| In this section:
- Luxembourg
Forms of Offshore Operation
- Luxembourg
Tax Treatment of Offshore Operations
- Luxembourg
Taxation of Foreign Employees of Offshore Operations
- Luxembourg
Exchange Controls
- Luxembourg
Offshore Activities
- Luxembourg
Employment and Residence
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. 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 0.05% 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.
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Luxembourg Forms of Offshore
Operation
Offshore
operations may take place within the following
forms:
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Luxembourg Tax Treatment
of Offshore Operations
See
Domestic
Corporate Taxes for the general principles
of Luxembourg; however these do not apply to offshore
entities except as indicated below. Offshore entities
are not covered by Luxembourg's Double Taxation
Treaties except as indicated below. From January
2011, a minimum flat income tax of EUR1,500 was
introduced for companies whose financial assets,
transferable securities, and cash at bank amount
to more than 90% of their balance sheet.
Offshore
companies (but see above for the status of the
various corporate forms) are taxed as follows
:
- The
Family Private Assets Management Company,
or SPF is intended to be exempt from corporate
income tax, municipal business tax and net-worth
tax, and from withholding tax on distributions.
These vehicles are prohibited from commercial
activity, and are limited to private wealth
management activity, for example the holding
of financial instruments such as shares, bonds
and other debt instruments, in addition to
cash and other types of bankable asset. If
the SPF is used to hold voting rights in other
companies, it must ensure that it does not
involve itself in the running of those companies,
and it is prohibited from providing any kind
of service. The SPF's exemptions can be affected
by participation in non-resident, non-listed
companies, if those companies are located
in a country not subject to a roughly equivalent
corporate tax regime.
A subscription tax at a rate of 0.25% is payable
on share capital.
- SOPARFI companies,
which were created under the law of 24th December
1990, are subject to the normal regime of
income taxes etc (see Direct
Corporate Taxation) but do receive the
benefit of Double Taxation Treaties, and in
many circumstances are exempt from taxation
on dividends received from or paid to resident
and non-resident companies in which they have
a significant participation. The EU Parent-Subsidiary
Directive also provides some withholding tax
exemptions (improved as from 2004, see
below), but the SOPARFI benefits are more
extensive. The rules are complex; there are
conditions; and there are limitations on the
deductibility of expenses.
- The various
forms of UCI are all exempt from all Luxembourg
taxation, and pay only a small capital duty
on start-up, plus an annual tax on net assets
which (at the time of writing) varies between
0.01% and 0.06% depending on the type of fund.
In June, 2004, the Luxembourg government announced
that pension funds would be exempt from the
0.01% 'subscription' tax, in order to encourage
the transnational pooling of pensions assets.
- In
2004, Luxembourg introduced the SICAR, which
may take one of a number of corporate forms,
including that of a limited partnership (see
Forms of Company).
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, and is exempt
from the municipal business tax. Income from
the partnership and capital gains realized
on units by nonresident partners will not
be taxed in Luxembourg.
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Luxembourg The EU's Parent/Subsidiary
Directive
Changes to the
parent/subsidiary directive in 2004 have reduced
the
holding requirement to 20% for 2005-06; to 15%
for 2007-08; and to 10% for 2009 onward. Under
the EU's Directive on Interest and Royalties,
which also came into effect in 2004, both types
of payment will be exempt from withholding tax
if they are between associated companies (rules
as for the participation exemption).
Luxembourg
has actually gone even further, meaning that
there is no withholding tax on royalties paid
to non-resident companies.
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Luxembourg Taxation of
Foreign and Non-Resident Employees
In
Luxembourg the taxation of individuals is based
entirely on the concept of residence, regardless
of nationality. See Domestic
Personal Taxes for the general principles
of individual taxation in Luxembourg, which also
apply to the resident employees of non-resident
entities. Generally, individuals are considered
to be resident when they maintain a residence
in Luxembourg with the intention of remaining
other than temporarily. A stay of six months is
deemed to be residence. Most types of compensation
and benefit paid to employees are taxable. Traditionally,
there have been no special privileges or exemptions
for expatriate workers, although an
expatriate tax regime for highly skilled employees
came into force on January 1, 2011. See Domestic
Personal Taxes for details of the newly-introduced
expatriate tax regime.
Non-residents
are liable to pay Luxembourg taxes only on certain
types of income arising in Luxembourg or from
Luxembourg sources. These types of income are
very precisely defined in Luxembourg legislation.
Nationals of countries with which Luxembourg has
Double Taxation Treaties
also need to be aware that the relevant treaty
may well affect their tax treatment.
The
main types of taxable income for non-residents
are:
-
income
from trade or business carried on in Luxembourg
or arising there;
-
income
from dependent services (ie employment income)
performed or arising in Luxembourg;
-
pension
income resulting from former activity in Luxembourg;
-
investment
income arising or paid from Luxembourg;
-
income
from leasing of goods etc situated in Luxembourg
or exploited by a Luxembourg entity;
-
capital
gains on the sale of property or substantial
participations in Luxembourg companies.
Each
of these categories is further defined in considerable
detail in the legislation.
Luxembourg
eventually signed up to the compromise on the
European Savings Tax Directive reached in January,
2003, and has been imposing a withholding tax
on non-residents' investment returns, like Switzerland,
as from July, 2005 (initially at a rate of 15%,
rising to 20% in 2008, and 35% in 2011).
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Luxembourg Exchange Control
Luxembourg
has no exchange controls.
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Luxembourg Offshore Activities
'Offshore',
ie low-tax, activity in Luxembourg is possible
only through the various specialised corporate
forms listed above. These types of holding
company and collective investment fund are limited
to the specified holding and financial activities
for which they were created. All other types of
commercial and business activity have to be conducted
in the mainstream, and therefore highly-taxed,
economy.
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Luxembourg
Employment and Residence
There
are no special privileges or disabilities for
the employees of non-resident or offshore operations
as such. Nationals of European Union member states
have free right of movement in Luxembourg. However,
any stay for the purposes of employment or remunerated
activity, including remunerated or non-remunerated
training courses, is subject to obtaining in advance
both a provisional residence permit (autorisation
de sejour provisoire) from the Ministry of Justice,
and a work permit from the Ministry of Labour.
Presumably these permits cannot be refused to
EU nationals.
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