Luxembourg Finance Company (Lux FinCo)
Contributed by Gerli Wren & Co.
07 May, 2013
Contributed by Gerli Wren & Co. [www.gerlico.com ]
- a Lux FinCo is entitled to the extensive Luxerñbourg DTT network and EC directives;
- no withholding tax on interest in Luxembourg;
- virtually no statutory audit;
- advance tax rulings from the Luxembourg tax authorities are possible and is highly
- recommendable to avoid discussions about the taxable spread;
- annual accounts and taxable profit can be reported in another currency than the euro (' functional currency ruling' ).
When to use it
* as a financing vehicle to optimize group financing activities by reducing (foreign) withholding taxes;
* can also be used in combination with holding and/or licensing activities.
Taxation of a Lux FinCo
- Interest payments are not subject to withholding tax;
- Lux FinCo can suffice with reporting a small taxable spread on incoming and outgoing interest payments;
- income is subject to3lYo Luxembourg corporate income tax;
- no stamp duty;
- wealth tax of 0.5% of the net asset value with exemptions for e.g. participations or IPs;
- profit distributions (dividends) are subject to l5Yo Luxembourg dividend withholding tax but will be fully exempted under a tax treaty or the EC Parent Subsidiary Directive.
The favorable tax regime for financing companies in Luxembourg is well known. An important tax advantage in Luxembourg is the absence of withholding tax on interest, which means that the 'repatriation' of interest received by the Lux FinCo to its lender - irrespective of the latter's country of residence - can be realized without withholding tax. By using the extensive tax treaty network, the typical Luxembourg finance structure furthermore allows for a reduction of foreign withholding taxes on interest payments.
Based on Luxembourg corporate law, several types of legal entities can serve as a Lux FinCo. The most commonly used types are the Sárl (a private limited liability company) and the SA (a public limited liability company).
For more detailed information about Sárls and SAs, we refer to our memorandum titled 'Legal aspects of a Luxembourg Sarl and SA'.
3. Taxation of Lux FinCo
In general, the income of a Lux FinCo is subject to corporate income tax at a rate of 3l% Interest income derived from financing activities are taxable in Luxembourg. On the other hand, interest expenses are in. principle tax deductible. In case a Lux FinCo attracts a loan and lends it on to another company (i.e. back-to-back situation), the Lux FinCo has both interest income and interest expenses which can be offset against each other. For Luxembourg corporate income tax purposes, the Lux FinCo will only have to report a small taxable profit. This can be realized by applying a small mark-up (spread) on the interest.
Lux FinCos have access to the extensive tax treaty network of Luxembourg as well as the EC Interest and Royalty Directive, resulting in tax treaty protection and reduced withholding tax rates on interest received by the Lux FinCo. Furthermore, Luxembourg has no withholding tax on interest.
Consequently, structuring international financing activities via a Lux FinCo can result in substantial tax savings.
In a situation where a Russian company would attract a loan from a lender residing outside Russia (e.g. offshore), the interest payments would be subject to 20%o Russian interest withholding tax (unless reduced under a tax treaty). This Russian interest withholding tax can be reduced substantially by using a Lux FinCo.
In the event the loan from the foreign company is received by the Russian company via a Lux FinCo, the Russian company will have to pay interest to the tux FinCo instead of the foreign company. Subsequently the Lux FinCo will pay interest to the foreign company.
Interest payments ao. Á" Russian company to a Lux FinCo are not subject to Russian interest withholding tax, whereas interest payments from a Lux FinCo to the foreign company are not subject to interest withholding tax either. Consequently, interposing a Lux FinCo would result in a saving of 20%o Russian interest withholding tax.
This can be illustrated as follows:
Suppose the interest payment to the foreign company amounts to 100,000 Rubbles. in that case, an amount of 20,000 Rubble of Russian interest withholding tax would be due if the interest would be paid directly to the foreign company. However, if the financing activities are structured via a Lux FinCo, no interest withholding tax will be due.
Consequently, by interposing a Lux FinCo, the Russian company will save 20,000 Rubbles of Russian interest withholding tax for each interest payment in the amount of 100,000 Rubbles.
Luxembourg transfer pricing rules allow for the Lux FinCo to suffice with reporting a small taxable spread of for instance 0.5%.hr this example this would lead to a taxable profit of 500 Rubbles. This profit is subject to3lYo Luxembourg corporate income tax, being 155 Rubbles in total.
I Assuming the Russian withholding tax rate is not reduced under a tax treaty.
4. Corporate income tax return.
The Lux FinCo must file an annual corporate income tax return. This tax return prepared in euros. The taxpayer however has the possibility to report its taxable income in another currency.
This could be attractive if the Lux FinCo is part of an international group which reports in a foreign currency or prepares its administration in a foreign currency. By applying this currency as well, foreign exchange results will be eliminated at the level of FinCo.
5. Public filing in Luxembourg
Registration with the Luxembourg trade register is obligatory and the Lux FinCo is required to prepare annual accounts in conformity with Luxembourg civil law. The annual accounts need to be filed with the Luxembourg trade register on an annual basis.'
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