Luxembourg: Offshore Legal and Tax Regimes
The term 'offshore' is not used in Luxembourg legislation or in describing company forms. Use of the special 'holding company' forms is the key criterion for obtaining offshore tax treatment for most types of business; special forms are also available for collective investment vehicles and investment funds.
In 2003 the European Union finally agreed its Savings Tax Directive, under which Luxembourg was 'allowed' to apply a withholding tax to the returns on the savings of citzens of EU member states, initially at the rate of 15% (20% in 2008, and 35% from July 2011), rather than providing information to the citizens' home tax authorities. This is set to change, however, from 1 January 2015 when the withholding tax option will be abolished and replaced with automatic information exchange. It wasn't until May, 2004, however, that Brussels finally agreed acceptable rules with Switzerland for the imposition of a withholding tax and the preservation of banking secrecy, rules which would also apply to Luxembourg - the famous 'level playing field'. The Directive came into force in July, 2005.
In June 2009, the European Commission announced its decision to refer Luxembourg to the European Court of Justice over its incorrect application of certain provisions of the Savings Tax Directive.
The case regarded interest payments made to beneficial owners who benefit from "non-domiciled resident" status in their country of residence.
Because Luxembourg had not (or in the EC’s eyes, “refused”) applied the Directive to beneficial owners who benefit from the non-domiciled resident status in their country of residence, Luxembourg paying agents did not levy withholding tax on interest payments to such beneficial owners.
According to Luxembourg legislation, beneficial owners are considered to benefit from the "non-domiciled" status, if they are generally exempt from income tax in their state of residence for tax purposes or if the interest payments, as long as they are not transferred to the state of residence, are not subject to tax in that state.
According to the Commission, Luxembourg cannot provide for an exemption from withholding tax in situations other than those expressly provided by article 13 of the Directive. This lays down the rules for the "voluntary disclosure" procedure which allows the beneficial owner expressly to authorize the paying agent to report information to the tax authorities of his state of residence and the "certificate procedure" which ensures that withholding tax is not levied when the beneficial owner presents to his paying agent a certificate drawn up by his member state of residence for tax purposes.
“The Commission is of the opinion that the paying agent has the obligation to establish the residence of the beneficial owner on the basis of minimum standards, as provided by article 3(3) of the Directive,” the EC stated.
“If the beneficial owner is a resident of another member state in accordance with these standards, the member state of the paying agent must ensure that the latter applies the Directive and, in the case of Luxembourg, that the paying agent levies a withholding tax on interest payments to such a beneficial owner,” the Commission added.
“Consequently, the Commission considers that Luxembourg's legislation, in its current state, is not compatible with articles 2, 3, 10 and 11 of the Directive.”
In December 2008, the Commission sent a ‘reasoned opinion’ to the government of Luxembourg setting out its stance on the matter. This was the second stage in infringement proceedings and gave Luxembourg two months to respond to the Commission’s arguments.
The other key EU fiscal initiative affecting Luxembourg in particular, the EU's Code of Conduct Committee's campaign against 'harmful tax practices', resulted in the abolition of most of the holding company regimes in 2007, and their replacement by the new SPF format, aimed at the asset management sector.
Capital contributed to a Luxembourg company or branch was, until recently, generally subject to a 1% capital tax on the net value of the property contributed, but the 2008 draft budget provided for a reduction in the rate of capital duty to 0.5% as from 1 January 2008. The capital duty was subsequently abolished, as of January 2009 . Investment funds pay a flat registration duty of EUR75 (at the time of writing) when they are established and an annual subscription tax of 0.25% of net asset value on the last day of the calendar quarter. For contributions to other types of business entities, there may be an exemption under the following circumstances (subject to certain conditions):
- Share-for-share contribution;
- All assets and liabilities contribution;
- Conversion of retained earnings or reserves into share capital; or
- Migration of capital within the EU.