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Table
of Statutes
This
is a non-exhaustive list of the main Luxembourg statutes affecting
offshore and non-resident business. Click on the statute for
a fuller description of the statute or the legal regime it
forms part of.
Law of 1915 (Commercial Companies)
Law of 28th July 1923
(Tax Incentives)
Law of 31st July 1929 (Holding Companies)
Grand-Ducal Decree of 17th December 1938 (Holding Milliardaire)
Circular 11/5020 of 9th September 1965 (Holding de Financement)
Law of 4th December 1967
(Income Tax)
Law of 27th July 1972
(Tax Incentives)
Law of 19th July 1983, Fiduciary
Assets
Law of 30th March 1988 (Undertakings
for Collective Investment)
Law of 6th December 1990
(Tax Reform)
Grand-Ducal Decree of 24th
December 1990 (Soparfi)
Grand-Ducal Regulation of
28th December 1990 (Listing Requirements)
Law of 19th July 1991 (Dedicated
Funds)
Law of 1991 (Insurance
Supervision)
Law of 5th April 1993 (Banking
Secrecy)
Law of 22nd December 1993 (Double
Taxation)
Law of 23rd December 1998 (Market Supervision)
Loi du 15 juin 2004 relative a la Societe d'investissement
en capital a risque (SICAR)
The EU Parent-Subsidiary
Directive 90/435/CEE is also relevant.
The 2004 CSSF Circular 02/80 governing
hedge funds
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The
financial services sector in Luxembourg is regulated by the
Commission de Surveillance du Secteur Financier (CSSF).
'Holding'
Company Law
Low
tax or 'offshore' activities in Luxembourg usually involve
use of a 'holding' company. Four Luxembourg statutes mainly
govern the operation of 'holding' companies:
- The law
of 31st July 1929 which set up the concept of a tax-exempt
holding company ('1929 Holding') which pays only low capital
taxes);
- The Grand-Ducal
Decree of 17th December 1938 which created a class of
'milliardaire' holding ('Milliardaire Holding');
- The Circular
11/5020 of 9th September 1965 which extended the holding
company concept to financial holding companies ('Financial
Holding'); and
- The Grand-Ducal
Decree of 24th December 1990 which created the SOPARFI
or Societe de Participation Financiere which is not tax-exempt
but has tax advantages ('SOPARFI').
None
of the various types of holding company has a specific corporate
form separate from the forms available under the Commercial
Companies Law of 1915, ie SA, SARL or Societe a Commandite
par Actions (SECA).
The
1929 Holding is defined as a company whose statutory object
is the acquisition and management of participations in other
Luxembourg or foreign companies. Participation in partnerships
is permitted subject to some conditions. The 1929 Holding
may own financial assets and may issue debt, subject to some
thin capitalisation rules; it may also own patents. Direct
ownership of real estate is not permitted, except for the
1929 Holding's own premises.
The
1929 Holding may lend at interest to its subsidiaries, but
not to its parent or third parties. It may provide services
to its subsidiaries, but not for profit, and it must not manage
them. Most other activities, and certainly all commercial
activities, are prohibited.
Milliardaire Holding status is available to 1929 Holdings
whose own funds are at least LUF 1 bn. Once made, the choice
of Milliardaire status is irrevocable as long as own funds
remain above the limit. The Milliardaire Holding pays capital
taxes on a more favourable basis than the 1929 Holding.
The
Financial Holding is allowed to provide a somewhat wider range
of services to its subsidiaries than the 1929 or Milliardaire
Holding, and 'subsidiary' is much more loosely defined. 1929
or Milliardaire Holdings can act as Financial Holdings provided
they fulfil the conditions for a Financial Holding, which
effectively limit the Holding's activities to within the Group
of which it forms a part. The minimum subscribed share capital
for a Financial Holding is EUR1.2m; it can be only an SA or
a SARL.
All
three forms of 1929 holding company are excluded from the
operation of Double Tax Treaties,
and the SOPARFI, which pays normal income tax and is therefore
within the scope of the Double Tax Treaties, was created to
allow a group holding regime with beneficial treatment of
dividends and profits from transactions in the shares of subsidiaries.
There are some conditions; and to some extent the benefits
of the SOPARFI overlap those obtained under the EU Parent-Subsidiary
Directive. However it remains a useful form in some circumstances.
In
July, 2006, the European Commission ordered the government
of Luxembourg to dismantle its system of tax breaks for financial
holding companies, after concluding that the preferential
tax regime in favour of Luxembourg’s Exempt, Milliardaire
and 1929 Financial Holding companies violates EC Treaty state
aid rules. (The existing regimes are described in Offshore
Legal and Tax Regimes.)
"It
distorts competition and trade by altering the level playing
field between financial undertakings and induces them to create
dedicated structures in Luxembourg to reduce their current
tax liabilities," the EC stated.
In
June 2005, Luxembourg amended the 1929 law by abolishing the
exempt status for holdings receiving more than 5% of their
yearly dividend income from participating companies which
have not been subject to a tax comparable to the one applied
in Luxembourg. While this narrowed the scope of the law, the
EC argued that the regime still constitutes state aid, as
the tax advantages remain unchanged.
The
Commission decision requires the scheme to be repealed by
the end of 2006, while its effects for the existing holdings
must be definitively eliminated by the end of 2010. This will
allow the existing beneficiaries to exit from the holding
structures without incurring tax penalties.
The
'SICAR'
In
2004 the Luxembourg Parliament passed the final text of legislation
on SICARs (Sociétés d’Investissement en
Capital à Risque), which offer an alternative to the
traditional limited partnership structure which works well
for fund managers and investors in countries such as the United
Kingdom, but can pose problems for fund managers in continental
Europe. The new law defines venture capital as direct or indirect
investment in an entity to finance the launch, further development
or flotation of the entity. This definition includes a wide
variety of investment forms in addition to straight equity,
such as corporate bonds, mezzanine finance, and convertible
bonds.
A SICAR may take one of a number of corporate forms, including
that of a limited partnership (see Forms
of Company). SICARs in corporate form may adopt an “open-ended”
share capital structure, like an open-ended investment company
or SICAV, and thus avoid multiple filings for every movement
in equity capital. The minimum subscribed share capital is
Euro 1 million, of which at least 5% must be paid up.
No special
restrictions are imposed on distribution policy, and the legal
reserve requirement and usual interim dividend and capital
redemption formalities are waived.
Because SICARs are high-risk investments, the law restricts
access to professional, institutional and 'knowledgeable'
investors. An investment of at least Euros 125,000 is required
together with an election in writing or the provision of a
certificate issued by a licensed bank or other financial services
professional confirming the expertise and experience of the
investor.
A SICAR must appoint a duly authorized Luxembourg-registered
credit institution as custodian of its assets. A SICAR must
be approved by the CSSF, which will, in particular, examine
the SICAR’s articles of incorporation or their equivalent
and the choice of custodian bank as well as the professional
qualifications and expertise of the SICAR’s executive
management. Once approved, a SICAR need not undergo the standard
“visa” clearance procedure for prospectuses. However,
the law does require at least one prospectus, as well as an
annual report. The annual report must be published within
six months of the relevant reporting date and must be the
subject of an external audit. SICARs are expressly excluded
from the requirement to prepare consolidated financial statements.
A
fixed capital duty of Euro 1,250 applies to equity capital
injections upon incorporation or thereafter. SICARs that are
in corporate form are fully taxable and should in principle,
like SOPARFIs and unlike 1929 holding companies, be eligible
for benefits under Luxembourg’s tax treaties as well
as benefits under EC directives. Investment income and realized
gains are not considered taxable income, and realized losses
and write-downs are not deductible. All other income and expenses
are taxable in the normal way. Distributions are exempt from
withholding tax, as are redemptions by nonresident investors,
regardless of the amount or holding period. SICARs are exempt
from wealth tax, and there is an exemption from VAT for management
charges. SICARs are excluded from the benefits of fiscal consolidation.
Investors seeking tax transparency will opt for a SICAR in
the form of a limited partnership (SeCS). An SeCS is not liable
to corporate income tax or net wealth tax. Issues regarding
the municipal business tax have been resolved by providing
an exemption from this tax for SICARs adopting the SeCS form.
Income from the partnership and capital gains realized on
units by nonresident partners will not be taxed in Luxembourg.
See
Offshore Legal and Tax Regimes
for more details of the tax treatment of the different types
of holding company.
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