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LUXEMBOURG
LINKS IN THIS SECTION
FORMS OF OFFSHORE OPERATION
TAX TREATMENT OF OFFSHORE OPERATIONS
THE EU'S PARENT/SUSIDIARY DIRECTIVE
TAXATION OF FOREIGN EMPLOYEES
EXCHANGE CONTROL
OFFSHORE ACTIVITIES IN LUXEMBOURG
EMPLOYMENT AND RESIDENCE
RELATED INFORMATION

Offshore Legal And Tax Regimes

The term 'offshore' is not used in Luxembourg legislation or in describing company forms. Use of the special 'holding company' forms is the key criterion for obtaining offshore tax treatment for most types of business; special forms are also available for collective investment vehicles and investment funds.

In 2003 the European Union finally agreed its Savings Tax Directive, under which Luxembourg was 'allowed' to apply a withholding tax to the returns on the savings of citzens of EU member states, initially at the rate of 15% (20% in 2008, and 35% from July 2011), rather than providing information to the citizens' home tax authorities. It wasn't until May, 2004, however, that Brussels finally agreed acceptable rules with Switzerland for the imposition of a withholding tax and the preservation of banking secrecy, rules which would also apply to Luxembourg - the famous 'level playing field'. The Directive came into force in July, 2005.

In June 2009, the European Commission announced its decision to refer Luxembourg to the European Court of Justice over its incorrect application of certain provisions of the Savings Tax Directive.

The case regarded interest payments made to beneficial owners who benefit from "non-domiciled resident" status in their country of residence.

Because Luxembourg had not (or in the EC’s eyes, “refused”) applied the Directive to beneficial owners who benefit from the non-domiciled resident status in their country of residence, Luxembourg paying agents did not levy withholding tax on interest payments to such beneficial owners.

According to Luxembourg legislation, beneficial owners are considered to benefit from the "non-domiciled" status, if they are generally exempt from income tax in their state of residence for tax purposes or if the interest payments, as long as they are not transferred to the state of residence, are not subject to tax in that state.

According to the Commission, Luxembourg cannot provide for an exemption from withholding tax in situations other than those expressly provided by article 13 of the Directive. This lays down the rules for the "voluntary disclosure" procedure which allows the beneficial owner expressly to authorize the paying agent to report information to the tax authorities of his state of residence and the "certificate procedure" which ensures that withholding tax is not levied when the beneficial owner presents to his paying agent a certificate drawn up by his member state of residence for tax purposes.

“The Commission is of the opinion that the paying agent has the obligation to establish the residence of the beneficial owner on the basis of minimum standards, as provided by article 3(3) of the Directive,” the EC stated.

“If the beneficial owner is a resident of another member state in accordance with these standards, the member state of the paying agent must ensure that the latter applies the Directive and, in the case of Luxembourg, that the paying agent levies a withholding tax on interest payments to such a beneficial owner,” the Commission added.

“Consequently, the Commission considers that Luxembourg's legislation, in its current state, is not compatible with articles 2, 3, 10 and 11 of the Directive.”

In December 2008, the Commission sent a ‘reasoned opinion’ to the government of Luxembourg setting out its stance on the matter. This was the second stage in infringement proceedings and gave Luxembourg two months to respond to the Commission’s arguments.

The other key EU fiscal initiative affecting Luxembourg in particular, the EU's Code of Conduct Committee's campaign against 'harmful tax practices', resulted in the abolition of most of the holding company regimes in 2007, and their replacement by the new SPF format, aimed at the asset management sector.

Capital contributed to a Luxembourg company or branch was, until recently, generally subject to a 1% capital tax on the net value of the property contributed, but the 2008 draft budget provided for a reduction in the rate of capital duty to 0.5% as from 1 January 2008. The capital duty was subsequently abolished, as of January 2009 . Investment funds pay a flat registration duty of EUR1,250 (at the time of writing) when they are established. For contributions to other types of business entities, there may be an exemption under the following circumstances (subject to certain conditions):

  • Share-for-share contribution;
  • All assets and liabilities contribution;
  • Conversion of retained earnings or reserves into share capital; or
  • Migration of capital within the EU.

Luxembourg Forms of Offshore Operation

Offshore operations may take place within the following forms:

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Luxembourg Tax Treatment of Offshore Operations

See Domestic Corporate Taxes for the general principles of Luxembourg; however these do not apply to offshore entities except as indicated below. Offshore entities are not covered by Luxembourg's Double Taxation Treaties except as indicated below. From January 2011, a minimum flat income tax of EUR1,500 was introduced for companies whose financial assets, transferable securities, and cash at bank amount to more than 90% of their balance sheet.

Offshore companies (but see above for the status of the various corporate forms) are taxed as follows :

  • The Family Private Assets Management Company, or SPF is intended to be exempt from corporate income tax, municipal business tax and net-worth tax, and from withholding tax on distributions. These vehicles are prohibited from commercial activity, and are limited to private wealth management activity, for example the holding of financial instruments such as shares, bonds and other debt instruments, in addition to cash and other types of bankable asset. If the SPF is used to hold voting rights in other companies, it must ensure that it does not involve itself in the running of those companies, and it is prohibited from providing any kind of service. The SPF's exemptions can be affected by participation in non-resident, non-listed companies, if those companies are located in a country not subject to a roughly equivalent corporate tax regime.
    A subscription tax at a rate of 0.25% is payable on share capital.
  • SOPARFI companies, which were created under the law of 24th December 1990, are subject to the normal regime of income taxes etc (see Direct Corporate Taxation) but do receive the benefit of Double Taxation Treaties, and in many circumstances are exempt from taxation on dividends received from or paid to resident and non-resident companies in which they have a significant participation. The EU Parent-Subsidiary Directive also provides some withholding tax exemptions (improved as from 2004, see below), but the SOPARFI benefits are more extensive. The rules are complex; there are conditions; and there are limitations on the deductibility of expenses.
  • The various forms of UCI are all exempt from all Luxembourg taxation, and pay only a small capital duty on start-up, plus an annual tax on net assets which (at the time of writing) varies between 0.01% and 0.06% depending on the type of fund. In June, 2004, the Luxembourg government announced that pension funds would be exempt from the 0.01% 'subscription' tax, in order to encourage the transnational pooling of pensions assets.
  • In 2004, Luxembourg introduced the SICAR, which may take one of a number of corporate forms, including that of a limited partnership (see Forms of Company). A fixed capital duty of EUR1,250 applies to equity capital injections upon incorporation or thereafter. SICARs that are in corporate form are fully taxable and should in principle, unlike 1929 holding companies, be eligible for benefits under Luxembourg’s tax treaties as well as benefits under EC directives. Investment income and realized gains are not considered taxable income, and realized losses and write-downs are not deductible. All other income and expenses are taxable in the normal way. Distributions are exempt from withholding tax, as are redemptions by nonresident investors, regardless of the amount or holding period. SICARs are exempt from wealth tax, and there is an exemption from VAT for management charges. SICARs are excluded from the benefits of fiscal consolidation. Investors seeking tax transparency will opt for a SICAR in the form of a limited partnership (SeCS). An SeCS is not liable to corporate income tax or net wealth tax, and is exempt from the municipal business tax. Income from the partnership and capital gains realized on units by nonresident partners will not be taxed in Luxembourg.

Luxembourg The EU's Parent/Subsidiary Directive

Changes to the parent/subsidiary directive in 2004 have reduced the holding requirement to 20% for 2005-06; to 15% for 2007-08; and to 10% for 2009 onward. Under the EU's Directive on Interest and Royalties, which also came into effect in 2004, both types of payment will be exempt from withholding tax if they are between associated companies (rules as for the participation exemption).

Luxembourg has actually gone even further, meaning that there is no withholding tax on royalties paid to non-resident companies.


Luxembourg Taxation of Foreign and Non-Resident Employees

In Luxembourg the taxation of individuals is based entirely on the concept of residence, regardless of nationality. The general principles of individual taxation in Luxembourg also apply to the resident employees of non-resident entities. Generally, individuals are considered to be resident when they maintain a residence in Luxembourg with the intention of remaining other than temporarily. A stay of six months is deemed to be residence. Most types of compensation and benefit paid to employees are taxable. Traditionally, there have been no special privileges or exemptions for expatriate workers, although an expatriate tax regime for highly skilled employees came into force on January 1, 2011.

Non-residents are liable to pay Luxembourg taxes only on certain types of income arising in Luxembourg or from Luxembourg sources. These types of income are very precisely defined in Luxembourg legislation. Nationals of countries with which Luxembourg has Double Taxation Treaties also need to be aware that the relevant treaty may well affect their tax treatment.

The main types of taxable income for non-residents are:

  1. income from trade or business carried on in Luxembourg or arising there;
  2. income from dependent services (ie employment income) performed or arising in Luxembourg;
  3. pension income resulting from former activity in Luxembourg;
  4. investment income arising or paid from Luxembourg;
  5. income from leasing of goods etc situated in Luxembourg or exploited by a Luxembourg entity;
  6. capital gains on the sale of property or substantial participations in Luxembourg companies.

Each of these categories is further defined in considerable detail in the legislation.

Luxembourg eventually signed up to the compromise on the European Savings Tax Directive reached in January, 2003, and has been imposing a withholding tax on non-residents' investment returns, like Switzerland, as from July, 2005 (initially at a rate of 15%, rising to 20% in 2008, and 35% in 2011).

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Luxembourg Exchange Control

Luxembourg has no exchange controls.

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Luxembourg Offshore Activities

'Offshore', ie low-tax, activity in Luxembourg is possible only through the various specialised corporate forms listed above. These types of holding company and collective investment fund are limited to the specified holding and financial activities for which they were created. All other types of commercial and business activity have to be conducted in the mainstream, and therefore highly-taxed, economy.

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Luxembourg Employment and Residence

There are no special privileges or disabilities for the employees of non-resident or offshore operations as such. Nationals of European Union member states have free right of movement in Luxembourg. However, any stay for the purposes of employment or remunerated activity, including remunerated or non-remunerated training courses, is subject to obtaining in advance both a provisional residence permit (autorisation de sejour provisoire) from the Ministry of Justice, and a work permit from the Ministry of Labour. Presumably these permits cannot be refused to EU nationals.

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LINKS IN THIS SECTION
FORMS OF OFFSHORE OPERATION
TAX TREATMENT OF OFFSHORE OPERATIONS
THE EU'S PARENT/SUBSIDIARY DIRECTIVE
TAXATION OF FOREIGN EMPLOYEES
EXCHANGE CONTROL
OFFSHORE ACTIVITIES IN LUXEMBOURG
EMPLOYMENT AND RESIDENCE
RELATED INFORMATION

 

 

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