The Delaware Difference vs. Luxembourg

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The Delaware Difference vs. Luxembourg

  1. 1. Trusts and Fiduciary arrangements in Luxembourg Carine Feipel December 2 nd ,2009
  2. 2. Luxembourg in a nutshell <ul><li>Located in the heart of Europe </li></ul><ul><li>Founding member of the EU, as such submitted to EU legislation </li></ul><ul><li>One of the most important international financial centers in the EU </li></ul><ul><li>One of the smallest countries in the EU but one of the highest incomes per capita in the world </li></ul><ul><li>Multicultural and multilingual population </li></ul><ul><li>Great political stability, high level of security </li></ul><ul><li>Well connected to the outside world with over 50 double tax treaties </li></ul><ul><li>Money laundering: GAFI rules </li></ul><ul><li>Cooperation between foreign authorities even in tax matters </li></ul><ul><li>OCDE compliant - Luxembourg on no black/grey OCDE list </li></ul>
  3. 3. Agenda <ul><li>Recognition of foreign trusts </li></ul><ul><li>Luxembourg fiduciary agreements </li></ul><ul><li>Family wealth management company as an alternative </li></ul><ul><li>Specialized Investment Fund as an alternative </li></ul>
  4. 4. Recognition of foreign trusts
  5. 5. Recognition of foreign trusts <ul><li>Judgment of the Luxembourg Court of Appeal of 22 May 1996 </li></ul><ul><li>Facts : </li></ul><ul><ul><li>A settlor grants a guarantee to a bank on assets (cash) allocated to a Jersey trust without any intervention of the 2 trustees </li></ul></ul><ul><ul><li>The bank exercises its guarantee on the assets of the trust </li></ul></ul><ul><li>Issue </li></ul><ul><ul><li>The trustees ask the Luxembourg court to force the reimbursement of the guarantee by the settlor  the settlor is not entitled to grant a guarantee on the assets of the trust </li></ul></ul><ul><ul><li>The settlor challenges the authority of the trustees to act as representatives of the trust before the Luxembourg court </li></ul></ul>
  6. 6. <ul><li>Court </li></ul><ul><ul><li>The trust is not a legal concept existing under Luxembourg law </li></ul></ul><ul><ul><li>Impossibility of establishing a trust in Luxembourg </li></ul></ul><ul><li>But </li></ul><ul><ul><li>The capacity of the trustees to act as representatives of the trust exists in the law of the trust </li></ul></ul><ul><ul><li>The law of the trust is not contrary to Luxembourg law and Luxembourg public policy </li></ul></ul><ul><ul><li>The action before the Luxembourg court introduced by the trustees is admissible </li></ul></ul>Recognition of foreign trusts
  7. 7. <ul><li>The Hague Convention on the law applicable to trusts and on their recognition </li></ul><ul><li>“… the legal relationships created - inter vivos or on death - by a person, the settlor, when assets have been placed under the control of a trustee for the benefit of a beneficiary or for a specified purpose.” Article 2 </li></ul><ul><li>Luxembourg law dated 27 July 2003 applicable to trusts and fiduciary agreements (with effect in Luxembourg since 1 st January 2004 )  recognition of foreign trusts </li></ul>Recognition of foreign trusts
  8. 8. <ul><li>In « common law » jurisdictions : difference between legal and economic property: </li></ul><ul><ul><li>the settlor transfers legal property of assets to the trustee </li></ul></ul><ul><ul><li>the beneficiaries have the economic property of the assets transferred to the trustee </li></ul></ul><ul><li>Luxembourg law does not recognize this difference: </li></ul><ul><ul><li>principle of unique and full ownership </li></ul></ul><ul><ul><li>no possibility to launch a Luxembourg trust but foreign trusts are recognized </li></ul></ul>Recognition of foreign trusts
  9. 9. <ul><li>Judgment of the Luxembourg District Court of 12 December 2008 </li></ul><ul><li>Facts </li></ul><ul><ul><li>A US resident, Mrs. B, holds a real estate in Luxembourg </li></ul></ul><ul><ul><li>At the time of her death, the real estate is allocated to a US trust </li></ul></ul><ul><ul><li>The trustee is in charge of managing the assets of the trust during a certain period of time </li></ul></ul><ul><ul><li>The beneficiary of the trust is the sister of Mrs. B and the French foreign Ministry and a French association </li></ul></ul>Recognition of foreign trusts
  10. 10. <ul><li>Issue </li></ul><ul><ul><li>The Luxembourg tax authorities consider that the real estate has been allocated to the trust and that inheritance tax is due at a rate applicable to non-relatives </li></ul></ul><ul><li>Court </li></ul><ul><ul><li>Principle of tax neutrality of the transfer of assets to a trust </li></ul></ul><ul><ul><li>Trusts do not have legal personality </li></ul></ul><ul><ul><li>Recognition by the Luxembourg tax authorities of the US trust: no inheritance tax was due </li></ul></ul>Recognition of foreign trusts
  11. 11. Luxembourg fiduciary agreements
  12. 12. Luxembourg fiduciary agreements <ul><li>Introduced in the Grand-Ducal regulation of 19 July 1983 modified by the law of 27 July 2003 </li></ul><ul><li>Innovation: introduction of the principle of segregation of assets </li></ul><ul><li>Fiduciary agreements may be used for various purposes: </li></ul><ul><ul><li>Management purposes ( fiducie-gestion ); </li></ul></ul><ul><ul><li>Guarantee purposes ( fiducie – sûreté ); </li></ul></ul><ul><ul><li>Credit purposes ( fiducie – crédit ); </li></ul></ul><ul><ul><li>Carrying purposes ( fiducie – portage ) </li></ul></ul><ul><ul><li>Gift or inheritance purposes ( fiducie – donation ) </li></ul></ul>
  13. 13. <ul><li>Definition (Art 5, Law 2003) </li></ul><ul><li>“ A fiduciary agreement is an agreement by which a person, the principal, agrees with another person, the fiduciary, that, subject to the obligations determined by the parties, the fiduciary becomes the owner of assets which shall form a fiduciary estate”. </li></ul><ul><li>full transfer of ownership in favor of the fiduciary </li></ul><ul><li>separate patrimony held by the fiduciary on behalf of the settlor ( patrimoine d'affectation ) </li></ul><ul><li>No registration requirements in Luxembourg, except when relating to real estate located in Luxembourg, or aircrafts or vessels registered in Luxembourg </li></ul>Luxembourg fiduciary agreements
  14. 14. <ul><li>Eligible persons as fiduciary  credit institutions and certain professionals of the financial sector: </li></ul><ul><li>investment firms, investment funds (SICAV, SICAF), management companies of collective investment funds (FCP), pension funds, insurance or reinsurance companies, securitization vehicles. </li></ul><ul><li>Non-eligible persons: </li></ul><ul><li>Lawyers, notaries, domiciliation agents </li></ul>Luxembourg fiduciary agreements
  15. 15. <ul><li>Functioning </li></ul><ul><ul><li>Freedom of contract </li></ul></ul><ul><ul><li>In absence of defined rules set by the parties  rules governing mandates except for representation and dismissal principle </li></ul></ul><ul><ul><li>The fiduciary arrangement may be irrevocable and discretionary </li></ul></ul>Luxembourg fiduciary agreements
  16. 16. <ul><li>The fiduciary assets do not belong to the personal estate of the fiduciary agent </li></ul><ul><li>This segregation survives even in the case of bankruptcy or insolvency of the fiduciary agent </li></ul><ul><li> the fiduciary assets cannot be seized by creditors of the fiduciary agent </li></ul><ul><li> the fiduciary assets will not form part of the insolvency estate of the fiduciary agent </li></ul>Luxembourg fiduciary agreements
  17. 17. Family wealth management company as an alternative
  18. 18. <ul><li>The law on family wealth management companies ( “société de gestion de patrimoine familial” - “SPF” ) was adopted on 11 May 2007 </li></ul><ul><li>The SPF is designed as an investment company intended solely for individuals managing their private wealth. The level of wealth or sophistication of the individual is irrelevant. </li></ul><ul><li>The SPF is a legal entity separate from its shareholders </li></ul>Family wealth management company as an alternative
  19. 19. Family wealth management company as an alternative <ul><li>Shareholders of the company : </li></ul><ul><ul><li>any individuals acting within the framework of the management of their private wealth; </li></ul></ul><ul><ul><li>any wealth management entities acting exclusively in the interest of the private wealth of individuals i.e. family offices, trusts, private foundations or similar entities; </li></ul></ul><ul><ul><li>intermediaries holding shares in the SPF on a fiduciary basis or in a similar capacity, on behalf of eligible investors </li></ul></ul><ul><li>« Family » notion : </li></ul><ul><li> no need to be relatives </li></ul>
  20. 20. <ul><li>Corporate form : any form of a capital company such as the private limited liability company, the public limited liability company, the partnership limited by shares, or the cooperative company in the form of a public limited company </li></ul><ul><li>minimum registered capital </li></ul><ul><ul><li>31,000 EUR for a public limited liability company </li></ul></ul><ul><ul><li>12.500 EUR for a private limited liability company </li></ul></ul>Family wealth management company as an alternative
  21. 21. <ul><li>purpose of the company </li></ul><ul><ul><li>acquisition, holding, management and sale of financial assets, to the exclusion of any commercial activity </li></ul></ul><ul><li>The SPF cannot: </li></ul><ul><ul><li>hold real estate directly, but it can invest in any kind of property company </li></ul></ul><ul><ul><li>grant loans </li></ul></ul><ul><ul><li>subscribe to an insurance policy </li></ul></ul>Family wealth management company as an alternative
  22. 22. <ul><li>Subjective tax exemption </li></ul><ul><li>No Withholding tax </li></ul><ul><li>No benefit from Double Tax Treaty </li></ul><ul><li>0.25% subscription tax (with a cap) </li></ul>Family wealth management company as an alternative
  23. 23. Specialized Investment Fund as an alternative
  24. 24. <ul><li>Introduced by a law of 13 February 2007 </li></ul><ul><li>Subject to a light supervision by the CSSF: </li></ul><ul><ul><li>E x post approval procedure </li></ul></ul><ul><ul><li>Requirement of a prospectus (issuing document) which needs to be updated only if new shares or units are issued to new investors </li></ul></ul><ul><li>No promoter requirement but reputable and experienced directors </li></ul><ul><li>Principle based investment restrictions </li></ul><ul><li>Subject to an annual subscription tax ( taxe d’abonnement ) at the rate of 0.01% </li></ul>Specialized Investment Fund as an alternative
  25. 25. <ul><li>Eligible investors: well-informed investors </li></ul><ul><ul><li>Institutional investor, or </li></ul></ul><ul><ul><li>Professional investor, or </li></ul></ul><ul><ul><li>Other well-informed investor, i.e. </li></ul></ul><ul><ul><ul><li>having confirmed in writing that he/she adheres to the status of well-informed investor, and </li></ul></ul></ul><ul><ul><ul><li>investing a minimum of 125,000 Euros in a SIF </li></ul></ul></ul>Specialized Investment Fund as an alternative
  26. 26. <ul><li>All legal forms permitted: </li></ul><ul><ul><li>FCP (common fund) </li></ul></ul><ul><ul><li>SICAV (investment company with variable capital) / SICAF (investment company with fixed capital) under the form of an S.A., S.C.A., S.à R.L. or S.C.S.A. </li></ul></ul><ul><ul><li>Umbrella structure possible </li></ul></ul>Specialized Investment Fund as an alternative
  27. 27. <ul><li>Risk diversification </li></ul><ul><li>No quantitative investment restrictions except CSSF Circular 07/309 of 3 August 2007 (possible derogation): </li></ul><ul><li>no more than 30% of the SIF assets in securities of the same kind issued by a single issuer; </li></ul><ul><li>Master-Feeder structure possible </li></ul>Specialized Investment Fund as an alternative
  28. 28. Thank You
  29. 29. Contact us <ul><li>Carine Feipel </li></ul><ul><ul><li>Partner </li></ul></ul><ul><ul><li>Tel : +1 212 554 3541 </li></ul></ul><ul><ul><li>Email : carine.feipel @arendt.com </li></ul></ul>

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