creavision Published by
Discovering Luxembourg Relocating to Luxembourg - why now? Turning Art into a Security Income Tax below 10%? - AIFMD New law - Luxembourg Limited Partnerships The Luxembourg Holding Company Special Section: Luxembourg Foundations
contents Creavision About this Edition
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Luxembourg: An international Financial Centre
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Relocating to Luxembourg: Why?
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The Intellectual Property Company
Page 11
Transforming Art into a Security
Page 12
Creating your own Specialised Investment Fund
We have summarised the most important solutions in one single publication and have tried to make the content easy to read and informative.
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AIFM: The Alternative Investment Fund Manager Directive
We hope you enjoy reading it and that we have made Luxembourg and its solutions more tangible for you.
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Special Tax Regime for Alternative Investment Fund Managers
The Creatrust Team
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New Law: Special Limited Partnerships
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SOPARFI: Luxembourg Holding Company
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SPF: Private Wealth Management Company
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Special Section: Bill on the new Luxembourg Foundations
The most frequent question we get from our international clients is: why Luxembourg? This edition of Creavision seeks to explain what makes Luxembourg special and especially why corporate clients, fund managers and family offices use Luxembourg and some even relocate to Luxembourg.
Creatrust is a provider of solutions for corporate clients, fund managers and family offices. Additional information about Creatrust and the solutions presented in this magazine can be found under www.creatrust.lu.
Creavision is a Creatrust Publication Creatrust Sàrl BP 027 - West Side Village 89 e, Parc d'activités L-8308 Capellen GD Luxembourg Tel : +352 277 299 99 Fax: +352 277 299 11 Email: info@creatrust.lu Website: www.creatrust.lu Numéro de matricule: 2005 2425 108 A.E.: 117448 Numéro RCS: B110593 Print run: 1.500 copies
Luxembourg - Leading international financial centre
Net assets under management in
Luxembourg funds: 2.523 billion euro at the close of June 2013. This represents an increase of 5.85% since the 1st of January 2013. Recent achievements: 1�� European country to transpose the AIFM directive into law. Facts about Luxembourg Luxembourg, officially the Grand Duchy of Luxembourg is bordered by Belgium, France and Germany. It has has a population of 524,853 (as of October 2012) in an area of 2,586 square kilometres (998 sq mi). As a representative democracy with a constitutional monarch, it is headed by a grand duke and is the world's only remaining grand duchy. Luxembourg is a developed country, with an advanced economy and the world's second highest GDP (PPP) per capita, according to the World Bank. Luxembourg is a member of the European Union, NATO, OECD, the United Nations, and Benelux. Luxembourg's culture is a fusion of Roman and Germanic Europe, borrowing customs from each of the distinct traditions. Luxembourg is a trilingual country: Luxembourgish, French and German are official languages. Although a secular state, Luxembourg is predominantly Roman Catholic.
How could the smallest country in Europe, become one of the largest financial centers? To make a long answer short: Luxembourg has turned its small size into an advantage. Where other large countries can be lost in debate and administrative procedures, Luxembourg is run like a company, intent on ensuring its competitive advantage in Europe and beyond. Intelligent implementation of EU directives into Luxembourg law has been turned into a decisive advantage. While larger countries still wonder how to implement a directive, Luxembourg has already voted, past and implemented it, with a decisive first-mover advantage. The implementation of the AIFM Directive is a good proof in point. Last but not least Luxembourg is the product of its political leadership. Intelligence, commitment, language skills and superior diplomatic talent. The quality of this leadership is best understood by studying the achievements of its prime minister Jean-Claude Juncker.
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Relocating to Luxembourg - Why?
Safety, stability, ease of life: Executives who come to work in Luxembourg for a few years usually end up staying. Luxembourg is not a tax haven - so why should anyone wish to relocate there? When you talk to foreigners living in Luxembourg, they are likely to tell you that they came to work in Luxembourg for a few years only, and then they stayed. Luxembourg is not a tax haven. As such, unlike Monaco and Dubai, Luxembourg does not lure residents with an absence of personal income tax. Luxembourg can probably best compared to a “small Switzerland” in the heart of Europe. Political stability, security, reliable and forthcoming administration and efficient and pragmatic tax administration. Are these reasons sufficient to come and live in Luxembourg. It depends from where you come and what your experience has been. If a changing political landscape, a policy of suspicion towards wealth and increasing insecurity have made you wary, Luxembourg might be the place for you. Choosing for Luxembourg does not mean giving up anything. Luxembourg residents can freely develop their passions and their enterprises and enjoy everything Europe has to offer.
Luxembourg is the safest city in the world and has highly sophisticated infrastructures linking it to many major European cities in just a few hours. (London, Paris, Frankfurt, Barcelona, Rome, Copenhagen, Geneva, Nice, etc.) The free circulation of people and goods in the European Union is guaranteed by the Treaty of Rome and strengthened by Luxembourg’s membership of the Schengen area. Luxembourg has also voted a new piece of legislation to attract highly skilled employees who want to use their skills in the many innovative businesses located in the country. In term of taxation, to name a few, high net worth individuals can enjoy various tax benefits when becoming resident: ● No wealth tax ● No inheritance and succession tax (direct line descendants). ● Maximum tax rate: 39%. ● No capital gains tax: if holding under 10% and held for at least six months. ● Tax on Luxembourg-source interest received: 10% withholding tax (flat rate). ● Tax on Luxembourg-source dividends: 15% withholding tax then standard rate with a 50% allowance. ● Tax on life assurance income: nil, if held for at least 10 years. ● VAT on motor vehicles: 15%
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Intellectual Property Companies in Luxembourg
You can reduce your effective tax rate on income and capital gains on intellectual property to below 6%. IP Companies benefit from a tax break of 80% on income and capital gains. The Luxembourg tax regime for income and capital gains from intellectual property (IP) is defined in the law of 21 December 2007 and defined in Art. 50bis of the Luxembourg Tax Code. Scope of the law All individuals or companies either residing or carrying on activities in Luxembourg can benefit from the IP regime according to which 80% of the net income and capital gains generated by, or issued from, copyrights on software, patents, trademarks (including “service marks” and “domain names”) designs, patterns and models, acquired or instituted after 31 December 2007, shall be exempt from tax, while only 20% shall be taxed at the ordinary combined income tax and municipal business tax) rates. Details on tax treatment The tax benefits can be summarized as follows: •80% exemption, i.e. only 20% of the net income (including capital gains) will be taxed. •All expenses directly connected with the acquisition and constitution (including financing costs and amortization) can be deducted. In practice this reduces the effective tax rate below the normal 6% rate (see case study).
Case Study A foreign investor (a company or a private individual) has developed or owns an IP Right (e.g. copyright on software). He contributes this IP Right into a Luxembourg company. Generally the said company will be a Société à Responsabilité Limitée (SàRL) and no preliminary external valuation needs to be carried prior to incorporation. Assumptions: •Value of software rights: 800 and amortized over 10 years •Royalties of 200 per year •Legal and other development costs associated for 20 per year The tax situation of the Luxembourg IP company will become as follows: Royalties
200
Amortization
-80
Associated costs
-20
Gross profit
100
Taxable income
20
Income tax 29.22%
-584
Net profit
9414
Effective tax rate
5,8%
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Private Art Portfolios - Art Securitisation
Turning art into a securityPrivate Art Portfolios are securitised collections of art for art investors. Private Art Portfolios are individually tailored to the needs of private investors. Background There are usually two main reasons for investing into Art. The first one is passion, it is the desire to own, hold and display a series of artworks. The second is the opportunity to invest into a tangible asset. In times of economic crisis, artworks may represent a safe-haven investment. Family offices and collectors rely on professional advice when it comes to building a collection of art for investment purposes. The reason is mainly due to the fact that the emotional factors, which are predominant when it comes to buying art for passion, may interfere with judgment when it comes to investment. In addition investors increasingly seek to “package” their art investment. The reasons for “packaging” the art collection are manifold. Among others packaging can allow investors to: •Hold a collection jointly between family members or related parties and assign a clear percentage to each holder. •Evenly share in the costs and proceeds. •Deduct the costs of outside advisors and consultants. •Harmonize the tax implications of capital gains.
Research Paper Fine Art Wealth Management and Creatrust have joined forces to create a solution encompassing all of the above considerations into one product: Private Art Portfolios. Rationale: Private Art Portfolios are securitized art collections. The securitisation allows ownership, management, revenues and costs to be shared between different parties while maintaining the art collection complete. By securitising the art collection, family members can own part of the collection without dismantling it. Family members can also donate or sell their ownership to other family members, while leaving the collection intact. In addition to owning part of the collection, the family members perceive the proceeds of any sale or lending activity and participate to the extent of their ownership in the costs of maintaining and insuring the collection. Hence securitisation has become an ideal opportunity to maintain the collection over generations. Art as an investment: Securitisation can also be used to make an art collection available to outside investors. The originator bundles the amounts invested into a securitisation fund and uses the invested amount to buy and sell artwork. A copy of the research paper can be obtained on our web-site www.creatrust.lu.
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Specialised Investment Funds in Luxembourg
Specialised Investment Funds (SIF) are a flexible way to share your skills with professional investors. SIF have no constraints on the type of assets and benefit from a lighter regulatory regime. SIF - Specialised Investment Funds The Specialised Investment Fund (SIF) is a multipurpose investment fund vehicle for international institutional and qualified investors requiring a more limited level of protection. Pursuant to article 2 of the SIF Law “well-informed” investors comprise: institutional investors; professional investors; and other investors who confirm in writing that they adhere to the status of “wellinformed” investors and who either invest a minimum of EUR 125.000,- or have been assessed by a credit institution, an investment firm or a management company which certifies the investors’ ability to understand the risks associated with investing in the SIF. Authorisation and supervision As a regulated vehicle, the SIF must be approved by the Luxembourg supervisory authority. The authorisation will be granted subject to: •approval of the constitutional documents; •approval of the choice of depositary bank and auditor; •notification of the directors of the fund or managers of the management company.
Risk Diversification The CSSF has published general guidelines for the risk diversification requirements applicable for SIFs in the Circular CSSF 07/309: •In principle, a SIF may not invest more than
30% of its assets or commitments to subscribe securities of the same type issued by the same issuer. However, this restriction does not apply to •investments in securities issued or guaranteed by an OECD Member State or its regional or local authorities or by EU, regional or global supranational institutions and bodies and to •investments in target UCIs that are subject to risk-spreading requirements at least comparable to those applicable to SIFs; •Short sales may not in principle result in a SIF
holding a short position in securities of the same type, issued by the same issuer and representing more than 30% of its assets. •When using financial derivative instruments,
a SIF must ensure, via appropriate diversification of the underlying assets, a similar level of risk-spreading. Similarly, the counter-party risk in an OTC transaction must, when applicable, be limited having regard to the quality and qualification of the counterparty.
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AIFM - Alternative Investment Fund Manager Directive
Alternative Investment Fund Managers need to be aware of the new AIFM Directive - Here is why. The AIFM directive has been defined to bring more supervision to the alternative investment fund industry (hedge funds and private equity funds) after the 2008 financial industry crisis.
The purpose of the new AIFM law is to ensure that regulators have an opportunity to monitor what type of investments are offered to institutional and qualified investors and bring some transparency to the market.
The Alternative Investment Fund Manager Directive (AIFMD) has been implemented under Luxembourg law on 22 July 2013. It targets all alternative investment managers: e.g. hedge fund, private equity and real-estate fund managers.
In summary, every fund manager who wishes to offer investment solutions to EU-based clients such as banks, pension funds, corporate treasury, family offices and qualified high net worth investors will need to consider this directive. It does not matter whether this manager is based in the EU or outside, as this also applies to US, LatinAmerican and Asian managers.
The directive regulates the manager of non-ucits funds. UCITS funds, i.e. funds destined for public distribution, are well regulated already; the directive only targets the less well regulated part of the industry. This means that anyone managing a fund which is not a UCITS fund, will need to study the AIFMD directive, irrespective of what type of fund is managed and irrespective of the type of vehicle. This relates to private equity funds (i.e. funds investing in companies that are not publicly listed), real estate funds and funds using a specific methodology, often using leverage and short-selling, i.e. commonly known as hedge funds. .
If it is not UCITS, it is likely to be subject to AIFMD.
The directive seeks to mitigate the potential risks related to alternative investments. The main areas are related to: • Organisation: Clarity of roles and structure, ensuring that all functions are clearly defined, whether internal or outsourced and communicated. • Transparency: Provide investors and the regulator with an annual report and provide investors prior to investment with specific information. • Valuation: Ensure that the valuation of assets is done according to well-defined rules in order to ensure that the value of the assets is known, is well-documented and supervised by an independent party. 14
Tax Breaks for Alternative Investment Fund Managers
The AIFMD law introduces a special tax regime for employees of AIFM managers and management companies.
THE AIFM Law introduces a new limited partnership regime and tax breaks for their managers. Tax transparency for Common Limited Partnership and Special Limited Partnership From a direct tax standpoint, the primary measure of the AIFMD law is the full tax transparency of the SCS/SCSp for Corporate Income Tax (“CIT”), Municipal Business Tax (“MBT”) and Net Wealth Tax (“NWT”) purposes. In addition, the distribution of dividends by a SCS/SCSp is not subject to withholding tax. The full tax transparency applies when the corporate GP of the SCS/SCSp owns less than 5% of the partnership interests and when the SCS/SCSp does not carry out a commercial activity.
The AIFMD law is thus providing a tax treatment equivalent to Anglo-Saxon partnerships and perfectly matching the needs of the Alternative Investment Funds (“AIFs”).
Luxembourg introduces are range of Incentive measures to attract alternative investment fund managers to Luxembourg. The AIFMD law introduces a special tax regime applicable to carried interest paid to employees of AIF Managers and to management companies of an AIF. The applicable tax rate is a progressive rate up to 10.335% (extraordinary income regime) and granted under the following conditions: • transfer of tax residence to Luxembourg between 1.1.2013 and 31.12.2018. • not having been a Luxembourg tax resident nor subject to taxation on their professional income in Luxembourg during the 5-year period preceding the year 2013. • not having received any advance tax payment relating to their carried interest. • can demonstrate that prior to the payment of their carried interest, committed capital has been fully repaid to investors. • This regime is applicable for a period of 11 years from the year the individuals take on the position in Luxembourg that entitles them to the carried interest.
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Tax Breaks for Alternative Investment Fund Managers The sale or redemption of shares is tax-exempt under certain conditions. Combined, these advantages can save executives up to 75% of personal income taxation. Exemption of capital gains The sale or redemption of shares/units of the AIF is taxexempt provided the shareholding did not exceed 10% at any point in time during the 5-year period and was longer than 6 months in total. Luxembourg already offers highly skilled workers significant advantages which may lead to substantial yearly savings of personal income tax for an executive whose compensation package is properly structured. Such an executive would also save save a 75% tax on his carried interest through the beneficial temporary regime. Broadening the VAT exemption scope for management services rendered to funds The objective of the AIFMD law is to extend the VAT exemption of the previous eligible vehicles to the assimilated investment vehicles located in another EU Member State as well as to any AIF as defined by the law itself. The goal of that measure is to avoid any VAT distortion between the management of investment vehicles either registered in Luxembourg or registered in another EU Member State.
A Luxembourg-based management company delegating part of its management tasks to a third-party provider (established in Luxembourg or abroad) continues to benefit from the VAT exemption on management services if all the VAT conditions are met, irrespective of whether the relevant investment vehicle is registered in Luxembourg or in another EU Member State.
New Law - Luxembourg Limited Partnerships
Limited partnerships are redefined following implementation of AIFMD. Upon implementation of AIFMD into Luxembourg law, the rules applicable to Luxembourg Limited Partnerships will be adapted and introduce three types of partnerships in Luxembourg. ● ● ●
common limited partnerships (Amended legislation: sociétés en commandite simple SCS or CLPs) special limited partnerships (New legislation: sociétés en commandite special SCSp or SLPs) partnerships limited by shares (Amended legislation: sociétés en commandite par actions, SCAs)
The SCA structure, a joint stock company with partnership features, is already currently a common vehicle for investments. CLPs, with legal personality and SLPs without legal personality have been modified as follows: Investment vehicles can be created as unregulated as well as regulated vehicles (SIF and SICAR) and may be structured in the form of a limited partnership (CLP or SLP). Changes are as follows: ● Confidentiality of the identity of the limited partners ● Management of the limited partnership can be entrusted to one or more managers, without them necessarily being unlimited partners ● Limited partners can exercise an internal role, without losing limited liability ● Holdings can be represented by securities or partnership accounts.
The following may be freely organised in the partnership agreement: – – – – –
Issue and reimbursement of partnership interests Entitlement of partners to the profits and losses of the limited partnership Distributions to partners, whether under the form of a distribution of profits or a reimbursement of partnership interests. Voting rights. Transfer of partnership interests.
The changes in the Luxembourg legislation further increase the chances for Luxembourg to become a leading hedge fund and private equity investment centre. New legislation also foresees a very favourable tax rate for fund managers who are resident in Luxembourg. Further details can be obtained under www.creatrust.lu.
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SOPARFI - The Luxembourg Holding Company
SOPARFI - The widely used solution to manage the income and capital gains related to an international portfolio of companies. SOPARFI take advantage of the EU parent-subsidiary directive 2003/123/EC and 90/435/EC. Definition The EU Parent-Subsidiary Directive which applies to fully taxable resident companies has been transposed into Luxembourg law in 1990, thus creating the Société de Participations Financières, or Soparfi. A Soparfi is a normal commercial entity governed by the 1915 Law on commercial companies. It is fully taxable and there are no restrictions on its field of activity. A Soparfi can, however, significantly reduce its tax burden by limiting its activity to holding investments (so-called passive Soparfi) and structuring these so that it can benefit from the rules in the EU Parent-Subsidiary directive. This EU regime provides companies, under certain specific conditions, with a tax exemption on dividends received from sister companies and capital gains realised through the sale of participations. Only taxable companies can benefit from the EU parent-subsidiary regime and double tax treaties. The Soparfi is not regulated by the Luxembourg financial supervisory authority CSSF.
Tax treatment Soparfi are used to manage participations in a group of businesses. It is also the preferred vehicle for financing and holding venture capital and private equity investments. The Soparfi is subject to corporate income tax, municipal business tax and net wealth tax. Income from dividends and capital gains realised by the Soparfi, may, under certain conditions, benefit from the participation exemption regime. In particular, the Soparfi needs to have held or to commit to hold at least ten percent of the shares in a fully taxable company for at least one year. If the threshold of 10% is not met, an exemption is nevertheless available if the acquisition price of the shares was higher than 1.2m euro for dividends and 6.0m euro for capital gains. The Soparfi benefits from a large network of tax conventions signed by Luxembourg, in order to reduce the withholding tax rates in foreign jurisdictions. Soparfi may also hold intellectual property and benefit from the 80% tax exemption related to IP income and capital gains.
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SOPARFI - The Luxembourg Holding Company The Tax Efficiency of a Soparfi is linked to certain conditions. Soparfi have become the “industry standard” for participations in other companies, based on the well-established tax and legal framework and proven track record. When a Soparfi fulfills the requirements provided by the Luxembourg participation exemption regime, it may be exempt on the following income: ▪ income received from its shareholdings; ▪ capital gains realized upon the sale of shares in its participation. Furthermore, dividend distribution to corporate shareholders will also be exempt from withholding tax under certain conditions. In cases where the Parent-Subsidiary Directive does not reduce withholding tax rates to zero, the Soparfi will be entitled to benefit from the reduced withholding tax rates provided by the Double Tax Treaties signed by Luxembourg or by domestic law. The net wealth tax applicable to a Soparfi can be substantially reduced or eliminated within the framework of the participation exemption.
Taxation of dividends received by a Soparfi Dividends received by a Soparfi from its resident or non-resident subsidiaries are tax exempt if the paying company is: • a resident joint-stock company, fully taxable for corporate income tax (which does not benefit from total or partial subjective exemption), or • a company resident in a member State of the EU and covered by the Parent-Subsidiary directive, or • a non-resident joint-stock company, fully taxable for a tax corresponding to corporate income tax (i.e. 10,50%, half of the Luxembourg corporate income tax rate), and • held directly or indirectly through tax transparent entities.
Conditions: A Soparfi receiving dividends: • holds or undertakes to hold, on the payment date of the dividends, the participation for an uninterrupted period of at least 12 months; • throughout this period the level of the participation must not fall below the threshold of 10% of the capital of the paying company or • Has paid an acquisition price of >EUR 1.2m.
Withholding Tax on Dividends paid by a Soparfi The withholding tax on dividends paid by a SOPARFI to its parent company is regulated as follows: If the parent company of the Soparfi is a resident of the EU (Article 147 of LIR) - transposition of the Parent/ Subsidiary Directive 90/435/CEE there is no withholding tax if: ▪ the effective beneficiary company (parent company) holds or undertakes to hold for an uninterrupted period of at least 12 months a participation of at least 10% or ▪ the investment amount in the Soparfi was > EUR 1.2m. If the parent company of the SOPARFI is not a resident of the EU (Articles 147-148 of the LIR) but the parent company is located in a country with which Luxembourg signed a double tax treaty, no withholding tax will be levied.
SPF: The Private Wealth Management Company
The SPF is a tax-free wealth management and accumulation vehicle for private wealth. The Wealth Management Company is an investment company designed to administer private wealth. The Wealth Management Company (Société de Gestion de Patrimoine Familial – SPF) is an investment company designed to administer and manage wealth on behalf of individuals. Its sole purpose is the acquisition, holding, management and disposal of financial assets, to the exclusion of any commercial activity. The expression Patrimoine Familial “family wealth” is to be interpreted in the sense of “private wealth belonging to natural persons” and does not necessarily imply a family connection between the individual shareholders of an SPF. Authorisation requirement No prior authorisation is required when setting up an SPF. Supervisory authority The authority charged with supervising the SPF in tax matters is the Administration de l’Enregistrement et des Domaines “AED” (the public registrar). Legal and regulatory framework The legal framework for an SPF is the law of 11 May 2007 on family wealth management companies.
The SPF is exempt from income, municipal, business and net worth tax. Due to its specific tax regime, the SPF is not entitled to benefit from double tax treaties concluded by Luxembourg nor the European Parent-Subsidiary Directive (90/435/EEC). The SPF is subject to an annual subscription tax at a rate of 0.25%. The subscription tax cannot be lower than 100 Euro and cannot be higher than 125.000,- Euro per year. ▪Non resident shareholders Capital gains made by non-residents on holdings within the SPF or on the liquidation of the SPF are not subject to Luxembourg tax. Dividends distributed by the SPF to non-residents are likewise not subject to withholding tax. Interest payments distributed by an SPF are not subject to withholding tax except if the payment falls within the scope of the European Savings Directive. ▪Luxembourg resident shareholders Dividends distributed by a Luxembourg SPF are fully taxable at the level of a Luxembourg resident shareholder. Payments of interest by an SPF to Luxembourg resident individuals is subject to a 10% final withholding tax if the conditions of the law dated 23 December 2005 are met.
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New: Luxembourg Foundation
A Bill has been introduced to Luxembourg Parliament to define the future Patrimonial Foundation. The Patrimonial Foundation is a planned instrument for estate and inheritance planning. The proposed Patrimonial Foundation is an additional instrument for estate and inheritance planning. This solution complements existing solutions such as Life Insurance and Fiduciary Contracts and also the Private Wealth Management Company (SPF). Unlike the SPF which is clearly defined as a company structure with shareholders, the Patrimonial Foundation is created by the Founder in an authenticated deed in front of a Luxembourg notary and a publication in the official journal. Orphan Structure The Foundation is an orphan structure. This means, that although it is based on corporate law it has a corporate structure like a Société Anonyme but no shareholders and no general assembly. Issuance of Certificates of Entitlement The Luxembourg Law foresees that Foundations can issue certificates of entitlement. This provides beneficiaries with a clear title which represents an asset or a part of the estate of the foundation.
Definition of a Foundation: "A Foundation" is an independent self-governing legal entity, set up and registered or recorded by an official body within the jurisdiction of where it is set up, in order to hold an endowment provided by the Founder and/or others for a particular purpose for the benefit of Beneficiaries and which usually excludes the ability to engage directly in commercial operations.“ The Advantages of the Foundation The advantages of the Foundation, especially in comparison to Trusts, are: • A Foundation is a separate legal entity unlike a Trust. • Assets placed into a Foundation become the property of the Foundation itself both legally and beneficially. • Legal certainty: The Foundation is an incorporated body with clear statutory laws and regulations governing it in the jurisdiction. • Foundations are clearly governed by the law in the jurisdiction where established. • One can place assets into a Foundation and then transfer "ownership" of the Foundation in a number of ways to indirectly transfer the underlying assets of the Foundation. This is not possible with a Trust. • For succession planning, a Trust that is to take affect after the death of the Settlor must conform to the formalities of a will. When a Foundation is created to take effect after the Founder's death, the formalities need not conform to making a will.
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Luxembourg Foundation
The Purpose of the Foundation is the management of an estate for the benefit of one or more beneficiaries. The reasons why individuals and wealthy families have used the patrimonial foundation are numerous •
•
The cohesion of the family patrimony: the patrimonial foundation can be used as an instrument to prevent the dispersal of assets in the event of death of a member of the family. The creation of a patrimonial foundation becomes an instrument of succession planning to ensure the continuity of a patrimony or even a family business, and to maintain or enhance the long-term family wealth; Continuity in the management of the company: the patrimonial foundation allows the separation of economic ownership of family property and the management of the family business. This is particularly useful when the founder has no children, if he considers that some of the heirs are not suitable or when they do not want to run the family business, but also to allow a family business to move towards a more open structure to attract new capital and talent;
•
The protection of privacy and family safety: the patrimonial foundation can meet the legitimate needs of wealthy families to limit the visibility of their assets to ensure their safety and the safety of their children (the Dutch foundations for example are often used for this purpose by wealthy Dutch families);
•
The achievement of a given purpose in connection with the family: the family patrimony can be assigned to a specific purpose such as to ensure that the financial needs of a child or disabled parent or the funding of education of a child.
The Purpose of the Foundation The purpose of Patrimonial Foundations is the management and administration of an estate for the benefit of one or more beneficiaries or for the benefit of one or more goals, other than those reserved for non-profit foundations. It is not prohibited to the Patrimonial Foundation to have incidental charitable and non-profit activities, but they should not be incorporated with a goal in mind reserved for non-profit foundations.
Autonomy of the will of the founder and protection of the beneficiaries The Bill seeks to reconcile two principles, namely on the one hand, the autonomy of the will of the founder and on the other hand, the protection of the patrimony of the patrimonial foundation and, ultimately, of the beneficiaries. The latter is particularly important given the orphan nature of the patrimonial foundation. Thus, if in principle the founder has a large amount of freedom to draft the constitution acts and extrastatutory regulations, the Bill, however, imposes certain restrictions designed to protect beneficiaries, in particular through provisions regarding the liability of the administrators and liquidators, through the information which must be available at the headquarters of the Patrimonial Foundation and by limiting the changes which can be made to the constitution acts.
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Luxembourg Foundation
Based on Corporate Law but without shareholders The Patrimonial Foundation has similarities with a number of institutions in neighboring countries, but should not be assimilated to them. Thus, if the provisions governing the new corporation are to a large extent based on the law of 10 August 1915 on commercial companies, especially those applicable to share companies (Société Anonyme or S.A.), the fundamental difference is that the patrimonial foundation is an orphan structure, which has no shareholders, partners or members.
Absence of General Assembly The absence of a general assembly obviously has an impact on the operation of the patrimonial foundation. For example, the rules relating to the changing of the constituting documents, to the approval of the accounts or the discharge of the directors, which normally fall under the general assembly, cannot be taken from the law of 10 August 1915 on commercial companies.
This fundamental distinction between the patrimonial foundation and corporate structures also affects estate transmission: while stocks or shares of a company remain in the patrimony upon death, capital grants of a patrimonial foundation are considered as having left the patrimony during the lifetime of the founder. The Foundation vs Non-Profit Organisation The Patrimonial Foundation also distinguishes itself from foundations governed by the law of 21 April 1928 on associations and non-profit foundations. On the one hand, by their intent, these pursue philanthropic, social, religious, scientific, artistic, educational, sports and tourism goals. On the other hand, regarding their operation, a certain control is applied by the Minister of Justice. The Patrimonial Foundation, on the contrary, is a tool for estate structuring and planning.
Step Up Principle The bill introduces the "step-up" principle with regards to the securities which are related to a substantial holding held by an individual. Upon becoming a Luxembourg resident taxpayer (i.e. when deciding to move to Luxembourg) the purchase price related to this substantial holding can revalued and these securities can be sold afterwards. This applies to a substantial holding of securities or convertible loans according to the Luxembourg Income Tax Law. Step Up Principle in Practice By applying the “Step-up” principle an entrepreneur can re-value his assets upon migrating to Luxembourg to the fair market value. Upon becoming a Luxembourg resident taxpayer, the purchase price of his assets can revalued to the fair market value and the assets can be sold afterwards. The difference between the sale price and the fair market value, i.e. the realisation of capital gains is minimized. Simplified examples Example 1: • Acquisition price of assets in 1995: 50.000,Move to Luxembourg in 2013 • “Step-up”: fair market value: 7.500.000,• Sale of assets after move: 7.500.000,• The entire proceeds are not taxable in Luxembourg as there is no capital gain recorded. Example 2: • Acquisition price 1995: 50.000,Move to Luxembourg in 2013 • “Step-up”: fair market value: 7.500.000,• Sale of assets after move: 8.000.000,There is a capital gain of 500.000,-. This capital gain will be taxed at only 50% of the marginal rate and a further deduction of EUR 50.000,- may apply subject to conditions. A participation of less than 10% is not taxable subject to a minimum holding period of six months.
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Setting up a Foundation
The set-up of a Foundation is done by signing a deed in front of a Luxembourg notary.
The Patrimonial Foundation is created as an authenticated deed in front of a Luxembourg notary. The deed contains the Charter of Constitution. The deed contains the following information ● the identity of the founders who signed the deed or on whose behalf the document was signed; ● the name of the patrimonial foundation; ● the duration of the patrimonial foundation; ● the seat of the patrimonial foundation; ● the subject of the patrimonial foundation; ● the amount of the initial endowment (minimum EUR 50.000,-); ● the names, date and place of birth, position and private or professional address of the persons in charge of administering the patrimonial foundation and the determination of their powers of representation. ● the names, date and place of birth, position and private or professional address of the persons of the Supervisory Board of the patrimonial foundation, if any, and the powers of the Supervisory Board; ● the designation of the beneficiary(ies) or the criteria or the entity or persons in charge of the determining such beneficiaries and the form of their appointment.
The administrators must publish the Constitution Charter in the Mémorial C Company Register within 3 months.
Additional Elements statutory Regulations
in
the
Extra-
In addition to the Constitution Charter, the Founder can define the following elements in the Charter or in the Extra-statutory Regulations: ● The modalities under which the administrators are named, ● how they operate their duties, ● how they are remunerated, ● the power of the Founder, ● his rights and obligations, ● the designation of a Supervisory Board and an external auditor. The appointment of a Supervisory Board is mandatory for Foundations exceeding EUR 20 million.
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Examples of Foundations Simple structure with one founder and one beneficiary The founder: Usually one person. The endowment: Can be cash or assets, can be granted by the founder or by outside persons and must be EUR 50.000 minimum. The offices: If the Foundation has no offices it must use the services of a recognised Luxembourg domiciliation entity. The administrators: Can be physical persons or companies entrusted with the administration of the assets. The administrators will open the bank account for the Foundation, manage the assets and organise the payment to the beneficiaries The supervisory board and external auditor: There is no requirement for a Supervisory Board or External Auditor for small foundations.
The administrators: Can be physical persons or companies entrusted with the administration of the assets. If a company is names administrator it must designate one person in permanence to execute this duty. The administrators will open the bank account for the Foundation, manage the assets and organise the payment to the beneficiaries. The supervisory board and external auditor Is required for Foundations with assets in excess of EUR 20mio or more than 5 beneficiaries. Supervisory Board members cannot be administrators and must be physical persons. At least 3 members are required. Issue of certificates: The foundation may issue registered certificates to any individual or entity managing the wealth of one or more persons in connection with the assets it owns, according to the conditions defined in the constitution charter or extra-statutory regulations or issuance of certificates documents. The Foundation maintains a register of certificates containing: • a precise description of each holder of certificates and the number of certificates held; • where appropriate, the class of certificates; • indication of payments; • transfer certificate and the date of such transfers. Ownership certificates are established by an entry on the register.
Complex structure with capital in excess of 20mio or more than 5 beneficiaries The founder: Can be one or more physical persons or entities entrusted with the management of personal wealth. The endowment: Can be cash or assets, can be granted by the founder or by outside persons. The offices: If the Foundation has no offices it must use the services of a recognised Luxembourg domiciliation entity.
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Taxation of Foundations
Overview of Taxation The tax treatment of Patrimonial Foundations is divided into the treatment for resident and non-resident founders. For residents, the bill of law seeks to establish a level playing field with the taxation of inheritance and gifts in direct ownership. For nonresidents there is generally no taxation except for Luxembourg property. The Tax Regime in a Nutshell The Bill also defines the tax regime which applies to the Patrimonial Foundation. With regards to indirect taxes, it is proposed to introduce a special registration fee in line with the rates currently applied to inheritance. The result of this is that registration fee becomes payable on the net assets of the Patrimonial Foundation upon the death of the founder. It should be noted that “net assets� is limited to the real estate assets located in Luxembourg in case of death of a founder who has lived abroad. The transfer of assets or property to the patrimonial foundation gives rise only to a fixed registration duty. The removal of assets is taxed as a gift provided it is done during the lifetime of founder: The common regime on gifts is applied in this case. Tax Deconsolidation In relation to direct taxes, the Bill establishes the patrimonial foundation as a separate taxable entity independent of the founder or his dependents, beneficiaries or administrators.
Taxation at the level of the Foundation No wealth tax No withholding tax on distributions received Not taxable on financial income derived from financial assets Not taxable on capital gains on financial assets (share/bond) Not taxable on income received from life insurance policies Subject to tax on other income
Non-resident Founder
Remarks
Contribution to Foundation
Flat registration duty
Transfers to the Foundation
Flat registration duty
Dissolution of the Foundation
0% gift tax in direct line
except on Lux real estate
Upon death of Founder
0% inheritance tax in direct line
except on Lux real estate
Payments received from the Foundation
No income tax No withholding tax
Non-resident Beneficiaries
Remarks
Asset received from the Foundation 0% gift tax in direct line
except on Lux real estate
Dissolution of the Foundation
0% gift tax in direct line
only on Lux real estate
Upon death of Founder
0% inheritance tax in direct line
only on Lux real estate
Payments received from the Foundation:
No income tax No withholding tax
Special considerations when the Founder and or Beneficiaries are resident in Luxembourg. Also refer to Step Up.
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Creatrust seminars and publications
Creatrust offers access to a wide range of publications and educational seminars: www.creatrust.lu. www.creatrust.lu has become a prime source of information for upto-date tax information
Information - Education
Fact Sheets Creatrust publishes a range of short and up-todate fact on the most important Luxembourg solutions. The following fact sheets can be ordered from the Creatrust web-site: ▪ Soparfi ▪ SPF - Private Wealth Company ▪ Securitisation - Intellectual Property ▪ Securitisation - Debt Restructuring ▪ Securitisation - Real-Estate ▪ Securitisation - Private Gold Portfolio ▪ Securitisation - Private Diamond Portfolio ▪ Securitisation - Private Art Portfolio ▪ Intellectual Property Company ▪ Patrimony Foundation
Creatrust Newsletters The regular Creatrust newsletters, highlight a specific topic or a specific change which has happened recently. An example is the range of documents recently published in relation to AIFMD.
Each fact sheets contains a summary of the key points relating to the subject, highlighting the tax treatment where appropriate. Brochures Creatrust has published an extensive range of brochures which are kept up-to-date. The brochure seeks to bring together all information related to a specific subject. The Soparfi Tax Guide is a good example.
Creatrust spends a significant amount of time informing about Luxembourg solutions.
Creatrust News Creatrust news are published on the Creatrust web-site and can be subscribed to. They provide users with alerts and also with information on recent publications. Creatrust Professional Seminar Creatrust holds regular seminars helping participants to understand complex topics and also receive practical guidance with relation to specific subjects. Creatrust Workshops Workshops, like the Art Structuring event which will be held in London on 27 November 2013, are paying events which bring together a limited number of participants to speak with experts about new solutions on a specific subject.
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