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The tax aspects of holding companies in Luxembourg. By: Thomas, Louis. International Tax Review, Jun2010, Vol. 21 Issue 5, p68-70, 3p, 1 Color Photograph; Abstract: The article discusses the taxes that are imposed to holding companies that operate their business in Luxembourg. It claims that the country has been improving its services continuously, in cooperation with other international groups to create the necessary tools to establish a stable and flexible corporate framework. It cites the various regulated and unregulated investment vehicles offered in the country, including the Socit de Participations Financires (SOPARFI). It examines the participation exemption tax regime that is imposed to dividends and capital gains.; (AN 52160486) Base de donnes: Business Source Complete Rubrique : Special features

The tax aspects of holding companies in Luxembourg

Luxembourg remains attractive for holding companies for reasons beyond its tax regime, explains Louis Thomas of KPMG Luxembourg Investment in Luxembourg Luxembourg, as a central place within the EU, has been continuously developing its services vis--vis most international groups and brings to the business community the tools necessary to have a stable and flexible corporate structure. The business community has recognised its political stability and its authorities' pragmatic approach. Luxembourg has also developed a reputation for various technical regulations that are modified on a regular basis in order to fit business needs. Luxembourg offers a range of popular regulated and unregulated investment vehicles. Specifically, these vehicles include the well-known Socit de participations financires (SOPARFI), the standard Luxembourg unregulated fully taxable company, and the private family asset holding company (Socit de gestion de patrimoine familial -- SPF) We will hereby describe the main tax aspects and benefits of holding companies in Luxembourg. Tax rules applicable to holding companies The attractiveness of Luxembourg for holding companies is mainly due to the favorable tax regime for dividends and capital gains, namely the participation exemption regime. The Luxembourg rules on participation exemption apply to both dividends and capital gains derived from qualifying participations. It also allows for an exemption from withholding tax on dividends paid to qualifying recipients. These rules were introduced in the Luxembourg tax code during World War IL and subsequent amendment to these rules have resulted in an improvement for corporate taxpayers. This a very rare type of tax legislation that is being applied to a third generation of taxpayers, and that has always been amended favorably to adapt to business. The Luxembourg rules on participation exemption governed by article 166 of the Luxembourg income tax law (LITL) can be summarised as follows: Dividends, capital gains and liquidation proceeds received by a Luxembourg parent entity
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from its direct qualifying subsidiaries or indirect qualifying subsidiaries held through tax transparent entities are exempt from income tax provided that: The Luxembourg parent entity is a: fully taxable resident collective entity listed in article 166 LIR paragraph 10 LITL, or fully taxable resident corporation not listed in article 166 paragraph 10 LITL, or Luxembourg permanent establishment of either: - a collective entity that is covered by the Parent-Subsidiary Directive; or a corporation resident in a country with which Luxembourg has signed a tax treaty; or - a corporation or a co-operative company that is resident in an PEA country other than a member state of the European Union; holding, for a minimum uninterrupted period of 12 months or undertaking to hold (on the allocation date of the income), at least 10% of the share capital of its subsidiary or has acquired it for at least 1.2 million (to qualify for dividend and liquidation proceed exemption) or at least 6 million (to qualify for capital gains exemption); this subsidiary being a: Collective entity listed and covered by the Parent-Subsidiary Directive, or Fully taxable resident corporation not listed in article 166 paragraph 10 LITL, or Non-resident corporation fully subject to income tax comparable to the Luxembourg corporate income tax. A minimum income tax of 10.5 % as of 2009 generally satisfies this requirement as long as the taxable basis is determined according to rules and criteria similar to those applicable in Luxembourg. Expenses in relation to a qualifying participation, such as interest expenses, are only deductible to the extent that they exceed exempt income arising from the participation in a given year. The write-down in value of a qualifying participation is deductible under certain conditions. Dividends paid to qualifying recipients are exempt from withholding tax provided that: The recipient is a: Collective entity listed and covered by the Parent-Subsidiary Directive; or Fully taxable resident corporation not listed in article 166 paragraph 10 LITL; or Permanent establishment of one of the above qualifying entities; or Collective entity resident in a treaty country and fully subject to income tax comparable to the Luxembourg corporate income tax as well as a Luxembourg permanent establishment of such a collective entity; or Corporation that is resident in and subject to taxation in Switzerland without benefiting from an exemption; or Corporation or co-operative company resident in a member state of the PEA other than an EU member state and fully subject to income tax comparable to the Luxembourg corporate income tax; or
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Permanent establishment of a corporation or of co-operative company resident in an PEA member state other than an EU member state holding for a minimum uninterrupted period of 12 months or undertaking to hold (on the allocation date of the dividends), at least 10% of the share capital of its subsidiary or has acquired it for at least 1,200,000, this subsidiary being a: Fully taxable resident collective entity listed in article 166 paragraph 10 LITL; or Fully taxable resident corporation not listed in article 166 paragraph 10 LITL. Qualifying participations are exempt from net wealth tax provided that the conditions applicable for the exemption from income tax on dividends received by Luxembourg resident parent companies (as described above) are fulfilled except for the minimum detention period. Indeed, no minimum holding period should be fulfilled to benefit from the net wealth tax exemption. However, debts relating to the acquisition of exempt participations are not deductible from the total assets for net wealth tax purposes. One pitfall that needs to be avoided when operating an international headquarters is the 0.5% annual net worth tax applicable to all non qualifying assets, such as cash or receivables as of January 1 of any given year. There are many ways to manage and mitigate this tax efficiently as long as appropriate and timely measures are taken. IP activities Since January 1 2008 Luxembourg has offered a very favorable tax regime for royalty income and relating capital gains and exempts 80% of qualifying income, resulting in an effective tax rate of 5.72%. The rules can be summarized as follows: 80% exemption on royalties and capital gain from certain IP The 80% exemption is applicable to certain type of IP rights including patents, trademarks/service marks, design/models, internet domain names and software copyrights relating to standard software. However, copyrights of literary or artistic work, plans, secret formulae and processes remain outside the scope of the new IP regime. This 80% exemption applies to the net positive income (gross revenue from the IP less directly connected expenses, depreciations and write-downs). In case of disposal of the IP, 80% of the capital gains realised on this transfer are exempt from tax. For this purpose, a recapture system is foreseen. The reduced basis for the computation of the capital gains (20% of the gain) will be increased by 80% of the net negative result derived from the IP rights incurred during the tax year of disposal or any previous year, provided that such negative result has not been offset as a result of its capitalisation. 80% deemed income deduction for self developed patents The law provides for an 80% deemed income deduction for self-developed patents that are used by the taxpayer himself. This notional deduction is calculated in terms of what the arm's length patent royalty would have been had such a patent been licensed to a third party.
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The law also applies to qualifying IP that has not yet been patented but for which the process has been started. However, when an application is denied, deductions affected during the application process must be added to the taxable income of the year of denial. General conditions In order to benefit from the new IP tax regime, the following conditions must be simultaneously met: The IP right must have been acquired or developed after December 31 2007; The IP right may not have been acquired from specified "directly" related companies, and Expenses, amortisations and write-downs economically related to the IP must be activated, if these exceed qualifying IP income in a given year. The burden of proof is on the taxpayer for the fulfillment of the cumulative conditions. Finally, it is important to note that IP assets qualifying for article 50 bis Luxembourg Income Tax Law are exempt from net wealth tax based on article 60 bis BewG (Bewertungsgezetz). Finance and treasury activities Although there is no specific tax regime applicable for finance and treasury activities, the Luxembourg authorities are ready to discuss international financial structures that involve Luxembourg. Some of these structures result in a low effective tax rate that helps groups achieve a global effective tax rate that is not too high, but also not so low as to be labelled bad corporate taxpayers. The tax authorities are also available to review with taxpayers in advance whether or not the pricing of a given financial transaction (or IP flow) can be considered arm's length, or in line with the market price. The possibility of having direct, transparent, and constructive communication with the Luxembourg tax authorities is certainly one important benefit that can benefit the board of an international headquarters with regard to the management of its tax risks. Other tax aspects

Network of double tax treaties, and investment protection treaties

Luxembourg has signed more than 60 double tax treaties and more than 80 investment protection treaties. Clarifications brought by these treaties bring a lot of comfort to international groups. Recently, Luxembourg concluded double tax treaties with Azerbaijan, Georgia, India, Moldova and United Arab Emirates. These treaties entered into force on January 1 2010. In 2008 five investment protection treaties were initialed with Tadjikistan, Panama, Barbados, Colombia and Jordania. One treaty with Oman has been signed and the investment protection treaties concluded with Peru and Madagascar entered into force. The list of applicable double tax treaties and investment protection treaties can be found on www.impotsdirects.public.lu and on www.unctad.org.

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EU interest and royalty directive

Luxembourg can also access the benefits of the EU interest and royalty directive that allows an exemption from withholding tax on interest and royalty payment paid to qualifying entities of the same group. This allows Luxembourg to play a central role for all EU flows of a given group.

Other investment vehicles

Over the last few years, Luxembourg has also increased its choice of funds-like investment vehicles (SIFs, SICARs, and others) and has adapted its company law to the current business climate. Currency In the Grand Duchy of Luxembourg, the official currency, is the Euro. Tax returns shall be prepared and filed in that currency. Accounts are generally also prepared and filed in that currency. It is, however, acceptable to issue shares and prepare the annual accounts in any other freely convertible currency. In that case, it is recommended that the company match the currency, of the subscribed capital with the one of the accounts. Private family asset holding company (Socit de gestion de patrimoine familial-SPF) After the abolition of the 1929 holding company regime, Luxembourg introduced an investment vehicle for individuals. The SPF was introduced by the law of May 11 2007. This type of company has been specifically designed to meet the business needs of family owned holding companies managing financial assets. This is why the exclusive object of the SPF is the acquisition, holding, management and disposal of financial assets, to the exclusion of any commercial activity. An SPF is exempt from corporate income tax, municipal business tax and net wealth tax. However, an SPF loses its tax-exempt status (for a given year) if it receives more than 5% of its dividends from a non-resident company, which is not listed on a stock-exchange and which is not subject to income tax comparable to Luxembourg corporate income tax (at least 10.5%). Companies listed in the annex to article 2 of the EU parent-subsidiary directive are deemed to be subject to comparable taxation. An SPF is not subject to VAT but is subject to all other direct and indirect taxes (for example, registration duties and payroll tax). An SPF is subject to an annual subscription tax of 0.25% of the paid-up capital at a minimum of 100 and a maximum of 125, 000 per year. The taxable basis for the subscription tax is the paid-up capital increased by the share premium. The taxable basis is increased by any debt exceeding eight times the paid-up capital plus the share premium. The subscription tax is levied on a quarterly basis. The SPF is excluded from double tax treaty benefits, and can not benefit from the EU parentsubsidiary directive as it is exempt from Luxembourg income tax. Dividend distributions by an SPF are not subject to withholding tax. Capital gains and liquidation proceeds realised by non-resident investors in a SPF are tax exempt in Luxembourg even if they are short term gains or proceeds. Shares issued by a SPF may not be publicly traded or listed on the stock exchange. Registration duty and transfer tax Capital duty was abolished in Luxembourg as from January 1 2009. A fixed registration duty of
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75 is due on incorporation, modification of by-laws or transfer of the statutory seat or central management to Luxembourg. Proportional registration duties apply on certain registered deeds. Deeds that may be registered, and may therefore be subject to registration duty include sales of immovable property like land and buildings, specific contributions to companies, rental leases and donations. The rate for proportional registration duty varies between 0.24% and 14.4%. A fixed registration duty of 12 or 24 applies on deeds which do not underlie the proportional registration duty. Transfer tax on the sale of real estate amounts to 7% or 10% (6% registration duty, 3% surcharge for real estate situated in Luxembourg City, 1% transcription duty). The contribution of real estate is either subject to reduced rates, or exempt, as in the context of reorganizations). Luxembourg challenges Luxembourg is largely dependent on the international economy. It is therefore subject to the variations of the global economy. It will be important to maintain its current flexibility and to continue adapting its rules rapidly through the decisions of a small number of talented individuals that can act quickly. Its multi-cultural context and the fact that Luxembourg is a founder and member of the European Union are also indications of quality and stability for international executives. Also, some of the smaller EU countries are now competing with Luxembourg and it will be very important that the accumulation of the various advantages that Luxembourg can offer today remain available in the future. Progress For over 50 years, the Luxembourg tax authorities, together with the support of the business community and various working groups, have progressively built and maintained a convergence of elements to offer international groups a platform for operating corporate structures in an efficient way. Luxembourg's advantage does not derive from one single isolated element, but is based on an accumulation of positive elements that, when added together, make it an appropriate jurisdiction for holding companies. PHOTO (COLOR): Luxembourg's holding company landscape includes a number of different features

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By Louis Thomas Louis Thomas, KPMGM Tel: + 22 51 51 5527, Email: louis.thomas@kpmg.lu Louis Thomas has been a tax partner of KPMG Luxembourg since 1999, in charge of commercial & industrial clients, and in charge of the Luxembourg tax aspects related to the interposition of Luxembourg vehicles of structured holdings, intellectual property and finance structures in various European countries and in connection with North American clients. Thomas has carried out successfully some very important restructuring and merger projects for top 10 commercial and industrial groups worldwide, where he advised on both direct and indirect
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taxation issues. Moreover his indepth knowledge of the legal framework surrounding company reorganisations is very useful for advising on the merger itself. He has more than 22 years of professional experience in business and international corporate tax consulting including feasibility studies, development and marketing of tax efficient financial structures of products. Through his past practice as corporate lawyer, he also gained in depthexpertise in the law on commercial companies. Euromoney Institutional Investor PLC. This material must be used for the customer's internal business use only and a maximum of ten (10) hard copy print-outs may be made. No further copying or transmission of this material is allowed without the express permission of Euromoney Institutional Investor PLC. Source: International Tax Review and http://www.internationaltaxreview.com.

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