Business environment

Luxembourg is a recognised economic and political partner, both on a European and international level, and is integrated in one of the main economic and monetary unions (Euro). As an EU member state, Luxembourg is required to comply with all EU frameworks.

The main financial services offered in Luxembourg are private banking and fund administration. With approximately 150 highly experienced and competent banking institutions, a successful investment fund industry, a dynamic insurance sector, skilled workers and specialised companies, Luxembourg has a full range of diversified and innovative financial services.

Luxembourg offers a full range of tailored investment incentives for new ventures. The government may grant support for funding specific projects (capital and medium/long term loans) for small and medium sized companies.

The principal advantages of the country are its strategic location in Europe, the quality of transport, logistic and telecommunication infrastructures, the skilled and multilingual workforce, the political and social stability, the legislative and fiscal framework, the multicultural environment, the open and international spirit and the high living standard.

Setting up a business

A business license is required to set up a company which has a commercial purpose in Luxembourg. In order to obtain a business license, the applicant needs to supply evidence of professional qualifications and good standing. The traditional corporate forms are the société anonyme (SA) and the société à responsabilité limitée (SARL).

Requirements for an SA and SARL

1. Capital

An SA is the equivalent of a public limited company: with a minimum issued share capital of EUR 31,000, of which at least 25% must be paid up at incorporation by each shareholder. The share capital may be issued in a foreign currency. It must be paid in cash or in kind.

A SARL is the equivalent of a private limited company: with a minimum share capital of EUR 12,400, which must be fully paid up in cash or in kind upon incorporation. A very recent law (January 21 – 2015) provides for the incorporation of a company with a capital of EUR 1.

2. Founders, shareholders, Board of directors

SA: There is a minimum of one founder or shareholder. There is a minimum of three members appointed for a period up to six years. However, where the SA has been formed by a single shareholder, the board of directors can be composed of one member.

SARL: There is a minimum of one founder or shareholder and a maximum of 40 partners. One or more managers are required.

Both: No specific residence and nationality requirements.

3. Management and control

The managing director is the responsible person for the day-to-day management of the company in Luxembourg, on an ongoing basis. To handle the activity, (s)he must be present in Luxembourg most of the time. A one-person company may hold the business license in his/her own name.

SA: A general meeting of shareholders must be held at least annually.

SARL: There is no requirement to hold an annual meeting unless there are more than 25 shareholders. Resolutions can be made in writing.

Both: no specific nationality/residence requirements.

Corporate tax

1. Overview

Legal and political stability is one of Luxembourg’s advantages, which could probably explain the low income taxes and social insurance costs. Nevertheless, companies based in Luxembourg are subject to corporate income tax, municipal business tax, minimum tax, Chamber of Commerce contribution, net worth tax and VAT.

A SOPARFI is a company that carries out holding or financing activities under the general tax regime. The SOPARFI prosperity lies in its access to the benefits of the EU directives, eligibility for tax deductions, unlimited loss carry-forwards and Luxembourg's broad network of tax treaties.

As with all EU members, Luxembourg has implemented the EU framework such as parent-subsidiary, interest, royalties and merger directives, as well as the EU savings directive.

Luxembourg does not have specific transfer pricing or thin capitalisation regimes, but transactions between related parties must be on arm’s length terms. There is no controlled foreign company regime.

2. Taxable income and rates

Luxembourg's effective corporate income tax rate (for a company with its registered seat in Luxembourg City) is 29.22%. Companies with taxable profit margins less than EUR 15,000 are taxed at 20%. Luxembourg companies which are in a loss position or paying less than the minimum income tax are subject to a minimum income tax, amounting from EUR 500. to a maximum of EUR 20,000.

3. Tax treaties and transfer pricing

The Grand-Duchy has a large tax treaty network based on the OCDE model. In Luxembourg all transactions must be handled at arm’s length.

4. Thin capitalisation

There is no specific thin capitalisation rule. In practice, the tax authorities use a debt-to-equity ratio of 85:15. Interest related to the debt surplus could be nondeductible and taxed as a dividend distribution, subject to a withholding tax.

5. Royalties

Luxembourg does not levy withholding tax on royalty payments.

6. Rulings

The Direct Tax Administration may approve an advance tax agreement which is mandatory for five years (an extension of the term could be requested).

7. Interest

There is no withholding tax on interest paid to nonresidents, except for interest that represents a right to profit participation.

IP regime

According to the Luxembourg's IP regime, the net income and capital gains generated by copyrights on software, patents, trademarks, designs, patterns and models acquired or created by a Luxembourg company after 31 December 2007 are exempt from income tax up to 80 %. The IP tax regime cannot apply to IP rights acquired from a related party. Qualify assets are exempt from net wealth tax.

Other taxes: net worth tax

A net worth tax of 0.5% is levied annually on the total net assets of resident companies but, under certain conditions, this tax could neutralise.

Dividends

The standard withholding rate on dividends is 15%. A withholding exemption applies for dividends paid to a qualifying company under the EU parent-subsidiary directive. The exemption applies if the beneficiary of the dividends has one of the company forms listed in the directive, it holds (or commits to hold), for an uninterrupted period of at least 12 months, at least 10% of the capital of the payer company, or the shares have an acquisition value of at least EUR 1.2 million.

Accounting, filing and auditing requirements

Upon incorporation, companies must file the articles of association and names of all directors/managers with the Trade and Company Register, and publish that information in the Official Gazette. The approved annual balance sheet, profit and loss statements, notes to the accounts, annual reports and auditors’ reports should also be registered with the Trade and Company Register.

The size of the company will define its obligations in relation to the publication of the company's balance sheet, profit and loss account and notes. Small companies are authorised to file a simplified balance sheet. Medium-sized companies may publish abridged balance sheets and notes to the accounts do not need to include information on turnover. Several items may also be grouped together under gross profit.

Small companies are defined as those that do not exceed two of the three following limits: (1) no more than EUR 6,25 million in annual net turnover; (2) no more than EUR 3,125 million in total balance sheet; and (3) no more than an average number of 50 full-time employees during the accounting year. Medium-sized companies are those that do not meet the test for small companies but fall within at least two of three higher limits: (1) up to EUR 25 million in annual net turnover; (2) up to EUR 12,5 million in total balance sheet; and (3) up to 150 employees.

An SA must appoint a statutory or external auditor, depending on the annual turnover, the balance sheet amount and the number of employees. An SARL needs a statutory auditor if the company has more than 25 shareholders, but will also need an external auditor when the annual turnover, the balance sheet amount and the number of employees exceed certain limits.

The annual accounts should be prepared in Luxembourg GAAP or IFRS and filed with the Commercial and Companies Register within the month of their approval, and within a maximum of seven months after the end of the accounting year.

VAT

The Luxembourg's standard VAT rate reaches 17%, which is one of the lowest rates in the EU. In addition, we have:

  • a reduced rate of 3% applying to printed materials, ebooks, water, pharmaceuticals, most food products and radio and television broadcasting services;
  • a reduced rate of 8% applying to gas and electricity, and
  • a reduced rate of 14 % applying to a range of financial sector services and wine.

There are no special deduction limits of input VAT, except that the costs must be related to VAT taxable activities. According to the company turnover, the returns must be filed monthly, quarterly or on annual basis.

SOPARFI

The SOPARFI is a vehicle for holding shares of local and foreign companies, participations or other businesses. A SOPARFI company in Luxembourg is a company that undertakes holding and financing activities. A SOPARFI can also carry out other activities, if it has the necessary business licenses and if such activities are allowed according to the company’s bylaws. This type of company in Luxembourg is subject to the taxation provisions for companies and it can benefit from the double tax treaties concluded between Luxembourg and other countries.

The SOPARFI has an attractive tax regime: the participation exemption and capital gains taxation

Dividends are subject to corporate tax. According to the participation exemption rules, dividends received could be tax exempt in Luxembourg if the following requirements are met:

  • the Luxembourg recipient is either a resident company fully subject to tax in Luxembourg, the Luxembourg permanent establishment of an entity cover by EU parent-subsidiary directive, a capital company resident in a country that has concluded a tax treaty with Luxembourg, or a capital or a cooperative company resident in a country of EEA other than an EU member state;
  • the Luxembourg company holds directly (or commits to keep) at least 10% of the capital of the payer company for an uninterrupted period of at least 12 months, or the shares had an acquisition price of at least EUR 1.2 million;
  • the payer company is another Luxembourg company, a qualifying company under the EU parent-subsidiary directive or a non-EU company that is resident in a country in which it is subject to a tax corresponding to the Luxembourg corporate income tax.

Dividends in relation to participations that do not qualify for the participation exemption can benefit from a 50% exemption if the dividends are paid by:

  • a fully taxable resident company; or
  • a company cover by the EU parent-subsidiary directive; or
  • a capital company resident in a country with which Luxembourg has signed a tax treaty and that is subject to a tax similar to the Luxembourg corporate income tax.

Capital gains in Luxembourg are taxable income. However, a participation exemption applies for gains derived from the sale of shares, if the below listed conditions are met:

  • the Luxembourg company holds directly at least 10% of the company shares or the shares had an acquisition price of at least EUR 6 million; and
  • the shares have been held (or the shareholder commits to hold the shares) for at least 12 months.

Taxes on individuals

Resident individuals are liable on their worldwide income, whereas non-residents are taxed only on their Luxembourg-source income.

For income earned in a country with which Luxembourg has no tax treaty in place, a tax credit could apply. Tax exemptions apply to income earned in the country where tax treaties are in place.

Residents of Luxembourg are taxed on the dividends received. Under certain conditions, 50% of dividends paid are tax-free for a Luxembourg resident.

Income exceeding EUR 100,000 (EUR 200,000 for couples jointly taxed) is subject to the maximum marginal personal income tax rate of 40%. Moreover, the tax liability is increased by the solidarity premium for the employment fund (from 7% to 9%).

For the Luxembourg resident, a final withholding tax of 10% is due on interest income. However, the income excluded from the 10% final withholding tax will be taxable at progressive rates. The directors' fees are subject to a flat 20% withholding tax, up to EUR 100,000 p.a. and then taxed at progressive rate. The withholding tax is deducted from the final liability.

For the non-residents, the withholding tax is final if the total income from directors’ fees in Luxembourg does not exceed EUR 100,000 p.a. and the non-resident has no other professional income in Luxembourg.

The rate of social security contributions payable by employees is 12.95% and includes benefits in kind.

Employer social security contributions reach 12.76% to 15.30%, depending on the nature of the remuneration.

Securitisation Vehicles (SVs)

1 Overview

Luxembourg introduced an attractive framework (the law of March,22 – 2004) for SVs in order to improve securitisation (i) on capital market transactions, (ii) on certain intra-group transactions and (iii) a combination of these two transaction types.

The securitisation transactions are the transactions by which an SV acquires or assumes, directly or through intermediary entities, the risks relating to assets and issues securities, whose value or yield are linked to such risks.

2 Legal

Based on the SV law, an SV could be incorporated under a Luxembourg legal form (SA, S.à.r.l, S.C.A, S.C, S.C.o.S.A) or as a fund. An SV can be set up in the form of an umbrella fund/company with multiple segregated compartments. Each compartment forms a distinct part of the SV. The rights of investors/creditors are limited to a specific compartment. It is possible to liquidate a compartment separately without liquidating the others. An SV has to be audited by an auditor (réviseur d’entreprises) regardless of size criteria.

The risks transferred to the SV may relate to movable or immovable, tangible or intangible assets. The forms of a securitisation transactions are :

  •     a true sale transaction where the originator sells or contributes a pool of assets to the SV; or
  •     a synthetic transaction where the originator buys credit risk protection from the SV.

If the SV does not issue securities to the public on a regular basis, the SV will be a non-regulated entity. Otherwise, the SV must be authorised by the CSSF (the supervisory authority of Luxembourg).

3 Direct tax

Securitisations Companies are resident companies fully liable to corporate tax. Commitments made to shareholders and bondholders are tax deductible. Hence they are fully tax-deductible, so the tax basis should be very limited. SVs are not subject to any thin capitalisation rule.

4 Double tax treaty protection and access to EU Parent-Subsidiary Directive

SVs do benefit from the EU Parent-Subsidiary directive and the double tax treaties.

5 Indirect taxes and withholding tax

The only indirect tax due on incorporation of a SV is the fixed registration duty of EUR 75. SCs are not subject to variable registration duties (except certain limited cases). SVs are a taxable person for VAT purposes. A case by case analysis is required to assess if the SV needs to be VAT registered.

SCs are exempt from net wealth tax.

Distributions (including liquidation) and interest payments made by SVs are not subject to domestic withholding tax (except where required by EU Savings Directive

Luxembourg venture capital vehicles (SICARs)

1 Overview

The SICAR is dedicated to venture capital and private equity although investments in listed companies or real estate companies could also be possible.

The law (June 15-2004) was introduced in order to attract venture capital investors (qualified investors) by facilitating fundraising and investment in risk bearing capital. Light regulatory supervision and favorable tax rules are the two main advantages of the SICAR regime.

The key qualification for gaining SICAR status is that the capital of a SICAR is invested in assets “at risk”. SICARs are entities supervised by the CSSF. The CSSF has stated that it looks at two main criteria:

  • investment risk (i.e. the risk of the investment is higher than normal business risk); and
  • intention to realise the investment .

Mezzanine financing, distressed debt and real estate investments may also qualify as assets “at risk” under certain conditions. The CSSF will perform a case-by-case assessment.

The SICAR shares are issued/offered to investors (individual or corporate) with a high level of expertise (well-informed investors). Other investors will have to declare in writing that they are aware of the risks and must invest at least €125,000 in order to access the status of qualified investor.

2 Authorisation and supervision

A SICAR must be authorised by the CSSF. Compared to an UCITs, the authorisation conditions are less stringent. The SICAR regulation does not request restrictions on investment policy.

A SICAR can be set up in the form of an umbrella fund with multiple segregated compartments. Each compartment forms a distinct part of the SICAR’s patrimony and the prospectus has to state the investment policy of each compartment. The rights of investors/creditors are limited to a specific compartment. It is possible to liquidate a compartment separately without liquidating the others (only the liquidation of the final compartment triggers the SICAR’s liquidation).

3 Legal forms and capital requirements

A SICAR can be incorporated under a Luxembourg legal form (SA, S.à.r.l, S.C.A, S.C.S, S.C.o.S.A).

The statutory seat and central administration of the SICAR needs to be located in Luxembourg.

The minimum subscribed capital of a SICAR is EUR 1 million (share capital and share premium), which must be paid within 12 months from the company being authorised. The share capital must be fully subscribed and each share must be paid up to at incorporation of at least 5%.

There are no legal restrictions on capital repayments, share redemptions, dividends or interim dividends. The only restrictions are those found in the SICAR’s articles of association. A SICAR is not obliged to maintain a legal reserve.

4 Publication of prospectus and annual reports

SICARs need to prepare a prospectus and an annual report for each financial year. The annual report must be audited by a Luxembourg auditor (“réviseur d’entreprises”). The audited annual report must be made available to the investors within six months following the end of the financial period to which it relates.

5 Double Tax Treaty Protection and access to EU Parent-Subsidiary Directive

From a Luxembourg perspective, SICARs do benefit from the EU Parent-Subsidiary Directive and the double tax treaties concluded by Luxembourg.

6 Income taxation

SICARs are resident companies fully liable to corporate tax. Incomes on securities held by a SICAR and cash held (less than 12 months) for future investment are tax exempt. Income not related to risk-bearing investments is subject to income tax. Losses and deductions relating to tax exempt income may not be offset against taxable income. A SICAR incorporated as a limited partnership is a tax transparent entity for Luxembourg tax and they are not considered to have a commercial activity. The Luxembourg fiscal consolidations do not apply to SICARs.

7 Withholding tax

The dividend (including liquidation dividend) distributed by a SICAR is not subject to domestic withholding tax, irrespective of the residence and tax status of its shareholders. Interest payments made by SICARs are not subject to domestic withholding tax (except where required by EU Savings Directive).

8 Indirect taxes

The only indirect tax due on incorporation of a SICAR is the fixed registration duty of € 75. Luxembourg SICARs are taxable persons for VAT purposes. A case by case analysis is required to assess if the SICAR needs to be VAT registered.

Specialised investment funds (SIFs)

1 Overview

The aim of the SIF law (dated February, 13-2007) is to create a particular type of undertaking for collective investment, which benefit from light statutory rules. A SIF is dedicated to institutional investors, professional investors and generally well-informed persons. The subscription and redemption prices are freely determined in the constitutional document.

SIFs can invest in every type of investment (including real estate and private equity) but they are subject to general risk-spreading rules (ma x 30% of assets in similar securities issued by the same issuer). SIFs can grant loans and financial guarantees to third parties.

2 Legal forms and capital requirements

SIFs may be constituted in contractual or under a Luxembourg legal form (SA, S.à.r.l, S.C.A, S.C.S.P, S.C.o.S.A). The same applies if the SIF is an investment company with variable capital (SICAV).

The subscribed share capital and the share premium have to reach together EUR 1,250,000 within the twelve months from the date of CSSF approval (at incorporation, the shares or the partnership interests must only be paid up to at least 5%).

The net asset value of a SIF constituted as a fonds commun de placement must reach the same amount of EUR 1,250,000 within the same period of twelve months.

The method of evaluating the assets shall be specified in the management rules which can be the general acceptable principle of valuation established by the professional associations. However, it has to be calculated at least once per year.

3 Publication of prospectus and annual reports

SIFs must be approved by the CSSF within a month from their constitution. Their assets have to be held with an approved depositary. The directors/managers (within the meaning of Luxembourg company law) of the SIF must be approved.

SIFs have to draft an offering document (prospectus) and publish an audited annual report.

Compared to UCITs, the SIF Law no longer requires mandatory provisions to be included in the offering document, provided that the information contained is up to date and enables the investors to make a well informed judgment of the investment proposed, and in particular of the risk attached thereto.

However, they shall not be required to publish its prospectus nor a semi-annual report.

Furthermore, the independent auditor does not need to issue a long form report.

4 Tax

SIFs are subject to subscription tax of 0.01% of the net asset.

The payments made by a SIF to the investors are not subject to domestic withholding tax. The realised capital gains are not subject to taxation in Luxembourg except if the shareholders hold more than 10% of the units/shares of the fund and if the shareholder sells its shares/units less than 6 months following the acquisition.