For the past couple of decades, Luxembourg has been a major financial centre and home to an increasing number of international investors. More recently, the country has been attracting numerous holding companies as well as financial and intellectual property structures, which are being set up within major international groups. In the past few years, the Luxembourg government has been looking to branch out and attract key players from other industries.
Taxation can certainly tip the scales in the favour of one country and Luxembourg consistently focuses on keeping its competitive edge in that area – particularly in the face of increasing competition over the years from the Netherlands, Ireland, Malta and Cyprus, to name but a few other EU member states.
As far as financial institutions, mutual investment funds and investment companies are concerned, the tax regime which governs them has remained more or less the same. Of course, the industry has had to deal with the implementation of the EU Savings Directive. However, this has not stopped Luxembourg-based assets under management increasing steadily year after year.
New structures bring in money
In a related area, the introduction of new legislation governing risk capital investment companies (Sociétés d'investissement en capital à risque or SICARs) and securitization companies and vehicles attracted new investors – mainly private equity investors – who liked both the effectiveness and straightforward nature of these new regimes.
Under the SICAR regime, the companies' investors must either be institutional investors or professional investors, that is, people who invest more than €125,000 ($161,000). The SICAR legislation provides for an exemption from corporation tax for all or part of the income received by the investment company and distributed to its shareholders in the form of dividends. This distribution made to shareholders is exempt from withholding tax, which ensures tax neutrality between the investments made by the SICAR and its investors/shareholders. In certain cases, this technique also reduces the aggregate tax burden on investments. In addition, SICARs are not subject to the standard capital duty at the rate of 1% when they are incorporated or when they increase their share capital. Instead, they only need to pay a small fixed charge. Finally, SICARs are exempt from net wealth tax.
The provisions of the securitization legislation governing relevant investment funds or companies are quite similar to those of the SICAR legislation. The differences between the two regimes will not be addressed here.
Helping real estate
Luxembourg has been attracting and still attracts numerous real estate investors who find there a well established and rather flexible regulatory environment combined with an efficient international tax environment.
As regards international structures (holding companies, finance companies or intellectual property structures), Luxembourg tax law has been amended to keep up with relevant developments in Community law but also to face increased global competition.
Rates and royalties
Thus, the attractiveness of the Luxembourg marketplace increased further when the combined corporation tax rate went under the 30% mark, to 29.67% – this included a decrease in municipal business tax, particularly in the city of Luxembourg.
In connection with the implementation of the EU Interest and Royalties Directive, the withholding tax on royalties was abolished in almost all cases. Interest payments had themselves been exempt from withholding tax for many years.
Treaty support
At the international level, Luxembourg has continued to add to its already extensive double tax treaty network, thus improving the tax treatment of the financial flows between Luxembourg and these new treaty partners. At the time of going to press, no fewer than eight double tax treaties are in the process of being negotiated, adopted or ratified.
The preferential tax regime granted to holding companies under the law of July 31 1929 (the 1929 Holding Companies regime) will be maintained until 2010. The regime had been under a state aid review by the European Commission. In its decision given on July 19 2006, the Commission asked that companies no longer be incorporated under the preferential regime while agreeing that the regime would remain valid for existing 1929 holding companies until January 31 2010. At any rate, the use of this type of company had increasingly been limited to the management of the private assets of high net worth individuals. As a matter of fact, since a participation exemption regime was introduced in the late 1990s for fully taxable companies in Luxembourg, the set up of 1929 holding companies for international groups has effectively been rendered less useful. Based on its awareness of the situation, the Luxembourg government has committed to developing a substitute for the H29 regime geared towards natural persons by 2010.
Luxembourg also intends to demonstrate that there's more to tax than international holding or finance companies. For instance, Luxembourg used an option provided for under the sixth VAT directive and introduced a VAT rate of 3% for broadcasting services from January 1 2006. Several key players in the broadcasting industry have already seized this new opportunity and decided to locate in Luxembourg, while some of their competitors are thinking about following suit.
Luxembourg also offers many advantages to logistics companies, which can benefit from its central location at the heart of Europe and its excellent infrastructure. Furthermore, companies located in Luxembourg do not need to pay VAT upfront on imported shipments, which can mean substantial financial savings.
Duty goes
Finally, if Luxembourg was one of the last member states in the EU to levy a proportional capital duty of 1% on all capital contributions, the government is thinking about abolishing it, hopefully in the near future.
Last but not least, as regards personal income tax, net wealth tax was abolished from January 1 2006 (many hope the abolition of the tax for legal entities will not be too far behind) and, at 38%, the marginal income tax rate is relatively low. In addition, non-resident taxpayers can also benefit from an attractive tax regime, particularly in the case of a married couple where one spouse works in Luxembourg and derives over 50% of the household's income.
René Beltjens, (rene.beltjens@lu.pwc.com), Luxembourg
Biography |
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René Beltjens is head of the tax practice in Luxembourg and member of the PricewaterhouseCoopers international tax structuring network. He is also the Eurofirm US outbound investment leader, a group whose main purpose is to align and coordinate Eurofirm resources to serve US based clients better. He advises major international groups on the tax impact of reorganizations of their structures (use of Luxembourg as an intermediate holding and/or financing vehicle), make them aware of tax planning opportunities and maps out, mitigation strategies. Beltjens also assists these groups in their negotiations with national authorities. Beltjens contributed a report on group taxation to the 2004 Vienna congress of the International Fiscal Association. Beltjens holds a law degree from the Catholic University of Louvain la Neuve, a degree in tax law from ICHEC in Brussels, and an MBA with a major in finance from the Catholic University of Leuven. |
