Luxembourg: A Preeminent Jurisdiction For Structuring Your Investments
Luxembourg’s geographical size belies its long-standing tradition as an international hub for business. By the end of 2010, Luxembourg had over EUR 2,199 trillion in net assets under management placing the country as the second largest fund centre in the world. It is also frequently used by worldwide private equity houses for the structuring of international acquisitions. Luxembourg’s business friendly environment, flexible legal and tax environment and the multilingual and high qualified work are some of the reasons why Luxembourg has become a place of choice for making investments.
The present article aims to provide you with an overview of the legal and tax features of some of the existing Luxembourg vehicles that an investor can use when investing in/through Luxembourg.
II. Luxembourg Investment Vehicles – An Overview
Société De Participations Financières (Soparfi)
A Soparfi is an unregulated company whose main business purpose is to hold shareholdings or to act as a financing vehicle.
The most common legal forms adopted by a Soparfi are public limited company (S.A. – société anonyme) or limited liability company (S.à r.l. – société à responsabilité limitée).
A Soparfi is subject annually to income tax at the rate of 28.80% and to net wealth tax at the rate of 0.5% based on its net assets as of 1st January of each year.
The attractiveness of a Soparfi lies in the favourable tax regime for dividends, capital gains and liquidation proceeds realised from qualifying shareholdings. Generally speaking, a full income tax and net wealth exemption for such types of income can be achieved for any important participation held, for a 12-month holding period, in fully-taxable subsidiary, whatever its country of residence.
Luxembourg imposes no withholding tax on interest payments and royalties. Dividend payments are in principle subject to a 15% withholding tax but the double tax treaties and the broad withholding tax exemption regime allow for a reduced or nil rate. In addition, a vast variety of financial instruments easily allows the implementation of tax efficient profit repatriation schemes.
A Soparfi has access to the benefits of the EU directives and the Luxembourg’s double tax treaty network (Luxembourg has 64 double tax treaties in force).
A Soparfi is not subject to any formal authorisation. In principle, the incorporation process of a Soparfi can takes less than a week. The minimum share capital is EUR 31,000 for an S.A. and EUR 12,500 for an S.à r.l. The share capital of an S.A. and S.à r.l. can be denominated in a currency other than EUR.
Specialised Investment Fund (SIF)
Created in 2007, the SIF is a regulated investment fund reserved to “informed investors”. The informed investor is the institutional or professional investor or the investor who either invests EUR 125,000 in the SIF or whose knowledge and experience are certified by a credit institution or an investment firm.
The SIF can invest in any type of assets. However, investments performed by a SIF have to comply with the principle of risk diversification e.g. the SIF may not in principle invest more than 30% of its assets in securities of the same type issued by the same issuer.
The SIF may be structured as a contractual fund (FCP - fond commun de placement), as a variable capital investment company (SICAV – société d’investissement à capital variable) or as a fixed capital investment company (SICAF - société d’investissement à capital fixe).
From a tax angle, the SIF is exempt from income and net wealth tax. Distributions of profits to the investors are exempt from withholding tax and foreign investors are not subject to tax in Luxembourg on the capital gain realised upon disposal of the shares of the SIF. The SIF is only subject to a subscription tax of 0.01% on its net asset value on the last day of every calendar quarter (exemptions are applicable).
SIF structured as SICAF or SICAV may have access to the double tax treaties concluded by Luxembourg.
The SIF is subject to authorisation and on-going supervision by the Commission de Surveillance du Secteur Financier (“CSSF”). The level of regulation it is subject to is however lighter than that applicable to UCITs funds. The net assets of the SIF must reach EUR 1.25mio within 12 months after authorisation from the CSSF.
Venture Capital Investment Company (SICAR)
Created in 2004, the SICAR is a regulated vehicle tailored to risk capital investments. Due to the high level of risk related to the SICAR, the access to the SICAR is also limited to “informed investors” (as described above).
Risk capital consists of high risk investments made in view of their launch, development or listing on a stock exchange. Investments performed by a SICAR do not have to comply with the principle of risk diversification, nor with lending or leverage restrictions.
The SICAR must take the form of a corporate entity, f.i. a public limited company (S.A. – société anonyme) or limited liability company (S.à r.l. – société à responsabilité limitée)
SICAR are subject to income tax at the rate of 28.80% (save the SICAR that have the legal form of a société en commandite simple which are transparent and totally disregarded for Luxembourg tax purposes). Income derived from transferable securities is, however, exempt from income tax which means that the effective tax rate of a SICAR is, in general, very low. Distributions made by a SICAR are exempt from withholding tax and foreign investors are not subject to tax in Luxembourg on the capital gains realised from the disposal of shares in the SICAR. The SICAR is not subject to net wealth tax.
SICAR have, in principle, access to double tax treaties concluded by Luxembourg and benefit from the EU Directives.
The SICAR is subject to authorisation and on-going supervision by the CSSF. The subscribed share capital plus share premium of a SICAR may not be less than EUR 1mio and must be fully subscribed within 12 months after the authorisation from the CSSF.
Private Wealth Investment Vehicle (SPF)
Created in 2007, the SPF (“société de gestion de patrimoine familial”) is designed for private investors acting exclusively for the benefit of their own private wealth. The activity of the SPF is strictly limited to the acquisition, holding, management and disposal of the financial assets excluding any commercial activity.
The SPF is exempt from income and net wealth tax in Luxembourg. It is also exempt from withholding tax on profit distributions. The SPF is however subject to a subscription tax at a rate of 0.25% per annum. The SPF cannot avail itself of the double tax treaties or EU directives.
Over the last 10 years, Luxembourg has demonstrated that it is committed to provide state-of-the-art vehicles that meet the requirements of the investors and funds sponsors. The draft law submitted recently to the Luxembourg Parliament (bill n° 6471) which (i) creates a new vehicle, the Special Limited Partnership and (ii) modernises the legal regime applicable to the Limited Partnership (société en commandite simple) is a further illustration of this commitment and will further increase the attractiveness of Luxembourg as a preeminent jurisdiction for structuring investments.
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