| Offshore
Legal And Tax Regimes |
The
term 'offshore' is not used in Luxembourg legislation or in
describing company forms. Use of the special 'holding company'
forms is the key criterion for obtaining offshore tax treatment
for most types of business; special forms are also available
for collective investment vehicles and investment funds.
In
2003 the European Union finally agreed its Savings Tax Directive,
under which Luxembourg was 'allowed' to apply a withholding
tax to the returns on the savings of citzens of EU member
states, initially at the rate of 15% (20% in 2008, and 35%
from July 2011), rather than providing information to the
citizens' home tax authorities. It wasn't until May, 2004,
however, that Brussels finally agreed acceptable rules with
Switzerland for the imposition of a withholding tax and the
preservation of banking secrecy, rules which would also apply
to Luxembourg - the famous 'level playing field'. The Directive
came into force in July, 2005.
In
June 2009, the European Commission announced its decision
to refer Luxembourg to the European Court of Justice over
its incorrect application of certain provisions of the Savings
Tax Directive.
The case
regarded interest payments made to beneficial owners who benefit
from "non-domiciled resident" status in their country
of residence.
Because
Luxembourg had not (or in the EC’s eyes, “refused”)
applied the Directive to beneficial owners who benefit from
the non-domiciled resident status in their country of residence,
Luxembourg paying agents did not levy withholding tax on interest
payments to such beneficial owners.
According
to Luxembourg legislation, beneficial owners are considered
to benefit from the "non-domiciled" status, if they
are generally exempt from income tax in their state of residence
for tax purposes or if the interest payments, as long as they
are not transferred to the state of residence, are not subject
to tax in that state.
According
to the Commission, Luxembourg cannot provide for an exemption
from withholding tax in situations other than those expressly
provided by article 13 of the Directive. This lays down the
rules for the "voluntary disclosure" procedure which
allows the beneficial owner expressly to authorize the paying
agent to report information to the tax authorities of his
state of residence and the "certificate procedure"
which ensures that withholding tax is not levied when the
beneficial owner presents to his paying agent a certificate
drawn up by his member state of residence for tax purposes.
“The
Commission is of the opinion that the paying agent has the
obligation to establish the residence of the beneficial owner
on the basis of minimum standards, as provided by article
3(3) of the Directive,” the EC stated.
“If
the beneficial owner is a resident of another member state
in accordance with these standards, the member state of the
paying agent must ensure that the latter applies the Directive
and, in the case of Luxembourg, that the paying agent levies
a withholding tax on interest payments to such a beneficial
owner,” the Commission added.
“Consequently,
the Commission considers that Luxembourg's legislation, in
its current state, is not compatible with articles 2, 3, 10
and 11 of the Directive.”
In December
2008, the Commission sent a ‘reasoned opinion’
to the government of Luxembourg setting out its stance on
the matter. This was the second stage in infringement proceedings
and gave Luxembourg two months to respond to the Commission’s
arguments.
The
other key EU fiscal initiative affecting Luxembourg in particular,
the EU's Code of Conduct Committee's campaign against 'harmful
tax practices', resulted in the abolition of most of the holding
company regimes in 2007, and their replacement by the new
SPF format, aimed at the asset management sector.
Capital
contributed to a Luxembourg company or branch was, until recently,
generally subject to a 1% capital tax on the net value of
the property contributed, but the 2008 draft budget provided
for a reduction in the rate of capital duty to 0.5% as from
1 January 2008. The capital duty was subsequently abolished,
as of January 2009 . Investment funds pay a flat registration
duty of EUR1,250 (at the time of writing) when they are established.
For contributions to other types of business entities, there
may be an exemption under the following circumstances (subject
to certain conditions):
- Share-for-share
contribution;
- All
assets and liabilities contribution;
- Conversion
of retained earnings or reserves into share capital; or
- Migration
of capital within the EU.
Luxembourg
Forms of Offshore Operation
Offshore operations
may take place within the following forms:
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Luxembourg
Tax Treatment of Offshore Operations
See Domestic
Corporate Taxes for the general principles of Luxembourg;
however these do not apply to offshore entities except as
indicated below. Offshore entities are not covered by Luxembourg's
Double Taxation Treaties except as indicated below. From January
2011, a minimum flat income tax of EUR1,500 was introduced
for companies whose financial assets, transferable securities,
and cash at bank amount to more than 90% of their balance
sheet.
Offshore companies
(but see above for the status of the various corporate forms)
are taxed as follows :
- The
Family Private Assets Management Company, or SPF is intended
to be exempt from corporate income tax, municipal business
tax and net-worth tax, and from withholding tax on distributions.
These vehicles are prohibited from commercial activity,
and are limited to private wealth management activity,
for example the holding of financial instruments such
as shares, bonds and other debt instruments, in addition
to cash and other types of bankable asset. If the SPF
is used to hold voting rights in other companies, it must
ensure that it does not involve itself in the running
of those companies, and it is prohibited from providing
any kind of service. The SPF's exemptions can be affected
by participation in non-resident, non-listed companies,
if those companies are located in a country not subject
to a roughly equivalent corporate tax regime.
A subscription tax at a rate of 0.25% is payable on share
capital.
- SOPARFI companies, which
were created under the law of 24th December 1990, are
subject to the normal regime of income taxes etc (see
Direct Corporate Taxation)
but do receive the benefit of Double Taxation Treaties,
and in many circumstances are exempt from taxation on
dividends received from or paid to resident and non-resident
companies in which they have a significant participation.
The EU Parent-Subsidiary Directive also provides some
withholding tax exemptions (improved as from 2004, see
below), but the SOPARFI benefits are more extensive.
The rules are complex; there are conditions; and there
are limitations on the deductibility of expenses.
- The various forms of UCI
are all exempt from all Luxembourg taxation, and pay only
a small capital duty on start-up, plus an annual tax on
net assets which (at the time of writing) varies between
0.01% and 0.06% depending on the type of fund. In June,
2004, the Luxembourg government announced that pension
funds would be exempt from the 0.01% 'subscription' tax,
in order to encourage the transnational pooling of pensions
assets.
- In
2004, Luxembourg introduced the SICAR, which may take
one of a number of corporate forms, including that of
a limited partnership (see Forms
of Company). A fixed capital duty of EUR1,250 applies
to equity capital injections upon incorporation or thereafter.
SICARs that are in corporate form are fully taxable and
should in principle, 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, and is exempt from the municipal business tax. Income
from the partnership and capital gains realized on units
by nonresident partners will not be taxed in Luxembourg.
Luxembourg
The EU's Parent/Subsidiary Directive
Changes to the parent/subsidiary
directive in 2004 have reduced the
holding requirement to 20% for 2005-06; to 15% for 2007-08;
and to 10% for 2009 onward. Under the EU's Directive on
Interest and Royalties, which also came into effect in 2004,
both types of payment will be exempt from withholding tax
if they are between associated companies (rules as for the
participation exemption).
Luxembourg
has actually gone even further, meaning that there is no
withholding tax on royalties paid to non-resident companies.
Luxembourg Taxation of Foreign and
Non-Resident Employees
In Luxembourg
the taxation of individuals is based entirely on the concept
of residence, regardless of nationality. The general principles
of individual taxation in Luxembourg also apply to the resident
employees of non-resident entities. Generally, individuals
are considered to be resident when they maintain a residence
in Luxembourg with the intention of remaining other than temporarily.
A stay of six months is deemed to be residence. Most types
of compensation and benefit paid to employees are taxable.
Traditionally, there have been no special privileges or exemptions
for expatriate workers, although an
expatriate tax regime for highly skilled employees came into
force on January 1, 2011.
Non-residents are
liable to pay Luxembourg taxes only on certain types of income
arising in Luxembourg or from Luxembourg sources. These types
of income are very precisely defined in Luxembourg legislation.
Nationals of countries with which Luxembourg has Double
Taxation Treaties also need to be aware that the relevant
treaty may well affect their tax treatment.
The main types
of taxable income for non-residents are:
-
income
from trade or business carried on in Luxembourg or arising
there;
-
income
from dependent services (ie employment income) performed
or arising in Luxembourg;
-
pension
income resulting from former activity in Luxembourg;
-
investment
income arising or paid from Luxembourg;
-
income
from leasing of goods etc situated in Luxembourg or exploited
by a Luxembourg entity;
-
capital
gains on the sale of property or substantial participations
in Luxembourg companies.
Each
of these categories is further defined in considerable detail
in the legislation.
Luxembourg
eventually signed up to the compromise on the European Savings
Tax Directive reached in January, 2003, and has been imposing
a withholding tax on non-residents' investment returns, like
Switzerland, as from July, 2005 (initially at a rate of 15%,
rising to 20% in 2008, and 35% in 2011).
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Luxembourg Exchange
Control
Luxembourg has no exchange controls.
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Luxembourg Offshore
Activities
'Offshore', ie
low-tax, activity in Luxembourg is possible only through the
various specialised corporate forms
listed above. These types of holding company and collective
investment fund are limited to the specified holding and financial
activities for which they were created. All other types of
commercial and business activity have to be conducted in the
mainstream, and therefore highly-taxed, economy.
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Luxembourg Employment
and Residence
There are no
special privileges or disabilities for the employees of non-resident
or offshore operations as such. Nationals of European Union
member states have free right of movement in Luxembourg. However,
any stay for the purposes of employment or remunerated activity,
including remunerated or non-remunerated training courses,
is subject to obtaining in advance both a provisional residence
permit (autorisation de sejour provisoire) from the Ministry
of Justice, and a work permit from the Ministry of Labour.
Presumably these permits cannot be refused to EU nationals.
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