in Switzerland and not benefiting from a tax exemption, and;

(v) a capital company or a cooperative company resident in an EEA country other than a Member State and fully subject to a tax comparable to the Luxembourg CIT regime, or a permanent establishment thereof;

provided the parent company has held shares in the Soparfi which represent at least 10% of the Soparfi’s social capital or with an acquisition cost price of EUR 1.2 million for an uninterrupted period of at least 12 months (or undertakes to continue to hold them for an uninterrupted period of at least 12 months).


Liquidation distributions and capital repayments

Liquidation distributions are not subject to withholding tax. Repayments of social capital contributed by the shareholders and capitalised retained earnings are also subject to withholding tax. If sound economic reasons for the repayment of contributed social capital can be demonstrated withholding tax does not apply. The LTA consider that no such reasons exist if the payer disposes of meaningful retained earnings. Capitalised profit reserves are deemed to be distributed first in case of a repayment for social capital. If the social capital repayment is subject to withholding tax, the exemptions explained above may be applied, provided the relevant conditions are met. Share premium and capital contributions under private seal are in practice considered to benefit from the same treatment as applied for social capital, although formally they do not qualify as social capital.

Capital gains and liquidation proceeds realized by non-resident shareholders

Non-resident shareholders (those without a Luxembourg permanent establishment to which the shares in a company are allocable) are only taxable on the realization of a capital gain (or liquidation gains) in respect of shareholdings of more than 10% in a company having its statutory seat or central management in Luxembourg if they realize that capital gain within six months after acquisition, or if they became non-resident taxpayers less than five years before the realization took place and have been Luxembourg resident taxpayers for more than 15 years. However, shareholders resident in a country with which Luxembourg has concluded a Treaty are generally not taxable on such capital gains in Luxembourg.

VIII Functional currency

A Luxembourg corporate tax payer may use a currency (other than Euro), of which the exchange rate is determined and published by the European Central Bank, for tax purposes under the following cumulative conditions which are reflected in the Circular of 16 June 2014:

(i) The Luxembourg tax payer must have its capital denominated in such functional currency and prepare financial statements in such currency;

(ii) A request must be filed with the Luxembourg tax authorities at the latest three months before the first financial year for which it is intended that the functional currency will be applied. For newly established tax payers the request must be filed prior to the end of the intended first financial year;


(iii) The functional currency will remain applicable as long as the tax payer has its capital denominated in such functional currency (although such correspondence is not required by Luxembourg commercial law); and

(iv) All tax payers that are part of a fiscal unity must use the same functional currency as of the first financial year in which the fiscal unity starts.

The taxable amount determined in the functional currency will need to be converted into Euro by using the exchange rate as published by the European Central Bank. The Luxembourg tax authorities will continue to determine domestic tax credits, tax assessments and notices in Euro.

IV Debt forgiveness

The Luxembourg ITA contains a specific provision for avoiding direct adverse tax effects from (partial) debt forgiveness. If a debt is fully or partially waived with a view to the financial recovery of the company, so that the waiver profit is eliminated from the debtor’s profits, and insofar as the result is a net profit for that company in the relevant year (prior to loss carry-forward). However, the eliminated amount reduces the company’s available loss carry-forwards. If the debt waiver is motivated by non-business reasons, i.e. shareholders’ reasons, the waiver should qualify as an informal capital contribution to the debtor and should therefore not be subject to taxation. Shareholders’ reasons are likely to be present if a third party would not have initiated the waiver e.g. because the debt is not distressed.

V Treaty entitlement

A Soparfi should be entitled to benefit from the Treaties, (see Reason 12).


Reason 2: Luxembourg’s intra-group financing regime

I Introduction

Luxembourg is an attractive jurisdiction for (intra-group) financing companies, as it generally does not levy withholding tax on interest or impose a debt-to-equity ratio for financing activities. It also has an extensive Treaty network (see Reason 12), and gives access to the Interest and Royalty Directive, which respectively generally provide for reduced withholding taxes on foreign source interest and for an absence of withholding taxes on certain intra-group interest.

II The Financing Circular

Financing companies may obtain advance confirmation of the arm’s length character of the remuneration they earn. In 2011 the LTA issued a Circular specifying the policy for providing such confirmation to intra-group financing companies, i.e. financing companies which lend money to related parties and borrow from another party, whether related or not (FinCos). A company is considered to be related to the lender if one participates (in)directly in the other’s management, control, or the same person participates (in)directly in two other companies (e.g. sister companies).

III Requirements imposed by the Financing CircularThe Circular imposes certain substance, risk and transfer pricing requirements on FinCos seeking advance confirmation of the arm’s length nature of the renumeration they report on their financing transactions.

Substance requirements

On the substance side, the Circular requires the FinCo to be effectively managed in Luxembourg. This means in particular that a majority (half plus one) of its directors must be Luxembourg (professional) residents. Corporate directors are permitted provide they have their registered office and central management in Luxembourg. The directors must have the necessary professional knowledge to perform their functions. Key decisions should be taken in Luxembourg. The Circular does not clarify when a decision qualifies as a key decision, but decisions on seeking and granting financing should qualify as such. Taking decisions should mean that a decision should not be merely ratified in Luxembourg but actually made elsewhere. It can generally be held that a decision is taken “in” Luxembourg if it is passed during a board meeting organized in Luxembourg. The Circular


does not impose a minimum number of annual board meetings, the Circular requires that the FinCo has a Luxembourg bank account, meet its Luxembourg tax filing obligations and is not considered as a tax resident of another country. It does not require the FinCo’s books to be kept in Luxembourg, but from a general substance perspective it is advisable to keep them in Luxembourg as well.

Risk requirement

The Circular also require a minimum amount of the FinCo’s equity to be at risk in relation to its financing activities (1% of on-lent funds or EUR 2 million, whichever is lower). A FinCo which is solely engaged in financing activities (its only asset being the loan granted), with an actual amount of equity in accordance with the above equity cap, meets this risk profile by definition. However, such a FinCo might become insolvent if the loan granted is defaulted for an amount in excess of the equity. To avoid insolvent FinCos the LTA require in practice the relevant loan contract to contain a limited recourse clause. Such a clause provides that the loan obtained is automatically waived for an amount equal to the defaulted amount under the loan granted, insofar as the defaulted amount exceeds the equity at risk. If a FinCo has more equity than the minimum equity cap, a limited recourse clause may limit the potential erosion of the equity in accordance with the cap. The latter would entail a reduced risk profile, and in consequence a lower taxable margin. In the case of a third-party lender a limited recourse clause is normally unacceptable, in such a case a “keep-well” agreement which limits the FinCo’s risk profile to the cap can for example be concluded with the parent of the FinCo. Alternatively it may be shown that the lender will take control of the borrower (e.g. via a share pledge) and will restructure the financing arrangement without triggering the bankruptcy of the FinCo.

Transfer pricing requirement

In addition, the remuneration reported by a FinCo must be substantiated in a transfer pricing report. The report will define and analyse the company’s functions and risks in order to calculate the relevant remuneration which follows from the specific transfer pricing software program.Failure to comply with the Circular requirements may mean that the Luxembourg tax authorities may not endorse the FinCo’s position that it is the beneficial owner of the interest it receives. It should be clearly understood that this does not mean the FinCo’s claim of beneficial ownership is only endorsed if advanced tax confirmation is obtained: merely complying with the Circular should suffice. If the LTA do not endorse a beneficial ownership claim, this might result in the refusal of Treaty or Interest and Royalty Directive benefits by the country where the FinCo’s debtor is situated (e.g. refusal to grant reduced interest withholding tax rates).


Reason 3: Luxembourg’s fiscal unity regime

I Introduction

Luxembourg provides for a fiscal unity regime which allows Luxembourg groups to assess their CIT charge on an integrated basis. This facility may lead to substantial tax savings when some group companies are in a profitable and others in a loss-making position. The fiscal unity regime does not apply to NWT.

II Eligibility criteria

The following requirements must be met to form a fiscal unity:

(i) The head of the fiscal unity must be: (i) a fully taxable Luxembourg resident capital company, or (ii) a permanent establishment of a non-resident capital company which is subject to a tax corresponding to the CIT (together referred to as the Parent);

(ii) The subsidiaries must be fully taxable Luxembourg resident capital companies;

(iii) The Parent must hold directly or indirectly at least 95% (75% in very specific cases subject approval by the Ministry of Finance) of the subsidiary’s capital; the percentage held in the capital of subsidiaries which are held via tax transparent Luxembourg entities is assessed on a pro-rata basis;

(iv) If the Parent holds the subsidiary indirectly, the foreign intermediate company must be a fully taxable capital company subject to a tax that corresponds to the CIT; and

(v) The companies must open and close their accounting periods on the same date.

The functional currency of the entities which form part of the fiscal unity should be the same as expressed by the LTA in their Circular on Functional currency (see Reason 1). Although they qualify as fully taxable Luxembourg resident capital companies, a SICAR (Reason 7) and a securitization company (Reason 9) may not form part of a fiscal unity. The threshold of 95% must be maintained without any interruptions from the beginning of the first accounting year for which the fiscal unity is requested. This last requirement means that in principle it is not feasible to integrate a subsidiary in a fiscal unity during a


financial year. The fiscal unity regime does not impose any requirements on economic and organizational integration.

III Fiscal unity application

The Parent and the subsidiaries may form a fiscal unity subject to a written application filed with the LTA in the name of the Parent and all the subsidiaries. The application must be filed before the end of the first accounting year for which fiscal unity is requested and should be maintained for at least five accounting years.

IV Effects of fiscal unity

All companies (Parent and subsidiaries) in the fiscal unity determine their taxable results on a stand-alone basis and each file a separate tax return. The fiscal unity companies have to apply the at arm’s length principle in dealings with each other. The profits and losses of the Parent and subsidiaries are added together, apart from some small adjustments (to avoid double (non-) taxation), and the Parent will file an extra tax return on the basis of which the tax charge for the fiscal unity is determined. Tax assessments will only be issued to the head of the fiscal unity. The Parent is responsible for paying the CIT for the members of the group. Luxembourg tax legislation does not specify whether the fiscal unity members may be held jointly or severally liable for the taxes due by their Parent.

The ITA only provides for loss carry-forward rules (loss carry-back is impossible), without limitation. Only the company which has suffered the losses may deduct these from its future profits. Pre-fiscal unity losses can thus only be carried forward for offset against taxable profits of the member of the fiscal unity that incurred them. In practice this principle is applied not only for subsidiaries, but also for the pre-fiscal unity losses of the fiscal unity’s parent. Fiscal unity losses which are deemed to be suffered by the parent may only be carried forward for offset against the fiscal unity’s profits in future years, which are also deemed to be generated by the parent. This means that if a company is demerged from the fiscal unity, it will not be able to use its stand-alone losses for the term of the fiscal unity. The fiscal unity may also affect the possibility to reduce the net wealth tax burden. A reduction is granted if certain conditions are met, but a cap equalling the annual corporate income tax due applies. If the company which applies for the credit is merged in a fiscal unity the cap is assessed on the basis of the total corporate income tax due by the fiscal unity.


V The term and termination of a fiscal unity

Fiscal unity status applies for a period of at least five accounting years. If the fiscal unity is divided earlier, the advantages enjoyed under the fiscal unity regime are clawed back with retroactive effect. Fiscal unity is automatically extended after the end of the five-year period, provided the relevant conditions are still met. If they are not met, the fiscal unity is divided with effect from the beginning of the accounting year during which the conditions were not met. According to current practice, absorptions or liquidations of entities within the fiscal unity should not terminate the fiscal unity.


Reason 4: Luxembourg’s intellectual property regime

I Introduction

Luxembourg’s IP regime provides for an 80% exemption from CIT for net positive income and capital gains derived from IP acquired or created after 31 December 2007. Thus the effective tax rate in the IP regime is reduced from the general combined rate of 29.22% to 5.84% for 2014 in Luxembourg City. Luxembourg provides for a tax credit/deduction for royalty withholding tax imposed by source countries. Net wealth allocable to qualifying IP is not subject to Luxembourg net wealth tax.

II Ownership requirement

The IP regime may only be applied by the IP’s owner. In the case of a discrepancy between legal and economic ownership, the latter prevails. The economic owner is the party who generally exercises effective control over the IP and can exclude the legal owner from his economic influence during the IP’s expected lifetime. The fact that the economic owner can apply the IP regime is a very welcome feature, as it may avoid burdensome re-registration of the IP rights needed to transfer the legal ownership.

III Qualifying IP requirement

To benefit from the IP regime, the net positive income and capital gains must be attributable to the following categories of IP: (i) software copyrights;(ii) patents; (iii) trademarks; (iv) service marks; (v) designs; (vi) models; and(vii) top level and lower level domain names.

The concept of a patent also covers utility models and pharmaceutical supplementary protection certificates. The Circular on the IP regime also stipulates that name and image rights which are registered as trademarks may benefit from the IP regime, provided they are used to commercialize products or services.


IV Qualifying revenue requirement

Net positive income and capital gains related to the IP benefit from the IP regime. Net positive income is defined as gross income, less costs in a direct economic relationship to that income, including depreciation and amortization. To qualify for the IP regime, the income must have the form of a royalty for the use of or entitlement to use the IP. A royalty is a payment for the use or entitlement to use the IP which would infringe the protection right if no licence agreement exists. Compensation payments for the infringement of IP rights should rights qualify as well. The form of the payment (for example, a lump sum, instalments or contingency payments) is irrelevant. Capital gains on the alienation of IP are 80%-exempt in the year of alienation. The exempt amount is reduced by the sum of 80% of the net negative revenues stemming from the alienated IP in the year of alienation and previous years, but only insofar as these net negative revenues have not been capitalized under the capitalization requirement explained in section VI below. Losses from prior years may be carried forward for their full amount and offset against the non-exempt part of the capital gain.

V Creation and acquisition date requirement

To qualify for the IP regime, the IP must be acquired or self-developed after 31 December 2007. From a Luxembourg tax point of view, the time when the economic ownership is acquired should be decisive for determining the time of acquisition. For an acquisition of the legal or economic ownership of IP, determining the date on which the ownership passed should not pose a problem. No new acquisition date is recognized when, inter alia, a permanent establishment (not a legal distinct entity) is created in Luxembourg to which the IP is allocated, or a company owning IP is migrated to Luxembourg.

VI Capitalization requirement

Before the IP regime can be applied, all costs, including depreciation and amortization costs attributable to the IP, must be capitalized and will be integrated in the taxable result for the first year in which the regime applies. The capitalized cost may be amortized for tax purposes over the IP’s useful lifetime. The profit realized as a result of this capitalization does not benefit from the IP regime. However, losses from prior years may be carried forward and will offset the profits originating from the capitalization.


VII Anti-abuse requirement

To avoid possible abuse, IP acquired from related companies as opposed to individuals does not qualify for the IP regime. Related companies are defined as entities:

(i) which directly own at least 10% of the Luxembourg taxpayer’s capital;

(ii) at least 10% of whose capital is directly owned by the Luxembourg taxpayer, or;

(iii) at least 10% of whose capital is directly owned by a company which also directly holds at least 10% of the Luxembourg taxpayer’s capital.

The related party test is to be applied immediately before the transfer of the IP takes place. This means that a company which contributes its IP on the incorporation of its Luxembourg subsidiary would not be considered as related to that subsidiary, because the subsidiary did not yet exist immediately prior to the contribution. The related party test does not prevent the taxpayer from applying the IP regime to royalty income received from related parties. Since the anti-abuse requirement only has an effect in the case of direct relationships, it should not in practice substantially hinder intra-group transfers of IP.

VIII Tax credit/deduction for royalty withholding tax

A royalty withholding tax credit may be granted against Luxembourg CIT under certain conditions, including the surcharge for the unemployment fund, but not against municipal business tax due. Withholding taxes that cannot be credited may be deducted from the Luxembourg company’s corporate income tax base. The credit is equal to the relevant net foreign income (after foreign withholding tax), grossed up against the Luxembourg CIT rate, multiplied by the Luxembourg CIT rate, but may not exceed the foreign taxes paid. Royalty withholding taxes may only be credited under the ‘‘per country’’ method, meaning that the credit is limited to the Luxembourg tax, calculated on the basis of the net income derived from the relevant state. The Luxembourg tax authorities apply the following formula to calculate the credit if income benefits from the IP regime, which in essence provides for a gross-up at the effective tax rate under the IP regime: IP regime tax credit = R * T / 5 - T, where R = foreign income net of foreign taxes and T = corporate income tax rate.


IX Self-developed (pending) patents used in the owner’s business

When a self-developed (pending) patent is used in the taxpayer’s own business a deduction equalling 80% of the net positive income which would be generated if the patent was licensed to a third party is granted. The net positive income equals the fictitious gross income which would be generated under a licence to a third party, minus allocable expenses. The deduction is granted from the time when the patent is filed. If the patent is refused, the tax benefits obtained as a result of the deduction are recouped in the year of refusal.


Reason 5: Luxembourg’s investment tax credits

I Introduction

To encourage taxpayers to invest in tangible assets, the ITA provides, on a request by the taxpayer, for generous tax credits for such investments. Shipping, transport and aviation companies in particular favour Luxembourg as their place of establishment because of these credits. Licensed shipping companies operating vessels in international maritime traffic benefit from relaxed tax credit rules. The credits can be claimed against CIT charged on any type of income in the year the investments are made, but not against MBT and NWT. Investment tax credits can be carried forward for 10 years. The credits are available for so-called increasing investments and for global investments, and can be claimed cumulatively.

II General requirements

The tax credit provision currently specifies that the credits can only be claimed if the investment:

(i) is made within a Luxembourg business establishment;

(ii) is intended to remain permanently within the Luxembourg business establishment; and

(iii) will actually be used in Luxembourg.

As a result of Luxembourg’s geographical situation (no coastline), investments in vessels operating in international maritime traffic by licensed Luxembourg shipping companies are exempt from condition (iii). On 31 March 2011 the Luxembourg tax authorities issued a circular which expands the geographic scope of the investment tax credits to assets physically used in EU and EEA territory, as requirement (iii) was considered to breach the EU rules on freedom to provide services. The ITA has not yet been amended in this respect, but taxpayers can rely on the circular.


III Investment credit for increasing investments

The tax credit for increasing investments is 12%. The base is the annual additional investments in tangible assets (thus not e.g. IP) assets which can be amortized (Qualifying Assets), not including buildings, agricultural livestock and mineral and fossil deposits or:

(i) assets which are amortized in less than three years;

(ii) assets acquired for consideration as part of an enterprise, an autonomous part of an enterprise or a fraction of an enterprise;

(iii) second-hand assets, but not vessels used in international maritime traffic by licensed shipping companies;

(iv) assets acquired for no consideration, and;

(v) certain motor vehicles.

Under certain conditions the assets under (ii) and (iii) above do qualify if made within the first three calendar years after establishment, but their value is capped at EUR 250,000. The amount of the increasing investments is equal to the value of the Qualifying Assets at the end of the accounting year, minus the reference value of the Qualifying Assets. This result is increased by the value of the amortization on the Qualifying Assets (including those acquired or constituted in that year) during the relevant accounting year. The reference value is equal to the average value of the Qualifying Assets at the end of the five preceding accounting years, and is at least EUR 1,850. However, the amount of the increasing investments is the amount invested in Qualifying Assets during the relevant accounting year.

IV Investment credits for global investments

An investment credit for global investments can be obtained for investments in Qualifying Assets in a specific accounting year. The credit is calculated on the acquisition price or the price of investments made during the accounting year. The credit amounts to 7% for the first EUR 150,000 of investments and 2% for the investments exceeding that amount. These percentages amount to 8%, and 4% for certain environmentally friendly assets.


V Investment tax credits and lease arrangements

In the case of a financial lease (a lease which is irrevocable by either party, during which the lessee pays the acquisition price and the additional cost to the lessor), only the lessee is entitled to the investment tax credits in relation to the relevant asset. The lessee rather than the lessor is the economic owner of the asset and thus the owner for tax purposes, and should be entitled to the credit. In the case of any other type of lease, the lessor is entitled to the tax credit, provided that the lessee uses the asset in a Luxembourg taxable business activity. Similarly, if the relevant asset is a vessel operated in international maritime traffic, the lessor cannot claim a tax credit.


Reason 6: Luxembourg’s company reorganization facilities

I Introduction

Luxembourg’s tax legislation provides for CIT-neutral (cross-border) company reorganization facilities for both the company undergoing the transaction and its shareholders, and for specific valuation facilities to accommodate the requirements for obtaining potential tax neutrality in another EEA country. This section focuses also on the Luxembourg reinvestment reserve and the tax aspects of inbound and outbound migrations of enterprises. As the relevant legal provisions are in practice difficult to distinguish on the basis of the ITA, references to those provisions are provided in this section.

II Tax neutrality for the company undergoing reorganization

The following domestic transactions may benefit from CIT neutrality:

(i) Mergers (fusions): the transfer by a Luxembourg company (transferor) of all its assets and liabilities to another fully taxable Luxembourg company (transferee), in exchange for shares (and to some extent cash payments) issued by the transferee to the transferor’s shareholder, or a cancellation of shares held in the transferee in the case of an upstream merger (170 (2) ITA);

(ii) Transformation of legal form (transformations): the transfer by a Luxembourg company (transferor) of all its assets and liabilities to another Luxembourg taxable company (transferee), in exchange for shares (and to some extent cash payments) issued by the transferee to the transferor’s shareholder (170 (2) ITA);

(iii) Demergers (scissions): the transfer by a Luxembourg company (transferor) of all or part of its assets and liabilities constituting an enterprise or an autonomous part thereof to one or more Luxembourg fully taxable companies (transferee(s)), in exchange for shares issued by the transferee(s) to the transferor’s shareholder, or a cancellation of shares held in the transferor in the case of an upstream demerger (170 (3 sub 3) ITA). The assets retained by the transferring company must constitute an enterprise or an autonomous part thereof (170 (3) ITA); and

(iv) Contributions (apports): the contribution of a business or an autonomous part of a business by a fully taxable Luxembourg company to another fully taxable


Luxembourg company (the transformation of a Luxembourg partnership in a Luxembourg company is assimilated to a contribution (59 (7) ITA) in exchange for shares issued to the contributor (59 (3) ITA).

The following cross-border transactions may benefit from CIT tax neutrality:

(i) Mergers (fusions): the transfer by a fully taxable Luxembourg company (transferor) of all its assets and liabilities to a company resident in another Member State (transferee), in exchange for shares (and to some extent cash payments) issued by the transferee to the transferor’s shareholder, or a cancellation of shares held in the transferor in the case of an upstream merger (170bis (1) ITA);

(ii) Demergers (scissions): the transfer by a fully taxable Luxembourg company (transferor) of all or part of its assets and liabilities constituting an enterprise or an autonomous part thereof to one or more companies resident in another Member State (transferee), or to a taxable Luxembourg company and a company resident in another Member State, in exchange for shares (and to some extent cash payments) issued by the transferee to the transferor’s shareholder, or a cancellation of shares held in the transferor in the case of an upstream demerger. The assets retained by the transferring company must constitute an enterprise or an autonomous part thereof (170bis (2) ITA);

(iii) Transformation of legal form (transformation): the transfer by a non-resident company (transferor) of a Luxembourg permanent establishment to another non-resident company (transferee), in exchange for shares (and to some extent cash payments) issued by the transferee to the transferor’s shareholder (172 (5) ITA);

(iv) Contributions to a Luxembourg permanent establishment (apports): the contribution of a business or an autonomous part of a business by a fully taxable Luxembourg company (transferor) to a Luxembourg permanent establishment of a Member State company (transferee) other than Luxembourg, in exchange for shares issued to the transferor (59 (3) ITA);

(v) Transfer of a Luxembourg permanent establishment: the transfer of a business or an autonomous part of a business, which constitutes a Luxembourg permanent establishment, by a company of a Member State other than Luxembourg (transferor) to a company of a Member State (transferee), in the framework of a contribution, a merger or a demerger (172 (4) ITA); and,

(vi) Transfer of a foreign permanent establishment: the transfer by a fully taxable Luxembourg company (transferor) of a permanent establishment situated in a EU/


EEA Member State with which Luxembourg has concluded a Treaty to a company resident in a EU Member State other than Luxembourg (transferee) in the context of a contribution (59bis (1 sub 1) ITA), merger or demerger (170bis (3) ITA).

With certain exceptions, full or partial tax-neutral exchange of Luxembourg assets and liabilities is only possible on condition that the neutralized profit is taxable in Luxembourg at a later stage (170 (2, sub 2) ITA). Luxembourg assets must therefore remain within the Luxembourg tax framework, and the transferee must continue the book values of the transferred assets and liabilities as recorded by the transferor directly prior to the transfer (170 (2, sub 2) ITA) for mergers and demergers and (59 (3) ITA) for contributions. In the case of cross border transactions this means that the transferred assets must remain within the Luxembourg tax framework and thus from a permanent establishment there. The continuation of the book values means that the acquisition date of the assets is deemed to be the acquisition date as recorded by the transferor (170 (5) ITA) for mergers and demergers, article (170ter ITA) for inbound transactions and (59 (3a) ITA) for contributions). If the transferor cancels its shares as a result of the merger or demerger, those shares are deemed to be realized at their exploitation value (171 (1 and 2) ITA). The participation exemption regime remains applicable in the case of such a realization, and applies in any event if the participation held in the transferor exceeds 10% (171 (3) ITA). In principle, tax losses present at the level of the transferor do not follow the transferred assets, except in the case of certain types of mergers. The transformation of the legal form of the Luxembourg company (172 bis (1) ITA), and the transformation of the legal form of the head office of a Luxembourg permanent establishment (172 bis (2) ITA) has no effect on the loss to carry forward of the Luxembourg company or the permanent establishment respectively.

III Valuation facilities to meet the requirements for obtaining tax neutrality in another country

The following transactions may benefit from a receipt at a value between book value and exploitation value

(i) Mergers (fusion): the transfer to a Luxembourg fully taxable company (transferee) by a company resident in an EEA state other than Luxembourg (transferor) of all its assets and liabilities, in exchange for shares (and to some extent cash payments) issued by the transferee to the transferor’s shareholder, or a cancellation of shares held in the transferor in the case of an upstream merger (170ter (1) ITA); and

(ii) Demergers (scission): the transfer by a company resident in an EEA state other than Luxembourg (transferor) of its assets and liabilities constituting an enterprise


or an autonomous part thereof to one or more fully taxable Luxembourg companies (transferee), in exchange for shares (and to some extent cash payments) issued by the transferee to the transferor’s shareholder, or a cancellation of shares held in the transferor in case of an upstream demerger. The assets retained by the transferring company must also constitute an enterprise or an autonomous part of an enterprise (170ter(2) ITA).

IV Tax neutrality for the shareholders

The following transactions benefit from CIT neutrality at the level of the Luxembourg or foreign shareholder/creditor unless the shareholder or creditor opts otherwise. However, this option does not exist for the transaction under point (ii) (22bis (2) ITA).

(i) The conversion of a loan into shares (and to some extent cash payments) (22bis (2 sub 1) ITA);

(ii) The exchange of shares as a result of a transformation (a company that adopts another legal form) (22bis (2 sub 2) ITA);

(iii) The exchange of shares (and to some extent cash payments) in the context of a merger or demerger of a Luxembourg capital company, or of companies resident in another Member State (22bis (2 sub 2) ITA); and

(iv) The exchange of shares (and to some extent cash payments) whereby a shareholder (contributor) contributes the shares in a company resident in a Member State, or a foreign company subject to a tax corresponding to Luxembourg CIT, to a company resident in a Member State, or to a foreign company subject to a tax corresponding to Luxembourg CIT (contributee). The shares newly acquired by the contributee, together with any shares acquired earlier by the contributee, must represent the majority of the voting rights in the contributed company at the level of the contributee company (22bis (4) ITA).

In the above cases the acquisition date and acquisition value of the new shares obtained by the contributor or the former creditor must be recorded as the acquisition date and acquisition value of the converted shares or loan.


V Reinvestment reserve

When funds are released from the disposal of buildings (including vessels used in international traffic owned by a licensed shipping company) or of assets which are not usually depreciated (e.g. participations), any gains can be (partly) sheltered from taxation and rolled over (54 ITA) to other assets provided that:

1. The disposed assets have been held for at least five years; 2. The released funds are reinvested in buildings or assets which are not usually

depreciated (replacement assets);3. The reinvestment may not take place in prior accounting years, except for

buildings under specific conditions; 4. The investment in the replacement assets must take place before the end of

the second book year following the disposal. This period may be extended if the taxpayer submits a reasoned request. If reinvestment does not take place before year-end, the gain must be recorded in the year-end balance sheet as a reinvestment reserve to avoid immediate taxation;

5. The transferred gains reduce the basic cost of the replacement asset; and6. The replacement assets are allocable to a Luxembourg permanent establishment.

The idea behind the provision is that the profit on the disposal of assets should not be taxed if the funds released are retained in the business and will be used to invest in other capital assets. In this case the profits are only taxed when the funds are finally released, e.g. on liquidation. If a gain is rolled over in a tax-exempt participation, it will be taxable on the disposal of this participation even if the disposal qualifies for the participation exemption for capital gains (see Reason 1).

VI Migrations

Migration to Luxembourg

Companies migrated to Luxembourg may benefit from a step-up in basis, meaning that their assets and liabilities may be valued for tax purposes at their going-concern value (35 ITA). As a result, profits allocable to the period before the company was migrated should be considered as capital for tax purposes and should under certain conditions not be subject to Luxembourg withholding taxes upon distribution (Reason 1). Permanent establishments migrated to Luxembourg may also benefit from a step-up in basis.

Migration to another state


Luxembourg taxable companies which are migrated out of Luxembourg (172 (1) ITA) are in principle subject to CIT on their unrealized gains on migration, unless and insofar as their assets remain allocable to a Luxembourg permanent establishment (172 (2) ITA). Luxembourg permanent establishments which are liquidated, transferred to another state or to a third party are also subject to CIT on their unrealized gain on migration. In the case of a migration to an EEA state postponement of the actual taxation (without interest for late payment) can be requested for until the time when the relevant asset is disposed of or transferred to a non-EEA state, provided the Luxembourg tax authorities are informed annually of the continued ownership of the asset. Capital losses allocable to the period after migration must be taken into account in retroactively the year of migration if the host EEA state does not take them into account. Luxembourg taxable companies which adopt a tax-exempt status (e.g. a Soparfi which adopts SPF status) are subject to CIT on their unrealized gains (172 (3a) ITA).


Reason 7: Luxembourg’s SIF and SICAR regime

I Introduction

Luxembourg provides an attractive tax and regulatory framework for alternative investment funds which are reserved to well-informed investors, i.e. the SIF (fonds d’investissement specialisé) and the SICAR (société d’investissement en capital à risque) regimes. Well-informed investors are institutional investors, professional investors and certain other investors with a confirmed status as well-informed investors, who either invest at least EUR 125,000 or have been the subject of a positive assessment by a credit institution, investment firm or management company. A SIF may invest in any type of assets, but the principle of risk-spreading applies. In general, the CSSF considers that the risk-spreading principle is complied with if the SIF does not invest more than 30% of its assets in securities of the same type issued by the same issuer. In addition, SIFs often benefit from a “ramp-up” period which allows them to meet the diversification requirement over a period of time. SICARs may only make investments in risk capital (investments in companies in view of their launch, development or listing) and no risk-spreading requirements apply to them.

A SIF may be organized as a tax-opaque company in one of the various forms available in Luxembourg, or as a tax-transparent partnership or contractual arrangement (fonds commun de placement) managed by a Luxembourg management company. A SIF organized as a contractual arrangement is in practice referred to as an “FCP-SIF”, a SIF organized as a company or partnership with variable capital as a “SICAV-SIF”, and a SIF organized as a company or partnership with fixed capital as a “SICAF-SIF”. A SICAR may be organized as a tax-opaque company or a tax-transparent limited partnership. Insofar as taxation is a driver for the choice of a particular type of SICAR or SIF, the relevant tax considerations are predominantly of foreign origin.

II Taxation of the SIF and its non-resident investors

SIFs organized as companies are exempt from CIT and NWT. As a result of their tax transparency, SIFs organized as contractual arrangements or partnerships are not subject to CIT and NWT. SIFs are subject to an annual subscription tax levied at a rate of 0.01% on their total net assets; certain exemptions apply, however. They are also subject to annual charges and regulatory application charges levied by the CSSF. Distributions and capital gains realized in respect of SIFs by non-residents are not subject to Luxembourg


taxation, save for some very specific cases. Management services provided to a SIF benefit from a VAT exemption (see Reason 14).

III Taxation of a SICAR and its non-resident investors

SICARs organized as companies are subject to CIT tax but exempt from NWT. SICARs benefit from a CIT exemption for income and capital gains derived from securities (valeurs mobilières). Distributions and capital gains realized in respect of a SICAR by non-residents are not subject to Luxembourg taxation. Management services provided to a SICAR benefit from a VAT exemption (see Reason 14).

IV Treaty entitlement

Since a SIF organized as a company is tax-exempt, it may not be considered as an entity liable to tax and thus not as a Treaty resident, meaning that it is not eligible for Treaty benefits. A SIF organized as a partnership or contractual arrangement is in principle not eligible for Treaty benefits either, but its investors may be eligible for such benefits. A SICAR organized as a company is a fully taxable resident company, and hence should be eligible for Treaty benefits. A SICAR organized as a partnership is in principle not eligible for Treaty benefits, but its investors may be eligible for such benefits. Whether a Treaty is actually applied will ultimately depend on the source state’s view of the taxation of the SIF or SICAR, its status as beneficial owner and its Luxembourg substance in general.


Reason 8: Luxembourg’s SPF regime

I Introduction

A SPF (Société de gestion de patrimoine familial) is entitled to a beneficial tax regime for private asset management. A Luxembourg company may adopt the SPF regime if

(i) it adopts the legal form of an SA, S.à r.l., SCA or Coop SA;

(ii) its sole object is the acquisition, holding, management and disposal of financial assets, excluding any commercial activity in the sense of the Luxembourg ITA;

(iii) its shares are held by: (a) one or more private individuals acting in the context of their private wealth management, (b) private wealth entities (trusts, foundations) acting solely for one or more private individuals, or (c) intermediaries acting on behalf of either (a) or (b); and

(iv) its articles of association state that the company is subject to the SPF law.

The concept of a financial asset must be interpreted in the sense of the broad definition given in the law of 5 August 2005 on financial guarantees. It also covers cash deposits or deposits of any other nature (precious metals) held with a financial institution and sophisticated products such as derivatives, options and exchange rates. A SPF may hold participations, and even a majority of the voting rights or share capital in such participations, provided it does not interfere in the management of the participation (hence it may not exercise any function in the governing bodies of the subsidiaries or render any services to them). Thus the SPF may only exercise its voting rights regarding the participation which it holds in the subsidiaries. An SPF may not grant any loans, not even to its participations. However, it may grant advances or guarantee the obligations of the company in which it holds a participation on an accessory basis and without remuneration. An SPF may not conduct a commercial activity, i.e. meaning an independent activity conducted on an ongoing basis which constitutes a participation in economic activities and is conducted with the aim of making a profit. Examples are trading financial assets or the supply of (financial) services.


II Taxation of an SPF

A company which has adopted the SPF regime is fully exempt from CIT, MBT and NWT. An SPF is subject to an annual subscription tax of 0.25%, levied quarterly, on the sum of (a) its share capital, (b) its premium, and (c) its outstanding debt, when that debt exceeds eight times the sum of the share capital and premium. Retained earnings are not included in the subscription tax basis. The minimum annual amount of the subscription tax is EUR 100 and the maximum amount is EUR 125,000.

III Termination of SPF status

When the SPF no longer fulfils all the legal conditions of the SPF regime, it may be deprived of the benefits of the regime. In this case the authorities will inform the SPF of this decision by registered mail. The termination of SPF status will apply from the date when the SPF is notified and thus is not retroactive. After the termination of the SPF regime, the Luxembourg company will no longer be subject to the subscription tax but will become subject to CIT, MBT and NWT.

IV Taxation of non-resident foreign investors

Distributions and capital gains realized in respect of a SPF by non-residents are not subject to Luxembourg taxation.

V Treaty entitlement

Due to its tax-exempt status, a SPF is generally not entitled to Treaty benefits and cannot benefit from the Parent-Subsidiary Directive.


Reason 9: Luxembourg’s securitization regime

I Introduction

Luxembourg has an attractive tax and legal framework for securitization entities. A Luxembourg securitization entity may be set up in the form of a company or as a contractual arrangement (fonds de titrisation) managed by a Luxembourg management company, since the contractual arrangement form is seldom used, it is not further referred to here. To qualify as a securitization company, the entity must carry out full or partial securitization, and its articles of association, management regulations or issuance documents must provide that it is subject to the Securitisation Law of 22 March 2004. The definition of securitization is broad, covering every transaction by which a risk relating to any type of assets is acquired, and where securities are issues whose value or yield depend on that risk. Securitization companies are often used for the acquisition of (distressed) debt. Securitization companies which issue securities to the public on a continuous basis, i.e. more than three times a year, are subject to authorization by the CSSF. In general the guidance issued by the CSSF on permissible activities for a securitization company may also be considered as relevant for securitization companies not subject to authorization. According to the CSSF, a securitization company should limit its activities to the passive administration of financial flows linked to the securitization transaction itself and the prudential management of the securitized risks; it may not act as an entrepreneur.

II Taxation of a securitization entity

A securitization company is fully subject to CIT in Luxembourg. Commitments to pay a yield to investors and any other creditors are tax-deductible, also if they arise in respect of equity capital, tax result is generally tax neutrality. A securitization company is not subject to NWT. Management services provided to a securitization entity benefit from a VAT exemption (see Reason 14).

III Taxation of non-resident foreign investors

Distributions and capital gains realized by non-residents in respect of a securitization entity are not subject to Luxembourg withholding tax. Non-resident shareholders (those without a Luxembourg permanent establishment to which the shares of a securitization company are allocable) are not usually taxable, unless they realize a capital gain in respect of at least a 10% shareholding in the securitization company within six months


after acquisition, or became non-resident taxpayers less than five years before the disposal took place, after being Luxembourg resident taxpayers for more than 15 years. However, shareholders resident in a country with which Luxembourg has a Treaty in force should generally not be taxable on such capital gains.

IV Treaty entitlement

As securitization companies are fully taxable resident companies, they should be eligible for Treaty benefits. Whether a Treaty is actually applied will ultimately depend on the source state’s view of the taxation of the securitization entity, its status as beneficial owner and its Luxembourg substance in general.


Reason 10: Luxembourg’s unregulated funds structured as

limited partnerships

I Introduction

In 2013 Luxembourg’s modernized limited partnership legislation will assist the establishment of vehicles suitable for structuring funds, most notably unregulated funds. As the investment platform which such vehicles use is often already based in Luxembourg, the whole fund structure can now be efficiently set up in Luxembourg, i.e. in a single jurisdiction. This should result in operational, tax substance and cost advantages.

II Main legal characteristics

The legislation modernizes the legal framework of the existing Luxembourg limited partnership (société en commandite simple) which has legal personality, and introduces the new special limited partnership (société en commandite spéciale) without legal personality. The updated provisions for the limited partnership (LP) are substantially applicable to the special limited partnership as well, unless indicated otherwise. The key characteristics, changes and implications are described below.

Establishment – a simple formality

An LP is established by contract (notarized or under private seal) between at least one partner who is jointly liable for the LP’s obligations on an unlimited basis and usually has control over its management (i.e. the general partner, GP), and one or more partners who have limited liability. The identity of limited partners is not publicly available.

Management of the LP

The legislation enables the governance of an LP to be organised flexibly. Managers of an LP may be appointed and removed under the rules established by the LP agreement. The management of an LP may be entrusted to one or more GPs, or to persons who are not partners. Only GPs have unlimited liability; the other managers are liable only in cases of negligence. GPs and other managers do not have to be natural persons, but may be any Luxembourg legal entity. An LP is bound by any of its managers’ acts towards third parties, in principle even if those acts exceed the LP’s objects.


Participation in management by limited partners

Limited partners are prohibited from carrying out any acts of management other than “internal management acts”. They may be held jointly and severally liable towards third parties for any commitments by the LP in which they have participated contrary to this prohibition. There is a non-exhaustive list of acts which constitute internal management acts: (i) exercising partners’ rights, (ii) providing advice to the LP, its affiliated entities or their respective managers, (iii) performing acts of control and supervision, (iv) granting loans, guarantees, securities or any other type of assistance to the LP or its affiliated entities, (v) granting authorizations to the managers as provided for in the LP agreement for acts exceeding the manager’s powers, and (vi) any other act, unless that act misleads a third party on the limited partner’s limited commitment. In addition, it is possible for a limited partner to act as manager of a legal entity which in turn acts as manager of the LP.

Voting rights

The LP agreement may derogate from the traditional ‘one share one vote’ principle. In the absence of specific provisions in the LP agreement, each partner’s voting rights are in proportion to his interest. In other words, flexibility is created to allow restrictions on (or increase) limited partners’ voting rights, or grant veto rights to GPs.

Distributions

Distributions may be freely arranged in the LP agreement; they are not restricted by the company law applicable to partnerships. Distributed capital may only be clawed back if the LP agreement so provides. Creditors will not be able to force limited partners to repay dividends which GPs/managers distribute to them incorrectly.

Fewer transfer restrictions for partnership interests

Transfer restrictions with respect to both GP and limited partner interests may be freely defined in the LP agreement. If the LP agreement does not contain any restrictions, the transfers of Limited Partners’ interests are subject to the majority requirements applicable to amendments to the LP agreement. For GP interests, the consent of any other GPs would be required.


III Tax considerations

LPs are tax-transparent for CIT purposes. LPs which conduct a real or a deemed commercial activity through a Luxembourg permanent establishment are subject to MBT levied at a rate of 6.75% in Luxembourg City. A commercial activity is present if the LP conducts on an ongoing basis an independent activity which constitutes a participation in economic activities and is conducted with the aim of making a profit. It cannot be fully excluded that an LP or SLP acting as a fund may be considered to conduct a commercial activity, but this should not usually be the case for a private equity type of fund. In other respects a Luxembourg LP or SLP remains tax-neutral; its distributions are not taxed in Luxembourg, and non-resident investors receiving distributions are not taxed in Luxembourg either.


Reason 11: Luxembourg’s carried interest regime

I Introduction

A carried interest is a share in the profits of an investment fund paid to the investment manager. The parties entitled to the carried interest are usually employees of the fund manager. Before paying the carried interest, private equity funds generally first have to return all contributed capital to investors, plus an agreed rate of return (the “hurdle”), usually 8% per annum on the investors’ drawn-down commitments or capital contributions. The carried interest income is typically 20% of the income in excess of the capital return and is normally only due when exiting an investment, which generally occurs after three to seven years.

II Taxation of the carried interest

In many jurisdictions discussions have arisen on how to tax the carried interest arrangement, whether as employment income at high rates, or as investment income at lower rates. Rules regarding the taxation of carried interest arrangements have now been introduced together with the implementation of the AIFMD in Luxembourg law.

III Definition of carried interest for Luxembourg tax purposes

The Luxembourg taxation rules define carried interest (l’intéressement aux plus-values) as a share in the profit of an alternative investment fund (AIF) paid to employees of alternative investment fund managers (AIFMs) or employees of management companies of an AIF. The carried interest must be paid on the basis of an incentive right which is granted based on the employees’ status and the AIF’s performance.

IV Taxation of carried interest in Luxembourg

The tax law distinguishes between two categories of carried interest income earned by the employees of AIFMs or management companies of AIFs: (i). carried interest not structured under units, shares or representation issued by an AIF, and; (ii) carried interest structured under units, shares or securities issued by an AIF. The return on the first type of carried interest arrangement is taxed at the progressive income tax rate of 43.6%. Capital gains on the second type of carried interest realized are subject to the same progressive income tax rate. However, if the gain is realized after a period of six months it is not subject to taxation, unless the carried interest represents a substantial stake in a tax-opaque AIF.


Such a substantial stake is generally present if the carried interest directly or indirectly represents more than 10% of the AIF’s capital. In this case, gains are taxed at half the progressive income tax rate (maximum tax rate of 21.8%). To ensure that the income paid under the second type of carried interest arrangement benefits from this exemption, the carried interest-holder should dispose of its carried interest, which would generally entail a buy-back of carried units by the AIF.

V Beneficial rules for fund managers migrating to Luxembourg

For employees who migrate to Luxembourg, the rules provide for a substantially reduced tax for the first type of carried interest arrangements. The conditions for benefiting from the reduced tax rate are the following:

(i) The employee became resident in Luxembourg in 2013 or within the five years after 22 July 2013;

(ii) Before migrating to Luxembourg, the employee in question was not resident for tax purposes in Luxembourg or subject to Luxembourg individual income tax with respect to professional income in the five years prior to 22 July 2013;

(iii) No advance payments for carried interest have been paid to the employee; and

(iv) The remuneration is paid within ten tax years after the year when the employee began to perform the functions for which the carried interest is paid.

If all these conditions are fulfilled, employees of an AIFM may benefit from a reduced rate corresponding to 25% of the personal income tax rate, leading to a maximum tax rate of 10.9%.


Reason 12: Luxembourg’s tax treaty network

I Introduction

Luxembourg values the importance of its Treaty network for its competitive tax climate, and is therefore continuously broadening and improving its scope and contents. The Treaties generally provide for reduced withholding tax rates on payment of interest, dividends and royalties to Luxembourg entities, and protect Luxembourg entities from foreign taxation on capital gains on foreign shares and business income allocable to a foreign permanent establishment.

Over the past few years Luxembourg has sought to conclude or update treaties with emerging markets such as India, Hong Kong (to provide for a gateway to China), Qatar, Mexico, Russia, Poland and Turkey. Luxembourg has also made efforts to update the exchange of information clauses in its Treaty network, in order to improve its image as a sustainable financial centre. Luxembourg is now generally willing to exchange information on request.

II Overview of Treaties

Luxembourg currently has 70 Treaties in force of which 39 privide for an exchange of information clause in line with OECD standards. It is to be noted that most Treaties contain a participation exemption for dividends, and also for net worth tax, under conditions which may be more favourable than the domestic participation exemption regime (Reason 1). Negotiations for new Treaties of Treaty updates are on-going have started with a number of other states. An up to date overview of the treaties in force and in negotiation can be found on the website of the LTA: www.impotsdirects.public.lu/conventions/index.html


Reason 13: Luxembourg’s expatriate regime

I Introduction

Luxembourg has a special personal income tax regime for expatriate employees who are seconded to a Luxembourg undertaking belonging to an international group or recruited from abroad by a Luxembourg undertaking. This expatriate regime provides for an exemption from Luxembourg income tax. The marginal income tax rate is 43.6 for 2014 on certain expenses and allowances (see below) paid to or on behalf of those employees in connection with their expatriation. These expenses are tax-deductible operating costs for the Luxembourg undertaking. The regime is laid down in a circular.

II Requirements to be met by the employee

The regime is only open to two types of employees: (i) employees seconded by a foreign company which is part of an international group to work in Luxembourg for a Luxembourg undertaking; and (ii) employees recruited directly from abroad by a Luxembourg company to work in Luxembourg. Employees must meet the following requirements to benefit from the expatriate regime:

i. they must be tax-resident in Luxembourg, i.e. have either (i) their tax residence in Luxembourg (a home permanently available to them which they maintain and use regularly), or (ii) their usual place of residence in Luxembourg (a usual place of residence is deemed to exist after a continuous presence in Luxembourg of six months during two calendar years);

ii. they may not have been Luxembourg residents or have been living less than 150 km from the Luxembourg border, nor have been subject to income tax in Luxembourg, for the five years preceding the starting date of their professional activities in Luxembourg;

For the first type of employees, the following additional requirements must be met:

(i) they must have five years’ seniority within the international group or five years’ specialized professional experience in the relevant sector of activity;

(ii) there must be a “work” relationship between the foreign group company and the expatriate employee during the secondment to Luxembourg;


(iii) they must have a right to return to the foreign group company when the secondment ends; and

(iv) there must be a secondment contract between the foreign group company and the Luxembourg undertaking.

The second type of employees must demonstrate their specialization in a sector of activity or a profession which is subject to a recruitment shortage in Luxembourg.

III Requirements to be met by the Luxembourg undertaking as employer

The following conditions apply to the Luxembourg employer:

(i) he must have at least 20 full-time employees on the payroll, or undertake to have at least 20 full-time employees in the medium term; and

(ii) the number of expatriate employees may not exceed 30% of the total number of full-time employees. This condition does not apply to companies which have existed for less than 10 years.

IV Requirements applicable to the employment activity

The following conditions apply with respect to the employment activity:

i. it must be the expatriate worker’s main activity;

ii. the basic annual gross remuneration for the employment activity, excluding any bonus or benefits in kind, must amount to at least EUR 50.000;

iii. the expatriate worker may not replace another employee who does not fall within the scope of the expatriate regime;

iv. the expatriate worker must share his knowledge and know-how with the other employees of the Luxembourg undertaking.

V Exempt expenses and allowances

The expatriate regime provides that qualifying expenses and allowances paid by the Luxembourg undertaking in connection with an expatriate worker’s secondment to Luxembourg or recruitment from abroad do not constitute employment income or benefits


in kind for the expatriate employee. It thus also provides for the exemption of expatriation-linked benefits, provided they are reasonable and the expatriate worker actually moves to a residence in Luxembourg. In addition, those qualifying expenses and allowances remain deductible from the Luxembourg undertaking’s taxable basis. The following is a list of “exempt” expatriate-linked benefits:

(i) one-off expenses linked to the move itself (e.g. moving costs in relation to the transfer of residence in and out of Luxembourg, travel costs in certain circumstances such as birth, marriage, death of relatives). One-off expenses are exempt without limitation;

(ii) regular expenses linked to the expatriation and tax equalization, including housing expenses (provided the employee maintains a residence in the country of origin; otherwise, only the additional costs are covered). The exemption applies to regular expenses up to the lower of EUR 50,000 (EUR 80,000 for couples) and 30% of the employee’s total annual fixed remuneration;

(iii) additional schooling costs for the children of employees or their partners; and (iv) cost of living allowances up to 8% of the monthly fixed remuneration, with a maximum of EUR 1,500 (16% or EUR 3,000 for couples) provided the spouse does not exercise a professional activity.

The expatriate regime applies for a maximum period of six years and ceases to apply when the relevant conditions are no longer met. By 31 January of each year at the latest, the Luxembourg employer must provide the Luxembourg tax authorities with a list of the expatriate workers it employs.


Reason 14: Luxembourg’s VAT regime

I Low VAT rates

Luxembourg enjoys the lowest standard VAT rate in the EU; its standard VAT rate is 15%, compared to an average EU standard VAT rate of 21%. this low rate is particularly advantageous for Luxembourg entities which do not have the (full) right to recover their input VAT (e.g. financial institutions), as VAT represents an actual cost for such entities. A reduced rate (3%, 6% or 12%) or a VAT exemption may apply on certain supplies.

II An efficient VAT practice

The VAT compliance obligations for Luxembourg entities having no VAT deduction right (such as investment funds or certain financing and holding companies) are often limited to a simplified annual VAT return per calendar year. VAT returns can be filed electronically and filing periods and payment terms are generous. Fines and penalties are applied with moderation. Several exempt VAT payers may form an “Independent Group of Persons” to share services, without bearing unrecoverable VAT on these services. Unlike most other Member States, VAT due on importations of goods can be self-assessed directly via the taxable person’s VAT returns, instead of being paid at the customs and later recovered, thus avoiding the need to finance VAT.

III No use and enjoyment rule for holding companies

In some countries purely shareholding companies are required to register for VAT purposes in order to pay VAT on services received from non-UE suppliers, on the ground that these services are used and enjoyed within the EU. Such VAT payments constitute a cost for the holding companies, as they are not entitled to deduct VAT. Luxembourg does not have such a rule, which makes Luxembourg an ideal choice for pure holding companies engaged in worldwide transactions.

IV The VAT-free zone

The VAT-free zone is a regime which under certain conditions allows for an exemption for supplies of goods. It is particularly advantageous for companies dealing with traded commodities whose ownership can be quickly transferred during short periods; no VAT registration is required for either the seller or the buyer of goods stored in this VAT-free zone. It is also intended for transactions in high-value goods such as works of art.


The entry, storage, maintenance and improvement services carried out in the VAT-free zone benefit from a “VAT suspension”, which can be paired with customs duty or excise suspensions. The physical transfer of goods out of the free zone may constitute a taxable event for VAT, customs and excise purposes.

V VAT exemption for fund management services

Management services provided to regulated UCITS, UCI, SIFs, SICARs, pension funds and securitization vehicles benefit from a specific VAT exemption. Since July 2013 this exemption also applies to management services provided to AIFs. As all these entities are generally unable to deduct any possible VAT input, the application of this VAT exemption enables them to avoid huge VAT costs. Administrative services, portfolio management services, risk management services and, under certain conditions, custody bank services can benefit from the exemption, but not control and supervisory services. A recent ruling by the Court of Justice of the European Union has confirmed that this exemption also applies to fund investment advisory services, thus confirming a long-standing approach by the Luxembourg VAT authorities. The exemption does not apply to mere material or technical services such as making an IT system available. It is applicable to services rendered by both Luxembourg and foreign service providers, insofar as those services are deemed to be located in Luxembourg according to the place of supply rules. “Delegated” or “outsourced” management services to a Luxembourg or foreign service provider may also be VAT-exempt. However, in such cases the application of the exemption is subject to the additional requirement that the services form a distinct whole and are specific to, and essential for, the management of the fund by the management company.


Reason 15: Luxembourg’s APA/ATR practice

I Introduction

Since the early 1990’s Luxembourg has been well-known for its advance tax rulings (ATR) and advance pricing agreements (APA). An ATR/APA sets out how the Luxembourg tax authorities intend to apply the tax legislation in force to a specific case. As the predictability of the tax burden is crucial when making investment decisions, this makes Luxembourg a very attractive jurisdiction for the structuring of investments.

II Legal basis

Luxembourg law does not contain specific statutory provisions on the ATR/APA procedure, which is in fact governed by practice and by guidelines issued by the Luxembourg tax authorities in 1989. Luxembourg’s constitution does provide that no privileges regarding tax matters may be granted, and that an exemption from or reduction of taxes may only be granted by statute. Luxembourg tax law is thus governed by the principle of legality. This means that the law (in the sense of an act of Parliament) is the only source of tax law. Other provisions may not deviate from the law and only the legislator may change the law. ATR/APAs may therefore may not deviate from the Luxembourg tax legislation in force.

III Filing an ATA/APA

Request for ATRs/APAs are filed in writing with the Luxembourg tax authorities. Requests may be filed in French, English or German. According to administrative guidelines issued in 1989 an ATR/APA should contain the following items: (i) details of the applicant’s identity; (ii) description of an actual (not hypothetical) transaction and its related tax and legal aspects; (iii) the reason for the taxpayer’s interpretation of the legal and tax aspects; and (iv) a request for confirmation regarding specific legal questions. According to administrative guidelines issued in 2011 on APAs, confirmation that the remuneration charged for an intra-group financing arrangement is at arm’s length will only be issued if the applicant concerned can demonstrate sufficient Luxembourg substance, can produce a transfer pricing report substantiating the arm’s length character of the remuneration and is subject to a minimum level of risk with respect to its Luxembourg financing operations.


IV Issuing ATRs/APAs

Unless the tax authorities have queries, their written approval of an ATR can generally be expected within two to three months after filing the request. The turnaround period for APAs on intra-group financing arrangements is generally longer. A dedicated team within the LTA deal with transfer pricing matters. There are no statutory deadlines for issuing ATRs/APAs. A negative ruling or a refusal may not be appealed to the courts. No fees are charged by the tax authorities for issuing ATRs/APAs. ATRs/APAs are not publicly disclosed.

V Binding effect of ATRs/APAs for the tax authorities

If an ATR reflects a reasonable interpretation of the law (and case law) applicable at the time when it is issued, the taxpayer is protected against a subsequent reversal of this interpretation on the basis of the principle of good faith (bonne foi), which is a general principle of Luxembourg law. The binding effect of an ATR should continue as long as the facts on the basis of which it was obtained continue to be correct, and the statutory provisions (and case law) on the basis of which it was given do not change. APAs on intra-group financing are subject to the same principles, but are only binding for a period of up to five years. If the facts and circumstances remain unchanged after the first five-year period, the taxpayer can request the renewal of the APA for an additional period of up to five years.


Contacts

LuxembourgPieter StalmanT: +352 466 230 403 E: [email protected]

Frank van KuijkT: +352 466 230 330 E: [email protected]

AmsterdamBartjan ZoetmulderT: +31 20 578 56 58 E: [email protected]

Etienne SpiertsT: +31 20 578 57 70 E: [email protected]

ArnhemRobert de VriesT: +31 26 334 72 23 E: [email protected]

BrusselsEnrico SchoonvlietT: + 32 2 743 43 66 E: [email protected]

DubaiJan-Bart Schober T: +971 4 437 27 07 E: [email protected]

Hong KongCarola van den BruinhorstT: +852 3763 9393 E: [email protected]

Thierry LohestT: +352 466 230 216 E: [email protected]

LondonPeter AdriaansenT: +44 20 7826 3093 E: [email protected]


New YorkMichiel van KempenT: +1 212 471 93 52 E: [email protected]

ParisHarmen ZevenT: +33 1 495 391 25 E: [email protected]

RotterdamBart RubbensT: +31 10 224 66 06 E: [email protected]

SingaporeJoep OttervangerT: +65 6532 30 70 E: [email protected]

ZurichMarieke BakkerT: +41 43 266 55 53 E: [email protected]

Jaap ZwaanT: +41 43 266 55 50 E: [email protected]

www.loyensloeff.com

15 tax reasons for choosingLuxembourg as an investment centreAugust 2014

Loyens & Loeff is the natural choice for a legal and tax partner

if you do business in or from the Netherlands, Belgium and

Luxembourg, our home markets. You can count on personal

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