Reasons for frequent use of Luxembourg in international structuring/ planning
Pragmatic approach of Luxembourg tax authorities in enacting domestic tax laws in favour of cross border investment streams (holding, financing, real estate, IP, trading, etc.) and high 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 Luxembourg
Good 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 tax authorities)
As a general rule, no withholding tax on royalties, interest payments and liquidation proceeds
Luxembourg participation exemption
Easy partial / full exit or refinancing strategy - can be structured to be free of withholding tax
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 certain conditions) – exemptions available (see further)
VAT : 3% to 15% rate
No capital duty (abolished effective 1 January 2009).
Tax analysis letter system available to secure tax treatment
15% WHT on dividend payments (reduced by double tax treaty 0%, or EU Parent-Subsidiary Directive 0%)
No withholding tax on royalties (apart from certain artistic activity)
No withholding tax on interest payments (withholding tax or exchange of information in case Savings Directive applies)
As from 1 January 2011, specific tax provisions to highly skilled workers relocated in Luxembourg after 31 December 2010 -> exemption of part of highly skilled workers’ remuneration in relation with their assignment in Luxembourg.
As Luxembourg has concluded a double tax treaty with Israel and provided certain conditions are fulfilled, dividends paid by a Luxembourg company to an Israeli company should not be subject to Luxembourg withholding tax.
IP Tax regime
80% deduction of IP related income
Qualifying IP assets are now exempted from the Net Wealth Tax
DTT list of countries In Force Not yet in force Middle East and North Africa UAE, Morocco, Tunisia, Turkey, Israel, Bahrain, Kuwait, Qatar Lebanon, Syria. Asia Azerbaijan, China, Hong Kong, Georgia, South Korea, Indonesia, India, Japan, Malaysia, Mongolia, Uzbekistan, Singapore, Thailand, Vietnam, Kazakhstan, Georgia Pakistan, Kyrgyzstan. East 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, Denmark, Spain, France, Greece, Hungary, Ireland, Italy, Netherlands, Poland, Portugal, Czech Republic, Slovak Republic, Romania, UK, Sweden, Finland, Malta, Slovenia, Estonia, Latvia, Lithuania Cyprus Latin America/caribbean Brazil, Trinidad and Tobago, Argentina, Barbados Africa South Africa, Mauritius North America Canada, Mexico, USA
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.
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.
80% exemption on net positive royalty AND on net capital gain from certain IP
80% deemed income deduction for self-developed patents
Effective corporate tax rate of 5.76% on qualifying net IP income
Recapture system & anti-abuse provisions
Simple valuation methods for small and medium size businesses
The 6 paragraphs of article 50bis ITC
1§. The income received as payment for the use or the granting of the right to use (usage ou la concession de l’usage d’un droit) any software copyright, patent, trademark or service mark, domain names, design or model, is exempt up to 80 % of its net positive amount.
The 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.
Luxco Opco royalty licence CustomerCo sale Sale price
§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.
Net 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.
3§. 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 nets négatifs) derived from the IP rights in both current and prior accounting periods to the extent net losses have not been compensated by article 50bis 4§2 (i.e. capitalized on the balance sheet, etc.)
No 80% exemption on assets acquired under articles 53 or 54 ITL.
4§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 on the taxpayer’s balance sheet and shall be included in the profits / loss allocation as from the first fiscal year for which the benefit of this tax regime is applied provided that for a given year, these expenses exceeded the income in relation with the same intellectual property right .
IP 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 parent company
Seller / Acquirer Seller / Acquirer 10% NO Parent Acquirer 10% NO Seller 10%
9. Luxembourg IP Law: Which transfers are acceptable or not under the new law? Acquirer 10% Transferor Acquirer 100% YES 100% InterCo YES Individual Contribution of a branch of activity Seller / Acquirer Seller / Acquirer 100% YES? 10% Seller / Acquirer Seller / Acquirer 100% YES 10% InterCo
LUXEMBOURG ABROAD Property Company Holding Company ISRAEL Investors FCP-SIF Management Company
The investors are well informed investors, institutional 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 a public/private limited liability 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 the FCP-SIF is not liable to corporate income tax, municipal business tax, net wealth tax and contribution to 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 a public/private limited liability 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.
Luxembourg Special Investment Funds (SIF) FCP - SIF
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).