Luxembourg: Law of Offshore
Holding Company Law
Low tax or 'offshore' activities in Luxembourg usually involve use of a 'holding' company.
None of the various types of holding company has a specific corporate form separate from the forms available under the Commercial Companies Law of 1915, ie SA, SARL or Societe a Commandite par Actions (SECA).
The various holding regimes were abolished effective from January 1, 2007, following an EC decision that they violated EC Treaty state aid rules by granting "unjustified tax advantages". However, under the implementing legislation, pre-existing holding companies were entitled to continue benefiting from their current tax regime until December 31, 2010.
The replacement for the holding company regime is the SPF (Family Private Assets Management Company or Societe de gestion du Patrimoine Familiale). See Offshore Legal and Tax Regimes for more details.
In 2004 the Luxembourg Parliament passed the final text of legislation on SICARs (Sociétés d’Investissement en Capital à Risque), which offer an alternative to the traditional limited partnership structure which works well for fund managers and investors in countries such as the United Kingdom, but can pose problems for fund managers in continental Europe. The new law defined venture capital as direct or indirect investment in an entity to finance the launch, further development or flotation of the entity. This definition includes a wide variety of investment forms in addition to straight equity, such as corporate bonds, mezzanine finance, and convertible bonds.
A SICAR may take one of a number of corporate forms, including that of a limited partnership (see Forms of Company). SICARs in corporate form may adopt an “open-ended” share capital structure, like an open-ended investment company or SICAV, and thus avoid multiple filings for every movement in equity capital. The minimum subscribed share capital is, at the time of writing, EUR1 million, of which at least 5% must be paid up. No special restrictions are imposed on distribution policy, and the legal reserve requirement and usual interim dividend and capital redemption formalities are waived.
Because SICARs are high-risk investments, the law restricts access to professional, institutional and 'knowledgeable' investors. An investment of at least EUR125,000 (at the time of writing) is required together with an election in writing or the provision of a certificate issued by a licensed bank or other financial services professional confirming the expertise and experience of the investor.
A SICAR must appoint a duly authorized Luxembourg-registered credit institution as custodian of its assets. A SICAR must be approved by the CSSF, which will, in particular, examine the SICAR’s articles of incorporation or their equivalent and the choice of custodian bank as well as the professional qualifications and expertise of the SICAR’s executive management. Once approved, a SICAR need not undergo the standard “visa” clearance procedure for prospectuses. However, the law does require at least one prospectus, as well as an annual report. The annual report must be published within six months of the relevant reporting date and must be the subject of an external audit. SICARs are expressly excluded from the requirement to prepare consolidated financial statements.
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. Issues regarding the municipal business tax have been resolved by providing an exemption from this tax for SICARs adopting the SeCS form. Income from the partnership and capital gains realized on units by nonresident partners will not be taxed in Luxembourg.
See Offshore Legal and Tax Regimes for more details of the tax treatment of the different types of holding company.