Trust IFA Boston

TRUST The SGG Group magazine

> P.32-33 I

James R. Silkenat

The Ruleof Law

> 08 Focus From Luxembourg with love> 10 TEcHNIcAL Our Partners contribution> 46 Your SGG Contacts at IFA Boston SPECIAL IFA

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The SGG Group magazine I Publishing Director: Serge Krancenblum I Editor-in-chief: Christian Mognol I Editorial staff: Ewa Gutfrind-Józefowicz, Christian Mognol, 360Crossmedia I Design & coordination: 360Crossmedia I Artistic director: Franck Widling I Cover credit: 360Crossmedia I Printed in Luxembourg I Print run: 5 000 copies.

fRom The Top 5By Serge Krancenblum

one of US 6Luc Frieden: in the thick of the action

focUS 8From Luxembourg with love

TechnIcaL 10Netherlands 10Luxembourg 20

GLobaL 32USA 32Belgium 36Switzerland 38Germany 40

SGG In a nUTSheLL 42

YoUR SGG conTacTS aT Ifa boSTon 46

TRUST SPECIAL IFA

One bank in Luxembourg knowswhat international business means

With a high level of proficiency in its fiscal and economic regulatory environment, ING Luxembourg provides fast and accurate advice to its clients. This is one of the elements that can make your business take off.

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SGG Group is proud to sponsor the 66th IFA Annual Meeting in beautiful Boston. Since its foundation, SGG has been servicing corporate, private equity, real estate and private clients. We provide them with the administrative, accounting, legal and tax compliance support they need in Luxembourg, the Netherlands, Switzerland and Belgium. With ANT, IMFC and FAcTS, which are today an integral part of the SGG Group, we also assist our Clients and Partners in Malta, Cyprus, Latin America and Asia. During all these years, our only aim has been to exceed our clients’ and partners’ expectations. Our Partners honor us by contributing to the present issue of TRUST. Enjoy their articles with the latest legal and tax news in the jurisdictions where SGG operates. We wish you all, a fruitful and enjoyable stay in Boston, the “Capital of New England”.

Kindest regards

Serge KrancenblumCEOSGG GrOup

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fRom LUxemboURG To haRvaRdBorn in Esch-sur-Alzette in September 1963, Luc Frieden attended the local primary school before completing his secondary schooling at the Athénée in Luxembourg in 1982. Attracted by the law, he first studied in Luxembourg and then at “Université de Paris”, where he obtained a Master’s Degree in business law in 1986. He then decided to give an international dimension to his academic career and, in 1987, graduated as Master of Comparative Law and Legal Philosophy from the University of Cambridge (UK) and in 1988, as Master of Laws from Harvard Law School in the United States. His thesis on «Media news gathering by satellites» was to be published in 1989 by the Stanford Journal of International Law.

fRom The Law To poLITIcSFrom 1989 to 1998, Luc Frieden worked as a lawyer in Luxembourg. He taught public law at the University Centre and wrote several articles

on banking law and constitutional law. From 1981 to 1994, he regularly commented on legal and political issues for RTL Radio Luxembourg. It was during this period that he entered politics.He was elected Member of Parliament for the Centre constituency for the first time at the par-liamentary elections of 1994 and was entrusted with his first political functions, as Chairman of the Finance and Budget Committee and Chairman of the Commission on Institutions and Constitutional Revision in particular.

fRom mInISTRY To mInISTRYOn the 4th of February 1998, at the age of 34, Luc Frieden was named Minister of Justice, Minister of Budget and Minister for Relations with Parliament. His brief included coordinating government work related to the introduction of the euro to Luxembourg. In 1999, his responsi-bilities were extended to the Ministries of the Treasury, Budget and Justice. Five years later, he was reappointed, and also became Minister of Defence for 2 years.Following the 2009 parliamentary elections, Luc Frieden was appointed Minister of Finance. He was therefore at the helm when it became necessary to save Fortis, Dexia or KBL, but also to explain to his countrymen the urgent need for reform. His pleas have fallen on deaf ears so far. The next few months will be critical. It could herald an extraordinary political destiny.

www.myofficialstory.com/lucfrieden

A MEMBER OF ThE GOvERNMENT SINCE 1998, LUC FRIEDEN MADE ThE ROUNDS OF SEvERAL MINISTRIES BEFORE BEING APPOINTED TO hEAD UP ThE MINISTRy OF FINANCE IN 2009, A POST WhERE, TODAy, EACh DECISION hAS SERIOUS IMPLICATIONS.

LUC FRIEDEN

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cLIenTS fIRST. aLwaYSOur business is a client centric business: we do it with passion as we love what we do.When SGG Luxembourg started its service offer to clients, almost sixty years ago, the original approach was to enhance their patrimonial situa-tion. Our clients came to Luxembourg to protect their assets but also to structure the latter with Luxembourg companies and legal solutions. In order to help our clients with the day to day mana-gement of their Luxembourg vehicles, we started offering them accounting, tax filing and ancillary legal compliance activities linked to the proper maintenance of their local legal entities.

fRom LUxemboURG To The woRLdAt that time, “globalization” wasn’t that often used to describe the beginning of an activity where large enterprises and entrepreneurs started to dis-cover Luxembourg as a hub to expand their cross border activities. With a growing client base and – contemporarily – a growing demand from our clients for the same quality service they enjoyed in the Grand Duchy, SGG was bound to expand.

The fIRST offIce SGG opened abRoad waS Geneva, SwITzeRLand In 1979The Netherlands was the next step. Some Private Equity houses, our faithful clients since our Luxembourg beginnings, were more and more often using the Netherlands in their investment structuring. As Luxembourg, the Netherlands is another jurisdiction of choice for international groups as the country has a good - if not excellent - double tax treaty network. It also has a healthy infrastructure of service providers. In order to assist our clients in the latter jurisdiction, SGG

decided to start with Amsterdam. In 2008, SGG added a further location on the global map, through the acquisition of a Luxembourg based service provider with a presence in Holland.

Brussels’ office followed soon after, as more clients were looking for a reliable service for Belgian hol-ding companies structures. Our clients expected in Brussels the same service quality level they enjoyed in Luxembourg. The growing number of Belgian companies we currently assist confirms the decision to expand in our neighboring country was a sensible one: SGG Belgium proves to be a real success.

SeRvIcInG oUR cLIenTS wheReveR TheY aRe In a constantly changing world, Luxembourg and the Netherlands - although sometimes perceived as competitors - were always represented in the organization chart of our Private Equity and cor-porate clients structures. In order to offer our clients the best of both worlds, SGG Group Dutch expansion soon became a strategic must. Our Executive Committee identified possible available targets but not all of them fitted both our philoso-phy and approach for a top notch quality service to our end clients while always keeping their advi-sors in the loop. With IMFC and ANT, SGG was lucky enough to find two Dutch leading service providers sharing the same values and client cen-tric approach. Both transactions were finalized in less than a year between August 2011 and April 2012. With two strong operational platforms, the SGG Group now employs more than 500 professionals in 14

fRom LUxemboURG wITh Love

chRISToph n. [email protected]

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jurisdictions: it has now a true presence on a glo-bal scale. With offices in Aruba and Curaçao, Shanghai and Hong Kong, ANT added 2 continents on the SGG map.

Contemporarily, SGG opened offices in Malta and strengthened its activities in Cyprus. Both juris-dictions are in high demand by our clients. As more and more of our clients stemmed from the USA - especially the Private Equity and Real Estate players - we opened a New York office in April 2012. The purpose of a New York presence is to be closer to our existing clients and assist US law firms and tax advisers with their projects in all SGG jurisdictions.As we are in a client driven business, the story

goes on as and will always do. We listen to our clients’ ideas and needs and will open operational platforms wherever it makes an economic sense for both of us. We will open in all jurisdictions where our clients expect the SGG service quality level they are accustomed to with SGG, FAcTS (our second Luxembourg subsidiary) IMFC and ANT.

IFA 2013 Copenhagen special edition will tell you about SGG’s next destination. Wherever as long as we keep on putting our clients where they belong: Number One on our priority list.

By christoph N. Kossmann,SGG Group

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TechnIcaL I NETHERLANDS

IN OUR PRACTICE WE ExPERIENCE AN INCREASING INTEREST IN ThE NEThERLANDS AS hOLDING JURISDICTION. MAIN REASONS ARE ThE BENEFICIAL TAx SySTEM, FAvORABLE DOUBLE TAx TREATIES, FINANCIAL INFRASTRUCTURE, GEOGRAPhICAL LOCATION AND ThE FACT ThAT ThE NEThERLANDS IS NOT BLACK LISTED IN ThE MAJOR JURISDICTIONS.

pRoTecTIon vIadUTch bILaTeRaL InveSTmenT TReaTIeS

surveys show that many multinationals also route their foreign investments via the Netherlands because of its network of bilateral investment treaties (“BIT”).

Thanks to the active role of the Dutch govern-ment, the Netherlands has concluded an impres-sive list of almost a hundred BITs.As shown by the recent Vodafone case, Dutch BITs provide means of recourse against suppos-edly unfair actions undertaken by the country in which investments have been made. Vodafone’s Dutch subsidiary has triggered the dispute settle-ment mechanism under the BIT concluded between the Netherlands and India, after being confronted with an Indian tax claim of USD 2 billion that resulted from amendments in Indian tax law that were given retrospective effect.

bITSA BIT is a treaty between two states establishing terms and conditions for the protection of inves-tors of one state regarding their investments in

the other state. For this reason many multination-als in for example the oil and gas industry struc-ture their foreign investments all over the world through the Netherlands. Not only direct invest-ments fall within the scope of the Dutch BITs, also indirect investments through subsidiaries are typically protected. BITs normally guarantee that the treatment of investors is fair and equitable and not less favorable than the treatment of domestic investors or investors from other states. Furthermore BITs usually provide protection from expropriation without compensation.

dISpUTe ReSoLUTIonBITs allow for a dispute resolution mechanism for investors whose rights under the BIT have alleg-edly been violated. These investors may have access to international arbitration, often under the auspices of the ICSID and/or UNCITRAL rather than suing the host state in its own court.

To concLUdeWhich investments are covered by a BIT depends on the definition of investment in a particular BIT. To make sure that the effects are known and the best BIT is used, it is important to thoroughly review and compare BITs. The Netherlands has concluded BITs that offer extensive protection, which makes it one of the critical success factors of the Netherlands as favorite holding jurisdiction.

By Ivo Kuipers,Atlas Tax [email protected]

Ivo Kuipers.

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foReIGn InveSTmenT fUndS maY have RIGhT To RefUnd of dIvIdendS

InTRodUcTIonRecent developments in both Dutch and European Union («EU») case law, indicate that foreign investment funds may be entitled to a full refund of Dutch dividend tax (i.e. the 15% tax to be normally withheld from dividends paid by Netherlands-resident companies). Dutch law and tax treaties generally do not provide for refunds of dividend tax to foreign investment funds.There would be a right to the refund, however, based on the free movement of capital as laid down in the Treaty on the Functioning of the EU (“TFEU”). It would also apply to funds esta-blished outside the EU, including US-resident funds.

dUTch caSe Law deveLopmenTSOn March 13th 2012, the ‘s-Hertogenbosch Court of Appeal granted a Finnish investment fund its request for a refund of Dutch dividend tax. In the appeal, the Finnish fund argued that it had to be accorded the same treatment as tax-exempt Netherlands-resident entities, which are entitled to a full refund of dividend tax under Dutch tax law and that there was no justification for a different treatment. This argument found

favor with the Court of Appeal. In first instance, the District Court had denied the Finnish fund its request on basis that it was not comparable with a resident fiscal investment fund. The Secretary of Finance has appealed against the Court of Appeal’s judgment to the Supreme Court, whose final judgment is pending.

eU caSe Law deveLopmenTSOn May 10th 2012, European Court of Justice («ECJ») rendered judgment in the Santander case (C-338/11), in which - contrary to their French peers - non-French investment funds, including investment funds established outside the EU, were denied a full refund of 25% French dividend tax. The ECJ ruled that the foreign and domestic investment funds were comparable, that the different treatment constituted a res-triction of the free movement of capital and that there was no justification for the restriction. Furthermore, whether the foreign investment funds were comparable with their French peers did not depend on the position of the sharehol-ders of the foreign funds. The Santander case has increased the likelihood of a judgment of the Supreme Court in the aforementioned case which favors the Finnish fund.

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ThE DUTCh TAx SySTEM hAS MANy FEATURES ThAT MAKE ThE NEThERLANDS AN ATTRACTIvE LOCATION FOR AMONG OThERS hOLDING, FINANCING AND LICENSING COMPANIES – NOT ONLy hISTORICALLy, BUT EvEN MORE INCREASING.

dUTch Tax cLImaTe – STILL GoInG STRonG(eR)

hoLdInG ReGImeA key element of the Dutch holding regime is the flexible participation exemption, pursuant to which a full exemption applies from Dutch cor-poration tax to benefits such as dividends and capital gains derived from qualifying subsidia-ries. The participation exemption requirements have been made more lenient as per 2010, and generally speaking are already met if a Dutch holding company owns 5% or more in a subsidiary.Also, opposed to many other jurisdictions, there is no minimum holding period. The flexible participation exemption and its extensive and attractive tax treaty network (see below), which reduces foreign dividend withholding taxes on incoming dividend payments, make the Netherlands an increasingly attractive hol-ding location.

fInancInG and LIcenSInG ReGImeThe Netherlands is also attractive and com-

monly used for financing and licensing activities among others due to: (i) the absence of Dutch withholding taxes upon interest and royalty payments made by a Dutch resident company and (ii) its extensive and attractive tax treaty network which reduces foreign interest and royalty withholding taxes on incoming interest and royalty payments.

Tax TReaTY neTwoRkAs mentioned, the Netherlands has an extensive and attractive tax treaty network with 95 juris-dictions. It is continuously expanding this treaty network by negotiating tax treaties with new jurisdictions and renegotiating existing tax treaties.Also, the Netherlands has concluded approxima-tely 95 bilateral investment treaties. It is impor-tant to note that the Netherlands has not and will not (with only very few exceptions) include a real estate provision – similar to article 13 paragraph 4 of the OECD Model Convention – in its existing or new tax treaties. This was again confirmed by the Dutch Ministry of Finance in 2011 in a tax treaty policy note.Many other jurisdictions are including such pro-visions in their existing and/or new treaties. Therefore, it is also increasingly beneficial and common practice to structure international real estate investments via the Netherlands.

By Arco Bobeldijk and Michiel Beudeker,Loyens & Loeff

mIchIeL [email protected]

aRco [email protected]

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COMPANy LAW FOR DUTCh Bv’S WILL SUBSTANTIALLy ChANGE AS OF 1 OCTOBER 2012. ThAT WILL RESULT IN A MUCh MORE ATTRACTIvE REGIME FOR ThE Bv, ThE PRIvATE LIMITED LIABILITy COMPANy UNDER DUTCh LAW, WhICh IS ONE OF ThE MOST WIDELy USED LEGAL ENTITIES IN INTERNATIONAL hOLDING STRUCTURES AND JOINT vENTURES. AMONG ThE ChANGES ARE AN ABOLIShMENT OF ThE MINIMUM CAPITAL AND CAPITAL PROTECTION PROvISIONS, MAKING IT EASIER AND qUICKER TO SET UP AND USE ThE Bv IN DAy-TO-DAy PRACTICE.

companY Law In The neTheRLandSFOR DuTCh BVS wILL SuBSTAnTIALLY ChAnGe AS OF OCTOBeR 1ST, 2012

aboLIShmenT of mInImUm capITaLThe most striking change certainly is the abo-lishment of a minimum capital and the obliga-tion to have that minimum capital paid in before or at incorporation. Capital protection formali-ties in that respect were time-consuming and

nal value of the shares may be expressed in a different currency than the euro (the functional currency for accounting and tax purposes could already be different).

oTheR chanGeSFor joint ventures, the new law explicitly allows for a lock-up of existing shareholders for a period of at least five years and – depending on the circumstances – even much longer. It will become easier to combine a shareholders agree-ment or joint venture agreement with the Articles of Association. Transfer restrictions may now be tailor-made, including the mecha-nisms to determine the purchase price. Each shareholder may be allowed to directly appoint his own directors in the joint venture. It will be possible to create non-voting shares and shares without entitlement to profits and reserves.

sometimes costly; in view of their limited effec-tiveness, they will all be dismantled. The obli-gation to pay in on shares will now become the result of negotiations between the shareholders and the BV.Furthermore and interesting enough, the nomi-

Tax ISSUeSDutch corporate income tax laws will not change in connection with the change in Dutch company law. That means that the existing attractiveness of the Netherlands (among which the participation exemption, the wide network of favorable tax trea-ties and the network of bilateral investment trea-ties) will now be combined and increased with modern, flexible and attractive company law.

whaT doeS IT mean foR YoUFor existing BVs, an amendment of the Articles of Association will not be required to comply with the new legislation. However, in order to optimally use the newly available flexibility, the Articles of Association may have to be changed, as the cur-rent Articles of Association usually contain refe-rences to and paraphrasing of the more restrictive provisions of the “old” law.

caRoLe n. van keSTeRenLustrousLaw [email protected]

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ThE NEThERLANDS IS WELL KNOWN AS AN INNOvATIvE TEChNICAL AND IT ENvIRONMENT. LARGE COMPANIES LIKE ShELL, PhILLIPS AND ASML ARE SEATED IN ThE NEThERLANDS. BUT ALSO TEN ThOUSANDS MIDSIzED AND SMALL COMPANIES SPREAD ThERE INvENTIONS OvER ThE WORLD. TO STIMULATE AND FACILITATE ThIS ENvIRONMENT ThE NEThERLANDS hAS DEvELOPED INNOvATIvE TAxATION RULES.

neTheRLandS Tax facILITIeS ReGaRdInG InnovaTIon: 5% effecTIve Tax RaTe

1. dUTch InnovaTIon box (dIb)Starting 2007, the DIB enabled corporate tax-payers to pay 10% corporate tax on innovative profits. From 2010 the DIB became even more attractive by lowering the effective tax rate to 5% and removing certain hurdles. The DIB has served as a standard for several other European Countries.One of the main characters is its broad applica-tion. Through “transfer pricing light” formulas reasonably easy solutions can be reached.

2. ReSeaRch and deveLopmenT dedUcTIon (Rdd)Starting 2012 the Netherlands has introduced the RDD which enables tax payers to deduct

40% from non employee R&D expenses and investments.

3. R&d empLoYeRS facILITY of 42%A corporate employer is entitled to get a refund for its R&D employee’s income tax for an amount of 14% - 42% of salary depending on the total wages amount.

4. enhanced ReLaTIonSTo be able to implement the above facilities one can discuss upfront with the accessible officials of the tax authorities.

By Wiecher Munting,Otterspeer haasnoot & [email protected]

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state of the art fibre optic network. The country is becoming a strategic place for developing e-commerce opportunities and has one of the best data center parks in Europe.

favoRabLe Tax ReGIme foR expaTRIaTeSHighly skilled workers relocating to Luxembourg can benefit from tax relief provisions aimed at exempting part of their remuneration while mitigating expenses to relocation and school fees.As the Luxembourg government continues to step up public expenditure on R&D and infras-tructure, and considering the very stable politi-cal legal and tax system of the country, we can expect to see an increased presence of interna-tional groups relocating their operations to Luxembourg.

TechnIcaL I LUXEMBOURG

LUxEMBOURG hAS LONG BEEN ThE DESTINATION OF ChOICE TO hOUSE ThE hEADqUARTERS OF SEvERAL INTERNATIONAL GROUPS FOR hOLDING AND TREASURy MANAGEMENT ACTIvITIES. ThIS PRESENCE hAS INCREASED SIGNIFICANTLy OvER ThE PAST TEN yEARS WITh A GROWING NUMBER OF MULTINATIONALS MOvING ALSO PART OF ThEIR OPERATIONAL ACTIvITIES TO LUxEMBOURG.

LUxemboURG, an aTTRacTIve LocaTIonfoR YoUR GLobaL oR eURopean headqUaRTeRS

Leading players such as Amazon, Microsoft, PayPal, Intelsat, Pfizer, Guardian and AOL are among the notable relocations that have taken

place. The success is equally attributable to the investment made by the Luxembourg govern-ment to diversify the economy as well as the country’s strategic geographical position and its advantageous fiscal environment.

a Renowned deSTInaTIon foR hoLdInG and TRea-SURY manaGemenT acTIvITIeSHolding companies benefit from an attractive tax regime in Luxembourg that allows them to exempt 100% of divi-dends and gains derived from foreign subsidiaries. The cash proceeds distributed from foreign affiliates are frequently reinvested from the Luxembourg holding company by way of inter-company financing generating interest that is usually subject to tax on the basis of a reduced margin. This advantage is accentuated by the fact that Luxembourg

does not typically levy withholding tax on interest. It is likewise the absence of withholding tax under domestic rules on dividends distributed to a US parent corporation that explains the growth in Luxembourg holding companies.In addition, Luxembourg’s double tax treaty network boasts an extensive 64 tax treaties cur-rently in force, which allow a reduction in withholding tax for subsidiaries domiciled in foreign jurisdictions, in particular those based in China where withholding tax on dividends is reduced to 5% by virtue of the tax treaty in force with Luxembourg.Luxembourg also offers an interesting tax regime for the management of intellectual pro-perty such as patents, trademarks and software copyrights. Revenues derived from such activi-ties may be taxed at an effective rate as low as 5.76% without necessarily relocating major R&D activities to Luxembourg.

The RISe of opeRaTIonaL acTIvITIeS wIThIn LUxemboURG headqUaRTeRSHeadquarters often take on other functions and services along the value chain of the group, such as marketing and sales, central procurement and other shared services, which may benefit

from a very low effective tax rate in Luxembourg based on an appropriate

tax structuring and customized incentives. An excellent infrastructure and a substantial finan-cial support from the Government equally explain the attraction of Luxembourg for opera-tional activities.

ReSeaRch and deveLopmenT (R&d)Innovative companies are encouraged to deve-lop their R&D activities in Luxembourg by receiving up to 50% of the costs of industrial research projects and up to 25% for a pre-com-petitive development project deductible for tax purposes. It is no surprise that the strong industrial R&D and technology culture of Luxembourg has drawn prominent US groups such as Novelis/Hindalco, DuPont and Goodyear to move a part of their R&D activities to the Grand Duchy of Luxembourg with Delphi group employing over 600 technical experts in its local R&D centre.

LoGISTIcS acTIvITIeSLuxembourg has become an attractive hub in Europe for logistic activities mainly due to its 15% VAT, the lowest rate available in Europe. Contrary to the majority of the other EU Member States, Luxembourg does not require the imme-diate payment of VAT upon import of goods into the EU, which is a significant cash flow advantage.Luxembourg’s international airport is the 5th largest freight airport in Europe and world-class logistics players have already chosen Luxembourg as an operating base for logistics activities.

IcT (InfoRmaTIon and commUnIcaTIon TechnoLoGIeS) fUncTIonSLuxembourg offers high-speed data transmis-sion with all major European centres through a

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LoUIS ThomaS [email protected]

baSTIen [email protected]


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ThE PhRASE “REGULATORy TSUNAMI” MAy OFTEN BE hEARD IN ThE SAME SENTENCE AS AIFMD BUT, UNLIKE ThE MASSIvE WAvE, ThIS DIRECTIvE hAS NO INTENTION OF RECEDING. IT IS SET TO ChANGE ThE PRIvATE EqUITy ENvIRONMENT WORLDWIDE, AND LUxEMBOURG hAS ALL ThE RIGhT ASSETS TO TAKE ADvANTAGE OF ThIS SITUATION.

pRIvaTe eqUITYIn LUxemboURG:ThRee STepS ahead

hISToRIc aSSeTSJournalists often ask whether Luxembourg will repeat the same success with the AIFMD that it had with UCITS IV. In fact, there is one major difference between the two. UCITS IV primarily protects the investor from himself, whereas the AIFMD is aimed at professionals. It is an area with limited liquidity and is more complicated than UCITS, which automatically rules out any form of ‘democratisation’. That being said, Luxembourg has extensive experience in a regulated context. Since the advent of the risk capital investment company (SICAR) in 2004, the country has been building up know-how in Private Equity. For a long time, it was the only country requiring the use of a custodian. The complete infrastructure is already in place.

TowaRdS a pRIvaTe eqUITY fSpSkype is a prime example of the success of Private

Equity in Luxembourg, but this cutting edge acti-vity is also at work supporting the development of industrial firms such as IEE. Not only is Luxembourg stable in terms of politics, law and tax, many have rightly observed the fact that the CSSF supervises both the product and the mana-ger when both are based in Luxembourg. Investors should soon demand that AIFMs comply with the AIFMD Directive, including in some cases covered by exclusions, e.g. a risk capital fund manager managing less than €500 million. As is its custom, Luxembourg is set to create a Private Equity ‘FSP’ along the same lines as existing FSPs.

LeveL pLaYInG fIeLdAlthough Luxembourg has everything in place, for the time being it is maintaining a UCITS perspec-tive which risks making its professionals less com-petitive than their counterparts in other countries.For example, the AIFMD specifies that for unlisted assets the job of custodian can be given to an ins-titution which is not a bank, a concept which has yet to gain ground in Luxembourg given its background. However, everyone understands the importance of a level playing field, and these dif-ficulties should be resolved quickly because, at the end of the day, the trend is plain to see and the power of investors is continuing to grow. They have more choice, more vehicles and more domi-ciles, and Luxembourg’s onshore situation makes it extremely attractive in this new landscape.

By Hans-Jürgen schmitz,Mangrove Capital Partners

hanS-jüRGen SchmITz Managing Partnerat Mangrove Capital Partners and LPEA President


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DESPITE ThE FINANCIAL CRISIS AND ThE UNCERTAIN INTERNATIONAL ECONOMIC CONTExT OvER ThE PAST FOUR yEARS, ThE NUMBER OF LUxEMBOURG SECURITISATION vEhICLES hAS NOT CEASED TO INCREASE SINCE ThE INTRODUCTION OF ThE LUxEMBOURG LAW OF 22 MARCh 2004 ON SECURITISATION. ThIS SUCCESS IS MAINLy DUE TO ThE LUxEMBOURG’S ATTRACTIvE LEGAL, REGULATORy AND TAx FRAMEWORK FOR SECURITISATIONS (hIGh FLExIBILITy, LEGAL CERTAINTy, BANKRUPTCy REMOTENESS, TAx NEUTRALITy, qUALIFIED AND ACCESSIBLE MARKET PLAyERS).

Last July the Luxembourg regulatory body (CSSF) has published a refinement of its 2007 guidelines on securitisation in the form of questions and answers (the

“Q&As”). The Q&As include, inter alia, additio-nal definition elements and reiterate certain of the limits to the permissible activities of securi-tisation vehicles, e.g., abuse of law, conditions for the use of external borrowing, limitation of the role of securitisation vehicles to the administra-tion of the financial flows linked to the securiti-sation itself and interdiction to exercise a professional credit-granting activity for their own account. The Q&As also anticipate 2 burning topics which may impact the Luxembourg secu-ritisation industry in the near future, namely the AIMFD and possible new regulations on shadow banking. The Q&As stress that the discussions currently held at international level on shadow banking (based, a.o., on the EU Commission Green Paper on shadow banking) may reinforce

the current conditions to be met by securitisation undertakings to be allowed to themselves grant credits (to date the conditions are mainly inves-tors’ information requirements). The AIFMD topic is in principle already dealt with as the Luxembourg bill N°6471 aiming at transposing the AIFMD, very recently tabled before Luxembourg Parliament (24 August 2012), expli-citly excludes from the scope of the AIMF legis-lation the securitisation vehicles, subject to certain conditions (which is in line with the AIFMD). The Q&As and the bill N°6471 are examples of the pragmatic and far-sighted approach of the Luxembourg legislative and regu-latory bodies to maintain and consolidate the attractiveness and reputation of the Luxembourg securitisation status at the same time as to follow the current international “regulationist” trend.

By Frédéric Feyten and Marc-Antoine casanova,OPF Partners Luxembourg

SecURITISaTIon In LUxemboURG: RecenT deveLopmenTS and TRendS

maRc-anToIne [email protected]

fRédéRIc [email protected]


dIRecToRS’ LIabILITY UndeR LUxemboURG Law:A MULTIFACETED TOPIC TO BE TAkEN SERIOUSLy

benefIcIaL owneRShIp IN INTERNATIONAL TAX PLANNING & LUXEMBOURG

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Legal provisions applicable to directors’ liability are often well known by the governing bodies of companies. Such governing bodies are also generally

aware that directors’ liability is a multifaceted concept under Luxembourg law, which could lead to1:• Civil liability toward the company for mismana-

gement under Article 59(1) of the law of 10 August 1915 on Commercial Companies as amended (“1915 Law”);

• Civil liability toward the company and third par-ties for fault committed by breach of the law or the statutes, under Article 59(2) of the 1915 Law;

• Civil liability as provided by the Civil Code on the basis of contract or tort; and

• Criminal liability under Articles 163-173 of the 1915 Law and the Criminal Code.

However, more important than knowing that these provisions exist, is to understand their real meaning and implications and to realise that directors’ liability under Luxembourg law should be taken very seriously.In practical terms, appointed directors as well as de facto directors (dirigeants de fait) could be liable for their acts and/or omissions even if they perform their duties in good faith, to the extent that they must manage the company’s business in a competent, prudent and active manner and that they have a duty of care toward the com-pany (bon père de famille).

Such a liability has a large scope of application, which has not decreased with the law of 3 March 2010 introducing criminal liability of corporate entities. It could indeed apply:• During the life of the company (e.g. breach of

signing authority rules provided by the sta-tutes, of the legal provisions regarding the

approval and filing of the annual accounts if there is no credible reason, of the full and com-plete payment of the subscribed shares in cases of increase of share capital by means of new contributions, misconduct in preparing for and carrying out division of a company or rash investment decisions without appropriate gua-rantee); or

• When a company is in the process of formation and has not yet acquired legal personality (see Article 12bis of the 1915 Law: liability if the commitments are not assumed by the company within two months of its incorporation or if the company is not incorporated within two years after the commitments were entered into); or

• In the case of company insolvency (e.g. miscon-duct by continuing an unprofitable business or not filing for bankruptcy within one month of the substantive tests laid down in Article 440 of the Code of Commerce being met).

Most of the time, appointed and de facto direc-tors who are found liable are subject to civil penalties such as damages, but depending on the misconduct they could also be ordered to bear all or part of the company’s debts, be decla-red personally bankrupt or be subject to a sus-pension of the right to trade. In cases of criminal liability, the most common sanctions are fines, special confiscation and dissolution.

Directors’ liability to the company and third par-ties is based on public interest so that it is not possible to reduce it by inserting a clause in the statutes or in a contract. It is generally thought that receiving full discharge by the general mee-ting of shareholders is sufficient to avoid liability, but such discharge only relates to the accounts approved by the general meeting and the facts known to the sha-

reholders and does not bind third parties who may still file a tort claim against directors.

Since the beginning of the financial crisis, procee-dings against directors are increasingly common in order to meet people’s expectations of trans-parency. In particular, directors should avoid any risk by:• Attending all board meetings, voting for or

against the resolutions and making sure minutes include their disagreements or comments;

• keeping up to date with the company’s affairs;• Reporting any violation to the general meeting

of shareholders; • Seeking professional advice without delay if

there is any threat or suggestion of insolvency/distress of the company; and, if necessary,

• Taking out insurance or entering into a settlement.

1. For information, there is also a directors’ liability with respect to the payment of taxes due by the company, to the legislation on business licences and on commodo-incommodo authori-sations as well as toward the social civil service.

By Michel Molitor and stéphanie Juan,Molitor [email protected]@molitorlegal.lu

over the past 20 years, Luxembourg has become the leading jurisdiction in private equity/PE transactions. The country’s strong reputation for

pro-business legislation and lean public adminis-tration attracted global PE Houses. Its favou-rable tax environment and extensive treaty network made Luxembourg one of the top spots for holding and financing activities. In most PE deals, the PE fund is located in a tax haven (typi-cally the Cayman Islands). The fund acts as the shareholder and lender to a Luxembourg holding company (“Luxco”). Luxco acquires and finances the target company (“Target”) in a third country (the “State of source”). Luxco’s aim is to enable dividends and interest to be paid on a gross basis in the State of source, or at least at a lower rate than the domestic laws typically provide. This is possible if Luxco, under the State of source tax treaty providing for a lower withholding rate, also is the income’s “beneficial owner”.

BENEFIcIAL oWNErsHIP Is NoT dEFINEd IN INTErNATIoNAL TAx LAWLuxembourg, a civil law country, does not know the beneficial ownership concept (BO): one either has legal title over an asset, or not. The term’s origin is found in common law countries which differentiate “legal” and “equitable” title. Such distinction traces back to the Crusades: when leaving England, a landowner needed someone to run his estate, pay and receive dues. The Crusader would convey ownership to a friend, assuming it would be conveyed back on his return. The transposition of this concept into international tax law proved challenging. Indeed, a beneficial owner is defined neither in tax treaties, nor in the OECD Model Tax Convention (MTC). The MTC Commentary pro-vides guidance on the matter. The original Commentary to MTC’s Art. 10 and 11 referred to

the exclusion of interposed agents and nomi-nees (to obtain treaty benefits). Following the Conduit Companies Report, the Commentary included conduits which had such narrow powers over the income they received that they were in the position of mere fiduciaries.

courTs HAvE To dEFINE BENEFIcIAL oWNErsHIP It is hence up to the courts to decide how far reaching the concept of BO should be. Until recently, there has been limited international case law only discussing the term’s meaning. Two recent, and polemic, court decisions have consi-dered the concept. The English Court of Appeal decision in Indofoods International v JP Morgan Chase Bank NA [206] EWCA Civ 158 has taken a substance over form approach to the BO meaning, whereas the Tax Court of Canada’s decision in Prevost Car Inc v R 2008 TCC 231 took a form focused approach instead. Under the substance over form approach, Courts wonder if Luxco has no function whatsoever but to receive income and pay on the identical amount. In such case, Luxco is seen as a conduit not beneficially owning the income. In the form focused approach, Luxco will be the beneficial owner, unless it has acted as a nominee or as an agent. The form based approach should hardly cause any concerns to Luxco receiving its income as a beneficial owner, as Luxco always receives its income in its own name and account. The real concern hence is the alternative approach. Under the substance based approach, when determining whether Luxco only acts as the for-mal/conduit recipient of the income a first hurdle to overcome relates to the situation of group companies: Luxco may be the holding company of Target, but also part of a group. As indicated by the National Tax Tribunal of Denmark in a case involving a PE Luxco, all major decisions in any

group are initially made by its top management. Then the relevant bodies of the respective com-panies carry out such decisions. Although it may be expected for Luxco to implement the top deci-sions at their levels, there exists no legal obliga-tion for them to actually do so. Hence Luxco should not be automatically disqualified as the income’s beneficial owner. Otherwise, any inter-posed vehicle would never meet the BO test in a group situation.Under the substance-over-form doctrine, the key test for determining whether Luxco is the bene-ficial owner consists in finding out if Luxco is free to decide whether or not capital should be made available to others and how yields should be employed. If Luxco is bound to transfer all its income to its shareholder or a third party, Luxco will lack BO. Because of its narrow powers, Luxco would be assimilated to a mere fiduciary acting on its shareholders’ account. Let’s put it positi-vely: provided Luxco retains board level sufficient discretion with respect to income, it should be seen as being the beneficial owner. Luxco should hence not charge the same interest rate as the one it bears itself and all interest income received should not automatically be paid onwards to a third party. Provided Luxco’s board is free to decide what yield it pays under the financing instruments, it should be safe in terms of BO, since its ownership attributes will clearly outweigh those of any other person.

By Alain steichen,Managing partner at Bonn Steichen & PartnersProfesseur associé à l’université de [email protected]


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all derivative transactions details (conclusion, modification or termination), cleared or not, to TRs by T+113. In its draft implementing technical stan-dards on TRs, ESMA has set a reporting start date which shall be the earlier of:• 1 July 2013 where a TR for that particular deriva-tive type has been registered under Art. 55 of the Regulation before 1 May 2013;• if there is no TR registered for that particular deri-vative under Art. 55, 60 days after the registration of a TR for that particular derivative type under Art. 55;• where there is no TR for a particular asset class by 1 July 2015, the reporting obligation shall com-mence on this date and contracts shall be reported to ESMA.

1. Article 4(1) of the Regulation 648/2012.2. The definition of OTC derivative is provided by Article 2(7) of the Regulation 648/2012.3. Article 5 (1) of the Regulation 648/2012.4. Article 5 (3) of the Regulation 648/2012.5. Article 5 (4) of the Regulation 648/2012.6. Article 11 of the Regulation 648/20127. Definition provided by Article 2(8) of the Regulation 648/2012.8. Definition provided by Article 2(9) of the Regulation 648/2012.9. ESMA proposed in its Consultation Paper Draft Technical Standards for the Regulation on OTC Derivatives, CCPs and Trade Repositories of 25 June 2012, to set the clearing thres-holds per asset class (credit derivatives, equity derivatives, interest rate, foreign exchange, commodity and others).10. Article 10 (3) of the Regulation 648/201211. See ESMA Consultation Paper, Draft Technical Standards for the Regulation on OTC Derivatives, CCPs and Trade Repositories for more details on the criteria establishing which derivative contracts are objectively measurable as redu-cing risk directly related to the commercial activity of trea-sury financing, 25 June 2012.12. See ISDA, AFME, BBA, Associm Response of 05 August 2012 to ESMA Consultation Paper.13. Article 9(1) of the Regulation 648/2012.

By Josée Weydert and Meliha dacic,[email protected]@nautadutilh.com

ReGULaTIon no 648/2012 on oTc deRIvaTIveS, cenTRaL coUnTeRpaRTIeS and TRade RepoSIToRIeS

different techniques (e.g. exchange of collateral)6.The obligations to clear OTC derivative contracts via a CCP and report derivatives to TRs apply to financial counterparties7 (credit institutions, insu-rance and investment companies) and non-finan-cial counterparties8 (manufacturers, utilities, airlines) when exceeding the clearing threshold (to be set up by ESMA). Non-financial counterparties below that threshold will be exempted from the clearing obligation9. When calculating its positions, the non-financial counterparty should include contracts entered into by other non-financial enti-ties within the group (i.e. parent or subsidiary). OTC derivatives used by non-financial counterpar-ties to hedge risks related to their activities will not be included in the calculation of the clearing thres-hold10 11. A non-financial counterparty may be a special purpose vehicle (SPV) which, if exceeding the clearing threshold, will be subject to mandatory clearing. However, some Consultation Paper res-pondents (ESMA 25 June 2012), ask for more cla-rity as they consider the SPVs used in securitizations and other structured finance transactions com-monly enter derivatives trades as part of their com-mercial activity, and should thus benefit from the exemption set in Art. 10 (3) of EMIR12.EMIR also provides for an intra-group exemption if certain conditions are met (the exemption applies when the 2 counterparties are based in the EU but also when one of them is established in a third country). Such exempted transactions remain sub-ject to the risk-mitigation techniques under Art. 11. However, the intra-group transactions may benefit from an exchange of collateral exemption if 2 condi-tions are met: the counterparties’ risk-management procedures are sound, robust and consistent with the level of complexity of the derivative transaction and there is no current or foreseen practical or legal impe-diment to the prompt transfer of own funds or repay-ment of liabilities between the counterparties.EMIR requires counterparties and CCPs to report

ON 4 JULy 2012, ThE REGULATION 648/2012 OF ThE EUROPEAN PARLIAMENT AND OF ThE COUNCIL ON OvER-ThE-COUNTER (OTC) DERIvATIvES, CENTRAL COUNTERPARTIES (CCPS) AND TRADE REPOSITORIES (TRS), ALSO KNOWN AS ThE EUROPEAN MARKET INFRASTRUCTURE REGULATION (EMIR) WAS ADOPTED.

EMIR aims to regulate the clearing of OTC derivative contracts and their reporting to TRs, to increase transparency in the OTC derivatives market and make it safer by

reducing counterparty credit and operational risks.EMIR1 provides for a mandatory clearing of OTC derivative contracts if the transaction relates to a class of derivatives submitted to the mandatory clearing and if it is entered into between parties subject to the mandatory clearing obligation under EMIR . Such OTC contracts include any derivative contract which is not executed on a regulated mar-ket or foreign equivalent, including a number of derivative contracts as defined under MIFID (inte-rest rate and credit default swaps and certain com-modity derivatives)2. EMIR introduced two approaches to determine which OTC derivative contracts will be submitted to the mandatory clearing:• “bottom-up” approach: where a competent autho-rity has authorized a CCP to clear a class of deriva-tives, it will inform the European Securities and Markets Authority (ESMA) who will assess if a clea-ring obligation should apply to such class of deriva-tives in the EU, and develop draft regulatory technical standards to be adopted by the Commission3.• “top-down” approach: ESMA, on its own initiative and after consulting the European Systemic Risk Board, will identify contracts that should be subject to the clearing obligation4. When determining if a class of derivatives is subject to the clearing obliga-tion, ESMA shall take into account following crite-ria: the degree of contract standardisation and operational processes, the volume and liquidity of contracts and the availability of fair, reliable and generally accepted pricing information of the rele-vant derivatives5.For non-cleared transactions, EMIR provides that the counterparties make arrangements to monitor and mitigate operational and credit risks through

joSée weYdeRT

meLIha dacIc


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new oppoRTUnITIeS foR The LUxemboURG fUnd IndUSTRY: The eURopean venTURe capITaL and SocIaL enTRepReneURShIp fUndS ReGULaTIonS

The European Council approved on 26 June 2012 the European Commission’s proposals for regulations on “European Venture Capital Funds” (EuVCF)1 and

“European Social Entrepreneurship Funds” (EuSEF)2 (together the Proposals and EuVCFs and EuSEFs covered by the Proposals, the Funds). The Proposals aim to address the fundraising problems faced by venture capital and social investment fund managers across Europe. Eligible Funds will benefit from a European passport and the right to use the EuSEF/EuVCF branding.To benefit from the European passport, Funds will have to comply with investment rules and Funds managers will need to be registered under the AIFMD3, manage less than EUR500m of AuM and comply with (light) transparency and business conduct rules. The key points of the Proposals are:• a voluntary registration with local authorities;• simple notification process to market Funds

across Europe;• light reporting obligations and operating

conditions;• minimum investments (70%) in qualifying

investments, i.e., in respect of EuVCFs, invest-ments in equity and quasi-equity instruments issued by SMEs4 (or their parent companies) and, in respect of EuSEFs, investments in equity or debt instruments issued by, medium to long term loans to, and participations in, SMEs that aim to achieve measurable, positive social impacts, use their profits for that purpose and are managed in an accountable and transparent way. Leverage is prohibited;

• no risk diversification requirements.Eligible Funds will be freely marketable across Europe to (i) professional clients under MiFID and (ii) other investors investing a minimum of EUR100,000, aware of the investment risks and subject to a positive assessment by the Fund manager.The regimes set out under the Proposals are simi-lar to the (lightly) regulated funds regimes which already exist in Luxembourg (eg, SIF and SICAR regimes). Luxembourg, as a leading private equity fund centre and as a pioneer in the field of social investment funds with, inter alia, the well-esta-blished Luxembourg Fund Labelling Agency’s (LuxFLAG) label for microfinance and environ-ment investment funds, should therefore be very well placed to benefit from the Proposals.A final vote in the European Parliament on the Proposals is expected in October 2012.

1. Proposal for a regulation of the European Parliament and the Council on European Venture Capital Funds, COM (2011) 860 final, 7 December 2011.2. Proposal for a regulation of the European Parliament and the Council on European Social Entrepreneurship Funds, COM (2011) 862 final, 7 December 2011.3. In accordance with article 3(3) of Directive 2011/61/EC.4. Ie, an undertaking that is not listed on a regulated market and either has an annual turnover not exceeding EUR50m or an annual balance sheet total not exceeding EUR43m and is not a collective investment undertaking.

By renaud Graas and Benoît dardenne,Allen & Overy [email protected]@allenovery.com

ON JULy 3 2012, ThE LUxEMBOURG PARLIAMENT hAS ADOPTED A NEW LAW ON ThE MANDATORy SqUEEzE-OUT AND SELL-OUT OF SECURITIES ISSUED By COMPANIES CURRENTLy OR PREvIOUSLy ADMITTED TO TRADING ON A REGULATED MARKET OR hAvING BEEN SUBJECT TO A PUBLIC OFFERING (ThE “LAW”).

The mandatory squeeze-out refers to the right given to a majority shareholder of a company to require the minority sha-reholders to sell their securities at a fair

price. Likewise, the mandatory sell-out grants a minority shareholder the right to force the majo-rity shareholder to purchase its securities at a fair price. A majority shareholder is defined by the Law as a person holding, alone or with other persons acting in concert with it, directly or indirectly, securities giving it at least 95% of the capital carrying voting rights and 95% of the voting rights of a company.Squeeze-outs and sell-outs were previously intro-duced into Luxembourg legislation by the Law of 19 May 2006 on takeover bids (the “Takeover Law”). Such procedures were nonetheless limi-ted to public takeover bids whereas the new Law now permits squeeze-out or sell-out procedures to be implemented outside the takeover bid fra-mework. Furthermore, non-voting securities

and hybrid instruments convertible into compa-ny’s securities or entitling their holders to buy or subscribe securities are now included. Both procedures shall be carried out under the supervision of the Luxembourg financial regu-lator (“CSSF”). In case the fair price cannot be agreed among the parties, the CSFF will ultima-tely be in charge of its determination. The Law thus strengthens the protection of the minority shareholders who are now in a position to have their securities repurchased at a fair price in case of a change of control. Inversely, a

new investor who becomes a majority shareholder is guaranteed by the

Law to bring together the entire share capital. For ins-tance, in case of a delisting process, it will inter alia permit that all the securi-ties can be removed from the quotation without having to go through a tedious takeover bid pro-cedure. The new Law thus greatly benefits the legal certainty of companies’

takeover by gathering the minority shareholders in the

squeeze out procedure while pro-tecting their interests in the deter-

mination of a fair price.

compULSoRY acqUISITIon: new acT on SqUeeze-oUTS and SeLL-oUTS

RenaUd [email protected]

benoîT [email protected]

jean-phILIppe [email protected]

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that government officials and contractors have been complicit in constructing buildings and public works dangerously below government-mandated standards in order to pocket the remai-ning surplus.Similarly, the Rule of Law has an impact in the public health area. Maintaining the physical health of a society is hugely reliant on its health care delivery systems. Absenteeism, mismanagement, bribes, and informal payments undermine health care delivery and waste already scarce resources. Unfortunately, it is in poor countries where people are more likely to have to pay bribes to obtain medial attention. As a result, many people do not receive adequate medical care and a society (along with its investment outlook) suffers.

One of the most innovative new tools available to the business sector and to potential investors in measuring the Rule of Law in different jurisdic-tion is the World Justice Project’s Rule of Law Index. This non-partisan evaluation of more than 800 Rule of Law factors in each of 66 countries is now being used by businesses, civil society groups and governments to compare jurisdictions in the same region or the same state of economic deve-lopment. The Index will cover approximately 100 countries by the end of 2012 and will be updated every year in order to show a country’s progress (or the lack thereof) on each Rule of Law indicator in that country. For more information on the World Justice Project’s Rule of Law Index, see www.worldjusticeproject.org. Investors and investment managers who value the Rule of Law should consult the Index regularly, but so should those who want to make prudent investment deci-sions for themselves and their clients. The Index will become even more important to investors in coming years, as more developing countries are added, as investment opportunities in emerging economies grow and as investors seek indepen-dent and expert analysis of the business risks associated with investments in those jurisdictions.

By James r. silkenat,Sullivan & worcester LLP,President-elect (2012-13), American Bar Association

The RULe of Law and ITS ImpacT on InTeRnaTIonaL InveSTmenT decISIonS

undertaken by the World Justice Project and other similar non-governmental organizations around the world has added precision, scope and a fra-mework to the meaning of this term. Now, a widely accepted definition of the Rule of Law has been developed, based on four universal principles that would apply in any jurisdiction:1. The government and its officials and agents are accountable under the law.2. The laws are clear, publicized, stable and fair, and protect fundamental rights, including the security of persons and property.3. The process by which the laws are enacted, administered and enforced is accessible, fair and efficient.4. Access to justice is provided by competent,

independent, and ethical adjudicators, attor-neys or representatives and judicial offi-

cers who are of sufficient number, have adequate resources, and reflect the

makeup of the communities they serve.These principles recognize that the definition of the Rule of Law must be broadly applicable to many types of social and political systems, but

also must have some real substantive content. The Rule of Law must be

grounded in more than just a system of rules – and indeed, a system of positive law

that fails to respect core human rights guaranteed under

international law is at best “Rule by Law,” and does not deserve to be called a Rule of Law system. In the words of Arthur Chaskalson, former Chief Justice of South Africa:

But perhaps the most compelling factor, particularly when investors are compa-ring possible investments in a number of different jurisdictions, may be the

presence or absence of the Rule of Law and the impact that this factor has on the business enter-prises operating in that jurisdiction.

Are government powers limited? Are govern-ment officials frequently involved in corrupt activities? Is due process available in the national courts? Are court proceedings transparent and is the independence of the judiciary assured? Are laws comprehensible to the public and readily accessible? Are government regulations effectively enforced? All of these questions, and many others rela-ting to the interaction of business, citizens and government entities, are at the heart of any rigo-rous analysis of whether a proposed invest-ment jurisdiction honors or ignores the Rule of Law. This “investment fac-tor” is a crucial one in any comparative analysis by a prudent investor.Each of these questions hints at some of the issues involved in defi-ning “the Rule of Law.” Recent work

“The apartheid government, its officers and agents were accountable in accordance with the laws; the laws were clear; publicized, and stable, and were upheld by law enforcement officials and judges. What was missing was the substantive component of the rule of law. The process by which the laws were made was not fair (only whites, a minority of the population, had the vote). And the laws themselves were not fair. They institutionalized discrimination, vested broad dis-cretionary powers in the executive, and failed to protect fundamental rights. Without a substan-tive content there would be no answer to the cri-ticism, sometimes voiced, that the rule of law is ‘an empty vessel into which any law could be poured’.”These principles represent an effort to strike a balance between varying conceptions of the Rule of Law, incorporating both substantive and pro-cedural elements – a decision which has been broadly endorsed by many international experts.Why is the Rule of Law important to investors and to business executives who make investment decisions? The answer is obvious in the straight-forward business context: investors do not favor jurisdictions where contracts are not enforceable, where courts and government officials are corrupt or where the personal safety of workers and exe-cutives is at risk.But the Rule of Law has a much broader impact on many investment decisions, and the conse-quences of a failure of the Rule of Law can be devastating – for individuals, communities, socie-ties and investors. For example, the Rule of Law is fundamental in guaranteeing the quality of public works and infrastructure in particular societies. In recent years, we have witnessed ear-thquakes, floods, tsunami and other natural disasters causing buildings, bridges, roads and utilities to collapse. Allegations have been made

GLOBAL INvESTMENT DECISIONS DEPEND ON A NUMBER OF COMPLEx FACTORS: ExPECTED RATE OF RETURN; qUALITy OF MANAGEMENT; TEChNOLOGy AND PATENTS; MARKET PENETRATION; AND PROSPECTS FOR LONG-TERM GROWTh.

GLobaL I USA

jameS R. [email protected]

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jurisdictions in the event that a future claim arises.It is important for investors to consider the imple-mentation of BIT structures at the earliest stages in their planning. Most BITs are enforceable against a government only if an investor can prove that its qualifying entity held its “investment” in the target country for more than a transient period. Thus, investors who insert intermediary entities into a structure to claim last-minute BIT relief will not likely succeed with their BIT claims.

We routinely plan for our clients to achieve the most efficient tax results while also incorporating the proper BIT protections into their structures.

By richard L. WinstonK&L Gates [email protected]

USInG bILaTeRaL InveSTmenT TReaTIeS To mITIGaTe The RISk of GoveRnmenT expRopRIaTIon and oTheR GoveRnmenT ThReaTS

“indirect” government actions that cause substan-tial damage to the value of the investors’ property. For example, a BIT can be used to challenge a new tax regulation that has the effect of a “confisca-tion” of the foreign investors’ property (vis-à-vis domestic companies).If a foreign investor could not rely on a BIT when damaged by a government, the investor would be required to pursue claims against the government in a potentially unfavorable local court. Even if a local court agrees that the government is respon-sible for damages, the court may undercompen-sate the investor for its claims. Investors who bring claims against a government in ICSID can ensure themselves a neutral forum to decide the proper compensation for all valid claims made against a government.Depending on the particular scope and wording of a BIT, foreign investors can generally use BITs to secure the following rights:1. Fair and equitable treatment (e.g., protection against arbitrary treatment, and fair access to the courts).2. Nondiscrimination against the passage of a new law that treats host-country investors more favo-rably than foreign investors (e.g., MFN treatment).3. Fair compensation in the event of direct or indi-rect taking.4. Full protection and security, free transfer of funds and assets, and protection against the breach by a government of its contractual respon-sibilities to an investor.

one non-tax consideration, which is often overlooked in the tax planning process, is whether the intermediary holding company will provide the investors/

owners with added protection against the risk of government expropriation and other government threats.

There are more than 2,500 Bilateral Investment Treaties (“BITs”) in force around the world. These BITs protect investors residing in one jurisdiction against the actions of a government in another jurisdiction that may deprive those investors of either property (e.g., expropriation) or other rights. Most BITs provide foreign investors with the opportunity to file their arbitration claims in vari-ous international dispute-resolution venues including the International Centre for the Settlement of Investment Disputes (“ICSID”), an independent arm of the World Bank devoted to the resolution of investor-government disputes.The common misperception about BITs is that they protect foreign investors only against direct “takings” (e.g., expropriations) by a government. BITs can also protect investors against various

Foreign investors who wish to enjoy the protec-tions of a BIT must ensure that they are residents in a jurisdiction that has a BIT with the target jurisdiction. If no such BIT exists, or the existing BIT does not present the proper language to pro-vide adequate protection, the investor may select an intermediary jurisdiction (e.g., holding com-pany) to channel the investment. In these particu-lar cases, it is critical to find a jurisdiction that offers both a favorable tax regime as well as the appropriate BIT protections.Generally speaking, any company in an “owner-ship chain” can use a BIT (applicable to that com-pany’s place of residence) to bring a claim against a government in the target jurisdiction. Investors can also structure investments through multiple intermediary BIT jurisdictions, while “picking and choosing” the best BIT protections from those

TAx PROFESSIONALS ARE OFTEN REqUIRED TO CONSIDER A COMPLEx SET OF ISSUES WhEN DETERMINING ThE PROPER JURISDICTION IN WhICh TO LOCATE AN INTERMEDIARy “hOLDING COMPANy.”

GLobaL I USA

RIchaRd L. wInSTon

Astana.

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Similarly, added to the batter of Belgian R&D leg-islation is the expatriate tax status for foreign researchers and executives. For example, for for-eign researchers and executives temporarily work-ing in a Belgian R&D centre, payments in the form of expatriate allowances (such as a housing allow-ance, tax equalisation, etc.) are treated as the reimbursement of costs attributable to the employer and are therefore not taxable in the hands of the expatriate, while still deductible for the employer. With some exceptions, the allow-ance exemption is limited to EUR 11,250, or EUR 29,750 when working in a research centre. Also, salary covering days spent abroad is equally excluded when determining the taxable income.

Finally – like finishing with melted butter – we whisk the lot with the R&D payroll withholding tax exemption until blended. This exemption enti-tles employers, subject to certain conditions, to retain 75% (proposed to be increased to 80%) of payroll tax withheld from qualifying researchers’ wages. In other words, while withholding 100% of payroll tax, only 25% must be remitted to the Treasury.

Now you might think that you’re already there if you managed to pour the batter into the waffle iron. But no – like a chocolate topping to finish it off – the Belgian government came up with the patent box deduction. This allows companies to deduct 80% of their gross royalty income (either actual or embedded in goods or services supplied) related to patents they have developed or acquired, while still able to deduct the costs relating to pat-ent income. Hence, this tax measure adds up to an effective taxation of the eligible patent income at a maximum rate of (but generally below) 6.8%. Combined with the above ingredients (the legisla-tive batter), the effective tax rate can be further significantly reduced, potentially to 0%.

Let these measures sink in – like resting the batter (for about 45 minutes) – and you might realise that you’ve not only found a prime location for R&D activities and IP, but also learned my father’s secret recipe for the waffles he used to make in his pastry shop.

how beLGIan waffLeS aTTRacT R&d InveSTmenTS To beLGIUm…

adding flour, sugar and a pinch of vanilla – there is the notional interest deduction (“NID”). It allows Belgian companies and branches to claim a tax deduction for the cost of capital, i.e. a virtual inter-est on their (adjusted) Belgian GAAP equity. For 2012, the NID rate amounts to 3% (3.5% for an SME). The NID is available – automatically, with-out any advance ruling – regardless of the activity, size (except for the NID rate), multinational char-acter, or nature or source of income.

You might not immediately think of Belgium as a primary location for R&D investments and the holding of intellec-tual property. But if you get the ingredi-

ents right (and there are, admittedly, quite a few), you might be surprised by its quality, living up to the standards of all the other products for which Belgium is famous.

Let’s take a look at the recipe – which is basically like making waffles.

We start off by mixing the basic ingredients – pretty much like the yeast, milk and water: having concluded more than 90 bilateral tax treaties, Belgium avails itself of an extensive network of treaties. In addition, it enjoys the benefit of all EU directives and regulations on the taxation (or rather non-taxation) of dividends, interest and roy-alties. The Belgian tax administration has a spe-cific and independent department devoted to the issuance of advance tax rulings on virtually all tax-related issues. The decisions issued by this department provide foreign investors with the nec-essary legal certainty regarding the tax conse-quences of any operations they plan in Belgium. Rulings are normally valid for a maximum (but renewable) period of five years, although patent-related rulings may be valid for the entire validity of the patent concerned.

After that – similar to getting the dough right by

Further – the beaten egg yolks to be added to the basic ingredients – there is an increased deduction for R&D expenditure. This allows a tax deduction for more than 100% of the cost effectively borne by a company when qualifying investments are made in an R&D centre for new environmental friendly products and innovative technologies. The deduction can either take the form of a one-off deduction (15.5% of the investment) or be spread out over the amortisation period (22.5% of the annual amortisation). This deduction can, if there are insufficient profits, either be carried forward for an unlimited period or be converted into a tax credit (refundable after 5 years).

What makes the Belgian waffles stand out are the egg whites, subtly beaten together until soft peaks form and then folded into the waffle batter.

BELGIAN BEER, BELGIAN WAFFLES AND BELGIAN ChOCOLATES: ThEy’RE WORLD FAMOUS AND RECOGNISED By EvERyBODy AS ThE BEST (ExCEPT MAyBE By ThE SWISS WhO ADORE ThEIR OWN ChOCOLATE AND ThE GERMANS WhO ThINK ThE SAME OF ThEIR BEER). BUT ThEy ARE NOT hANDED ON A SILvER PLATTER. ThEy hAvE TO BE MADE ThE BEST By USING ALL KINDS OF INGREDIENTS.

GLobaL I BELGIUM

bRenT SpRInGaeLBird&[email protected]

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downwaRd TRend foR SwISS Tax on pRofITReaSonS foR ThIS TRendIn response to the EU pressure on privileged tax status of companies based in Switzerland (such as holding and auxiliary companies), several cantons are anticipating the waiver of these tax relieves by replacing them with cantonal/municipality lower tax rates on net profit for all corporate entities without distinction as to the source of income.

ImpacTed pRIvILeGed STaTUSThe most important privileged tax status cur-rently granted by the Swiss cantons are the hol-ding and tax auxiliary status. In a nutshell, the holding status provides that a Swiss company without any commercial activity in Switzerland could obtain a holding privileged status provided that 2/3 of its total assets are qua-lifying participations or 2/3 of the company’s total revenues are derived from participations. As a rule, if those conditions are met, the company is exempted from cantonal/municipal tax on pro-fit (except for profits derived from real estate). As per the auxiliary status, the privileged (effective) tax rate on profit – approximately 12% in Geneva (federal, cantonal and municipal taxes included) – is only granted for business activity performed outside of Switzerland. A company with such a privileged status can only have limited business activities in Switzerland (approx. max 30% in Geneva).

whaT IS new?Blaming Switzerland for (supposedly) not abiding by the “European Free Trade Agreement” signed in 1972 (due to the fact that the income is taxed differently depending on its source), European Union has been putting more and more pressure on Swiss government to abandon such privileged status.To maintain and strengthen the position of Switzerland as one of the most tax competitive

States in Europe while being “euro-compatible”, some Swiss cantons have already adapted or are in the process of adapting their tax legislation by drastically reducing their tax rate on profits for all companies without distinction as to the source of income. For instance, the population of the canton of Neuchatel has voted and accepted a gradual decrease in the ordinary effective profit tax rate for all companies and any income (regardless of its source) from 22% to 15.5% (federal, cantonal and municipal taxes included). As opposed to the above mentioned tax relieves this reduced tax rate will also apply to commercial activity perfor-med in Switzerland regardless of its size/importance.Besides, the canton of Jura is in the process of preparing a tax reform according to which the total effective tax rate on profits should amount to 14.5% (federal, cantonal and municipal taxes included) from 2015. Other Swiss cantons, as well as the Federal State, could also follow this trend. In addition, we can imagine that Swiss cantons and the federal State are working together to design other “euro-compatible” privileged tax status which would be no longer based on the Swiss/foreign source distinction but rather on another criteria such as the type of income. For example, the canton of Nidwald has already implemented a very attractive tax relief (9% for federal, cantonal and municipal taxes included) for IP income.

concLUSIonSNotwithstanding the lower tax rate trend, the Swiss cantons still grant the privileged status as long as the Swiss legislation allows them. As a result, the European Union unfounded poli-tical pressure is perhaps making Switzerland more attractive than ever.

LUdovIc RaIS Budin &Associés, [email protected]

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reduction, however, is irrelevant where the 0% withholding tax rate pursuant to the EC Parent Subsidiary Directive applies. On the other hand, the German tax authorities have asserted the implementation of activity, switch-over and sub-ject-to-tax clauses and substantial aggravations on the taxation of (frequently used) hybrid ins-truments. Corresponding changes in domestic German tax laws are currently proposed.Existing investment and finance structures may need to be restructured in time.

By rainer schmitt,K&L Gates LLP

new DOuBLe TAx TReATY LuxeMBOuRG-GeRMAnY:conSeqUenceS foR ReaL eSTaTe STRUcTUReS

indirectly consists of real estate located in a contractual state (e.g. Germany), such state may tax capital gains from the sale of these shares. Under current German domestic tax law, only the disposal of shares in companies with German seat or centre of management by non-tax-resident shareholders is taxed, and only if the shareholding amounted to at least 1% at any time in the past five years (certain exceptions apply). Where the German participation exemp-tion for corporate shareholders applies, only 5% of the capital gain should be subject to 15.825% CIT. However, this exemption is not applicable in certain cases when the seller is a bank, an

Luxembourg is an important route for German inbound property investments. Thus, the impact of the new rules on existing and new structures needs to be

monitored. Selected aspects:• In the future, where more than 50% of the value of the shares in a company directly or

insurance company or even a common Luxembourg company having acquired the res-pective shares with a short-term investment horizon. Due to the substantial value of German real estate held by Luxembourg companies and in order to make full use of the taxing right conferred in the New DTT, Germany might be tempted to introduce a limited tax liability also for the sale of shares in non-German companies holding German real estate. • A positive aspect is the reduction of the withholding tax rate to 5% on dividends for cor-porate shareholders holding at least a 10% stake (excluding inter alia REIT dividends); this

GERMANy AND LUxEMBOURG SIGNED A NEW DOUBLE TAx TREATy (“NEW DTT”) WhICh IS ExPECTED TO BE ENFORCED ON 1 JANUARy 2013.

RaIneR SchmITTK&L Gates [email protected]

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SGG In a nUTSheLL

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sGG Is A LEAdING FINANcIAL ANd AdMINIsTrATIvE sErvIcEs ProvIdEr• Fully regulated and independent,• More than 500 professionals,• € 30 million equity,• Over 110 years experience.

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uPscALEBouquet garni: www.lebouquetgarni.luclairefontaine: www.myofficialstory.com/clairefontaineFavaro: www.favaro.luLa rameaudière: www.larameaudiere.luLe Windsor: www.windsor.luLéa Linster: www.lealinster.luMa langue sourit: www.mls.luMosconi: www.mosconi.lu

cAsuALBrasserie Mansfeld: www.mansfeld.lu Brasserie schuman: www.myofficialstory.com/brasserieschumanBoos K Fé: www.boos.luIkki: www.ikki.lu

scheiss: www.scheiss.luum Plateau: www.myofficialstory.com/umplateau

sPEcIALITIEsBurger: Le Booster’s: www.booster.luIndian: Maharaja: Tel.: (+352) 24 17 45Middle East: dubaï Palm: Tel.: (+352) 26 20 22 72sushi: Yamayu santatsu Tel.: (+352) 46 12 49

cIGAr2 rue de la Loge: www.myofficialstory.com/2ruedelalogeLa tabatière: www.la-tabatiere.lu

LeaSURe

cAsTLEs Beaufort: 24 Rue du Château, L-6310 BeaufortBourglinster: 8 rue du Château, L-6162 Bourglinster

clervaux: Am Schlass, L-9774 Urspeltvallée des sept châteaux: Leesbach, L-8363 SeptfontainesLarochette: 4 rue de Medernach, L-7619 Larochette

cuLTurEMudam: 3 Park Drai Eechelen 1499, Luxembourg www.myofficialstory.com/mudamPhilharmonie: Place de l’Europe L-1499, Luxembourgcasemates: 30 place Guillaume II, LuxembourgPalais Grand ducal: 17 Rue du Marché-aux-Herbes, Luxembourg

PArTYrives de clausen: www.myofficialstory.com/rivesdeclausenBypass: www.bypass.luWhite House: www.white.lu

hoTeLS

sofitel Grand ducal: www.myofficialstory.com/sofitelHotel Le royal: www.hotelroyal.luLe Place d’Armes: www.hotel-leplacedarmes.comMelia: www.melia-luxembourg.comAlbert 1er: www.albert1er.lucasino 2000: www.casino2000.luMondorf Parc Hotel: www.mondorfparchotel.com

ceos’ favourite addresses

clairefontaine. um Plateau. Bourglinster. sofitel Grand ducal.

www.luxembourgofficial.com

46

La qualité de notre gestion permet à chacun de nos clients de réaliser de belles

performances. La preuve. Nous avons une nouvelle fois été primés pour la qualité de notre gestion

et la régularité de nos performances, mais la plus belle de nos récompenses reste la confiance que nos clients nous accordent.

Plus d’informations sur nos fonds au 48 14 14ou sur www.banquedeluxembourg.lu

Meilleur gestionnaire de fondsPetits promoteurs – toutes catégories confondues sur 3 ans

BDL_ann_TRUST_200x280.indd 1 24/08/12 16:01

YoUR SGG GRoUp conTacTSaT Ifa boSTon

Serge krancenblumChief executive Officer, SGG [email protected]+352 621 491 501

christoph n. kossmannMember of executive Board, [email protected]+352 621 502 315

Luca GallinelliSenior Vice President, [email protected]+352 621 294 779

Geoffrey henryManaging Partner, FAcTS [email protected]+352 621 237 809

ewa GutfrindSenior Marketing Officer, [email protected]+352 691 720 572

andré nagelmakerChief executive Officer, [email protected]+31 681 08 56 83

dedde zeelenbergManaging Director, AnT [email protected]+31 623 95 07 18

heather jewittDirector Marketing, [email protected]+31 650 65 88 01

Sara douwesCommercial Director, [email protected]+31 651 97 59 97

bassem pierre daherChief executive Officer, SGG [email protected]+1 91 74 06 84 78

bas horstenManaging Director, AnT (Curaçao) [email protected]+599 96 70 19 14

joannes R.m. van de kimmenadeCorporate Lawyer, [email protected]+31 643 78 11 71

LUxemboURG

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