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Samantha Nonnenkamp |
As announced by the Luxembourg government following the recent decision of the European Commission on 1929 holding companies, Luxembourg is introducing a new investment vehicle for private wealth investment. A draft law was put before the Luxembourg Parliament on November 20 2006, defining the characteristics and conditions of the Société de Gestion de Patrimoine Familial (or SPF).
An SPF is defined in the draft law as a company whose purpose is limited to the acquisition, holding, management and disposal of financial assets excluding any type of commercial activity. The shares of the SPF have to be exclusively held by eligible investors and its bylaws make a specific reference to the present law. SPFs have to be set up under specific legal forms defined in the draft law.
Purpose of SPFs
SPFs perform private wealth management activities only. Any commercial activity is therefore prohibited. The SPFs may hold financial instruments within the meaning of the law of August 5 2005 on financial guarantees. Financial instruments may be shares in companies, other securities equivalent to shares/units in companies, undertakings for collective investment, bonds and other forms of debt instruments, as well as cash and assets of any kind held in a bank account. The SPF may also hold participations in the share capital or the voting rights of other companies, but only to the extent that the SPF does not involve itself in the management of these companies. The SPF will not be allowed to render any kind of services, including granting interest bearing loans, even to companies in which the SPF holds a participation. It may, however, make advances or guarantee liabilities of a company in which it holds a participation, but only on an ancillary and non-paid basis.
Eligible investors
Eligible investors within the meaning of the draft law are:
individuals managing their private wealth, or
private wealth entities acting for one or several individuals, or
intermediaries acting on behalf of either of the above.
Based on the commentaries to the draft law, private wealth entities are intended to include entities such as; trusts, foundations, stichtings or any such other type of entity.
Tax regime of SPFs
The SPF is exempt from corporate income tax, municipal business tax and net-worth tax. It is also exempt from Luxembourg withholding tax on distributions.
Income from financial assets is therefore exempt at the level of the SPF but will be taxed subsequently once the income is distributed to the private investor:
Interest paid by the SPF on its debts towards individuals are subject either to the final 10% withholding tax for individuals resident in Luxembourg or subject to withholding tax under the provisions of the EU Savings Directive mainly for EU resident individuals. Dividends paid to Luxembourg shareholders (individuals) will be fully taxed in their hands.
Gains realised by non-residents upon the sale of a participation in a SPF, either upon sale or upon liquidation of the company will not be subject to tax in Luxembourg.
Given its tax regime, the SPF will not be able to benefit from the double tax treaties concluded by Luxembourg.
The SPF is excluded from the exemption regime for a given financial year if at least 5% of the total dividend income it receives during that year is derived from participations in non-resident, non-listed companies that are not subject to an income tax similar to Luxembourg corporate income tax (that is, subject to an effective rate of less than half the rate of the Luxembourg corporate income tax of currently 22%, that is, 11%).
The SPF is subject to subscription tax at a rate of 0.25% applicable on its share capital, including any share premium. The minimum tax is €100 ($133) and the maximum tax is €125,000 a year. Subscription tax will also apply to the part of the debt (if any) that exceeds an equity to debt ratio of 1 to 8.
EU dimension: no state aid
The EU dimension was taken into account in the preparation of the draft law. The SPF, being a passive investment vehicle that is dedicated to private wealth management and does not interfere in the management of any subsidiary that it may hold, it does not realise any economic activity and should not be seen as benefiting from state aid. Article 87 of the Treaty of Rome, which prohibits state aid, deals with aids granted to enterprises carrying on an economic activity. Recent jurisprudence of the European Court of Justice (ECJ January 10 2006, Cassa di Risparmio di Firenze) confirms this position.
Samantha Nonnenkamp (samantha.nonnenkamp@atoz.lu), Luxembourg
