Using luxembourg in international structures

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Using luxembourg in international structures

  1. 1. Using Luxembourg in international structures Kiev - December 2012 BDO Luxembourg – Philippe PONSARD
  2. 2. General considerations
  3. 3. Luxembourg : General considerations  Central position in the heart of Europe  Top level financial center  2nd in the World for domiciled funds (behind the United States)  Multi-cultural and expert workforce  Highly qualitative infrastructure and good logistical network  Supportive and welcoming authorities  Favorable tax environment  Economic, social and political stability ensuring a secure legal and tax framework Hamburg 2011 - Tax Conference - Inbound Investment into Europe from North America Page 3
  4. 4. International players with operations in Luxembourg Page 4
  5. 5. Luxembourg fund industry at a glance  3 705 Investment funds  13 030 fund units  € 2,208 billion in Assets under Management  More than 46 000 distribution agreements for Luxembourg UCITS Figures as at February 28, 2011 – Sources: ALFI / CSSF / LuxembourgforFinance
  6. 6. Luxembourg investment funds :a unique brand Luxembourg market share of foreign funds registered for sale Sweden 75% Germany 70% South Korea 100% Switzerland 73% France 72% Japan 62% Taiwan 76% Bahrain 81% Hong Kong 78% Peru 93% Singapore 74% Chile 79% Sources: LuxembourgforFinance
  7. 7. Luxembourg : a favorable tax environment  No withholding tax on royalties, interest & liquidation proceeds  No withholding tax on dividends paid to tax treaty corporation if 10% shareholding or acquisition price > € 1.2m. and 12 months holding period  Maximum withholding tax on dividends : 15%  Participation exemption : total exemption for dividends and capital gains income if 10% shareholding or acquisition price of € 1.2 m. for dividends / € 6m. for capital gains and 12 months holding period  An 80% exemption for net income deriving from certain IP rights and capital gains realized on the sale of IP  No or minor taxation upon exit or refinancing strategy  No CFC rules  Access to EU Directives (Parents/Subsidiary, Interest/Royalties, and Merger Directives)  64 double tax treaties (latest treaties : Hong Kong, Bahrain, Qatar, ...)  Lowest VAT rate in the European Union (standard rate : 15%)  Ruling practice and stable law environment Page 7
  8. 8. Luxembourg DDT network 01. Austria 11. Finland 21. Italy 35. Portugal 44. Sweden 59. Cyprus 72. Serbia 02. Azerbaijan 12. France 24. Latvia 36. Romania 45. Switzerland 61. Albania 74. Armenia 03. Belgium 13. Germany 25. Lithuania 37. Russia 49. Turkey 62. Kazakhstan 75. Ukraine 05. Bulgaria 14. Greece 27. Malta 38. San Marino 50. UK 64. Kyrgyzstan 17 Brazil Canada Mexico Trinidad & Tobago United States 9 32 3 40 45 1 57 51 38 72 60. Argentina 68. Barbados 44 33 6 04. 06. 29. 47. 51. 08. Czech Rep. 16. Hungary 32. Netherlands 40. Slovakia 52. Uzbekistan 66. Liechtenstein 19 12 35 31 43 34 8 75 16 41 36 66 69 21 14 5 62 55 49 74 30 52 2 23 7 70 73 63 67 68 47 64 48 27 61 29 56 54 15 46 58 53 71 26 39 65 Double tax treaties in force (Bahrain, UAE, Qatar) Double tax treaties pending (Kuwait, Saudi Arabia, Lebanon, Syria) 59 20 4 28 No double tax treaty 10. Estonia 19. Ireland 34. Poland 43. Spain 57. Moldavia 69. Monaco 37 11 10 24 25 13 50 09. Denmark 17. Iceland 33. Norway 41. Slovenia 55. Georgia 67. Macedonia 42 60 Sources: LuxembourgforFinance 18 22 20. 28. 31. 56. 42. 48. 54. 58. 71. Israel Mauritius Morocco U.A.E. South Africa Tunisia India Bahrain Qatar 63. 65. 70. 73. Kuwait Lebanon Pakistan Syria
  9. 9. Tax treaty No tax treaty currently in force with Ukraine Treaty voted in Luxembourg in 2001 Page 9
  10. 10. Typical structures
  11. 11. Typical Structures: Private wealth management company (SPF) Investments in securities Indiv or HoldCo • Capital Lux SPF Dividends, interest, etc Securities of any kind Page 11 • Not subject to any tax in Luxembourg (only registration duty of 0,25% of the share capital) • Dividends Directly or indirectly (through patrimonial vehicle) held by a limited number of private shareholders No withholding tax on dividends paid without condition • Does not enjoy the benefits of the EU Directives or DTTs • Cannot grant remunarated loans
  12. 12. Typical Structures: Holding (SOPARFI) EU or non-EU Subsidiaries HoldCo (DTT country) No withholding tax on dividends paid to tax treaty parent company if : - 10% ownership or acquisition price of EUR 1.2m - 12 month holding period • Capital • Full exemption on incoming dividends and capital gains (participation exemption regime) if - 10% ownership or acquisition price > € 1.2m (dividends)/ € 6m (capital gains) - 12 month holding period - If EU subsidiary subject to tax or non EU sub. taxed at an effective rate > 10,5% • In general, no or low foreign withholding tax on incoming dividends from EU/ non-EU subsidiaries pursuant to EU Directive and tax treaties Dividends LuxCo Capital Dividends EU / non-EU Page 12
  13. 13. Financing Luxembourg entities Typical Structures: Holding & Financing Optimization through use of hybrid Instruments Tracking hybrid loans ParentCo Capital Dividends LuxCo Loan Capital Dividends Foreign Subs Page 13 Description: • Parent funds LuxCo with an hybrid instrument • Hybrid instrument is equity for Parent tax purposes and debt for LuxCo tax purposes • LuxCo uses proceeds to fund subs or to acquire assets Benefits: • Income on hybrid loan treated as tax deductible interest expense at level of LuxCo • Only taxation of small spread at the level of LuxCo (subject to confirmation of the Luxembourg tax authorities based on TP study) • No withholding tax from LuxCo to Parent • Certainty through tax clearance
  14. 14. Financing Luxembourg entities Typical Structures: Hybrid instruments Debt qualification in Luxembourg Debt qualification in Luxembourg if : LuxCo Assets Assets Assets Page 14 Interest / dividend Variable interest based on profits before tax • No stapling provision No entitlement to voting rights • Preferably not convertible into shares • Capital (Low) Interest rate accruing even in case of losses • Hybrid instrument • • Foreign Entity No entitlement to participation in liquidation proceeds or hidden reserves, • Short term (i.e. <49 years) • Ranking prior to capital No single factor is decisive. A comprehensive analysis is required. Tax agreement needed to secure tax treatment in Luxembourg
  15. 15. Financing Luxembourg entities Typical Structures: Hybrid instruments Debt qualification in Luxembourg Tested Hybrid Instruments (treated as debt for Luxembourg tax purposes) : Foreign Entity Hybrid instrument Interest / dividend LuxCo • Profit Participating Loan (“PPL”) / Asset linked note (“ALN”) Used to repatriate income to an investment fund (real estate investment fund, private equity fund, …), a private holding company, … • • Convertible Loan Note (“CLN”) Preferred Equity Certificates (“PEC") or Convertible Preferred Equity Certificates (“CPEC”) Treated as debt in commercial balance sheet. Used mainly to repatriate income to the USA Assets Assets Assets Page 15 • Mandatory Redeemable Preference Shares (“MRPS”) Treated as capital in commercial balance sheet but debt for tax purposes. Allows to show a strong balance sheet (important when third party funding is required). Tried and tested with Canada and Sweden.
  16. 16. Typical Structures: Hybrid instruments Convertible Preferred Equity Certificates ForeignCo CPEC Capital Dividends LuxCo Loan Capital Op COs Page 16 Dividends Background: • Yield under CPEC linked to profitability of underlying investments. Very low taxable margin in Luxembourg. • Conversion feature allowing increase in the fair value of the instrument if appreciation of underlying investments • CPEC treated as equity in US / debt for Luxembourg tax purposes Benefits: • Tax deduction in Luxembourg as interest accrue (no obligation to pay the yield before exit) • No Lux WHT on interest payments • Exit strategy : - no conversion but buy-back at the greater of FMV (of the shares at the time of the conversion) or principal amount - offset of taxable gain on investment by loss from buyback of instrument - No Luxembourg WHT • Not subject to US tax until repatriation • Debt push down to OpCos without incurring US taxable income
  17. 17. Typical Structures: Hybrid instruments Mandatory Redeemable Preference Shares Main characteristics: ForeignCo MRPS Dividends LuxCo Loan Capital Dividends Foreign Subs • Shares from legal perspective (debt for Lux. tax). Dividend distribution decided by AGM • No (or very limited) voting rights • Mandatory redemption at end of a fixed term (max. 10 years) • Redeemable at option of issuer at any time • Preferential right to reimbursement at maturity • Fixed and/or variable preferred cumulative dividend • No participation in net profits realized by the company in liquidation but participation in liquidation gain of determined activity or asset possible • MRPS may not represent more than half of share capital (share premium excluded). Ratio of 50/50 constitutes a legal requirement (voting shares/non voting shares) but most part of the MRPS financing can be made by an increase of the share premium account Hamburg 2011 - Tax Conference - Inbound Investment into Europe from North America Page 17
  18. 18. Typical Structures: Financing activity Intragroup financing activity – Transfer Pricing Circulars Parent Co Loan Third Party Capital LuxCo Loan Capital Subsidiary Page 18 Loan Background: • Conditions to be met in order to obtain a binding APA from the Luxembourg tax authorities • APA obtained before 28.01.2011 were valid until 01.01.2012 Considerations : • Equity at risk : lesser of 1% or EUR 2 mio • Level of substance in Luxembourg • TP study in line with the OECD guidelines (not mandatory but the Luxembourg tax authorities may challenge the remuneration earned by the taxpayer in absence of such documentation)
  19. 19. Typical Structures: Financing activity Bonds issued through Luxembourg Dutch Stichting Bond Investors Loan LuxCo Interest No withholding tax on interest paid by LuxCo If orphan structure : not subject to Luxembourg TP rules Page 19 Interest Beneficiary Company
  20. 20. Other repatriation technique Repatriation through share buy-backs Luxembourg tax consideration: • Redemption of entire class of shares followed by cancelation is not subject to withholding tax • Disposal by non residents of important (10%) shareholding in a LuxCo more than 6 months after acquisition is not taxable ParentCo Up to 10 classes of shares Other considerations: LuxCo Capital Op CO Op CO Op CO Op CO • Max 10 classes of shares • Classes of shares should not track the yearly income • Fair market value of shares depends on all assets and liabilities of LuxCo (no segregation of assets to determine the value of a specific class of shares) • Specific remuneration attached to a class of shares • Issue of classes of shares should be provided in the by-laws • Capital gain tax treatment at the level of the shareholder to be considered Hamburg 2011 - Tax Conference - Inbound Investment into Europe from North America Page 20
  21. 21. Increase / Transfer of activities to Luxembourg Migration & Step-up in value Background • Existing Company re-domiciles to Luxembourg ForeignCo LuxCo Foreign Subs Foreign Subs Benefits • Access to EU Directives, extensive tax planning opportunities, … • Opening tax balance sheet - Reserves and profit brought forward : treated as capital for tax purposes - Step-up of assets/liabilities : reevaluation reserve treated as capital for tax purposes - Possibility to activate a goodwill Amortization of goodwill will reduce future taxable income Hamburg 2011 - Tax Conference - Inbound Investment into Europe from North America Page 21
  22. 22. Increase / Transfer of activities to Luxembourg Tax intangible asset amortisation Foreign Country Group Co “business opportunity” 100 % LuxCo Luxembourg Background • Intangible assets can be recognized in case transfer of business/support from Group company to Luxembourg (know-how, clientele,…) Benefit • Only recognized and amortized in tax balance sheet • Annual depreciation is tax-deductible and reduce corporate tax basis Considerations • Potential recognition of deferred tax asset consolidated account • Net wealth tax applies on intangible assets • Tax agreement needed to secure tax benefits Hamburg 2011 - Tax Conference - Inbound Investment into Europe from North America Page 22
  23. 23. Luxembourg IP Box Application • 80% exemption of net positive income received in consideration for use of, or right to use any qualifying IP • 80% exemption of capital gain on the disposal of qualifying IP • Effective CIT rate : 5.76% • 100% net wealth tax exemption ParentCo LuxCo IP Domain name Patent Design & model Trade mark Software copyright Considerations • Only for creation or acquisition of the IP after 31.12.07 • Anti-abuse rules (for acquisition of IP from related company) • Recapture rules at the time of the disposal of the IP (when costs have been fully deducted) Gaming industry takes advantage of the regime (Innova, Kabam, Nexon, Onlive, ...) Hamburg 2011 - Tax Conference - Inbound Investment into Europe from North America Page 23
  24. 24. Luxembourg Securitization vehicle Unrestricted investor Luxembourg SV Securitised assets If non tax transparent (SCA, SA, Sàrl): • Subject to corporate income tax and trade tax • But payments (or commitment to pay) to investors are always deductible even if under Company Law, they take the form of dividend distributions. Hence: • No withholding tax on dividends distributed by SV • Any payment (or commitment to pay) is deductible from the tax basis • Exempt from net wealth tax • Resident for tax treaty purposes (Luxembourg position) • No withholding tax on dividend from LuxCo to SV If tax transparent (Securitization Fund) : • SV considered not to carry out a commercial activity in Luxembourg : non resident partners not taxable in Luxembourg • No withholding tax on distributions Hamburg 2011 - Tax Conference - Inbound Investment into Europe from North America Page 24
  25. 25. Real estate investment in Europe Through Luxembourg vehicles PPL / MRPS / CPEC ParentCo / Investment vehicle Capital Interest / dividends LuxCo Loan Loan Local SPV Loan Loan LuxCo Lux PropCo Lux PropCo French SCI /SAS Country X Germany UK France Hamburg 2011 - Tax Conference - Inbound Investment into Europe from North Page 25 America
  26. 26. Real estate investment in Europe Through Luxembourg vehicles • Investing in French real estate through a French SCI /SAS owned by a Luxembourg LuxCo : in case of sale of French SCI / SAS by LuxCo, capital gain should neither be taxable in France nor in Luxembourg* • Investing in German real estate through a Luxembourg company: possibility to avoid trade tax on rental income and capital gain (in case of direct sale of property) • Investing in UK real estate through a Luxembourg company : no capital gain tax on the sale of the property • Investing in other countries through a SPV owned by a Luxembourg company : possibility to finance the SPV with a shareholder loan. Possibility to sell the SPV (in general, the tax treaty gives the right to tax to Luxembourg) *Tax treaty between Luxembourg and France may change in the coming months Page 26
  27. 27. Luxembourg – a leading European real estate hub Aberdeen AM Heitman Hines Tishman Speyer UBS AMB Goodman ING SEB AM (…) Amundi AM Franklin Templeton JP Morgan AM Schroders Axa REIM First State LaSalle IM Prologis Aviva Investors Fidelity MGPA Pramerica BlackRock CBRE Investors Morgan Stanley Pacific Star Source : Luxembourg For Finance Hamburg 2011 - Tax Conference - Inbound Investment into Europe from North America Page 27
  28. 28. Available investment fund structures Deposita ry Bank CSSF Regulati on & Safety Auditor Asset Class: Strictly limited Asset Class: limited Regulation UCITS Part I SICAR UCI Part II SIF SOPARFI All type of Asset Class Source : Luxembourg For Finance Asset Class: VC & PE SV Flexibility
  29. 29. Private equity investments in Europe Through a Luxembourg SICAR, a SIF or a Soparfi Managers Investors Advisors Bonds / convertible bonds SICAR / SIF / Sop Luxembourg SCA GP LuxCo Management fees / carried interest LuxCo 1 LuxCo 2 LuxCo 3 LuxCo 4 NewCo NewCo NewCo NewCo Country X France Germany Poland Hamburg 2011 - Tax Conference - Inbound Investment into Europe from North America Page 29 Advisory fees
  30. 30. Private equity investments in Europe Tax regime of Luxembourg SICAR Qualified investor Luxembourg SICAR Lux SPV NewCo If non tax transparent (SCA, SA, Sàrl): • Subject to corporate income tax and trade tax • But exemption for all income and capital gains deriving from • Investments in transferable securities • Temporary cash investment pending their investment in risk capital • No withholding tax on dividends distributed by SICAR • Exempt from net wealth tax • Considered by Luxembourg as a resident for tax treaty purposes • No withholding tax on dividend from LuxCo to SICAR If tax transparent (SCS) : • SICAR considered not to carry out a commercial activity in Luxembourg : non resident partners are not taxable in Luxembourg • No withholding tax on distributions Hamburg 2011 - Tax Conference - Inbound Investment into Europe from North America Page 30
  31. 31. Private equity investments in Europe Luxembourg Specialized Investment Fund (SIF) Qualified investor Luxembourg SIF Loan Lux SPV NewCo Page 31 Main tax aspects : • Not subject to corporate income tax and trade tax • Subscription tax: 0.01% instead of 0.05% for normal funds • No withholding tax on dividends distributed by SIF • Exempt from net wealth tax • 15 % WHT on dividend from LuxCo to SIF but no WHT on interest payments Main regulatory aspects : • Minimum share capital of €1.25m • Custodian Bank/Auditors required • Possible forms: SICAV, SICAF or FCP • Risk spreading requirements
  32. 32. Luxembourg – a leading European private equity hub 3i Fortress Goldman Sachs TPG Unicapital American Capital CVC Investcorp PAI Partners Warburg Pincus Apax Partners Coller Capital JP Morgan Oaktree Capital (…) Bain Capital Cinven KKR LGT Capital Partners BC Partners Carlyle Group Kreditanstalt für Wiederaufbau (KfW) Lazard Source : Luxembourg For Finance Hamburg 2011 - Tax Conference - Inbound Investment into Europe from North America Page 32
  33. 33. Luxembourg – a leading European “regulated” hedge funds hub Aberdeen AM Goldman Sachs HSBC Pioneer Investments Transtrend Alliance Bernstein GLG ING Permal UBS BlackRock Fidelity Invesco Morgan Stanley (…) BlueBay Asset Management Deutsche Bank JP Morgan MAN Crédit Agricole Crédit Suisse LCF Rothschild Lyxor Source : Luxembourg For Finance Hamburg 2011 - Tax Conference - Inbound Investment into Europe from North America Page 33
  34. 34. Appendix Luxembourg investment vehicles: comparative table Hamburg 2011 - Tax Conference - Inbound Investment into Europe from North America Page 34
  35. 35. Luxembourg investment vehicles UCITS Corporate (SA, SCA, SARL, SCOSA) or transparent SCS (SA, SCA, SARL, SCOSA) FCP FCP SICAR SICAV (SA) SICAV (SA) SICAF (SA, SCA, SARL) SIF SV SICAV/F Entity type UCIs Corporate (SA, SCA, SARL, SCOSA) FCP Other (fiduciary) Fund (FCP or on a fiduciary basis) SPF SOPARFI Corporate (SA, SCA, SARL, SCOSA) Corporate (SA, SCA, SARL, SCOSA, European company) Minimum capital / net assets requirements (in EUR) €1,250,000 (within 6 months of the approval) €1,250,000 (within 6 months of the approval) €1,000,000 (within 12 months of the approval) €1,250,000 (within 12 months of the approval) SA/SCA SA/SCA SA/SCA €31,000 €31,000 €31,000 SARL SARL SARL €12,500 €12,500 €12,500 Capital (fixed / variable) Variable Fixed or variable Fixed or variable Fixed or variable Fixed for sec. companies Fixed Fixed Segregated subfunds Yes Yes Yes Yes Yes No No No restriction No restriction (except for interim distributions and for SICAF) No restriction for funds (except for corporate) Yes Yes Distribution of dividends : any restriction (except compliance with the min cap / NAV requirement) Page 35 No restriction No restriction Source : Luxembourg For Finance
  36. 36. Luxembourg investment vehicles UCITS UCIs SICAR Tax regime on ordinary income, capital gains, etc.. Fully exempt Fully exempt Fully taxable but exempt on qualifying securities and transit funds Is tax transparent form available? Yes Yes Yes SIF SV SPF SOPARFI Fully exempt Fully taxable but commitments paid to investors are deductible Fully exempt under conditions Fully taxable but benefits from large exemption, tax credit and tax incentive Yes Yes No No Any WHT on dividends to investors? No No No No No No No if eligible DTT corporate investors Treaty / EU Directives access? No, except for SICAV/F (50% DTT access) No, except for SICAV/F (50% DTT access) Yes (case by case) No, except for SICAV/F (50% DTT access) Yes (case by case) No Yes Other tax considerations? Small annual subscription tax on the NAV (0,05% max) with exemptions / reductions available Small annual subscription tax on the NAV (0,05% max) with exemptions / reductions available N/A Subscription tax of 0,25% on the capital, SP, and debt > 8 times SC and SP with a max of 125.000 per year Net worth tax of 0,5% per year with exemption available Page 36 N/A Source : Luxembourg For Finance Small annual subscription tax on the NAV (0,01% max) with exemptions available
  37. 37. Luxembourg investment vehicles UCITS Eligible investors Unrestricted Eligible assets / strategies Restrictions Offer of securities to investors Pag e 37 UCIs SICAR Unrestricted well informed Transferrable securities and / or other liquid financial assets Unrestricted All types of PE / VC (including RE PE) and temporary investments in other assets Borrowing and high diversification Risk diversification requirements (in principle, investment < 20% NAV) Subject to CSSF approval Subject to CSSF approval Qualifying investments Subject to CSSF approval Source : Luxembourg For Finance SIF SV SPF SOPARFI well informed Unrestricted Individual, private estate management entities or intermediary Unrestricted Unrestricted Securitization of risks linked to any type of assets or 1/3 party obligations Private financial assets Unrestricted No active management of assets No controlling activity over investments No Unrestricted if non regulated Not subject to CSSF approval Not subject to CSSF approval Risk diversification requirement (30% NAV) Subject to CSSF approval (with a possibility to launch before approval)
  38. 38. Luxembourg investment vehicles UCITS UCIs SICAR SIF SV SPF SOPARFI Promoter (financial institutions with sufficient financial means) Yes Yes No No No N/A N/A Investment manager (experience and reputation) Yes Yes No No No N/A N/A Directors / managers (experience and reputation) Yes Yes Yes Yes N/A if non reg N/A N/A Offering documents Yes Yes Yes Yes N/A if non reg N/A N/A AOA or Man Reg Yes Yes Yes Yes N/A if non reg N/A N/A Independent Auditor Yes Yes Yes Yes N/A if non reg N/A N/A Custodian Yes Yes Yes Yes N/A if non reg N/A N/A Central administration in Lux Yes Yes Yes Yes N/A if non reg N/A N/A Page 38 Source : Luxembourg For Finance
  39. 39. BDO Luxembourg
  40. 40. BDO Luxembourg : a one-stop shop International tax advice (corporate, VAT, individual income tax, …) + Setting-up and administration of all types of investment vehicles through our specialized subsidiaries (CF Corporate Services and CF Fund Services)
  41. 41. CF Corporate Services: “all-in” package • Incorporation of companies, including contacts with banks and notaries • Provision of registered office • Directorship mandates • Bookkeeping, legal formalities, secretarial • Tax compliance • Statutory auditor
  42. 42. Philippe PONSARD LUXEMBOURG Partner CF Corporate Services Experience Philippe joined BDO in 1999. He is one of the four partners of CF Corporate Services, the legal entity of BDO Luxembourg specialised in financial engineering and domiciliation and administration of companies. He is in charge of a portfolio of 200 companies and his clientele is made of entrepreneurs, HNWI, private equity funds and large corporate groups from all over the world. Areas of Specialization: Corporate and Trust Services Domiciliation and administration of Luxembourg entities Phone: +352 45123-357 Email: philippe.ponsard@cfcorporate.lu Page 42 Professional Affiliations Member of the Ordre des Expert Comptable (Chartered Accoutants Association) Member of the OEC Domiciliation Committee Member of the OEC Anti Money Laundering Advisory Committee Education Ingénieur commercial, I.A.G., U.C.L., Belgium

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