Luxembourg: A Must Consider Platform For Business

A solid political environment with a strong reputation for pro-business legislation and administration together with a tradition of strong investor protection in Luxembourg have contributed to the creation of a business-friendly environment and the development of a leading international financial centre.  Luxembourg offers companies exceptional opportunities for doing business in Europe and continues to attract numerous international companies from various sectors by its efficient approach to business.  Luxembourg’s strategies, geographical location, infrastructure and rewarding tax environment make it a must-consider jurisdiction for foreign investments and cross-border transactions. 
 
Given the current economic turmoil the Luxembourg government is tending toward a diversification of the economy, pronounced by the development of four areas:  eco-technologies, biotechnologies, Information & Communication Technologies (“ICT”) and logistics.  Luxembourg has furthermore introduced a dedicated public incentive framework for Research and Development (“R&D”) in order to support innovative companies.
 
In fact, Luxembourg has put a strong focus on the diversification of its economy by attracting public and private companies interested in investing in infrastructure (such as Datacenters, optical fibre, railway, international airport, etc.) and in operating out of and from Luxembourg.  As a result, online gaming, online payment services, e-commerce or logistics companies, such as iTunes, Amazon, PayPal, Zynga or Google, have established their European headquarters in Luxembourg with many others expected to come in a near future.
 
Although the development of the market of electronic goods and services is not negligible, the financial industry remains the leading industry in Luxembourg.
 
Generally speaking, the so called financial holding company “SOPARFI” (Société de participation financière) offers to investors an unregulated investment vehicle governed by a favourable national tax regime and benefits from dual taxation agreements and from the European directives.  The various regulated investments vehicles such as the SICAR (Private equity investment companies - Société d’investissement en capital à risque) or the SIF (Specialized Investment Fund – Fonds d’investissment spécialisés) which, despite the fact that they are regulated vehicles under the supervision of the Commission de Surveillance du Secteur Financier (CSSF), offer to investors a flexible scope for investments and have contributed to the Luxembourg fund industry becoming the second largest fund industry in the world after the United States of America.
 
In addition, despitea standard aggregate corporate income tax rate of 28.8%, due to its pragmatic approach to doing business, its steady political and economic environment and its advantageous tax regime, Luxembourg remains a prime business location.  A lot of structuring in Luxembourg is thus favoured because of the attractive schemes implemented by the Luxembourg government with regard to the management of intellectual property rights, to the promotion of research and innovation activities, to real estate financing and acquisition, private equity and M&A transactions for example.
 
A Favourable IP Regime
 
In the context of the European Union (“EU”) strategy to become the most competitive and dynamic knowledge-based economy in the world by 2020, Luxembourg has introduced in the income tax law (“LIR”) a favorable tax regime applicable to intellectual property rights (“IP regime”).  The hallmark of the Luxembourg IP regime is an 80% exemption on royalties and capital gains derived from qualifying IP rights.  The law also provides for an 80% deemed income deduction for self-developed patents that are used by the taxpayer himself. 
 
Inter-Group Financing Activities
 
On January 28, 2011 and on April 8, 2011, the Luxembourg tax authorities published Circulars on transfer pricing rules applicable to companies performing intra-group financing activities, aligning the Luxembourg practice with OECD standards in terms of documentation of intermediary financing transactions. 
 
Islamic Finance
 
Luxembourg is furthermore recognised as one of the leading European centres for Islamic finance with a long track record in the sector.  It was the first European Stock exchange to list a sukuk in 2002.  Luxembourg offers a wide range of vehicles that address the specific needs of both investors and promoters for sharia compliant investments.  Today, Luxembourg is the leading non-Muslim domicile for sharia compliant investment funds and can rival any Stock exchange in Europe for the number of sukuk issues listed.
 
Lowest Vat Rate in Europe Electronic Supply of Goods & Services
 
Luxembourg is currently known as the best European location for providers of electronic goods and services.  It comes in addition to other very favourable provisions in the country’s tax and VAT laws, such as a standard VAT rate of 15% (the lowest VAT rate in Europe), applicable on electronic services supplied from Luxembourg to any European customer. 
 
Based on the general rules of Luxembourg VAT law (“VATL”), the place of supply for electronic services to EU end users may vary depending on the taxable status of the recipient of the services. 
If the recipient of the electronically supplied services is a person subject to and liable to pay VAT (i.e. business to business (the B2B) relationship) the aforementioned services should be located where the recipient is established with consequently the relevant VAT rate in such jurisdiction to be applied. 
Conversely, if the recipient of the electronically supplied services is a private customer (i.e. business to customers (the B2C) relationship), the services should be located where the supplier is established and assuming the provider is established in Luxembourg, such services will be subject to 15% VAT.  As from 2015, Luxembourg based companies providing services to a private customer established in another country of the EU (i.e. B2C relationship) will no longer apply the Luxembourg VAT rate as such services will, going forward, be located where the recipient is based (the applicable VAT rate will be the VAT rate applicable where the consumer is established).
 
However, we estimate that companies located in Luxembourg should not necessarily migrate out of Luxembourg as they will still benefit from state of the art infrastructures, a favourable tax environment and highly skilled workers. 
 

François Petit heads the tax practice of Ober & Beerens.  He holds a Master's degree in law from the Université Catholique de Louvain-la-Neuve (Belgium) and an Advanced MA in Tax Law with the HEC Management School - University of Liege (Belgium). 
 
Mr. Petit has extensive experience in advising on Luxembourg tax issues related to tax efficient investment, holding and financing.  François focuses on Intellectual Property structures and is also specialised in the Information and Communication Technology sector.  Prior to joining Ober & Beerens, François worked for one of the world’s leading International accounting firms.  He is fluent in English and French.
 
François Petit can be contacted by phone on +352 26 26 79-1 or alternatively via email at fpetit@ober.lu