Luxembourg Tax Opportunities for ICT


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Luxembourg has created a global services package for Israeli companies that want to launch their business in Europe. This presentation outlines the tax opportunities offered within this Luxembourg/Israel European Business Initiative. This initiative is led by P&TLuxembourg's TERALINK unit, with collaboration on this presentation by KPMG.

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Luxembourg Tax Opportunities for ICT

  1. 1. Luxembourg tax opportunities for ICT
  2. 2. KPMG in Luxembourg Organization of KPMG Luxembourg (Total staff: 900, Tax: 200) KPMG Audit KPMG Advisory KPMG Tax22 Partners & Directors 6 Partners & Directors 14 Partners & Directors BANKING FUNDS INSURANCE INDUSTRIAL & COMMERCIALS CORPORATE HEADQUARTERS PUBLIC SECTOR REAL ESTATE
  3. 3. And the Winner is …KPMG Luxembourg voted 2010 Leading Tax planning & Tax transactional Firm in Luxembourg – International Tax Review, 2010« KPMG in Luxembourg delivers a full tax service to their many local and international clients. Some of their specialists are held in the highest regard by their peers and other market observers. »
  4. 4. 1/Generalities
  5. 5. Reasons for frequent use of Luxembourg in international structuring/ planningPragmatic approach of Luxembourg tax authorities in enacting domestic tax laws in favourof cross border investment streams (holding, financing, real estate, IP, trading, etc.) andhigh value added functions (IP management, distribution, entrepreneurial functions, etc).Very tax efficient vehicles (e.g. fully taxable SOPARFI, securitization vehicles, SICAR, SIF,SPF, etc.): if properly structured, no or minimum taxation in LuxembourgGood treaty network (57 treaties in force and currently 17 treaties signed/ in negotiation)Tax agreement system – available to secure tax treatment (very prompt and flexible taxauthorities)Luxembourg participation exemptionEasy partial / full exit or refinancing strategy - can be structured to be free of withholdingtax
  6. 6. Luxembourg: Not a “Tax Haven”Effective corporate income tax rate (corporate income tax and municipal business tax):28.80%.Net wealth tax: 0.5% annually on the net assets of the company (creditable under certainconditions) – exemptions available (see further)VAT : 3% to 15% rateNo capital duty (abolished effective 1 January 2009).Tax analysis letter system available to secure tax treatmentWithholding taxes15% WHT on dividend payments (reduced by double tax treaty 0%, or EU Parent-SubsidiaryDirective 0%)No withholding tax on royalties (apart from certain artistic activity)No withholding tax on interest payments (withholding tax or exchange of information in caseSavings Directive applies)As from 1 January 2011, specific tax provisions to highly skilled workers relocated inLuxembourg after 31 December 2010 -> exemption of part of highly skilled workers’remuneration in relation with their assignment in Luxembourg.
  7. 7. Luxembourg Tax DevelopmentsAs Luxembourg has concluded a double tax treaty with Israel and provided certain conditionsare fulfilled, dividends paid by a Luxembourg company to an Israeli company should not besubject to Luxembourg withholding tax.IP Tax regime80% deduction of IP related incomeQualifying IP assets are now exempted from the Net Wealth Tax
  8. 8. DTT list of countries In Force Not yet in forceMiddle East and North Africa UAE, Morocco, Tunisia, Turkey, Israel, Lebanon, Syria. Bahrain, Kuwait, QatarAsia Azerbaijan, China, Hong Kong, Pakistan, Kyrgyzstan. Georgia, South Korea, Indonesia, India, Japan, Malaysia, Mongolia, Uzbekistan, Singapore, Thailand, Vietnam, Kazakhstan, GeorgiaEast Europe & non EU Member states Russia, San Marino, Norway, Moldova, Switzerland, Iceland, Armenia, Ukraine, Serbia Montenegro, Albania, Macedonia.EU Member states Austria, Germany, Belgium, Bulgaria, Cyprus Denmark, Spain, France, Greece, Hungary, Ireland, Italy, Netherlands, Poland, Portugal, Czech Republic, Slovak Republic, Romania, UK, Sweden, Finland, Malta, Slovenia, Estonia, Latvia, LithuaniaLatin America/caribbean Brazil, Trinidad and Tobago, Argentina, BarbadosAfrica South Africa, MauritiusNorth America Canada, Mexico, USA
  9. 9. The Grand Duchy of Luxembourg At the Heart of Europe2/ Luxembourg VAT
  10. 10. Luxembourg VAT treatment of television, broadcasting and electronic services In a B2B transaction : services should be located where the recipient is established. In a B2C transaction: services should be located where the supplier is established.10
  11. 11. VAT on e-services Most services provided for a fee through the internet. The physical delivery of goods, where the order and processing is done eletronically, does not qualify as electronically supplied services. VAT advantage for B2C: The lowest VAT rate in the EU (15%).11
  12. 12. VAT on e-services Conditions to benefit of 15% VAT rate: Services delivered on the internet, Involving minimal human intervention, Internet cannot be used for communication between suppliers & customers, Internet is only used for the supply itself, Internet is used as a support for the commercial activity.12
  13. 13. VAT on e-services Examples: Supply of digitized products generally, Supply of music, Supply of online or offline games, Supply of games of chance and gambling games, Supply of images, text and/or information, Making available of databases, On-line auction services, Supply of distance teaching.13
  14. 14. VAT on TV/Radio broadcasting The broadcasting of television or radio programs, Many potential viewers or listeners VAT advantage for B2C: Super-reduced VAT rate (3%) Adults content still to 15%.14
  15. 15. VAT on TV/Radio broadcasting Conditions to benefit of 3% VAT rate: Whatever the mode of transmission used, Only to « public » broadcasting, Regardless of whether the provider has the responsibility of the content or not, Applicable to ancillarry operations , Applicable to all content except if exclusively aimed at adults.15
  16. 16. VAT on Telecommunications services Services relating to Transmission, Emission, Reception Of Signals, Words, Images, Sounds, Information By Wire , Radio, Optical, Other electromagnetic systems VAT advantage for B2C: The lowest VAT rate in the EU (15%). Not subject to VAT if enjoyed outside of the EU.16
  17. 17. VAT on Distance sales Goods ordered online « Distance sales » rules allow : A business to charge VAT rate, to a private consumer, at the rate applicable in the country where the business is established, if its sales to other EU countries do not exceed EUR 100,000. Otherwise, it will be required to charge VAT rate, at the rate applicable in the country where the goods are delivered. E.g. Amazon17
  18. 18. Condition to benefit from Luxembourg VAT rates Substance condition: the entity to be given the possibility to carry out an econimic activity in an autonomous and permanent way.18
  19. 19. 9. Luxembourg IP Law: Principles80% exemption on net positive royalty AND on net capital gain from certain IP80% deemed income deduction for self-developed patentsEffective corporate tax rate of 5.76% on qualifying net IP incomeRecapture system & anti-abuse provisionsSimple valuation methods for small and medium size businessesThe 6 paragraphs of article 50bis ITC1§. The income received as payment for the use or the granting of the right to use (usage oula concession de l’usage d’un droit) any software copyright, patent, trademark or servicemark, domain names, design or model, is exempt up to 80 % of its net positive amount. licence sale Luxco Opco CustomerCo royalty Sale priceThe net income is the gross income less expenses having a direct economic relationship with the income and includes annual amortizations as well as write-downs if applicable.
  20. 20. 9. Luxembourg IP Law: Principles §2. Where the taxpayer created a patent himself and it is used as part of his business activity, he is entitled to a deduction amounting to 80% of the net positive income that he would have realized if he had authorized the use of such right to a third-party. sale Luxco IP CustomerCo Sale priceNet revenue = fictive gross revenue less directly related expenses including annual amortizations and any write-downs.Deduction is allowed as of the date of the filing of the patent application.If patent denied, recapture of previously deducted in the operating year of the notice of the denial.
  21. 21. 9. Luxembourg IP Law: Principles3§. The capital-gain derived from the transfer (cession) of the right of software copyrights,patent, trade or service mark, or design or model is exempt up to 80%.But recapture rule:The capital gain is taxable up to the algebraic sum of 80% of the net losses (revenus netsnégatifs) derived from the IP rights in both current and prior accounting periods to theextent net losses have not been compensated by article 50bis 4§2 (i.e. capitalized on thebalance sheet, etc.)No 80% exemption on assets acquired under articles 53 or 54 ITL. Re investment Sale in IP Sale of IP
  22. 22. 9. New Luxembourg IP Law: Principles4§. Conditions of the law4§1. the right must have been created or acquired after 31 December 2007 and,4§2. the expenses, amortizations, and write-downs related to the right must be recorded onthe taxpayer’s balance sheet and shall be included in the profits / loss allocation as from thefirst fiscal year for which the benefit of this tax regime is applied provided that for a givenyear, these expenses exceeded the income in relation with the same intellectual propertyright.
  23. 23. 9. Luxembourg IP Law: Principles5§. Abuse of law provisionIP cannot be acquired from a direct related company.If either seller / buyer companies are direct owners of each by at least 10%;If both seller / buyer companies are directly owned 10% or more by same common parentcompany ParentSeller / Acquirer NO 10% NO 10% 10%Seller / Acquirer Acquirer Seller
  24. 24. 9. Luxembourg IP Law: Which transfers are acceptable or not under the new law? Transferor YES Contribution of 100% a branch of activity Individual InterCo 10% 100% YES Acquirer AcquirerSeller / Acquirer Seller / Acquirer YES? YES 100% 100% InterCo 10% 10%Seller / Acquirer Seller / Acquirer
  25. 25. 9. Luxembourg IP Law: Principles6§. Valuation method in case of disposal of IPLarge companies: generally accepted methods (Market Approach, Income Approach, CostApproach, etc);Other companies: possibility to determine the market value at 110% of expenses deductedfrom the taxable basis of the year of disposal and the preceding years. Grand Ducal Decree of16 March 2005.
  26. 26. 9. Luxembourg IP Law: Example of an IP acquisition Background IsraelCo incorporates LuxCo 1 Israel Co LuxCo 1 incorporates LuxCo 2 Dividends IsraelCo transfers IP to LuxCo 2 LuxCo 2 grants a license to EUCo EUCo pays royalties to LuxCo 2 LuxCo 1 LuxCo 2 pays dividends to LuxCo 1 Dividends LuxCo 1 pays dividends to IsraelCo LuxCo 2License IP Royalties EUCO
  27. 27. 9. Luxembourg IP Law: Example of an IP acquisition Luxembourg tax treatment 80% of Net IP income received by LuxCo 2 is Israel Co exempt from corporate income tax and municipal business tax Dividends Qualifying IP exempt from net wealth tax Only 20% of the Net IP income is subject to corporate income tax at the rate of LuxCo 1 28,80%, so 5,76% ETR Dividends paid by LuxCo 2 to LuxCo 1 Dividends should not be subject to withholding tax and said dividends should be tax exempt at the level LuxCo 1 LuxCo 2 Dividends paid by LuxCo 1 to IsraelCo should not be subject to withholding tax (under certain conditions) RoyaltiesLicense IP Foreign considerations Applicable withholding tax on royalties EUCO paid by EUCo to LuxCo2 Israeli taxation further to disposal of IP to a Luxembourg entity Israeli taxation of dividends by IsraelCo
  28. 28. 3/ Luxembourg Special Investment Funds (SIF)
  29. 29. Luxembourg Special Investment Funds (SIF) The investors are well informed investors, institutional ISRAEL Investors investors or professional investors. Taxation is to be analyzed on a case-by-case basis. The FCP-SIF is in the form of a contractual fund; the management company of the FCP-SIF is in the form of FCP-SIF a public/private limited liability company. Management FCP - SIF Company The FCP-SIF is not liable to corporate income tax, municipal business tax, net wealth tax and contribution to employment fund; the management company of theLUXEMBOURG FCP-SIF is not liable to corporate income tax, municipal Holding business tax, net wealth tax and contribution to Company employment fund if it manages only the FCP-SIF. The FCP-SIF is liable to subscription tax of 1 basis point on the net asset value. The holding company is typically in the form of aABROAD Property public/private limited liability company. Company The holding company is liable to corporate income tax, municipal business tax, net wealth tax and contribution to employment fund. The property company is typically in the form of the equivalent of a public/private limited liability company.
  30. 30. IncentivesR&D incentives Since Luxembourg wishes to attract companies developing technologies, the Luxembourg government developed a few financial aid processes for various type of scheme. The aim is to help companies to develop their business in Luxembourg. Financial aid can be granted according to certain conditions. In general, Medium-sized Enterprises (SMEs) and Large-sized Enterprises established in Luxembourg can benefit from these advantages.Equipment loan provided by SNCI (Société Nationale de Crédit et d’Investissement).
  31. 31. Contact François PetitManager, Commerce & Industry KPMG Tax Luxembourg T: +352 22 5151 5585