| 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% (later to increase, in
2008, to 20%, with a further increase to 35% scheduled for
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”)
to 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.
Offshore companies (but see above for the status of the various
corporate forms) are taxed as follows :
- Holding
companies formed under the law of 31st July 1929 are exempt
from income taxes (the IRC and the Municipal Business
Tax on Profits) and from the Fortune Tax. No tax is levied
on the transfer of shares, and there are no taxes due
on the liquidation of a 1929 Holding Company. No withholding
tax is due on dividends payable to a 1929 Holding Company.
(NB 1929 holding companies can no longer be formed.)
- 1929 Holding
Companies are subject instead to the capital contribution
tax (droit d'apport) of 1% of subscribed capital, either
on formation or on a later capital increase, and to the
subscription duty (taxe d'abonnement) which amounts to
0.20% of the value of the shares issued by the Holding
Company, payable annually in four equal instalments. If
shares are quoted, the value is the current market value;
if there is no quotation, the paid-in value is used. There
are adjustments if dividends are paid out during the year,
if profits are written to reserves, or if losses are incurred.
Under
legislation which came into effect in 2004, in order to
satisfy the EU's 'harmful tax practices' initiative:
A
1929 holding company loses its tax-exempt status if at
least 5% of its dividends received relate to foreign participations
that are not subject to tax at a rate comparable to the
Luxembourg corporate income tax rate. An effective tax
rate is considered to be comparable if it is at least
11%, equating to approximately one-half of the current
corporate income tax rate that applies to regular resident
taxpayers and is in line with the tax rate generally applicable
to dividends received from participations that do not
qualify for a full exemption.
Further,
the taxable base needs to be determined under a method
similar to the methods used in Luxembourg. An auditor
or accountant is required to certify annually that the
eligibility requirements have been met. A 1929 holding
company that loses its tax-exempt status is subject to
the normal corporate income tax regime.
For
newly incorporated 1929 holding companies, the amendment
applied as from 1 January 2004. For existing 1929 holding
companies (i.e. those incorporated under the law applicable
before 1 January 2004), the rules will not apply before
they are terminated in 2010.
- Milliardaire
Holding Companies are taxed on the basis of various percentage
rates applied to interest paid out and dividends distributed
by the company, and on the remuneration and fees paid
to directors, auditors and liquidators residing less than
six months of the year in Luxembourg. The minimum annual
tax liability of a Milliardaire Holding Company is much
less than an equivalent 1929 Holding Company would pay.
(NB Milliardaire holding companies can no longer be formed.)
- Financial
Holding Companies are taxed on the same basis as 1929
Holding Companies. (NB Financial Holding Companies can
no longer be formed.)
- The
replacement for the 1929 holding company, 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 new vehicles are prohibited from commercial activity,
and will be 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.
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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,
and Luxembourg holding companies incorporated according
to the terms of the law of 1929 are not subject to such
withholding tax either. In line with the directive, the
laws came into force retrospectively, with effect from January
1st 2004.
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. See
Domestic
Personal Taxes for the general principles of individual
taxation in Luxembourg, which 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; there
are no special privileges or exemptions for expatriate workers.
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 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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LAWANDTAX-NEWS.COM
13/07 
