corporate taxation in Luxembourg - Arendt & Medernach taxation in Luxembourg Table of contents 1....

corporate taxationin Luxembourg

corporate taxation inLuxembourg

Table of contents

1. Introduction 6

2. Overview of relevant taxes 9

2.1. Corporate income tax 9

2.2. Municipal business tax 10

2.3. Net worth tax 10

2.4. Withholding taxes 11

2.4.1. Dividends 11

2.4.2. Interest 11

2.4.3. Liquidation proceeds 11

2.4.4. Royalties 11

2.4.5. Directors’ fees 11

2.5. Value added tax 12

2.6. Registration duties 13

2.7. Customs and excise duties 14

3. Fiscal environment 15

3.1. Tax authorities 15

3.2. Tax courts 15

3.3. Tax compliance 16

3.4. Tax advances 16

3.5. VAT registration process 17

3.6. Penalties 17

4. Investment vehicles 18

4.1. SOPARFI 18

4.1.1. Participation exemption regime 18

4.1.2. Intellectual property rights 21

4.1.3. Intra-group financing activities 22

4.1.4. Fiscal consolidation 25

4.1.5. Other tax incentives 26

4.1.6. VAT 28

4.2. Partnerships 28

4.2.1. Common Limited Partnership 28

4.2.2. Special Limited Partnership 29

4.3. SICAR 29

4.4. Securitisation undertakings 30

4.5. Investment funds 31

4.5.1. Types of investment funds 31

4.5.2. Tax considerations 32

4.6. Banks and financial institutions 34

4.7. Insurance and reinsurance companies 35

4.8. Pension fund regimes 36

4.9. SPF 36

4.10. The Luxembourg maritime flag 37

4.11. Identification of the most appropriate investment vehicle 38

5. International context 39

5.1. Luxembourg tax residence 39

5.2. Permanent establishment 39

5.3. Double taxation elimination method 39

5.4. Double tax treaty network 40

5.5. Taxation on highly-skilled workers 42

5.6. EU Savings Directive 42

5.7. AIFM and Taxes 43

6. Accounting 45

6.1. Lux GAAP 45

6.2. IFRS 46

6.3. Lux GAAP with IFRS option 46

7. Summary table - Luxembourg vehicles 47

Tax at Arendt & Medernach 49

Arendt & Medernach Tax Team 51

About Arendt & Medernach 52

A broad range of practice areas

Ideally situated at the crossroads between Belgium, France and Germany, Luxembourg is a small but highly stable country boasting one of the highest GDP per capita in the world. The Luxembourg financial centre originally developed as a private banking centre and has grown to become a truly diversified hub for investment funds, banks, insurance and reinsurance companies, holding companies and family offices.

1. Introduction

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n Constitutional monarchy n Head of State: the Grand-Duke n Executive power: the Prime Minister and his government n Legislative body: the Parliament (Chambre des Députés), advised by the State Council (Conseil d’Etat) n Judicial power: judicial and administrative courts n Political environment characterised by continued stability over the past 60 years enabling the implementation of investor-friendly legislation

n Population > 500,000 n Official languages: French, German and Luxemburgish n English widely spoken n Significant expatriate population n Highly-skilled and cosmopolitan workforce of > 330,000 (incl. > 145,000 cross-border commuters)

n Situated in the heart of Europe n Territory +/- 2,600 km2

n Easy access n Daily flights to/from major European cities such as London, Frankfurt, Paris, Munich, Milano, Zurich, Geneva and Amsterdam (1 hour) and excellent railroad connections

n Founding Member of i.a. the European Union (EU), UN, NATO, OECD, FATF n Seat of several EU institutions (e.g. European Court of Justice, European Investment Bank, European Investment Fund, Secretariat of the EU Parliament, European Court of Auditors) n Founding Member of the Eurozone

n 150 credit institutions (total balance sheet EUR 735 billion), n 3,881 investment funds (EUR 2,680 billion AUM) making Luxembourg the 2nd largest investment fund

centre worldwide n 237 reinsurance companies n 95 insurance companies n Most important private banking centre in the Eurozone

n Forerunner in implementing EU legislation n Investment fund legislation since 1983 n Parent-subsidiary, interest and royalties Directives n Continued improvement of investment legislation through alternative vehicles such as specialised investment funds (SIF), investment companies in risk capital (SICAR), securitisation companies n Extensive double tax treaty network

n Flexible and practical corporate laws n Various legal forms of companies (e.g. SA, SCA, SARL), partnerships (e.g. SNC and SCS) or associations n No governmental or judicial authorisation required for company formation n Legal existence of companies as from the execution of the incorporation deed by the founders and the notary n Rapid company formation

1. Introduction

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Luxembourg thus has many advantages to offer foreign investors, of which the following are particular attractive:

n a favourable legal and fiscal environment for investments;

n a multilingual and experienced network of professional service providers;

n investor-friendly, accessible and pragmatic governmental administrations.

The scope of this brochure being necessarily limited, it focuses on companies limited by share capital (unless indicated otherwise). It is not supposed to address all legal and fiscal aspects in relation to an investment and is only designed to provide a basic understanding of Luxembourg companies and the Luxembourg tax law related thereto.

Under no circumstances should the information contained herein be understood or construed as legal or tax advice. To the best of our knowledge, the information contained in this document is correct as of 1 May 2014 but the delivery of this document does not imply any spontaneous update from our side.

1. Introduction

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2.1. Corporate income tax

Luxembourg levies an annual corporate income tax (impôt sur le revenu des collectivités - the “CIT”) on the net worldwide profits (subject to double tax treaties) of Luxembourg companies. Taxable profits are computed in accordance with the provisions of the amended income tax law dated 4 December 1967 (the “ITL”), which define them as the annual variation of the net assets of the company during the fiscal year, increased by withdrawals and reduced by contributions. As a general rule, taxable profits are determined on the basis of the accounting profits as established in accordance with the Luxembourg generally accepted accounting principles (the “Lux GAAP”), except when the valuation rules for tax purposes demand otherwise. Profits and expenses (e.g. amortisations, depreciations, interest, and other business expenses) are taken into account for the financial year during which they have been realised or exposed, irrespective of the actual payment. Several exemptions from CIT may apply, such as the participation exemption regime on eligible shareholdings or the exemption on certain intellectual property rights and roll-over reliefs may be available for reinvested capital gains in certain circumstances.

Fiscal losses incurred in a given tax year may be carried forward indefinitely by the company who has suffered them. Carry backs, however, are not allowed.

Luxembourg tax law does not provide for detailed thin capitalisation or transfer pricing regulations, except as regards intra-group financing transactions. Taxpayers must comply with the arm’s length principle. OECD guidelines and related adjustment methods are followed by the Luxembourg tax authorities.

In 2014, the CIT rates are as follows:

A solidarity surcharge for the employment fund is currently levied on companies at a rate of 7%, which leads to an effective CIT burden of 22.47% for taxable profits exceeding EUR 15,000.

Luxembourg fully-taxable resident companies are subject to a minimum advance CIT (the “ACIT”) of EUR 3,000 (increased to EUR 3,210 by the 7% surcharge for the employment fund) if their financial assets, transferable securities and cash deposits exceed 90% of their total balance sheet.

Other resident companies not expressly exempt from CIT and whose financial assets, transferable securities and cash at bank do not exceed 90% of their total balance sheet are also liable to an ACIT varying from EUR 500 to EUR 20,000 (plus the 7% surcharge for the employment fund) depending on the amount of their balance sheet total at year-end as follows:

Balance sheet total Minimum ACIT

≤ EUR 350,000 EUR 500

EUR 350,001 to EUR 2,000,000 EUR 1,500

EUR 2,000,001 to EUR 10,000,000 EUR 5,000

EUR 10,000,001 to EUR 15,000,000 EUR 10,000

EUR 15,000,001 to EUR 20,000,000 EUR 15,000

> EUR 20,000,000 EUR 20,000

2. Overview of relevant taxes

Taxable income Rate

< EUR 15,000 20%

> EUR 15,000 21%

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For the purpose of determining the minimum ACIT, (i) shares and units held in tax transparent entities will be considered “financial assets” irrespective of the underlying assets held by the entity and (ii) the net value of assets which generate (or may generate) income that Luxembourg is not allowed to tax according to a double tax treaty (e.g. income deriving from foreign real estate) should be excluded when computing the balance sheet total.

The ACIT constitutes an advance and is thus creditable against any future CIT charge due by the taxpayer. Any excess is however not refundable. Moreover, the ACIT may not be reduced by Luxembourg tax credits (e.g. investment tax credits).

The ACIT is capped at EUR 20,000 (EUR 21,400 including the 7% surcharge for the employment fund) for the entire group in case of a fiscal consolidation.

2.2. Municipal business tax

Luxembourg levies an annual municipal business tax (impôt commercial communal - the “MBT”) on the net profits realised by Luxembourg companies. The taxable base for the determination of the taxable result under the MBT is generally the taxable result as determined under the CIT (with minor adjustments). The MBT is governed by the amended municipal business tax law dated 1 December 1936. The MBT rates vary depending on the municipality in which the company’s registered office or undertaking is located.

In 2014, the MBT rate is 6.75% in Luxembourg City.

2.3. Net worth tax

Luxembourg levies an annual net worth tax (impôt sur la fortune - the “NWT”) on the net assets of Luxembourg companies in accordance with the net worth tax law dated 16 October 1934. Net worth is referred to as the unitary value, as determined at 1 January of each year in accordance with the valuation rules set forth by the valuation law dated 16 October 1934.

The unitary value is basically calculated as the difference between (i) assets generally estimated at their fair market value and (ii) liabilities vis-à-vis third parties. Several exemptions from NWT may apply, e.g. the participation exemption regime on eligible shareholdings or the exemption on certain intellectual property rights. Real estate assets situated abroad are generally exempt under the applicable double tax treaties.

The NWT charge for a given year can further be avoided or reduced if a specific reserve, equal to five times the NWT, is created before the end of the subsequent tax year and maintained during the five following tax years. The maximum NWT to be saved is limited to the CIT amount due for the same tax year (including the solidarity surcharge), which exceeds the ACIT and before imputation of the tax credits available.

In 2014, the NWT rate is 0.5%.


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2.4. Withholding taxes

2.4.1. Dividends

Dividends distributed by a Luxembourg company to its shareholder(s) are as a rule subject to a withholding tax (the “Dividend WHT”) at the rate of 15% (17.65% if borne by the distributing company). The Dividend WHT must be levied by the distributing company on behalf of the recipient and remitted to the tax authorities within 8 days from the date on which the dividend is placed at the shareholder’s disposal.

An exemption from or reduction of the Dividend WHT is however possible under the participation exemption regime or the applicable double tax treaties. For resident shareholders, the Dividend WHT may be credited against their income tax liabilities and any excess is refundable. For non-resident shareholders, the Dividend WHT is the basic tax on their Luxembourg-source dividends. A partial or total refund may be available by virtue of a double tax treaty.

2.4.2. Interest

Interest paid by a Luxembourg company is generally not subject to withholding tax (the “WHT”), except in the following limited cases:

n profit allocations paid to a silent partner investing in a business and remunerated in proportion to the business’s profits may be subject to a 15% WHT;

n interest paid on certain profit-sharing bonds or notes may be subject to a 15% WHT;

n interest qualifying as savings income within the meaning of Council Directive 2003/48/EC (the “EU Savings Directive”) on taxation of savings income paid by a Luxembourg-based paying agent to, or to the benefit of, individuals or residual entities resident or established in another EU Member State or in certain associated territories may be subject to a 35% WHT, unless the beneficiary elects for an exchange of information. As from 1 January 2015, the withholding tax system is to be replaced by the automatic exchange of information system foreseen by the EU Savings Directive;

n payments of interest or similar income by a Luxembourg-based paying agent, or under certain circumstances by an EU-based paying agent, to or for the immediate benefit of a Luxembourg-resident individual may be subject to a WHT of 10%. Such WHT is in full discharge of income tax, if the beneficial owner is an individual acting in the course of the management of his/her private wealth.

2.4.3. Liquidation proceeds

Liquidation proceeds (deriving from a complete or partial liquidation) paid by a Luxembourg company are not subject to WHT in Luxembourg.

2.4.4. Royalties

Royalties paid by a Luxembourg company are generally not subject to WHT in Luxembourg.

2.4.5. Directors’ fees

Fees (tantièmes) paid to directors or statutory auditors are subject to a WHT levied at the rate of 20% on the gross amount paid (25% if the withholding cost is borne by the payer). The WHT is the final tax for non-resident beneficiaries if their Luxembourg-source professional income is limited to directors’ fees not exceeding EUR 100,000 per fiscal year.


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2.5. Value added tax

As a Member State of the EU, Luxembourg has transposed into its national law (i.e. the amended VAT law dated 12 February 1979) the provisions of the EU Directives on value added tax (VAT), including the amended sixth VAT Directive (abolished as from 1 January 2007 and replaced with Directive 2006/112/EC of 28 November 2006 for the purposes of rearranging the articles only). Consequently, the interpretation of Luxembourg VAT law is widely based on the case law of the Court of Justice of the European Union (CJEU).

In 2013, the standard VAT rate in Luxembourg is 15%. Reduced rates of 3%, 6% and 12% apply to supplies of goods and services which are specified in three appendices to the Luxembourg VAT law. These appendices cover the specific scope of application of the reduced rates and must be interpreted in a strict sense. These VAT rates (except the 3%) will in principle be increased by 2% as from 1st January 2015.

All supplies of goods and services carried out (or deemed to have been carried out) in Luxembourg for consideration and by a person carrying out an economic activity fall within the scope of the Luxembourg VAT law.

The rules governing the place of supply and the tax exemptions follow the provisions of European VAT Directives as interpreted and further defined by CJEU case law. As from January 2010, based on the new place of supply rules adopted by Directive 2008/8/EC, services received by taxable persons established in Luxembourg are deemed to be located in Luxembourg (with some exceptions). This is called the reverse charge mechanism, whereby the person liable for the declaration of the supplies and the payment of the related VAT is the recipient of the supplies.

While located in Luxembourg, supplies of goods and services may benefit from a VAT exemption. The most frequently used VAT exemptions relate to (i) the supply and letting of real property, except where taxation is opted for, (ii) financial transactions, (iii) insurance and reinsurance and connected services, (iv) management services to regulated undertakings for collective investment, SlCARs, SIFs, pension funds and Luxembourg securitisation vehicles.

Generally, input VAT incurred on goods and services by a Luxembourg taxable person in relation to his/her business is recoverable.

No input VAT recovery is allowed for VAT paid on goods or services used to supply VAT exempt transactions, except in the case of VAT incurred on supplies used for exempt banking, financial and insurance transactions supplied to recipients established outside the EU.

If a taxable person carries out transactions entitling it to an input VAT deduction (i.e. subject to VAT or exempt with an input VAT recovery right) and transactions that are exempt from VAT or outside the scope of VAT, he will have a limited right to deduct input VAT. This right will, in principle, be calculated on the basis of a recovery ratio rule, unless a segregation of goods and services purchased for the taxable activities and the exempt activities is possible (direct allocation methodology). In this case, input VAT incurred in relation to taxable activities may be recovered in full.

VAT incurred on costs which are not strictly business expenditures, such as luxuries, amusements or entertainment, is not deductible.


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Main registration duties

Fixed rate Ad valorem rate Mandatory registration

Incorporation of a company EUR 75 n/a yes

Amendments to the articles of incorporation of a company

EUR 75 n/a yes

Transfer to Luxembourg of a company’s registered office or central administration

EUR 75 n/a yes

Sale of movables 6% no

Except shares EUR 12

Sale of immovables n/a 6% yes

+ Transcription duty 1%

+ Municipal surtax (Luxembourg City) 3%

Claims 0.24% no

Except negotiable bonds, notes, etc. EUR 12

Corporate reorganisations remunerated by a majority of shares

EUR 12 n/a yes

Mortgage n/a 0.05% yes

Lease n/a 0.6% yes


2.6. Registration duties

Registration duties are generally levied on the transfer of certain assets and are collected by the tax authorities upon the actual registration of the deed evidencing the transfer. Certain transfers must further be evidenced by a written deed that has to be registered on a mandatory basis.

Registration duties are either levied at a fixed rate or at an ad valorem rate.

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2.7. Customs and excise duties

As an EU Member State, Luxembourg is part of the single market without customs barriers, which ensures the free circulation of goods. Imports from another EU Member State are not subject to any customs duties.Goods imported from outside the EU, however, may be subject to customs duties levied on their customs value determined according to the Common Customs Tariff. Goods are classified according to the TARIC (Integrated Community Tariff) code. Several bilateral and multilateral treaties have been signed by the EU (e.g. with Australia, Canada, the USA, Norway, Switzerland) and are applicable in Luxembourg.

Excise duties are levied on certain products, especially on spirits, petrol and tobacco in accordance with European regulations.


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3. Fiscal environment

3.1. Tax authorities

The Luxembourg tax authorities are divided into three administrations, each being responsible for a particular area of competence:

n the Administration des contributions directes is mainly competent for CIT, MBT and NWT, as well as Dividend WHT and WHT;

n the Administration de l’enregistrement et des domaines is mainly competent for VAT and registration duties;

n the Administration des douanes et accises is mainly competent for customs and excise duties.

The Luxembourg tax laws and administrative guidelines do not formally provide for a ruling procedure, except regarding advance pricing agreements (APA) in respect of intra-group financing transactions. However, tax authorities are generally willing to answer enquiries made by taxpayers or their advisers orally or in writing.

3.2. Tax courts

In Luxembourg, tax litigation may be brought either before the administrative courts (tribunaux administratifs) or the judicial courts (tribunaux judiciaires), depending on the nature of the tax disputed.

The administrative courts are competent to rule on litigation regarding the assessment of direct taxes such as CIT, MBT or NWT, whereas the judicial courts are competent for matters regarding the assessment of VAT or registration duties, as well as the recovery of taxes in general.

Regarding tax matters, the judicial courts are divided into the lower District Court (Tribunal d’arrondissement) and a Court of Justice (Cour Supérieure de Justice) which may either rule as a Court of Appeal (Cour d’appel) or as the Supreme Court (Cour de Cassation).

The administrative courts are divided into a lower Administrative Court (Tribunal administratif) and an Administrative Court of Appeal (Cour administrative).

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Tax Filing obligation Due date Extension

CITMBT

annual 31 May of the year following the year for which the return is filed

may be granted on demand on a case-by-case basis

NWT annual 31 May of the year following the year for which the return is filed


Dividend WHT at each payment subject to WHT

8 days after the funds subject to WHT have been made available to the beneficiary


VAT annual and, in addition, monthly or quarterly (depending on the turnover)

n monthly return: 15th day of the following month

n quarterly return: 15th day of the month following the quarter

n single annual return: 1 March of the following year

n annual recapitulative return: 1 May of the following year

*electronic filing mandatory for taxpayers subject to monthly or quarterly filing

n up to 2 months for periodical VAT returns

n up to 8 months for single and recapitulative VAT returns

EU Sales Listings (ESL)

For services

monthly or option for quarterly

n electronic filing (eVAT system): 25th day of the month following the month or quarter

n hard paper filing (if quarterly): 15th day of the month following the quarter

n/a

For goods

monthly or option for quarterly (depending on the value of the supplied goods)

n electronic filing (eVAT system): 25th day of the month following the month or quarter

n hard paper filing (if quarterly): 15th day of the month following the quarter

n/a

3.4. Tax advances

The basis for the computation of tax advances is the estimated taxable income based on the income of the previous year or the estimated value of the company.

Advances are payable on a quarterly basis (with final payment upon assessment) by the following deadlines:

n CIT: 10 March, 10 June, 10 September, 10 December;

3.3. Tax compliance

Tax compliance of a company closing its accounts annually on 31 December may be summarised as follows:

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n MBT: 10 February, 10 May, 10 August, 10 November;

n NWT: 10 February, 10 May, 10 August, 10 November.

The advance tax payments to be made by a newly incorporated company are calculated by the tax authorities according to an estimated result for the year, and correspond at least to the ACIT.

3.5. VAT registration process

Entities performing an activity which gives them the quality of a taxable person must as a rule register with the competent tax administration (Administration de l’enregistrement et des domaines) for VAT purposes within 15 days after commencement of this activity.

However, VAT registration is not compulsory if, among other conditions, all the activities carried out by the taxable person are exempt from VAT (e.g. financial and insurance transactions) and these activities do not entitle it to deduct input VAT.

In such a case, the taxable person remains nevertheless obliged to register for VAT if it receives taxable services from foreign service providers governed by the reverse charge mechanism and for which it is liable to declare and pay VAT. In this case, a simplified registration has to be made prior to the receipt of the services.

Registration, if required, must be renewed in the event of any substantial change in a taxable person’s activities, such as the start of a new type of activity, the opening of a branch or a change in the company’s legal form. If the taxable person wholly or partly ceases its activities, it must notify the tax administration.

Upon VAT registration, Luxembourg taxable persons or foreign taxable persons having a permanent establishment in Luxembourg receive two numbers:

n a VAT code to be used in all correspondence with the Luxembourg VAT administration (i.e. matricule/reference number);

n a European VAT identification number, composed of the letters LU followed by eight digits, with the digits corresponding to the IBLC number (the VAT identification number must be used for all intra-community acquisitions or supplies of goods and services).

3.6. Penalties

In case a tax return is submitted too late, or not at all, the taxpayer may be charged with a penalty of up to 10% of the tax due and a fine in certain cases.

Penalties assessed for the late payment or late submission of a VAT return/ESL may vary from EUR 50 to EUR 5,000.


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4.1. SOPARFI

The term SOPARFI is an acronym for société de participations financières (financial holding company) and refers to ordinary unregulated Luxembourg resident companies fully subject to CIT (including ACIT), MBT and NWT, whose main activity is to hold the shares in subsidiaries benefiting from the participation exemption regime.

Since SOPARFIs are Luxembourg tax residents, they benefit from Luxembourg’s double tax treaty network. The relevant tax residence certificates may be obtained from the Luxembourg tax authorities. Several advantages of the SOPARFI are noteworthy, such as the participation exemption regime, the exemption of certain intellectual property rights, fiscal consolidation and investment tax credits.

4.1.1. Participation exemption regime

Under the participation exemption regime, the following exemptions are available:

n dividends, liquidation proceeds and capital gains received and realised on qualified shareholdings in eligible subsidiaries are exempt from CIT and MBT;

n dividends distributed to eligible parent companies are exempt from the 15% Dividend WHT;

n qualified shareholdings in eligible subsidiaries are exempt from NWT.

4. Investment vehicles

Qualified Parent

LuxCo

Qualified Subsidiary Qualified Subsidiary Qualified Subsidiary Qualified Subsidiary

Dividend WHTexemption

Exemption of dividends, capital gains & liquidation proceeds

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4. Investment vehicles – 4.1 SOPARFI

In order to qualify for the participation exemption regime, the following conditions must be met:

1 The holding of a participation through a tax-transparent entity is deemed to be a direct participation in the proportion of the net assets held in the tax-transparent entity.

Participation exemption on dividends and liquidation proceeds

Participation exemption on capital gains

Participation exemption for NWT

Participation exemptionon outbound dividends

Qualifiedparent

n a Luxembourg resident fully-taxable company

n a Luxembourg permanent establishment (“PE”) of a company covered by article 2 of the Directive 2011/96/EU of 30 November 2011, on the common system applicable in the case of parent companies and subsidiaries of different Member States (the “EU Parent-Subsidiary Directive”)

n a Luxembourg PE of a company resident in a country having a double tax treaty with Luxembourg

n a Luxembourg PE of a company which is resident in a Member State of the European Economic Area (EEA), other than an EU Member State


n a company covered by article 2 of the EU Parent-Subsidiary Directive or a Luxembourg PE thereof

n a company resident in a country having a double tax treaty with Luxembourg and liable to a tax corresponding to the Luxembourg CIT or a Luxembourg PE thereof

n a Swiss resident company which is subject to corporate income tax in Switzerland without benefiting from an exemption

n a company resident in an EEA Member State other than an EU Member State and liable to a tax corresponding to the Luxembourg CIT or a Luxembourg PE thereof

Qualifiedsubsidiary


n a company covered by article 2 of the EU Parent-Subsidiary Directive

n a non-resident company liable to a tax corresponding to the Luxembourg CIT

a Luxembourg resident fully-taxable company

Holdingperiod

holding or commitment to hold the participation for an uninterrupted period of at least 12 months

holding or commitment to hold the participation for an uninterrupted period of at least 12 months

Level ofparticipation1

≥ 10% or acquisition price ≥ EUR 1.2 million

≥ 10% or acquisition price ≥ EUR 6 million



n/a

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The following is a simplified example which illustrates this mechanism:

The parent acquires participation in the eligible entity on 1/1/n at the price of 1,000. The acquisition is entirely financed by a debt of 1,000 (with an annual interest of 50). In the year n, no income is derived from the participation. In the year n+1, a dividend of 30 is received. In the year n+2, a dividend of 70 is received.

n in the year n, the interest of 50 is deductible and creates a tax loss of 50;

n in the year n+1, the dividend is entirely exempt; the interest is not deductible up to 30; the excess interest of 20 is deductible and creates a tax loss of 20;

n in the year n+2, the dividend is entirely exempt; the entire interest expense is not deductible and the tax result is nil;

n on 1/1/n+3, the participation is sold for 1,500 (capital gain of 500):- the exempt amount of capital gain is reduced by the sum of the related expenses that have

decreased the tax result of the preceding years, i.e. the interest of 50 deducted in the year n and the 20 deducted in the year n+1;

- the taxable portion of the capital gain, i.e. 70, is entirely offset by the carry-forward of tax losses.

In addition to the domestic participation exemption regime, almost all of the double tax treaties concluded by Luxembourg grant relief on dividends under conditions which may be more favourable than domestic ones.

Anti-abuse measures do not permit the exemption in certain circumstances, notably when a non-eligible participation is exchanged for an eligible participation in a tax-free manner.

Furthermore, the participation exemption regime contains rules intended to avoid a double benefit (exemption of income and deduction of expenses). If the acquisition of a participation is financed through an interest-bearing debt, such interest has an implication for the application of the participation exemption. To the extent that received dividends or liquidation proceeds are exempt, the following expenses are not deductible: (i) business expenses in direct economic relation to the income and (ii) a value adjustment booked on the participation as a consequence of the distribution (the deductibility denial is to be determined in this order). If in a given year, related expenses exceed the exempt income derived from the given participation, the excess is tax deductible.

When a participation is disposed of, the capital gain exemption does not apply to the sum of the related expenses and value adjustments that have reduced the tax result of the current or preceding years. This rule is referred to as the “recapture rule”. No taxation should however arise if the company realises only exempt income (i.e. no taxable income such as interest, management fees, and so on), since the taxable portion of the capital gain should be fully offset against existing tax losses created by the expenses which are recaptured.

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Capital losses realised upon disposal of the shares remain tax deductible.

If the conditions of the participation exemption regime are not satisfied, the following tax treatment is applicable:

n dividends are as a rule fully liable to CIT and MBT at the ordinary rates. As an exception:

- a 50% exemption is available for dividends derived from a participation in one of the following entities:

n a Luxembourg resident fully-taxable company limited by share capital, orn a company resident in a State with which Luxembourg has concluded a double tax treaty and liable to

a tax corresponding to the Luxembourg CIT, orn a company resident in an EU Member State and covered by article 2 of the EU Parent-Subsidiary

Directive;

- a full exemption from MBT is available for dividends derived from a participation representing, at the beginning of the taxable year, at least 10% in the share capital of the distributing company which is:

n a Luxembourg resident fully-taxable company limited by share capital, or n a non-resident company limited by share capital fully liable to a tax corresponding to the Luxembourg

CIT.

n capital gains are treated as ordinary profits and are as a rule fully liable to CIT and MBT at the ordinary rates;

n dividends paid by a Luxembourg company to its shareholder(s) are as a rule subject to the 15% Dividend WHT. In principle, distributions made to treaty country resident shareholders benefit from reduced Dividend WHT rates provided for by double tax treaties concluded by Luxembourg.

Foreign WHTs on received dividends may generally be credited against any CIT liability in Luxembourg. Such CIT credit is however limited to the amount of CIT due in Luxembourg on such dividends, i.e. no credit is generally available if the dividends are exempt under the participation exemption regime. Any excess WHTs that could not be credited against the CIT liability may under certain double tax treaties be credited against the MBT liability.

4.1.2. Intellectual property rights

The tax legislation provides a partial exemption of up to 80% for profits and a complete NWT exemption for wealth derived from certain intellectual property (“IP”) rights.

Accordingly, remunerations received for the use of, or the right to use, qualifying IP rights (copyrights on computer software, patents, trademarks, designs, models and domain names) may be exempt from CIT and MBT up to 80% of their net positive income. The latter is defined as the gross income reduced by the amount of expenses directly in relation to this income including annual amortisation and any depreciation. This exemption leads to a reduced taxation at an effective maximum aggregate CIT and MBT tax rate of 5.844% (for Luxembourg City).

Combined with the participation exemption regime, profits may be repatriated withholding tax free.

A taxpayer who has created a patent and uses it in the course of his business is entitled to a deduction equal to 80% of the net positive income (as described above) which he would have received had he conceded the use of this right to a third party.

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Capital gains deriving from the disposal of the above-mentioned rights may also be exempt from CIT and MBT up to 80%. However, the capital gains exemption does not apply up to the amount of deducted expenses directly connected with the IP rights (including amortisation and depreciation) which reduced the taxable base during the year of disposal or any previous year.

The main conditions which must be met in order to benefit from such a tax regime are as follows:

n the IP right was acquired or established after 31 December 2007;

n expenses connected with self-developed IP rights must be recorded as assets in the balance sheet and added to the taxable base during the first year in which this special regime is used, to the extent that for the given year, the expenses connected with IP rights have exceeded the related income;

n the IP rights may not have been acquired from an affiliated company, i.e.:

- a company holding a direct participation of at least 10% in the share capital of the recipient;

- a company directly held for at least 10% by the recipient;

- a company directly held for at least 10% by a third company which holds a direct participation of at least 10% in the recipient.

4.1.3. Intra-group financing activities

Luxembourg has traditionally been a hub for intra-group financing transactions. In order to further clarify the tax treatment of intra-group financing transactions and the prior clearance thereof through advance pricing agreements (“APA”), the Luxembourg tax authorities issued on 28 January 2011 Circular Letter L.I.R. – No. 164/2 (“Circular Letter 164/2”) on the tax treatment of companies engaged in intra-group financing transactions.

In particular, Circular Letter 164/2 provides transfer pricing guidelines for the determination of the arm’s length character of intra-group financing transactions. The rules are based on article 9 of the OECD Model Convention on Income and Capital and the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations.

Qualified Parent

LuxCo

Qualified Subsidiary Qualified Subsidiary Qualified Subsidiary Qualified Subsidiary

Dividend WHTexemption

Royalties

Effective maximum tax rate 5.844%

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Parent

LuxCo

Subsidiary Subsidiary Subsidiary Subsidiary

Interest out

Interest in

4.1.3.1. Scope

Circular Letter 164/2 applies to any entity that is principally engaged in intra-group financing transactions. In order to determine such principal activity, activities related to the holding of participations are disregarded. Intra-group financing transactions are defined as granting loans or advancing funds to affiliated enterprises and refinancing them through financial instruments such as public issuances, private borrowings, advances or bank loans. Two enterprises are considered as affiliated if one of them participates directly or indirectly in the management, control or capital of the other, or if the same persons participate directly or indirectly in the management, control or capital of the two enterprises.

4.1.3.2. Determination of the arm’s length price

The determination of the arm’s length price should follow the remuneration charged by independent financial institutions for comparable credits, i.e. based on an individual risk analysis and taking into account the related costs. The risk analysis usually includes a review of the annual accounts of the borrower, the guarantees, the duration of the loan, the relevant industry and the terms and conditions of the loan. Related costs include the base costs of the financing and supplements (e.g. costs incurred by solvency requirements, credit risk, handling costs or foreign exchange costs). The remuneration is generally fixed in relation to either the amounts borrowed or the fair market value of the assets under management.

Accordingly, companies engaged in intra-group financing transactions should proceed to a prior risk analysis and take into account any other relevant factors that may influence the determination of the transfer price.

In addition, the company must have an appropriate amount of equity (share capital/premium) in order to be able to assume the risks involved.

4.1.3.3. Advance Pricing Agreements

The Luxembourg tax authorities are prepared to enter into APA with companies which (i) have a genuine presence in Luxembourg (i.e. a minimum substance is required) and (ii) assume the risks related to the financing transaction (i.e. a minimum equity at risk is required, i.e. the lower of 1% of the financing volume and EUR 2 million).

n Substance requirements

A genuine presence requires the fulfilment of the following conditions:

- the majority of the members of the board of managers, directors or managers having power to bind the company are (i) Luxembourg residents or (ii) non-residents who pursue a professional activity (i.e. a business, agricultural/forest, independent or salaried activity) in Luxembourg and who are taxable in Luxembourg thereon for at least 50%. In case a company is part of the management board, it must have its statutory seat and central administration in Luxembourg;

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- the members of the board of managers, directors or managers who are either Luxembourg residents or non-residents who realise at least 50% of the above-mentioned profits in Luxembourg (in case of individuals) or have their statutory seat and central administration in Luxembourg (in case of companies), must possess appropriate professional knowledge to exercise their functions. They must further have at least the capacity to engage the company’s liability and ensure the proper execution of all the transactions. The company must have qualified personnel (either its own employees or outside staff) capable to execute and register the transactions performed. The company must finally guarantee the supervision of the work executed by the staff;

- key decisions regarding the management of the company must be taken in Luxembourg. Companies that are required by corporate law to hold shareholder meetings must hold at least one annual meeting at the place indicated in the articles of incorporation;

- the company must maintain at least one bank account in its own name with a financial institution in Luxembourg or a foreign branch thereof;

- at the time the request for a binding advance tax confirmation is filed with the Tax Authorities, the company must have complied with all the legal requirements regarding the filing of tax returns;

- the company must not be considered a tax resident of another State; and

- the company’s equity must be appropriate to its activity (taking into account the assets managed and the risks assumed).

n Capitalisation

A company is considered as assuming the risks of the financing transaction if the amount of its equity corresponds to at least (i) 1% of the nominal amount of the loan(s) granted or (ii) EUR 2 million. The company should further be able to demonstrate that it is obliged to use its equity upon the realisation of the risks of the transaction.

n Content

Depending on the facts and circumstances of each case, the APA request must further include at least the following:

- the precise designation of the requesting taxpayer (name, residence and, as the case may be, file number);

- a detailed description of the transactions, arrangements or legal actions concerned by the request and the taxpayer’s legal motivation;

- the designation of the other States involved;

- the presentation of the legal structure of the group, including information on the beneficial owner;

- the designation of the fiscal years concerned;

- a transfer pricing analysis complying with the OECD standards and including in particular a complete description of the methodology used, as well as detailed information on that methodology, such as for instance the identification of the comparables and results;

- a general description of the market situation;

- an analysis of all other relevant tax issues raised by the methodology used;

- the confirmation that the facts disclosed are complete and accurate.

n Validity

The duration of the validity of the APA granted by the tax authorities depends on each individual case, but may not exceed 5 years. Once the 5-year period has expired, the tax authorities may, upon request of the taxpayer, grant a new confirmation for a maximum period of 5 years.

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According to the principle of good faith, the confirmation has a binding effect on the tax authorities, unless:

- the situation or the operations described are incomplete or not accurate, or

- the essential elements of the operations differ from the request, or

- the confirmation does not comply with international law.

Finally, the APA shall no longer be effective if the legal provisions on which it is based change or if the essential features of the transaction are modified.

4.1.4. Fiscal consolidation

Luxembourg resident companies of the same group are allowed to pool their taxable profits and losses for CIT and MBT purposes under certain conditions.

The main conditions which must currently be fulfilled in order to benefit from the fiscal consolidation regime may be summarised as follows:

n the consolidating parent company must be either a fully-taxable resident company or a Luxembourg PE of a non-resident company liable to a tax corresponding to the Luxembourg CIT;

n the consolidated subsidiaries must be fully-taxable resident companies;

n the consolidating parent company must hold, either directly or indirectly, a participation of at least 95% in the share capital of the consolidated subsidiaries. Participations of at least 75% may also qualify for consolidation, but are subject to the approval of the Ministry of Finance and of at least 3/4 of the minority shareholders. Indirect participations of at least 95% may further be held through non-resident companies liable to a tax corresponding to the Luxembourg CIT. The participation condition must be uninterruptedly satisfied as from the beginning of the first accounting period for which the consolidation is requested;

n the regime is granted upon written application filed jointly by the consolidating parent and the consolidated subsidiaries for at least 5 years. The application must be filed before the end of the first accounting period for which the consolidation regime is requested.

The ACIT amount is determined at the level of each member of the group as if there was no fiscal consolidation, but the ACIT due by the entire tax group is capped at EUR 20,000 (plus the 7% surcharge for the employment fund).

Tax consolidation


ParentLuxembourg

LuxCo

LuxCo LuxCo

FrenchCoLuxCo ItalyCo

45%

55%45%

100% 10%≥ 95%

≥ 95%

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Regime Basic Requirements Effects

Investment tax credit

n granted upon request to Luxembourg companies and Luxembourg PEs of non-resident companies, for qualifying investments physically used in a country of the EEA

n qualifying investments include tangible depreciable assets other than buildings, livestock, mineral and fossil deposits

n no tax credit is granted for assets usually depreciable in a period of less than 3 years, assets acquired through the transfer of an enterprise or autonomous part or subdivision thereof, second-hand assets, isolated assets acquired for no consideration, and generally motorised vehicles

n the following assets may also benefit from the tax credit for global investments:- heating plants and sanitation systems in hotel

buildings- certain buildings used for social purposes- investments in immovable property that serve

certain environmental purposes (e.g. reduction of water consumption, energy savings and waste management) or enable disabled persons to work

- certain ships used in international traffic and purchased by recognised shipping companies

n the tax credit for additional investments is equal to 12% of the acquisition price of qualifying investment

n the tax credit for global investments corresponds to (i) 7% for a first tranche of the total acquisition price acquired during the tax year not exceeding EUR 150,000 and (ii) 2% for the tranche exceeding EUR 150,000

n the total credit may be credited against CIT exceeding the ACIT amount and any excess may be carried forward for 10 years

Venture capital investment certificates

n the venture capital company (“VCC”) must be a Luxembourg fully-taxable resident public limited company (société anonyme) or a private limited company (société à responsabilité limitée) with registered shares

n the products or technologies developed by the VCC must have an innovative nature with both a high growth potential and a high risk component

n the certificate holders must be (i) Luxembourg individuals or fully taxable resident companies that are (ii) shareholders of the VCC

n a specific request must be addressed by the shareholder(s) to the Ministry of Finance before the investment is made in the VCC

n the investment in the VCC must be made as a cash contribution

n the aggregate amount of the certificate must be comprised between EUR 100,000 and EUR 5,000,000

n the risk capital investment certificates entitle their holders to a tax credit against their CIT liability exceeding the ACIT amount of an amount equal to 30% of their face value without exceeding 30% of the holder’s income

n the benefit of the certificate may not be carried forward and the certificate may only be transferred to a Luxembourg fully-taxable resident company

4.1.5. Other tax incentives

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Regime Basic Requirements Effects

Tax credit for hiring unemployed persons (temporary tax regime)

n existence of an employment agreement of a limited or unlimited duration for at least 16 hours per week over 36 months

n the tax credit equals 15% of the gross monthly remuneration

n the tax credit may be credited against CIT exceeding the ACIT amount (any excess may be carried forward for 10 years)

Tax credit for permanent vocational trainings

n at least half of the trainings must be followed during the normal working hours

n the training projects and programs exceeding EUR 500 are subject to a previous authorisation of the competent minister

n the tax credit equals 10% of the training costs

n the tax credit is creditable against CIT exceeding the ACIT amount (any excess may be carried forward for 10 years)

Tax exemption for new companies and new manufactured products

n available to Luxembourg resident taxpayers who (i) set up a new company or who (ii) develop manufactured products particularly suited to the development and the structural expansion of the economy or to the improvement of the geographical distribution of economic activities

n the exemption is subject to the approval of the Luxembourg Minister of Economy and limited to a maximum period of 8 years

n a 25% exemption on profits derived from manufactured products (limited to a certain percentage of investments)

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4.1.6. VAT

For VAT purposes, the concept of “taxable person” covers any person who independently carries out any economic activity, whatever the purpose or results of that activity. In its judgment in Polysar (Case C-60/90 dated 20 June 1991), the CJEU declared that a holding company whose sole purpose is to take an economic interest in an enterprise without being involved, directly or indirectly, in its management does not qualify as a taxable person. Consequently, “pure” holding companies, i.e. holding companies receiving income solely in the form of dividends, liquidation proceeds and capital gains accruing to them in their capacity as shareholders, cannot be considered to be taxable persons for VAT purposes and, therefore, do not have the right to deduct input tax. Those activities are commonly described as being outside the scope of VAT.

However, where a holding company takes part in the operations of its subsidiaries or is involved in their management, meaning that it renders services to them for consideration (for example, it provides consultancy services, grants loans, or transfers trademark or IP licenses to them), the holding company is considered to be a taxable person in respect of those transactions.

The CJEU also clarified that the annual granting by a holding company of interest-bearing loans to companies in which it has a shareholding and placements by that holding company in bank deposits or in securities, such as treasury notes or deposit certificates, constitutes economic activities (C-77/01 dated 29 April 2004).

Especially for SOPARFIs, three factors may be highlighted from the CJEU case law in order to reach a definition of what an “economic activity” is in the meaning of the Luxembourg VAT law. First, the activity must not be carried out merely on an occasional basis. Second, the activity must not be confined to management in the same way as a private investor would do. Third, the activity must be carried out with a defined business or commercial purpose, in particular with a concern to maximise returns on capital investment.

These qualifications with regard to economic activities for VAT purposes are important for determining the extent and the calculation of the right to a VAT deduction.

Should the Luxembourg SOPARFI be analysed as a taxable person for VAT purposes, any supply of intangible or intellectual services from abroad would be subject to the VAT of the country of the Luxembourg SOPARFI. Such taxation would be at the rate of 15%, the lowest applicable within the 27 EU Member States.

In this respect, the CJEU clarified that a person who carries out both an economic activity (e.g. the supply of services) and a non-economic activity for VAT purposes (e.g. the holding of participations) and who purchases consultancy services from a person liable to tax in another Member State, is to be regarded as a taxable person even though the purchase was made solely in respect of the non-economic activity (C-291/07 dated 6 November 2008).

4.2. Partnerships4.2.1. Common Limited Partnership

The Common Limited Partnership (société en commandite simple - “CLP”) has a distinct legal personality from its partners from a corporate law perspective, but is tax transparent for CIT and NWT purposes and hence not subject to CIT and NWT in Luxembourg. The CLP may however be subject to Luxembourg MBT if it carries on a commercial activity or in limited circumstances if it is managed by a commercial company (SA, SCA, or SARL).

The Luxembourg resident partners of the CLP are personally subject to income/wealth tax in respect of their share in the profits/assets of a CLP, regardless of whether such profits/assets are effectively distributed or not.

The CLP’s non-resident partners may only be subject to taxation in Luxembourg as regards their partnership interests if (i) they hold their interests through a Luxembourg PE or permanent representative or (ii) if the CLP

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itself is constitutive of a permanent establishment or PE (which may only be the case if the CLP carries out a commercial activity or is managed by a commercial company (SA, SCA, or SARL) owning at least 5% of the partnership interest).

As regard withholding taxes, any distributions by the CLP are as a rule made free of withholding taxes in Luxembourg. Given its tax transparency, the CLP may not benefit itself from double tax treaties but their partners may generally claim the treaty benefits with the same state.

4.2.2. Special Limited Partnerships

The Special Limited Partnership (société en commandite spéciale - “SLP”) has no distinct legal personality from its partners. Taxwise its treatment follows as a rule the tax treatment of the CLP.

4.3. SICAR

Created by the law of 15 June 2004 as amended on the investment company in risk capital (the “SICAR Law”), the SICAR (société d’investissement en capital à risque - investment company in risk capital) may be established as a corporate entity (SA, SCA, SARL) or as a partnership structure (SCS) dedicated to investments in risk and venture capital. Investments may be made directly or indirectly in entities to be launched, developed or listed with the aim of offsetting the high level of risks taken by investors by expecting higher than average return. The SICAR is a regulated entity under the supervision of the CSSF (Commission de Surveillance du Secteur Financier). The SICAR is reserved to well-informed investors; such investors are defined as any institutional investor, professional investor and any other investor who (i) has confirmed in writing that he adheres to the status of well-informed investor and (ii) invests a minimum of EUR 125,000 in the SICAR or has obtained an assessment made by a credit institution within the meaning of Directive 2006/48/EC, by an investment firm within the meaning of Directive 2004/39/EC, or by a management company within the meaning of Directive 2001/107/EC certifying his expertise, experience and knowledge in adequately appraising an investment in risk capital. The subscribed share capital of a SICAR may not be less than EUR 1 million. This minimum share capital must be reached within a period of 12 months following the authorisation of the SICAR.

The SICAR in the form of a corporation is as a rule subject to CIT and MBT at ordinary rates. However, income derived from (i) portfolio items consisting of securities and capital gains deriving from such securities and (ii) temporary investments in liquid assets held for a maximum period of 12 months before investment in “risk capital” is excluded from the tax base. A SICAR is furthermore exempt from NWT and Dividend WHT.

As a result, the SICAR is only subject to CIT and MBT on any other income, except for the ACIT (EUR 3,250 including the surcharge for the employment fund).

Non-resident shareholders of a SICAR who have neither a PE nor a permanent representative in Luxembourg to which the investments in the SICAR are attributable are not subject to tax on any capital gains or other income derived from the SICAR in Luxembourg.

Investors Investors Investors

Risk capital securities Risk capital securities Risk capital securities

SICAR

Dividend WHT exemption

Exemptionof profits

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A SICAR set up in the above-mentioned corporate forms may, from a Luxembourg perspective, benefit from the application of Luxembourg double tax treaties as well as the EU Parent-Subsidiary Directive.

From a VAT point of view, article 44, paragraph 1, under (d) of the Luxembourg VAT law, as revised by the Law of 12 July 2013 2,exempts the management of a SICAR from VAT. This exemption is also applicable to SICARs located in other Member States and subject to the supervision of a supervisory body similar to the Commission de Surveillance du secteur financier. The Luxembourg VAT authorities indicated in Circular 723 dated 29 December 2006 (on the implementation of the BBL3 and Abbey National 4 cases with respect to VAT and investment funds) that all entities benefiting from the specific VAT exemption contained in article 44, paragraph 1, under (d) of the Luxembourg VAT law (i.e. including SICARs) are taxable persons for VAT purposes with no right to an input VAT deduction. Indeed, the Luxembourg VAT authorities consider that these entities (including SICARs) are only active in VAT exempt activities. SICARs are not subject to any VAT registration requirements except in case of receipt of taxable services from abroad (such as legal or tax services).

4.4. Securitisation undertakings

The tax regime applicable to securitisation undertakings is provided for by the law of 22 March 2004 as amended on securitisation (the “Securitisation Law”) which aims to assure the tax neutrality necessary for any successful securitisation transaction. The Securitisation Law defines “securitisation” as the transaction by which a securitisation undertaking acquires or assumes, directly or through another undertaking, risks relating to claims, other assets, or obligations assumed by third parties or inherent to all or part of the activities of third parties and issues securities whose value or yield depends on such risks. “Securitisation undertakings” are defined as undertakings which carry out the securitisation in full, and undertakings which participate in such a transaction by assuming all or part of the securitised risks - the acquisition vehicles - or by the issuing of securities to ensure the financing thereof - the issuing vehicles - and whose articles of incorporation, management regulations or issue documents provide that they are subject to the provisions of the Securitisation Law. Securitisation undertakings which issue securities to the public on a continuous basis require an authorisation from the CSSF.

Under the Securitisation Law, securitisation companies and securitisation funds may be established. Securitisation companies are subject to CIT and MBT at ordinary rates. However, any commitments made by a securitisation company towards investors and creditors are considered tax deductible business expenses. The Securitisation Law makes no distinction in relation to the nature of the securities issued to investors. Such securities may be i.a. bonds, notes, shares or beneficiary units. For shares and beneficiary units, any commitment to distribute (whatever the form it may take from a corporate law viewpoint, e.g. dividends or redemptions) represents a deductible expense. In practice, securitisation companies may thus realise no taxable profits and hence will not actually pay income tax (apart from the ACIT) as any income or gain is normally offset by a tax deductible expense. Commitments include allocations to statutory and blocked reserves. In the same manner as debts, all commitments must be valued at the year-end exchange rate. Commitments may either be (i) liquidated in favour of the shareholders at the closing of the financial year, (ii) liquidated upon approval of the annual accounts or (iii) allocated to a blocked reserve. To the extent that there is a timing difference between the realisation of a profit and its distribution to the investors (the latter taking place in a subsequent accounting year), the taxable result of the securitisation company is determined on the basis of a fiscal balance sheet where any net profit shown in the statutory balance sheet is offset in the fiscal balance sheet by a deductible provision corresponding to commitments to be distributed. A discretionary allocation decided by the annual general meeting is not considered a tax deductible commitment.

2 Implementing the Alternative Investment Fund Managers Directive 2011/61/EC.3 Case C-8/03, Banque Bruxelles Lambert SA (BBL) v. Belgian State, 21 October 2004 (“BBL case”).4 Case C-169/04, Abbey National, 4 May 2006 (“Abbey National case”).

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5 Implementing, among others, the UCITS IV Directive.

Securitisation companies are per se exempt from NWT, and distributions made by a securitisation company will not be subject to Dividend WHT.

A securitisation company is a Luxembourg tax resident and residence certificates are issued by the competent taxation office upon request. From a Luxembourg tax perspective, a securitisation company may also benefit from double tax treaties concluded by Luxembourg.

Securitisation funds are one or more co-ownerships of assets or fiduciary estates. They have no legal personality and are managed by a management company. For direct tax purposes they are transparent and thus not subject to CIT, MBT, NWT or WHT (subject to the application of the EU Savings Directive).

From a VAT point of view, article 44, paragraph 1, under (d) of the Luxembourg VAT law, as revised by the Law of 12 July 2013, exempts the management of securitisation undertakings situated in Luxembourg and similar vehicles located in other Member States. The Luxembourg VAT authorities indicated in Circular 723 dated 29 December 2006 (on the implementation of the BBL and Abbey National cases with respect 30 to VAT and investment funds) that all entities benefiting from the specific VAT exemption contained in article 44, paragraph 1, under (d) of the Luxembourg VAT law (i.e. including securitisation undertakings established in Luxembourg) are taxable persons for VAT purposes with no right to an input VAT deduction. Indeed, the Luxembourg VAT authorities consider that these entities (including securitisation undertakings established in Luxembourg) are only active in VAT exempt activities. No other precision or nuance, however, is provided in this circular. Securitisation undertakings are not subject to any VAT registration requirements except in case of receipt of taxable services from abroad (such as legal or tax services).

4.5. Investment funds

4.5.1. Types of investment funds

Luxembourg investment funds may be established as common funds (fonds commun de placement - FCP) or investment companies (sociétés d’investissement):

n an FCP is a contractual, unincorporated co-proprietorship of assets. An FCP does not have any legal personality and therefore may not itself enter into contracts or obligations. Neither are the unitholders vested with the power to manage and administer the FCP. Such power is granted to a management company. The management company must manage the FCP in accordance with the management regulations and in the exclusive interests of the unitholders;

n investment companies may either be created as a structure with variable capital (société d’investissement à capital variable - SICAV) or as a structure with fixed capital (société d’investissement à capital fixe - SICAF). Investment companies have a legal personality (except for SICAV/SICAF in the form of an SLP) and are generally managed by a board of managers.

Both types of funds may be created (i) as undertakings for collective investment (UCI), undertakings for collective investment in transferable securities (UCITS) under the amended law of 17 December 2010 5 (the “2010 Law”) or (ii) as specialised investment funds (SIF) under the amended law of 13 February 2007. Both types of funds may issue several classes of units/shares, permitting to create classes with features which are adapted to the needs of the different investors. They may also be established as an umbrella structure, i.e. one single fund with one or more sub-funds, where each sub-fund corresponds to a distinct portfolio of certain assets and liabilities. As between investors, each sub-fund constitutes a separate pool of assets, which is ring-fenced against the liabilities of any other sub-fund.

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4. Investment vehicles – 4.5 Investment funds

4.5.2. Tax considerations

4.5.2.1. Taxation of investment funds

Luxembourg funds are subject to an annual subscription tax (taxe d’abonnement), but are exempt from CIT, MBT, NWT and Dividend WHT. As a general rule, for funds subject to the 2010 Law, the subscription tax is, in principle, equal to 0.05% of the aggregate net asset value of the investment fund as valued on the last day of each quarter. In case of a SIF, the subscription tax is reduced to 0.01%.

However, no subscription tax is payable on the asset value represented by units or shares held in Luxembourg funds by funds which have already been subject to the annual subscription tax and by (i) certain institutional cash funds, (ii) microfinance investment funds, (iii) exchange traded UCIs/UCITS, and (iv) pension pooling funds. Other reduced rates or exemptions may be available.

Contributions in cash to a corporate investment fund structure are upon incorporation subject to a fixed registration duty of EUR 75. This amount is also due in case of any amendment to its articles of incorporation.

4.5.2.2. Taxation of investors

Shareholders and unitholders are, in principle, not subject to tax on capital gains and income derived from the fund in Luxembourg, except for residents or those having a permanent establishment or a permanent representative in Luxembourg.

Generally there is no WHT levied on income distributed by a Luxembourg fund to its investors (subject to the application of the EU Savings Directive).

4.5.2.3. International aspects

4.5.2.3.1. UCITS IV

The implementation of the Council Directive 2009/65/EC (UCITS IV) raises several tax issues that are currently not dealt with at a European level, in particular regarding the management company passport, cross-border mergers, master-feeder structures and VAT. In order to allow a seamless implementation of UCITS IV, EU Member States thus need to adopt appropriate domestic fiscal measures to remove any existing tax barriers. Luxembourg has been a forerunner in this respect and has introduced several tax measures in the 2010 Law.

n Management company passport

The management company passport raises the issue of the possible attraction of the fiscal residence of a fund established in one EU Member State to another EU Member State where its management company is situated. Indeed, the tax laws of several EU Member States use a so-called “place of effective management test” in order to determine whether an entity is a tax resident covered by its tax sovereignty. If a management company situated in one of those EU Member States manages a fund situated in another EU Member State, the fund may be deemed to be a tax resident of the EU Member State where its management company is located and become subject to tax in that State. Absent any applicable double tax treaty, this dual residence may lead to a double taxation.

In order to avoid these uncertainties, the 2010 Law provides that a UCI established outside Luxembourg, whose central administration or effective place of management is located in Luxembourg, is exempt from CIT, MBT and NWT. Accordingly, foreign funds do not become subject to Luxembourg taxation due to the fact that they are managed by a Luxembourg management company.

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4. Investment vehicles – 4.5 Investment funds

n Cross-border mergers

Cross-border mergers (as well as purely domestic mergers) may generally trigger tax consequences at the level of both the merged UCITS and the investors:

- at the level of the merging UCITS, the transfer of assets/liabilities may trigger the realisation and taxation of hidden reserves;

- at the level of the investors, the exchange of the shares/units in the initial UCITS for shares/units of the absorbing UCITS may lead to a capital gain taxation.

Regarding Luxembourg UCITS, the merger remains tax neutral at the fund level, since Luxembourg UCIs are not subject to any income or worth tax. At the level of the non-resident investors in a Luxembourg UCITS, gains realised on the exchange of units/shares are not taxable to Luxembourg income tax and no WHT is levied thereon (subject to the EU Savings Directive).

n Master-feeder structures

In a cross-border master-feeder structure, adverse tax consequences may generally arise at the level of the feeder fund when the latter derives dividends from, or realises capital gains on the disposal of, the shares/units of the master fund (or other assets in case of a conversion of an existing UCITS in a feeder fund).

Assuming the master fund is a Luxembourg UCITS, tax neutrality is however ensured:

- dividends, share redemption and liquidation proceeds are not subject to any WHT in Luxembourg6;

- capital gains realised by a non-resident feeder fund are not subject to tax in Luxembourg.

4.5.2.3.2. Double tax treaty network

The FCP is not a legal entity and is therefore transparent for taxation purposes. The income of the FCP should be attributed proportionately to its investors, and any investor in a State which has concluded a double tax treaty may therefore, to the extent practicable, be able to take advantage of treaty benefits.

Since investment companies are legal persons under Luxembourg law, they should generally be eligible and resident in Luxembourg for the purposes of double tax treaties. Certain double tax treaties however contain provisions excluding investment companies from the respective benefits of the double tax treaty, and the application of a given double tax treaty needs to be checked on a case-by-case basis.

SICAV/SICAF FCP

Fund level tax neutral tax neutral

Investor level

Residentindividualinvestor

n tax neutrality regime available (exchange at book value)

n optional step-up available, but gain not taxable, unless (i) speculative or (ii) gain on a substantial participation

gain generally not taxable, unless speculative

Non-resident investor

gain not taxable in Luxembourg gain not taxable in Luxembourg

6 Except that a withholding tax may be levied in limited circumstances under the EU Savings Directive, where the beneficiary does not opt for an exchange of information. In such case, the beneficiary is however entitled to a corresponding tax credit or refund in the residence State.

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4.5.2.4. VAT

From a VAT point of view, article 44, paragraph 1, under (d), of the Luxembourg VAT law, as revised by the Law of 12 July 2013, exempts from VAT the management of investment funds such as investment companies, FCPs and AIFs . The Luxembourg VAT authorities indicated in Circular 723 dated 29 December 2006 (on the implementation of the BBL and Abbey National cases with respect to VAT and investment funds) that investment funds benefiting from the specific VAT exemption contained in article 44, paragraph 1, under (d) of the Luxembourg VAT law are taxable persons for VAT purposes with no right to an input VAT deduction. Indeed, the Luxembourg VAT authorities consider these investment funds to be active in VAT exempt activities only.

An FCP, opposed to an open-ended or closed-ended investment company, does not have any legal personality and is considered by the Luxembourg VAT authorities to be a single entity formed with its management company which, in principle, qualifies as a taxable person for VAT purposes. Same position should apply to an AIF set up as an SLP and which should qualify as a single VAT taxpayer together with its general partner.

The concept of “management services” with respect to investment funds encompasses the tasks of portfolio management and also those of administering the funds themselves (such as those set out in Annex II to the UCITS IV directive under heading Administration). As confirmed by the CJEU in the GfBk case (C-275/11) of 7 March 2013), investment advisory services supplied by third parties also fall under the notion of fund management services for the purposes of VAT exemption (irrespective of whether the advisors are subject to the control of a supervisory authority or not).

The VAT exemption may be extended to sub-contracted services if, viewed broadly, they form a distinct whole, and are specific to, and essential for, the management of investment funds.

The Luxembourg VAT authorities confirmed in circular 723ter of 7 November 2013 that risk management functions are to be considered as forming part of VAT exempt fund management services.

The VAT exemption does not cover the functions of depositary for the control and supervision duties (12% VAT). Similarly, legal, tax and audit services remain subject to VAT in all cases.

Should the legal or tax services be rendered by non-Luxembourg service providers, Luxembourg VAT would be due by the investment funds at the rate of 15% under the reverse charge mechanism without any possibility to recover that VAT. In such case, a SICAV or an FCP (together with its management company) will be required to register for VAT purposes in Luxembourg (although under a simplified regime).

4.6. Banks and financial institutions

Banks and financial institutions are governed by the amended law of 5 April 1993 relating to the financial industry. They are regulated entities under the supervision of the CSSF.

Banks are as a rule subject to CIT (including the ACIT), MBT and NWT at ordinary rates. However, they benefit from the Luxembourg participation exemption regime as well as the other tax incentives (e.g. investment tax credits). In addition, they may create certain provisions justified by their specific activities, such as a provision for the deposit guarantee scheme (Association pour la Garantie des Dépôts Luxembourg - AGDL), as well as a provision for currency exchange fluctuations. These provisions constitute in principle tax deductible business expenses.

Like insurance and reinsurance companies, they also benefit from a specific neutralisation of exchange gains realised upon the conversion into Euro, when the capital for tax computation is expressed in a foreign

35


currency. The exchange gain may be transferred to a non-taxable reserve in the tax balance sheet and the reserve should only be taxed in case of sale, cessation or liquidation of the business.

In addition, banks may benefit from tax credits for foreign income taxes.

Regarding VAT, banks and financial institutions are considered as taxable persons for VAT purposes as they carry out economic activities within the meaning of VAT. Banking transactions may be (i) taxable, (ii) VAT exempt or (iii) out of the scope of VAT. Most of the banking transactions are VAT exempt (e.g. granting of credit, transactions regarding deposits, current accounts, currency and bank notes) with no right to deduct input VAT (except under certain circumstances). Banks are usually required to register for VAT purposes.

4.7. Insurance and reinsurance companies

Luxembourg insurance and reinsurance companies are governed by the amended law dated 6 December 1991. They are regulated entities under the supervision of the Commissariat aux Assurances (“CAA”).

Luxembourg insurance and reinsurance companies are as a rule subject to CIT (including the ACIT), MBT and NWT at ordinary rates. Insurance and reinsurance companies are obliged to constitute each year appropriate technical provisions in accordance with the amended law dated 8 December 1994 on accounting principles for insurance companies. In addition, reinsurance companies must constitute a specific equalisation reserve against the risk of fluctuation of future claims. Allocations to technical provisions and reserve are tax deductible. Dividends, liquidation proceeds and capital gains may also be exempt under the participation exemption regime.

In addition, insurance and reinsurance companies benefit from a specific roll-over relief for foreign exchange gains in the case of the establishment of a company by a foreign group, when the initial capital for tax computation is expressed in a foreign currency. The exchange gain may be transferred to a non-taxable reserve in the tax balance sheet and the reserve should only be taxed if it has actually been realised.

Premiums for non-life insurance policies are subject to an insurance tax of 4%. Premiums related to life insurance policies, as well as the premium paid on reinsurance policies, are exempt from insurance tax.

Insurance companies are considered as taxable persons for VAT purposes as they carry out economic activities within the meaning of VAT. As a rule, insurance and reinsurance transactions, including related services performed by insurance brokers and insurance agents, are VAT exempt. This exemption is not applicable to services rendered by experts in relation to the evaluation of insurance indemnities. According to the CJEU in C-349/96 dated 25 February 1999, “the essentials of an insurance transaction are, as generally understood, that the insurer undertakes, in return for prior payment of a premium, to provide the insured, in the event of materialisation of the risk covered, with the service agreed when the contract was concluded”. The CJEU stated in the Taksatorringen case (C-8/01 dated 20 November 2003) that the concept of “related services performed by insurance brokers and insurance agents” refers only to services provided by professionals who have a relationship with both the insurer and the insured party. This definition places the emphasis on the external action of the insurance agent i.e. his/her position as a mediator between the policyholder and the insurance company, which necessarily implies the existence of relations with both parties. In the absence of a contractual relationship with both parties, the service cannot qualify as an insurance transaction and thus cannot benefit from VAT exemption. The outsourcing of accounting and administration, the provision or sharing of staff, customer services, and call-centre and back-office functions are taxable. Insurance companies performing VAT exempt insurance services do not have a right to the input VAT deduction, except if the recipients are based outside the EU. Insurance companies are not required to register for VAT purposes, unless part of the insurance activity is provided to non-EU customers or unless they receive taxable services from non-Luxembourg suppliers.

36


4.8. Pension fund regimes

Luxembourg pension funds may be established either (i) as pension savings associations (association d’épargne-pension - “ASSEP”) or pension savings companies with variable capital (société d’épargne-pension à capital variable - “SEPCAV”) under the supervision of the CSSF in accordance with the law of 13 July 2005 on pension funds (the “Pension Fund Law”) or (ii) as pension funds under the supervision of the CAA, in accordance with the amended Grand-Ducal decree of 31 August 2000. Pursuant to Luxembourg law, a Luxembourg pension fund cannot be set up and provide retirement benefits prior to obtaining the approval of the CSSF, respectively the CAA. The ASSEP, the SEPCAV and the pension funds under the supervision of the CAA are subject to CIT (including the ACIT) and MBT and exempted from NWT.

However, ASSEPs and the pension funds under the supervision of the CAA are obliged to constitute appropriate tax deductible provisions which must cover at all times the future liabilities towards beneficiaries. The SEPCAV benefits from an objective exemption from CIT and MBT for profits derived from investments in securities so that they are only taxed on other financial profits.

From a VAT point of view article 44, paragraph 1, under (d), of the Luxembourg VAT law, as revised by the Law of 12 July 2013, exempts from VAT the management of pension funds subject to the supervision of the CSSF or the CAA and also pension funds located in other Member States and which are subject to the supervision of a similar supervisory body.

4.9. SPF

Luxembourg has introduced the SPF (société de gestion de patrimoine familial) by the law dated 11 May 2007 (the “SPF Law”) with the purpose to create a legal framework for the management of family wealth by individuals. Qualifying shareholders of the SPF are limited to (i) individuals, (ii) wealth management entities acting exclusively in the interest of the private wealth of individuals (e.g. trusts, private foundations) and (iii) intermediaries holding the shares of the SPF on a fiduciary basis or in a similar capacity on behalf of investors who are themselves qualifying shareholders.

The activity of the SPF must be limited to the holding, managing and selling of financial assets, to the exclusion of any commercial activity. Financial assets are defined by reference to the law of 5 August 2005 on financial collateral arrangements and include shares, bonds, notes, structured products, derivatives or other negotiable securities. In addition, the SPF may hold cash, as well as any kind of assets held in a bank account. Excluded assets include non-transferable loans or real estate.

The SPF is exempt from CIT, MBT, NWT and Dividend WHT. This exemption is justified by the fact that the SPF does not have a commercial activity. Salaries and directors’ fees paid by the SPF are subject to WHT at the normal rate. Interest payments remain subject to the laws dated 21 June 2005 and the law dated 23 December 2005. The SPF is subject to a 0.25% subscription tax. The SPF Law, however, provides for minimum annual taxation of EUR 100 and maximum annual taxation of EUR 125,000. The subscription tax must be declared and paid quarterly to the Administration de l’enregistrement et des domaines.

In view of its particular purpose and the impossibility for it to exercise an economic activity under the terms of VAT regulations, the SPF cannot qualify as a taxable person for VAT purposes. Accordingly, an SPF is not allowed to deduct VAT incurred on costs and is in principle not subject to the VAT registration obligations.

37


Fiscal control of SPFs is the responsibility of the Administration de l’enregistrement et des domaines and the right to supervise and investigate is exercised under the authority of its director. The SPF’s books may be inspected at the head office as part of this control exercise. In order to facilitate the control, compliance by the SPF with the conditions laid down in the SPF Law (written declaration of investor eligibility and received dividends) must be certified by the domiciliary agent of the SPF or, if this is not possible, by an auditor or a chartered accountant. The certification will also include the indication either that the SPF has complied with the paying agent obligations incumbent upon it, or that the SPF has called upon a credit institution to meet these obligations on its behalf.

These certifications must be communicated annually by 31 July at the latest to the Administration de l’enregistrement et des domaines.

4.10. The Luxembourg maritime flag

Under the Luxembourg maritime flag, certain fiscal advantages are granted to companies active in the shipping business. The main fiscal features thereof may be summarised as follows:

n profits from operating or renting out ships of registered maritime companies are exempt from MBT;

n a depreciation of the purchase price is possible using straight-line depreciation or reducing balance depreciation at a rate of 25% per annum;

n vessels registered in Luxembourg may qualify for the investment tax credit (of up to 12%) with a 10-year carry-forward period;

n a roll-over relief may be available for capital gains realised on the disposal of vessels used in international traffic;

n the supply, chartering and hiring of a seagoing vessel can, under certain circumstances, benefit from a VAT exemption.

38

4.11. Identification of the most appropriate investment vehicle

CSSF

CAA

None

Investors Vehicles Tax StatusAssets/Activities

retail

institutional & sophisticated

all

all

diversified investments

diversified investments

venture capital/private equity

family wealth management

securitisation

securitisation

UCITS/UCI

SIF

SICAR

SPF

securitisation company

securitisation company

securitisationfund

securitisationfund

FCP

FCP

company

company or cooperative

company or cooperative

mutual insurance association, cooperative, association

shareholding,IP holding, financing,

commercial

investmentcompany

investmentcompany

partnership

fund

fund

flow-through

flow-through

opaque

opaque

opaque

ASSEPSEPCAV

pension fund

pension fund

pension plan

insuranceinsurancecompany company

company

company

opaque

opaque

opaque

opaque

flow-through

company opaquereinsurancereinsurance company

SOPARFI

pension plan

employees

individuals

employees

specific

opaque

opaque

opaque

flow-through

flow-through

Supervision Legal form


39

5. International context

5.1. Luxembourg tax residence

Under Luxembourg tax law, a company is a Luxembourg resident if its registered office or its central administration is located in the Grand Duchy of Luxembourg. “Registered office” means the statutory office as determined by the articles of incorporation of the company. “Central administration” refers to the place of effective management of the company, where it is commonly understood that the principal establishment designates the place where the company’s accounts and records are kept, where the general meetings of the shareholders are held and where the decisions concerning the company’s business are taken.

If a company is dual resident, the tie-breaker rule of applicable double tax treaty, if any, will usually determinethe tax residence based on the “place of effective management”.

5.2. Permanent establishment

A Luxembourg PE of a non-resident company is liable to CIT and MBT on its Luxembourg-source profits. A PE is defined as (i) every fixed piece of equipment or the places which serve for the operation of the established business, including the places where the top-level management is organised; (ii) branches, factories, warehouses, places of purchase and sale, landing areas, offices and other places of business, which the entrepreneur (co-entrepreneur) or his permanent agent (for example a person who has been given a power of attorney) usually carries out the business; (iii) building or construction sites if the duration of their use has exceeded 6 months or is expected to exceed 6 months; (iv) a railway business and (v) an undertaking which supplies gas, water, electricity or heat.

Regarding branches that are constitutive of a Luxembourg PE, there are no specific tax rules on the allocation of profits between a branch and its head office. Generally, a branch may either determine its taxable profits by a direct method or an indirect method. In the direct method, the taxable profits correspond to the profits as determined in the branch’s separate accounts (to the extent that the valuation principles are acceptable for tax purposes). By comparison, in the indirect method, a portion of the overall profits of the branch and its head office is allocated to the branch according to a determined allocation key. If the branch keeps its own accounts and carries on a separate activity from its head office, the taxable profits will be determined according to the direct method. The use of the direct method supposes that the branch and the head office act as independent enterprises and therefore requires that the branch shall act on an arm’s length basis.

5.3. Double taxation elimination method

Absent a double tax treaty, resident taxpayers are generally subject to Luxembourg income tax on their worldwide income but unilateral credit relief is generally available.

Under treaties concluded by Luxembourg, double taxation is generally avoided by way of an exemption method with a progressivity clause which permits the inclusion of the foreign income into the Luxembourg tax base in order to determine the global tax rate. As an exception, Luxembourg generally uses the credit method regarding dividends, interest and royalties.

40 ARGENTINA

CHILE

URUGUAY

BRAZIL

PANAMA

MEXICO

UNITED STATES OF AMERICA

CANADA

GREENLAND(DENMARK)

ALASKA(U.S.A.)

ICELAND

TRINIDAD AND TOBAGO

BARBADOS

FRENCH GUIANA

SWEDEN

1

2

SOUTHAFRICA

28

21

22OMAN

TUNISIA

MOROCCO

SENEGAL

EGYPT

SAUDI ARABIA

NEWZEALAND

MONGOLIA

JAPAN

SRI LANKA MALAYSIA

INDONESIA

24

30

T

DNALI

AH

VIETNAM

23

CHINA SOUTHKOREA

HONG KONG

PHILIPPINES

TAIWAN

RUSSIA

KAZAKHSTAN

UZBEKISTANKYRGYZSTAN

PAKISTAN

INDIA

TAJIKISTAN

2029

CYPRUSSYRIA

TURKEY

27

25 26

28 KUWAIT 20 ISRAEL 29 LEBANON

23 LAOS 30 BRUNEI

21 QATAR 22 UAE

24 SINGAPORE 25 ARMENIA 26 AZERBAIJAN 27 GEORGIA

FRANCE

UK

IRELANDGUERNSEYJERSEY

GERMANYPOLAND

DENMARK

FINLAND

NORWAY

7

814

94

6

ITALY

10ROMANIA

GREECE

16SPAINPORTUGAL

BULGARIA

5

MALTA

3

UKRAINE

11

MAURITIU

BOTSWANA

S

MONACOANDORA

BAHRAIN

12

15

SEYCHELLES

Treaty in force1 LITHUANIA

2 LATVIA 3 ESTONIA 4 SLOVAKIA 5 CZECH REP. 6 BELGIUM 7 NETHERLANDS 8 SWITZERLAND 9 AUSTRIA10 HUNGARY11 MOLDOVA12 SLOVENIA13 SAN MARINO14 LIECHTENSTEIN15 MACEDONIA

Treaty in negotiation

Treaty in force Treaty in negotiation

16 ALBANIA

18 CROATIA 19 ISLE OF MAN

17 SERBIA

1318

17

19


5.4. Double tax treaty network

Luxembourg’s double tax treaties are generally based on the OECD Model Convention.

Sixty-nine double tax treaties are currently in force with the following States:

Armenia, Austria, Azerbaijan, Bahrain, Barbados, Belgium, Brazil, Bulgaria, Canada, China, Czech Republic, Denmark, Estonia, Finland, France, Georgia, Germany, Greece, Hong Kong, Hungary, Iceland, India, Indonesia, Ireland, Israel, Italy, Japan, Kazakhstan, Laos, Latvia, Liechtenstein, Lithuania, Macedonia, Malaysia, Malta, Mauritius, Mexico, Moldova, Monaco, Morocco, Netherlands, Norway, Panama, Poland, Portugal, Qatar, Romania, Russia, San Marino, Seychelles, Singapore, Slovakia, Slovenia, South Africa, South Korea, Spain, Sri Lanka, Sweden, Switzerland, Tajikistan, Thailand, Trinidad and Tobago, Tunisia, Turkey, United Arab Emirates, United Kingdom, United States of America, Uzbekistan and Vietnam.

SWEDEN

1

2

SOUTHAFRICA

28

21

22OMAN

TUNISIA

MOROCCO

SENEGAL

EGYPT

SAUDI ARABIA

NEWZEALAND

MONGOLIA

JAPAN

SRI LANKA MALAYSIA

INDONESIA

24

30

T

DNALI

AH

VIETNAM

23

CHINA SOUTHKOREA

HONG KONG

PHILIPPINES

TAIWAN

RUSSIA

KAZAKHSTAN


PAKISTAN

INDIA

TAJIKISTAN

2029

CYPRUSSYRIA

TURKEY

27

25 26


23 LAOS 30 BRUNEI

21 QATAR 22 UAE


FRANCE

UK


GERMANYPOLAND

DENMARK

FINLAND

NORWAY

7

814

94

6

ITALY

10ROMANIA

GREECE

16SPAINPORTUGAL

BULGARIA

5

MALTA

3

UKRAINE

11

MAURITIU

BOTSWANA

S

MONACOANDORA

BAHRAIN

12

15

SEYCHELLES





16 ALBANIA


17 SERBIA

1318

17

19

SWEDEN

1

2

SOUTHAFRICA

28

21

22OMAN

TUNISIA

MOROCCO

SENEGAL

EGYPT

SAUDI ARABIA

NEWZEALAND

MONGOLIA

JAPAN

SRI LANKA MALAYSIA

INDONESIA

24

30

T

DNALI

AH

VIETNAM

23

CHINA SOUTHKOREA

HONG KONG

PHILIPPINES

TAIWAN

RUSSIA

KAZAKHSTAN


PAKISTAN

INDIA

TAJIKISTAN

2029

CYPRUSSYRIA

TURKEY

27

25 26


23 LAOS 30 BRUNEI

21 QATAR 22 UAE


FRANCE

UK


GERMANYPOLAND

DENMARK

FINLAND

NORWAY

7

814

94

6

ITALY

10ROMANIA

GREECE

16SPAINPORTUGAL

BULGARIA

5

MALTA

3

UKRAINE

11

MAURITIU

BOTSWANA

S

MONACOANDORA

BAHRAIN

12

15

SEYCHELLES





16 ALBANIA


17 SERBIA

1318

17

19

Double tax treaties in force

Double tax treaties signed or under negotiation

Numerous new double tax treaties have currently been signed, are in negotiation or negotiations are planned, including those with:

Albania, Andorra, Argentina, Botswana, Brunei, Croatia, Cyprus, Egypt, Guernsey, Isle of Man, Jersey, Kuwait, Kyrgyzstan, Lebanon, New Zealand, Oman, Pakistan, Philippines, Saudi Arabia, Senegal, Serbia, Syria, Taiwan, Ukraine and Uruguay.

5. International context - 5.4 Double tax treaty network

ARGENTINA

CHILE

URUGUAY

BRAZIL

PANAMA

MEXICO

UNITED STATES OF AMERICA

CANADA

GREENLAND(DENMARK)

ALASKA(U.S.A.)

ICELAND

TRINIDAD AND TOBAGO

BARBADOS

FRENCH GUIANA

42


5.5. Taxation on highly-skilled workers

On 27 January 2014, the tax authorities issued Circular Letter L.I.R. – No. 95/2 (“Circular Letter 95/2”) replacing the circular letter dated 21 May 2013 as from 1st January 2014, on the hiring of highly-skilled workers on the international market. According to Circular Letter 95/2, certain expenses assumed by a Luxembourg employer in relation to the international recruitment of an employee becoming Luxembourg resident constitute tax deductible business expenses for the employer without being a taxable benefit in kind in the hands of the employee. The application of Circular Letter 95/2 is subject to several limits and conditions.

5.6. EU Savings Directive

The EU Savings Directive on taxation of savings income and several agreements concluded between Luxembourg and certain dependent and associated territories of the EU, were implemented into Luxembourg law by the laws dated 21 June 2005. Under these laws, interest payments made by a Luxembourg paying agent to (or for the benefit of) individuals and certain residual entities resident or established in another EU Member State or in certain dependent and associated territories are subject to a withholding tax in Luxembourg, unless the beneficiary elects for the procedure of exchange of information. Under the procedure of exchange of information, the tax authorities of the State of residence of the beneficiary are informed about the payment thereof. The withholding tax rate amounts to 35% (as from 1 July 2011). A corresponding tax credit or refund should be granted by the State of residence of the beneficiary of the income. The withholding tax system is applicable for a transitional period the end of which depends on the agreement on an exchange of information to be concluded by the European Union with third countries.

The following dependent and associated territories of the European Union are concerned: Aruba, British Virgin Islands, Curaçao, Guernsey, Isle of Man, Jersey, Montserrat and Sint Maarten.

For the purposes of the EU Savings Directive residual entities are entities (i) without legal personality (except for certain Finnish and Swedish entities) and (ii) the profits of which are not taxed under the general arrangements for the business taxation and (iii) which are not, or have not opted to be considered as, UCITS recognised in accordance with Council Directive 85/611/EEC as replaced by Directive 2009/65/EC.

Regarding UCITS recognised in accordance with Directive 2009/65/EC (and Luxembourg residual entities), interest includes dividends and income realised upon the sale, refund, redemption of shares or units held in a UCITS, if it invests directly or indirectly more than 25% of its assets in debt claims within the meaning of the EU Savings Directive, as well as any income derived from debt claims otherwise distributed by a UCITS where the investment in debt claims of such UCIT exceeds 15% of its assets.

On 20 March 2014, the European Council decided to pass the revised EU Savings Directive, which will amend and broaden the scope of the EU Savings Directive. On the same European Council meeting, Austria and Luxembourg confirmed that they will endorse the amendment to the EU Savings Directive and will provide the required information on interest payments to the tax authorities of other EU Member States under the automatic information exchange as of 1 January 2015 and will abolish the withholding system. On 24 March 2014, the Council of the European Union passed the proposed amendment to the EU Savings Directive.

43


5.7. AIFM and Taxes

What does the AIFM Law regulate?

n General overview

Although the directive 2011/61/EU of the European Parliament and of the Council with regard to regulatory technical standards determining types of alternative investment fund managers (“AIFMD”) is silent on tax aspects, the law of 12 July 2013 implementing the AIFMD (the “AIFM Law”) introduces specific provisions addressing the tax status of foreign alternative investment funds (“AIFs”) managed in Luxembourg, the carried interest paid to certain Luxembourg managers and VAT.

n No Luxembourg income tax for foreign AIFs managed in Luxembourg

As a general rule in international tax law, a company is tax resident (and thus subject to tax) in the country where it has its statutory seat or where it is effectively managed, the latter criterion prevailing in case of dual residency. The management of an alternative investment fund by an AIFM resident in another State may thus trigger adverse tax consequences for the AIF or its investors.

The AIFM Law expressly states that AIFs established outside Luxembourg but having their place of effective management or central administration in Luxembourg are expressly exempt from Luxembourg taxation (i.e. corporate income tax, municipal business tax and net worth tax). This statutory rule ensures the absence of Luxembourg tax exposure for foreign AIFs managed by Luxembourg resident alternative investment fund managers.

n Attractive taxation of carried interest received by Luxembourg managers

A specific tax regime is introduced under certain conditions for carried interest received by Luxembourg individuals who are employed by managers or a management company of an AIF. Such carried interest, granted in accordance with the AIFM Law, is taxed as miscellaneous income at 1/4 of the standard progressive income tax rates (i.e. a maximum tax rate of 10.90% in 2014).

This favourable tax rate is subject to the following conditions:

- the employee moved his or her tax residency to Luxembourg in the course of 2013 (i.e. within the first year following the entry into force of the AIFM Law) or in any of the five following years;

- he or she was not previously taxable in Luxembourg during the five tax years preceding the entry into force of the AIFM Law (i.e. 2013);

- no advance of carried interest has been paid to the employee;

- initial capital contributions have been fully repaid to investors prior to carried interest payment.

According to the AIFM Law, this tax treatment is currently applicable for a period of 11 years (i.e. until the end of 10th tax year following the year in which the employee took up in Luxembourg the position entitling him or her to the carried interest).

n VAT aspects

As regards VAT, the AIFM Law impacts many market players of the non-UCITS industry in Luxembourg and their existing business models, which may need to be reviewed and adapted. New service flows characterise the environment post-AIFMD and new VAT issues have to be managed so as to limit or avoid VAT costs.

44

n VAT exemption

SIFs and SICARs benefit from the VAT exemption applicable to any fund management services supplied to them, irrespective of whether they qualify as AIF and irrespective of whether they are established in

Luxembourg or any other EU jurisdiction. As regards unregulated investment vehicles, a provision has been introduced into the Luxembourg VAT law explicitly extending the scope of VAT exemption to the management of AIFs as they are defined in the AIFM Law.

n No EU harmonisation of the notion fund management services

In theory, VAT is subject to EU harmonisation. There are however many differences, not only in VAT rates, but also in the interpretation (i) of the list of vehicles benefiting from the VAT exemption, and (ii) of the notion of “fund management services”. The impacts of these VAT distortions also merit consideration.

n Increasing cross-border marketing and management

The AIFM Law provides AIFMs with a “marketing passport” for EU and non-EU AIFs. It also provides AIFMs with a “management passport” allowing these AIFMs to provide their services cross-border to EU and non- EU AIFs. Both passports increase cross-border management activities mainly in the private equity, real estate and hedge fund industries. The VAT treatment applicable to these cross-border management activities may be subject to various and conflicting interpretations, possibly resulting in unexpected taxation within the EU if not properly managed.

n New service providers

The AIFM Law introduces new requirements in respect of valuation, liquidity and risk management as well as reporting to investors and regulators. These functions can be delegated under certain conditions by the AIFM to third parties. In this respect, new types of services circulate within the AIFs and the AIFMs and new VAT problematics are emerging.

In that regard, the Luxembourg VAT authorities issued, on 7 November 2013, a circular (No 723ter) clarifying that risk management functions are forming part of VAT exempt fund management services. This exemption remains applicable in case risk management functions are outsourced to third parties to the extent some specific conditions are fulfilled. It will not apply in case the role of the external supplier would be limited to purely technical functions (e.g. provision of the required computer software or supply of computerised calculations).

n VAT optimisation and reduction of costs

VAT is usually considered a show stopper if charged on recurring expenses (e.g. on management fees payable by unregulated investment schemes). The invoicing of set-up costs is also mainly subject to VAT and the question of the recovery of that VAT is often material. Designing an investment scheme maximising VAT recovery is a key step in the set-up phase.

n Ever growing importance of VAT compliance

The increasing management activities of investment vehicles on a cross-border basis require the fulfilment of VAT compliance obligations. Any mismanagement of these obligations (e.g. incorrect invoices, lack of VAT identification number, incorrect reporting of foreign transactions, unclear explanations provided to the tax authorities, etc.) will necessarily lead to unexpected VAT costs or even to double taxation.

5. International cvontext - 5.7 AIFM and Taxes

45

6. Accounting

6.1. Lux GAAP

The Lux GAAP are derived from the Fourth Council Directive 78/660/EEC of 25 July 1978 on annual accounts of certain types of companies, which was transposed in 1984 into Luxembourg law. These provisions, as transposed in 1984, were amended by the law of 19 December 2002 which (i) extended the application of the provisions on annual accounts to a larger number of entities, (ii) established the principle of a standardised chart of accounts, (iii) created an Accounting Standards Committee (Commission des normes comptables) and (iv) laid the foundations for the establishment of a centralised accounting data collector (Centrale des Bilans).

Lux GAAP requires the observance of i.a. the following basic principles:

n the annual accounts must include a balance sheet, a profit and loss account and the notes to the accounts;

n the formal presentation of the annual accounts must follow specific rules;

n the annual accounts must give a true and fair view of the company’s assets and liabilities;

n any set-off between the assets and liabilities, as well as between profit and expenses, is prohibited;

n the accounts for a given financial year must include the figures of the previous year and the presentation of the accounts must follow the presentation of the previous year;

n the company is presumed to be carrying on its business as a going concern;

n the valuation methods for a given financial year must follow the valuations used the previous year;

n the valuations must be made following the principle of prudence (e.g. unrealised profits shall not be taken into account and unrealised losses shall be taken into account);

n profits and expenses are taken into account for the financial year in which they have been realised or exposed, irrespective of the actual payment;

n the assets and liabilities must be valued separately;

n the opening balance sheet for a given financial year corresponds to the closing balance sheet of the previous year.

The Grand-Ducal decree of 10 June 2009 determines the content and presentation of standardised accounting under Lux GAAP (Plan comptable normalisé - “PCN”). Companies using Lux GAAP are required to adhere to the PCN as from the first fiscal year beginning after 31 December 2010. The Grand-Ducal decree defines the content and presentation of the PCN as set out in article 12 of the Luxembourg Commercial Code (Code de Commerce).

The PCN is compulsory for all commercial companies, as defined in article 8 of the Commercial Code. This includes all corporations under Luxembourg law, such as the SA, the SARL, and the SCA. The rules do not apply to companies that have opted for the preparation of their annual accounts according to IFRS. However, companies are still allowed to use alternative presentation schemes for their accounts, insofar as their specific activities require an alternative presentation. The main objective of the PCN is to facilitate reporting to the competent government agencies, including the tax authorities and the statistical office.

46

6.2. IFRS

On 10 December 2010 the Luxembourg Parliament adopted a law with regard to (i) the introduction of the International Financial Reporting Standards (IFRS) for the statutory accounts of Luxembourg companies and (ii) the transposition into domestic law of Directives 2003/51/EC and 2006/46/EC on the modernisation of annual and statutory accounts, Directive 2001/65/EC on valuation rules, as well as Commission Regulation (EC) No 1606/2002 on the application of international accounting standards.

The three most important amendments enacted by the law may be summarised as follows:

n Luxembourg companies have the possibility to establish their accounts in accordance with IFRS;

n in case a company has opted to continue using Lux GAAP, it will have the possibility to apply the fair value principle with regard to certain financial instruments (including derivative instruments);

n the introduction of the so-called “substance over form” principle, which was also introduced into Lux GAAP, whereby the appraisal of the economic reality of a transaction, rather than its legal features, governs the accounting treatment.

6.3. Lux GAAP with IFRS option

In addition to the national implementation of IFRS accounting standards, the law of 10 December 2010 also offers Luxembourg companies the possibility to retain Lux GAAP accounting in principle, with the option of valuing certain assets according to IFRS. This change represents a major alteration of the classic prudence and valuation at acquisition cost principles of Lux GAAP.

The Lux GAAP with IFRS option accounting standard allows companies to value certain financial assets, such as derivatives, financial assets available for sale and financial assets held for trading, as well as investment property at fair value, as opposed to the acquisition value cap foreseen under Lux GAAP.

As valuation above historical acquisition cost is as a rule not allowed by tax law, a fiscal balance sheet may have to be drawn up.

6. Accounting

47

7. Summary table -Luxembourg vehicles

Companies Investment funds Securitisation undertaking

SOPARFI SPF SICAR UCI SIF Company Fund

SICAV/F FCP SICAV/F FCP

CIT applicable but exemptions

n/a applicable but exemptions

n/a n/a applicable but notax base

n/a

MBT applicable but exemptions

n/a applicable butexemptions

n/a n/a applicable but no tax base

n/a

NWT applicable but exemptions

n/a n/a n/a n/a n/a

Subscription tax

n/a 0.25%maximum EUR 125,000 p.a.

n/a 0.01 to 0.05% of NAV with exemptions

0.01% of NAV with exemptions

n/a

WHT on dividends7

15% but exemptions/reductions available

n/a

WHT on interest7

n/a

WHT on capital gains7

n/a

VAT no VAT exemption for management services

n/a

Double tax treaties (DTT)

applicable n/a applicable several DTTs applicable

n/a several DTTsapplicable

n/a several DTTsapplicable

n/a

7 For the purposes of this summary table it is assumed that income is paid to companies and that the EU Savings Directive and the law of 23 December 2005 as amended are not applicable.

VAT exemption for management services

49

Arendt & Medernach’s highly experienced Tax Team has provided tailor-made advice to local and international clients for over 20 years. The Team is active in all areas of taxation, whether domestic or cross-border, and is ranked in the first tier of the leading law firms in Luxembourg by all major international league tables.

Arendt & Medernach’s Tax Partners are members of professional associations, such as ABA, ABBL, ALFI, COBMA, IBA, and IFA, and take part in local and international tax think tanks. Arendt & Medernach’s Tax Partners are recognised by their peers through their frequent contributions to academic and specialised publications and are actively involved in the further development of Luxembourg tax legislation.

Tax at Arendt & Medernach

Arendt & MedernachTax Team

www.arendt.com © Arendt & Medernach 2014

Alain Goebel, PartnerEmail: [email protected] Tel: (352) 40 78 78 512

Thierry Lesage, PartnerEmail: [email protected] Tel: (352) 40 78 78 328

Eric Fort, PartnerEmail: [email protected] Tel: (352) 40 78 78 306

Bruno Gasparotto, PrincipalEmail: [email protected] Tel: (352) 40 78 78 909

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