Contributed By Loyens & Loeff
Concept of Residence/Income Subject to Tax
An individual is considered a tax resident of Luxembourg if he has his tax domicile in Luxembourg (ie, a permanent place of residence in Luxembourg that he actually uses and intends to maintain) or his 'usual abode' there (a usual abode is deemed to exist after a continuous presence in Luxembourg of six months that may be spread over two calendar years).
In Luxembourg, a resident taxpayer is subject to Luxembourg income tax on the basis of his worldwide income (such as employment income, dividends, interest and rental income). A non-resident taxpayer is subject to income tax on the basis of his Luxembourg-source income only.
Tax rates applicable for individuals range from 0% to 45.78% (including the surcharge for the employment fund).
Luxembourg does not apply a wealth tax for individuals.
Treatment of Capital Gains
Non-resident shareholders (those without a Luxembourg permanent establishment to which the shares in a Luxembourg company are allocable) are only taxable on the realisation of a capital gain in respect of more than a 10% shareholding in such company if they realise that capital gain within six months after acquisition, or if they became non-resident taxpayers less than five years before the disposal took place and have been resident taxpayers for more than 15 years. However, shareholders resident in a country with which Luxembourg has concluded a tax treaty are generally not taxable on such capital gains.
For Luxembourg-resident shareholders, capital gains on movable assets (such as shares) are only taxable if they are realised within six months following acquisition or (if after six months) concern a substantial shareholding (>10%). Capital gains realised after six months on substantial shareholdings benefit from a rate reduction of 50%. In addition, the taxable gain may be reduced by an allowance of EUR50,000 (or EUR100,000 jointly).
Capital gains realised on the sale of an individual’s principal residence benefit from an exemption. Capital gains realised on real estate within two years after acquisition are taxed as ordinary income (at progressive rates). However, after two years a 50% rate reduction would apply.
Emigration to Luxembourg/Step-Up in Basis
If you have a substantial interest (>10%) in a company (or shares in your own private or public limited company) and are considering emigrating to Luxembourg (from any country), you can legally claim an increased acquisition price for your substantial interest. This is also called 'step-up'.
Under this scheme, the acquisition price of the substantial participation is set at the market value at the time of emigration. As a result, at the time of disposal (for example, if you sell the interest), Luxembourg will not tax capital gains on your substantial interest that accumulated in the period prior to your emigration (deferred tax assets).
Gift tax is levied when a gift is registered in Luxembourg in a written document; ie, a notarial deed. Such registration is not always obligatory (except if the gift concerns Luxembourg real estate) so it may be possible to make a gift without gift tax by means of a gift by hand (don manuel).
When a Luxembourg-resident taxpayer dies, there is no inheritance tax to pay in Luxembourg on bequests to direct descendants providing that the statutory distribution to each descendant under Luxembourg law has been respected. It does not matter where the direct descendants live. However, if one child receives more than another, Luxembourg levies up to 5% inheritance tax on the difference. Moreover, a surviving spouse is also exempt from inheritance tax under certain conditions.
Income Tax Planning
The principle of the choice of the least taxed remains valid law in Luxembourg, and it entails that a taxpayer may freely organise his estate or business in the most appropriate and the least costly way from a tax perspective. Luxembourg offers in this respect a toolbox that is suitable for international wealth structuring. Subject to an analysis of the specific needs that result from the requirements in each relevant jurisdiction, Luxembourg may offer solutions as diverse as the société de participation financières (SOPARFI), the family private wealth management company (SPF), the specialised investment fund (SIF), the investment company in risk capital (SICAR), or, to a lesser extent, reserved alternative investment funds (RAIFs). Fiduciary agreements and insurance products are also options.
Luxembourg is considered one of the most stable jurisdictions in the world, from the legal, political and financial points of view. In that perspective, Luxembourg is very attractive for clients wishing to manage their private wealth in the most optimal way possible. More specifically, rules related to estate and transfer tax laws can be considered very stable since the basic principles have not drastically evolved over the years but only adapted to the evolving needs of high net worth individuals. For instance, the law on registration fees dates back to December 1798 and is still the applicable law.
As an EU member state, Luxembourg is committed to participating in European and international initiatives that aim at combating money laundering and terrorism financing through increased transparency and exchange of information between tax authorities. Luxembourg has notably adopted legislation to implement the Common Reporting Standard (CRS) and the US Foreign Account Tax Compliance Act. In accordance with the EU anti-money laundering directives, it has set up a national register of ultimate beneficial owners (UBOs) of companies and other legal entities that are registered with the Luxembourg register of trade and companies. The UBO register is publicly available but there are some safeguards to preserve the UBO’s right to privacy.
Luxembourg will also have to implement the EU directive requiring intermediaries (such as lawyers, tax advisers and accountants) to report potentially aggressive tax planning arrangements with a cross-border dimension, as well as arrangements designed to circumvent reporting requirements like CRS and UBO reporting.
Luxembourg applies the situs principle, which means that the inheritance is opened in the last state of residence of the deceased person for Luxembourg tax consideration. However, Luxembourg also levies duties on the transfer of real estate located in Luxembourg upon death.
The inheritance duties in Luxembourg are in principle at a rate of 0% in direct ascending line and between spouse and partners (for the part inherited corresponding to the heirship law). The base rate applicable to other heirs can vary up to a maximum 15% notwithstanding possible surcharges.
Luxembourg only levies a duty on gifts to the extent that the gift is registered in Luxembourg. The rate varies between 1.8% and 14.4%. Following this principle, gifts that are not effected before a notary should not be subject to this duty. Luxembourg also does not levy gift tax on real estate located abroad regardless of whether the act was registered in Luxembourg. Luxembourg gift and inheritance tax are levied on the fair market value of the assets.
In Luxembourg, gifts are not often used to anticipate inheritance because of the existence of gift tax even in direct line, whereas inheritance in direct line is exempted from inheritance tax.
Luxembourg has not signed any double tax treaty regarding inheritance tax. However, as mentioned before, the ascending direct line and inheritance between spouses and partners are subject to a 0% rate. There is, as a consequence, no risk of double taxation in such situations.
Concerning the civil law applicable to the inheritance, Luxembourg must apply the European regulation on inheritance that simplifies the European cross-border inheritance (except for the United Kingdom, Ireland and Denmark). The applicable law will be in principle the law of the last state of residence unless the deceased opts for the law of the state of his or one of his nationalities. The European Commission provides some recommendations in order to head for unilateral relief measures of the member states to avoid double taxation upon inheritance.
There are four categories of heirs: (a) descendants, (b) the surviving spouse, (c) ascendants and (d) collateral heirs.
The descendants are the decedent’s privileged heirs. They supersede all other heirs with the exception of the surviving spouse.
The decedent can freely dispose (via a testamentary provision) of a portion of his estate (the so-called disposable portion) despite the protection of the descendants’ inheritance rights. The rate of the disposable portion depends on the number of children left by the decedent or represented in his estate. If the decedent has:
In the absence of testamentary provisions, the estate is devolved equally (division per capita) among the closest relatives.
If the decedent leaves descendants, his surviving spouse can choose between (i) a share equal to that of the legitimate child who receives the smallest share (which may not be lower than a quarter of the estate) and (ii) the usufruct of the matrimonial home and the related furniture, provided that the said building belonged to the decedent in its entirety or together with the surviving spouse.
The descendants’ due portion of inheritance is reduced in proportion to the rights of the surviving spouse.
Representation allows descendants of different degrees of kinship to compete for the estate, in so far as it allows representatives to take the place and degree of, and to be entitled to the rights of, the represented person who had a title to inheritance but who deceased before the decedent.
If there are no descendants, the surviving spouse inherits and comes to own the freehold estate.
Ascendant and collateral heirs only have inheritance rights where there are no descendants and no surviving spouse. The surviving spouse, as well as ascendant or collateral heirs, can be disinherited by the deceased through his will.
Prenuptial and Postnuptial Agreements
Luxembourg allows for matrimonial agreements, under which the future spouses choose their matrimonial regime and any other advantages (it being understood that some elements are seen as being subject to public order rules, such as maintenance obligations or any compensatory benefits). If there is an international element (for example, if at least one of the spouses is a foreign national), the matrimonial agreements may be subject to foreign law. For that purpose, the agreements must be in writing, they must be dated and signed by the spouses, and they must comply with the form prescribed for marriage contracts, either by the law chosen by the spouses or by the law of the place where they were entered into.
The Luxembourg Civil Code distinguishes between the primary and the secondary regime.
The primary regime sets forth rules of public order, such as the prohibition of the sale of the common residence even if it is part of the personal patrimony of one of the spouses, or the duty to contribute to the needs of the household. Those obligations may not be derogated from.
The secondary regime provides supplementary rules on marital assets. The secondary regime provides for three community regimes: (i) the community property regime, where the spouses each have a patrimony and, in addition, a common patrimony composed essentially of their professional revenues as well as all the property acquired with said revenues; (ii) the separation of property; and (iii) the joint ownership of acquired properties regime, which provides for a kind of equal distribution of the assets at the time of the dissolution of the marriage. These matrimonial regimes can be modified by the spouses as they see fit.
In principle, for direct tax purposes, the transfer of property upon death or gift is valued at the historical acquisition costs for subsequent disposal. However, there is an exemption for substantial participation (more than 10% held for more than twelve months), which is considered to be a realisation even without consideration.
Luxembourg inheritance taxes are limited and do not require specific structuring in the case of traditional inheritance to the spouse or children. In any case, good planning can consist in using the manual gift, which is not taxed in Luxembourg for assets potentially allowed to be transferred without notarial deed (ie, not for real estate, for example).
Luxembourg inheritance law does not include any special provision for digital assets. The latter are considered as movable and intangible properties for purposes of tax and succession.
There is no such thing as a Luxembourg trust, since the legislature has never introduced that type of structure in the legislation. However, Luxembourg recognises foreign trusts (see 3.2 Recognition of Trusts for more details), which still makes the country attractive for investment structures involving a trust.
A new bill introducing a private foundation (fondation patrimoniale) in Luxembourg legislation was drafted in 2013 and was about to be voted on by the Parliament in November 2014. However, the legislative process was suddenly stopped and has not been relaunched since then. There is currently no sign that the bill is finally about to be voted on.
Foreign forms of private foundations such as the Stichting in the Netherlands or the fondation privée in Belgium can, however, be used in combination with a Luxembourg company for private wealth purposes.
As already mentioned in 3.1 Types of Trusts, Foundations or Similar Entities, trusts are recognised in Luxembourg: the country has ratified the Hague Convention of 1 July 1985 on the law applicable to trusts and on their recognition through a law of 27 July 2003 (the 2003 Law). That ratification facilitates the use of all forms of trusts governed by foreign jurisdictions.
Based on the general Luxembourg tax law (Steueranpassungsgesetz), taxation follows economic ownership rather than legal ownership. As such, if it is clear that a foreign trust or foundation owns assets on behalf of a Luxembourg individual, the proceeds from such assets would be allocable to the individual and taxed accordingly. The analysis may be different for certain discretionary and irrevocable trusts whereby no clear beneficiaries can be identified. In other words, the characteristics of any foreign trust or foundation would need to be analysed on a case-by-case basis.
A fiduciary based in Luxembourg would be taxed on the basis of the same principles of economic ownership versus legal ownership; ie, in the opposite way. If the fiduciary is not the economic owner of the assets, any proceeds derived therefrom would not be taxable for the fiduciary. However, based on the arm’s length principle included in Luxembourg tax law, the fiduciary should earn an arm’s length remuneration for its activities. Such remuneration could be in the form of a service fee or as part of the return from the assets.
In the absence of types of structures such as Luxembourg trusts, Luxembourg has not taken any step to allow settlors to retain extensive powers over irrevocable planning vehicles.
To structure the transmission of a family business, Luxembourg offers an arsenal of vehicles that ensure asset protection and provide for succession planning: depending on the assets and the amount to be transmitted, family members can choose between transparent arrangements, non-regulated vehicles and regulated vehicles.
Structuring Via Transparent Arrangements
Since Luxembourg has not yet devised an instrument comparable to a trust, which is due to the different legal background dominated by the 'Code Civil' introduced by Napoleon I, it has adopted specific legislation in relation to fiduciary arrangements that deviates slightly from the legislation applicable to the common UK trusts. Aside from the fiduciary agreement, the Luxembourg Civil Code allows the splitting of ownership of assets between the usufruct and the bare ownership.
The Luxembourg fiducie is a contract whereby a person, the principal (or fiduciant), agrees with another person, the agent (or fiduciaire), that, subject to the obligations set forth by the parties, the fiduciaire becomes the owner of assets that shall form a fiducie estate. As an agreement, the fiducie will be subject to all conditions generally required for the validity of an agreement under Luxembourg law. The fiducie contract and the transfer of assets, including receivables, are effective vis-à-vis third parties as from the moment the agreement is entered into. The debtor is, however, validly discharged from its payment obligations by payment to the agent as long as it is not aware of the transfer. No other specific requirement is necessary to make the agreement or the transfer of the underlying assets enforceable as against third parties, except if such transfer of assets, which are the subject matter of the fiducie, has to be made public in a certain form.
A first major difference with a trust is that, from a civil law standpoint, the fiduciaire becomes the full owner of the assets that have been assigned, which it operates in its own name under the fiducie contract. No division between legal and equitable ownership is thus created and, subject to the personal recourses that are developed below, the fiduciaire will have full power of management, use and divestment that, as a rule, are recognised to owners under Article 544 of the Civil Code. The second major difference consists of the fiducie not being established unilaterally, without the agent’s approval. The Luxembourg position and its concepts included in the 2003 Law are nonetheless quite similar to trusts, which will allow the fiducie to be recognised as a similar instrument to a trust for the purpose of the Hague Convention.
The fiduciaire must be a credit institution, an investment firm, an investment company with variable or fixed share capital, a securitisation company, a fiducie representative acting in the context of a securitisation transaction, a management company of common funds or of securitisation funds, a pension fund, an insurance or reinsurance undertaking or a national or international public body operating in the financial sector. It is also possible for an agent to be a foreign entity subject to regulatory supervision and located in the EU or the European Economic Area, without the need for this foreign entity to operate out of or via a permanent establishment or place of business in Luxembourg.
The fiducie entails the creation of a fiducie estate (a patrimoine fiduciaire), which is separated from the personal estate of the fiduciaire, as well as from any other fiducie estate managed by the fiduciaire. It implies, on the one hand, that its assets may only be seized by creditors whose rights have arisen in connection with this separate fiducie estate. On the other hand, in the case of liquidation or bankruptcy of the fiduciaire, or in any other situation of the fiduciaire generally affecting the rights of its personal creditors, the assets comprising the fiducie estate are not affected by these procedures. The fiduciaire will be obliged to manage the assets in accordance with the rules set forth for the mandate agreement, which are established under Articles 1984 to 2010 of the Civil Code.
A frequent way to structure assets under Luxembourg law consists in dividing the property of assets between bare ownership and usufruct. According to Article 578 of the Luxembourg Civil Code, usufruct is the right of a person (the usufructuary) to use and enjoy in its entirety an asset that is owned by another person (the bare owner), and to assume the obligation to conserve and maintain the asset in its form and substance, in particular to pay the rates and taxes. Upon the usufructuary’s death, all rights of the ownership will automatically be consolidated to the person carrying the bare property. In this way, the full property is reconstituted to the bare owner without an actual transfer.
In practice, this is often used in a context where the current owner of an asset wants to donate an asset ahead of his death but wishes to keep the possibility to enjoy the asset. The value of such a gift results from official tables (recently amended through Circular Letter No 767 dated 7 April 2014 of the Luxembourg Administration de l’Enregistrement et des Domaines) that estimate the value of the portion of the property depending on the age of the owner of the usufruct.
Structuring Via Non-Regulated Vehicles
SOPARFI: société de participations financières'
Most taxable holding companies in Luxembourg are a so-called SOPARFI, which is the abbreviation for the French société de participations financières. As a fully taxable holding company, a SOPARFI is fully subject to Luxembourg income tax (impôt sur le revenu des collectivités, or IRC) and the municipal business tax (impôt commercial communal). In addition, there is a surcharge for the employment found calculated on the IRC. The total combined tax rate (inclusive of surcharge) is therefore 24.94%. A SOPARFI is also subject to an annual net wealth tax, which is levied at a rate of 0.5% on the company’s worldwide net wealth on January 1st. As such, a SOPARFI is entitled to take advantage of the exemption regimes, such as the Parent Subsidiaries Regime. Indeed, according to Article 166 of the Luxembourg law on income tax (LIR) and the Grand-Ducal Decree of 21 December 2001, dividends (including liquidation dividends) and respective capital gains (including currency exchange gains) are exempt from profit taxes. Moreover, as a totally normal commercial company, a SOPARFI benefits from the tax treaties concluded between Luxembourg and other countries as well as the EU directives.
Common limited partnerships and special limited partnerships
Commonly, for transferring a family business to the next generation, family members gladly use Luxembourg limited partnerships. It is possible to distinguish between two different partnerships.
On the one hand, the common limited partnership (CLP, or SCS, or société en commandite simple) is defined as a partnership established by contract, for a limited or unlimited duration, between one or more general partners with unlimited joint and several liability for all obligations of the partnership, and one or more limited partners with limited liability, who commit to contributing a certain amount, constituting partnership interests, represented or not by a security instrument, in accordance with the provisions of the limited partnership agreement. Seen as a very flexible vehicle, the contractual freedom allows the partners to draw up the contract in order to assure the best way for the transmission of the heritage.
On the other hand, more recently, the special limited partnership has been successfully introduced in Luxembourg law (SCSp, or société en commandite spéciale). The main specificity of the SCSp is that it does not have legal personality, although the assets can be registered in the name of the partnership.
From a Luxembourg perspective, the SCS and SCSp have a similar tax and corporate treatment. They are both characterised by a corporate flexibility that goes beyond the competing forms of Anglo-Saxon limited partnerships (contractual freedom, protection for the anonymity of the limited partners, limited liability, security in the case of distributions, etc) while ensuring at the same time legal certainty. In addition, the vehicles are exempt from Luxembourg corporate income or net worth tax. Luxembourg resident partners are subject to income and net worth tax on the partnership's income and net worth in proportion to their partnership interests. That said, some investors would prefer a tax-opaque vehicle with access to double taxation treaties.
SPF: société de gestion de patrimoine familial , family private wealth management company
In 2007, Luxembourg decided to introduce for the management of individuals’ private wealth a family wealth management company (also known as an SPF, or société de gestion de patrimoine familial) with a specific commercial purpose, which consists essentially in acquiring, holding and selling of financial assets in the framework of wealth management and without entrepreneurial activity. In so far as an SPF is a passive investment vehicle, an SPF is prohibited from undertaking any commercial activities. As a consequence, this entity cannot interfere in the management of its participation, meaning that an SPF cannot exercise any function in the governing bodies or render any services the company holds itself, although additional structuring may be implemented to achieve this.
Anyway, the main interest of using such an entity lies in its very favourable tax regime. Indeed, under the SPF Law, SPFs are exempt from Luxembourg corporate income tax, municipal business tax and net wealth tax. In addition, SPFs have the benefit of not being subject to any Luxembourg withholding taxes over its dividend distributions to its qualifying shareholders. However, SPFs are subject to an annual subscription tax of 0.25%, with a minimum annual amount of EUR100 and a maximum amount of EUR125,000. This annual tax is levied on the share capital, grossed-up with the share premium and the component of the debt that is eight times more than the share capital and share premium as at January 1st. In return, because of these exemptions, an SPF cannot generally take advantage of double tax treaties or EU directives.
Structuring Via Regulated or Supervised Entities – the Specialised Investment Fund
A frequent vehicle for structuring private assets is the specialised investment fund (SIF).
The SIF regime is reserved for well-informed investors, meaning institutional investors, professional investors or any other investor that (i) has confirmed in writing that it adheres to the status of well-informed investor and (ii) either (a) invests a minimum of EUR125,000 in the SIF or (b) has obtained an assessment certifying its expertise, experience and knowledge in adequately appraising an investment in the SIF, made by a credit institution within the meaning of Directive 2006/48/EC, by an investment firm within the meaning of Directive 2004/39/EC, or by a management company within the meaning of Directive 2001/107/EC.
A SIF must establish procedures ensuring that its investors are well-informed investors within the meaning of the SIF Law.
In addition, the managers/directors (dirigeants) and other persons who are involved in the management of the SIF, including the management of the assets of the SIF (ie, the personnel of an appointed investment manager or investment adviser) do not need to be certified as 'well informed' as a result of their involvement in the management of the SIF or its assets.
A SIF may be structured in several ways:
A SIF may thus, among others, replicate the operational and legal flexibility typically associated with Anglo-Saxon limited partnerships. Depending on the choice of fund vehicle, there will usually be a high degree of structuring flexibility, including for the organisation of subscriptions, redemptions or distributions, the valuation methodology, or the compartmentalisation of assets, liabilities or investors.
The minimum capitalisation of a SIF (share capital and premium included) is EUR1,250,000, which has to be reached within twelve months of its approval by the Commission for the Supervision of the Financial Sector (Commission de Surveillance du Secteur Financier, or CSSF). At least 5% of each share must be paid-up (in cash or in kind) at subscription. A SIF may opt for variable or fixed share capital. The distribution policy is freely determined in the constitutional documents.
SIFs may be constituted with multiple compartments, each compartment corresponding to a distinct part of the assets and liabilities of the SIF. In the case of some families, they allow each of their members to personalise the management of their assets. Unless otherwise provided for in the constitutional documents of the SIF, the rights of investors and of creditors relating to a specific compartment or that have arisen in connection with the creation, operation or liquidation of that compartment are limited to the assets of that compartment. Consequently, the assets of that compartment are exclusively available to satisfy the rights of investors in relation to that compartment and the rights of creditors whose claims have arisen in connection with the creation, operation or liquidation of that compartment.
Unless the constitutional documents provide otherwise, for the purpose of the relationship between investors, each compartment will be deemed to be a separate entity. Compartments may be separately liquidated and the liquidation of a compartment will not result in the liquidation of any other compartment of the SIF. Likewise, the withdrawal of CSSF authorisation of a particular compartment has no impact on the other compartments of the same SIF, which remain registered on the official list of SIFs.
A compartment is able to invest in one or more other compartments of the same SIF, subject to (i) a prohibition on reciprocal cross-compartment investments (ie, where the latter, in turn, also holds interests in the former), (ii) the suspension of voting rights attaching to interests held by the former in the latter compartment and (iii) the value of the holding of the interest held by the former in the latter will not be taken into account for the purpose of calculating whether the minimum capitalisation required by the SIF Law has been reached.
The CSSF devotes special attention to the qualification of the managers/directors of a SIF. The representatives of a SIF need to submit proof of their professional qualifications and experience, good standing and honourability. The managers/directors are not subject to any residency requirement. In practice, the appraisal of the CSSF will consider the qualifications and experience of the management team in its entirety.
Investment concentration and leverage restrictions
The absence of preset or statutory investment restrictions represents another important feature of the SIF regime. Although the principle of risk spreading applies, there are no preset quantitative, qualitative or other investment restrictions. CSSF Circular 07/309 provides, however, for certain 'safe harbour' diversification rules. The SIF initiator may thus freely determine the investment policies, architecture (eg, a single or multi-compartment (umbrella) SIF), investment restrictions or limitations provided that the investment policies are based on the principle of risk spreading. Where a SIF has been constituted with multiple compartments, the principle of risk spreading applies to each compartment separately. SIFs are furthermore not bound by any preset or statutory leverage restrictions.
As is the case for all Luxembourg fund vehicles, the assets of a SIF have to be safeguarded and/or monitored by a Luxembourg established depositary bank. However, the SIF Law does not impose specific functions on the depositary bank, thus resulting in fewer constraints for the organisation of the relationship between the SIF and its depositary bank and prime broker.
The setting up and launching of a SIF requires the prior authorisation of the CSSF. Such authorisation is granted upon approval by the CSSF of the constitutional documents of the SIF, as well as of the choice of its depository bank and after taking into account the suitability of the managers/directors (dirigeants) of the SIF. A SIF approved by the CSSF has to notify the CSSF fully in writing of any change relating to information that the CSSF used to grant its approval and any such change is subject to the CSSF’s prior approval. This applies both to changes to the documentation and to material information such as a change of service provider.
Disclosure and reporting obligations
Each SIF has to establish an issuing document, which may be labelled as a private placement memorandum, offering memorandum or prospectus, as the case may be. Even though no minimum content is prescribed, such document must include all information necessary for prospective investors to make an informed investment decision. Any change to the essential elements of the issuing document is subject to CSSF approval. A SIF is required to produce an annual report following a preset reporting template providing for a minimum level of disclosure. This annual report has to be provided to investors and the CSSF within six months of the end of the period to which it relates. A SIF is not obliged to publish a net asset value.
Save for the application of the Savings Tax Directive, a SIF is exempt from income and net wealth taxes. Distributions are generally exempt from withholding tax. A SIF is subject to an annual subscription tax (taxe d’abonnement) of 0.01% assessed on the total net assets of the SIF. The subscription tax does not apply to:
More than 80 double tax agreements concluded by Luxembourg are currently in force, some of which do not extend their benefits to Luxembourg undertakings for collective investment. Many jurisdictions, however, grant treaty protection to Luxembourg SICAVs/SICAFs under the UCI Law and may extend to (corporate) SIFs (application to be confirmed by foreign counsel on a case-by-case basis).
Please refer to 4.1 Asset Protection. The same set of vehicles that ensure asset protection are used to provide for succession planning. The strategies depend on the purpose for which they are developed and on the factual aspects of each family business.
Luxembourg does not levy transfer duties when a partial interest in an entity is transferred.
Currently there are no specific trends driving wealth disputes in Luxembourg.
Luxembourg has not developed specific mechanisms for compensating aggrieved parties in wealth disputes. The general principles of compensation apply; ie, where execution in kind is not possible, the aggrieved party will receive financial compensation that is supposed to make up for the complete damage (material and moral) suffered (principe de la réparation intégrale).
The 2003 Law limits its application to a limited number of entities so that an individual cannot proceed as agent under the 2003 Law, contrary to common law trusts. Only the following institutions may act as a fiduciaire: a credit institution, an investment firm, an investment company with variable or fixed share capital, a securitisation company, a fiducie representative acting in the context of a securitisation transaction, a management company of common funds or of securitisation funds, a pension fund, an insurance or reinsurance undertaking, or a national or international public body operating in the financial sector. The 2003 Law also recognises the possibility for an agent to be a foreign entity subject to regulatory supervision and located in the EU or the European Economic Area, without the need for this foreign entity to operate out of or via a permanent establishment or place of business in Luxembourg.
The fiducie estate is separated from the personal estate of the fiduciaire, as well as from any other fiducie estate managed by the fiduciaire. It implies, on the one hand, that its assets may only be seized by creditors whose rights have arisen in connection with this separate fiducie estate. On the other hand, in the case of liquidation or bankruptcy of the fiduciaire, or in any other situation of the fiduciaire generally affecting the rights of its personal creditors, the assets comprising the fiducie estate are not affected by these procedures.
In the absence of any official publication of the fiducie, it is possible that third parties having recourse on the fiduciaire acting on its own behalf or on behalf of other fiducie estates seize assets that form part of a fiducie estate other than the one on the occasion of which their claim arose. In such case, it will be possible to obtain the release of the seizure by injunction.
From an accounting point of view, the fiduciaire has the obligation to keep a separate accounting of its personal estate and each of the other fiducie estates. This is essential for the fiduciaires, which are all regulated entities, some of which are subject to capital adequacy rules that would have potentially damaging consequences if they took into account the assets and liabilities attached to the fiducie estates.
As indicated above, the fiducie agreement has in principle effect towards third parties by its mere execution, with the only exceptions indicated above. The extent and measure of this effect can, however, give rise to subtle distinctions. Article 7(3) of the 2003 Law sets forth that restrictions on the powers of the agent under the fiducie agreement are only binding upon third parties who are aware of them. A third party unaware that assets are the subject matter of a fiducie arrangement would thus not be bound by the terms of it, while other parties made aware of the terms of the fiducie agreement would be subject to its limitation. A question may, of course, arise as to whether mere awareness that assets are the subject matter of a fiducie arrangement would be sufficient to impose the limitations of the fiducie on the third parties. This may, in this firm's view, be imposed on the basis of the general principles of law under which a party may not participate in the infringement of a contract by another party if he knew or should have known that he helped in the infringement of a contract. In the case of a fiducie arrangement, a third party aware of the fact that the assets are the subject of a fiducie agreement could be under the obligation to request a copy of the fiducie arrangement to ensure that they do not participate in its infringement.
In principle, clauses limiting fiduciaire’s liability are permitted under Luxembourg law. The only limitation pertains to gross negligence and wilful misconduct, for which no limitation of liability is possible under Luxembourg law.
Article 7 of the 2003 Law provides that, absent derogation by agreement between the fiduciant and the fiduciaire, or a provision of the 2003 Law, the rules of the mandate agreement, which are established under Articles 1984 to 2010 of the Civil Code, are applicable to the fiducie agreement. The second paragraph of Article 7 provides for a major carve-out, by excluding any rule thereof that relates to the representation by the agent. In other words, the fiduciaire may not represent – and create obligations – on behalf of the fiduciant. In case the fiduciaire contemplates representing the fiduciant in any other transaction, it is assumed that they will do it on the basis of other contractual arrangements since there is no reason that the fiduciaire should mix the capacities in which he acts. This implies that neither the fiduciant nor the third-party contractor may invoke the existence of a direct contractual relationship between themselves.
Other principles of the mandate agreement will remain applicable. For example, the fiducie will be rendered gratuitously should no specific provision set forth the right to compensation. Under Article 1986 of the Civil Code, the mandate is indeed assumed to be granted on gratuitous terms. Should any compensation be envisaged, the fiduciaire will be liable for mere negligence. The fiduciaire will be under an obligation to inform the fiduciant (or the third-party beneficiary) of the fulfilment of its duties at the latest at the end of the agreement.
There are no specific investment rules or diversification requirements.
Since 1 April 2017, the law authorises residents having been living in Luxembourg for at least five years to acquire Luxembourgish nationality by naturalisation under certain conditions. The acquisition of Luxembourgish nationality by naturalisation confers the status of Luxembourger with all attached rights and duties. Furthermore, the applicant is not obliged to give up his nationality of origin owing to the principle of dual nationality, provided the law of his nationality of origin allows this.
Luxembourg applies the second generation jus soli. A child born in Luxembourg one of whose parents or adopting parents was already born in Luxembourg is automatically a Luxembourgish national.
Nationals from the EU and Iceland, Norway, Switzerland and Liechtenstein do not need a prior residency/work permit to reside/work in Luxembourg. However, if their residency exceeds a period of 90 days, they need a subsequent registration certificate.
Nationals from third countries need to apply for a prior work/residence permit. This needs to be done before arriving in Luxembourg in most cases. The first work/residence permit is valid for a year, after which it can be renewed. After five years of residence in Luxembourg, third-country nationals can apply for a long-term residence permit.
It should be noted that recently a special residency permit for investors has been introduced. There are three possibilities: the investor may either invest at least EUR500,000 in a company that already exists or in one that is to be created in Luxembourg, or he may invest at least EUR3 million in a Luxembourg investment structure, or finally he may invest at least EUR20 million as a deposit with a Luxembourg bank in order to obtain a residency permit.
Acquisition of Luxembourgish Nationality
To apply for Luxembourgish nationality by naturalisation, there are the following conditions to be met.
Luxembourgish nationality can be assigned to non-Luxembourgish nationals 'by option'.
Acquiring Luxembourgish nationality by option is possible in ten specific cases and subject to further conditions (such as meeting good repute and integrity requirements):
There are no special planning mechanisms for minors or for adults with disabilities in Luxembourg.
Appointing a guardian, conservator or similar party requires a court proceeding and ongoing supervision by the court.
Under certain conditions, elderly people may benefit from the Social Inclusion Act of 28 July 2018, which provides basic livelihoods to people whose pension or other means of livelihood are insufficient. In addition, any person in need may contact the social office of his municipality of residence, whose purpose includes carrying out all steps required to obtain social services and financial aid, accepting (to the extent possible) the supervision imposed by the guardianship judge, and covering the risk of illness, disability and senescence of uninsured people.
Children born out of wedlock enjoy the same rights as legitimate children.
Luxembourgish law distinguishes between full and simple adoption.
In the case of a full adoption, the adoptee loses all legal ties with his family of origin, with the new filiation completely replacing the original filiation.
In the case of a simple adoption, the adoptee maintains his filiation with his family of origin while acquiring inheritance rights in his adoptive family. The adoptee has the same civil rights as a non-adopted child within his adoptive family, except that the adoptee is not entitled to the forced heirship (réserve héréditaire) in the succession of the ascendants of his adoptive parent.
Luxembourg recognises same-sex marriage. Since 2004, Luxembourg has also recognised the right to enter into a civil partnership. Partners have fewer rights than spouses. Partnerships can be terminated ad nutum. The ex-partner might be entitled to alimony in the year following the end of the partnership.
Contrary to marriage, the civil partnership does not entail automatic succession rights for the surviving partner. However, if the predeceased partner bequeaths (part of) his estate to his partner, the tax exemption applies if the partnership has been registered three years before his death.
Luxembourg has attempted to incentivise charitable giving by offering a variety of legal forms that can be used to set up a Luxembourg charity:
Under certain conditions, donations to charities are deductible from income tax and may be exempt from gift tax.
Foundations are common charitable structures. Any person may establish a foundation by way of a notarial deed or will, by irrevocably allocating all or part of his estate to this purpose. In order to benefit from legal personality, the foundation’s articles of association must be approved by Grand-Ducal decree. A foundation must furthermore be registered with the Luxembourg Register of Commerce and Companies. Foundations must pursue a philanthropic, social, scientific, religious, artistic, educational, sports or tourist objective, each time without the intention to generate profit. As a consequence, a foundation can be defined as an independent pool of assets or rights with legal personality that is set up to carry out a public interest purpose.
Most assets can be allocated to a foundation but there is an exception for real estate. Under current law, only real estate assets that are used by the foundation to carry out its purpose can be allocated to the foundation; inter alia, the registered seat of the foundation.
The allocation of assets by its founder(s), made through the deed of foundation, becomes irrevocable upon approval of the Minister of Justice. Indeed, this irrevocable nature of the foundation also appears during its existence and at its liquidation, A foundation is prohibited from distributing profits. A foundation may be liquidated if it cannot carry out its public interest purpose. If the foundation is liquidated, liquidation proceeds must be allocated to another foundation.
A foundation is managed by a board of directors whose appointment procedure must have been stated in the foundation’s articles of association. The Ministry of Justice checks that foundations’ assets are used in accordance with the purpose for which they were created; ie, a public interest purpose. To that extent, there is a requirement for the board of directors of a foundation to submit the foundation’s accounts and the provisional budget to the Ministry of Justice within two months following the end of each financial year.
Pursuant to Article 159(5) of the Luxembourg income tax law, foundations are taxable entities. However, pursuant to Article 161 of that law, income derived from charitable or public interest activities is exempt. Due to their public interest rationale, Luxembourg foundations are thus exempted from Luxembourg taxes. It should be noted that the exemption only applies as long as the activity carried out by the foundation is charitable or related to public interest. If a foundation carries out a commercial or industrial activity, it will be normally taxed for the part related to said activities. In this context, commercial or industrial activities are defined as those that aim to make profit. In addition, it should be borne in mind that if a foundation carries out a different purpose than the charitable or public interest purposes for which it was settled, there is a risk of (i) dismissal of directors and (ii) judicial liquidation of the foundation. The registration of a foundation deed with the Luxembourg Register of Commerce and Companies is subject to a fixed registration duty that amounts to EUR12.