15 tax reasons for choosing Luxembourg as an investment centre August 2014

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1 Loyens & Loeff is the natural choice for a legal and tax partner if you do business in or from the Netherlands, Belgium and Luxembourg, our home markets. You can count on personal advice from any of the advisers based in one of our offices in the Benelux region or in key financial centres around the world. Thanks to our full-service practice, specific sector experience and thorough understanding of the market, our advisers comprehend exactly what you need. Our firm has the perfect blend of legal and tax expertise for project finance transactions. Our unique approach has made us a leading player in this rapidly developing market. Because we regularly act for lenders, borrowers and investors, our approach is multi-faceted and we are able to foresee potential questions and risks well in advance. This enables us to come to a balanced agreement for all parties. 15 tax reasons for choosing Luxembourg as an investment centre August

2 15 tax reasons for choosing Luxembourg as an investment centre August 2014

3 Loyens & Loeff Luxembourg S.à r.l., 2014 All rights reserved. No part of this publication may be reproduced, stored in a retrieval system or in an automated database or disclosed in any form or by any means (electronic, mechanical, photocopy, recording or otherwise) without prior written permission. Although this publication has been compiled with great care, Loyens & Loeff Luxembourg S.à r.l. and all other entities, partnerships, persons and practices trading under the name Loyens & Loeff, cannot accept any liability for the consequences of making use of this issue without their cooperation, including any errors or omissions. The information provided is intended as general information and cannot be regarded as advice.

4 Since the early 1990 s Luxembourg, which is situated in the heart of Europe, has considerably enhanced its position on the international business scene by introducing a series of tax measures favouring inbound and outbound investments. As a result of these efforts Luxembourg has become the preferred European jurisdiction for investment management, and is high on the short list of jurisdictions for holding, financing, private wealth management and intellectual property activities. This booklet sets out 15 reasons why a company planning to conduct any form of international business should consider choosing Luxembourg as preferred jurisdiction of establishment. Compared to the 2012 edition, this 2014 edition contains five additional reasons: Luxembourg s fiscal unity regime, Luxembourg s investment tax credits, Luxembourg s unregulated funds structured as limited partnerships, Luxembourg s carried interest regime and Luxembourg s ATR and APA practice. The seminal number of ten used in the 2012 edition had therefore to be abandoned, but instead this booklet offers an even more complete view on the Luxembourg tax framework. Savings Directive considerations no longer form part of this 2014 edition, as the relevant withholding taxes are expected to be abolished from 1 January The information given in this booklet is by no means exhaustive. Luxembourg offers many other attractive laws and regulations which make it worthwhile to consider establishing in Luxembourg. Moreover, its friendly corporate tax climate, its high standard of living, its safe and welcoming atmosphere and its location in the heart of Europe also make it a great country to live in! The author thanks Kheira Mebrek and Eric Cayrel for their input on wage tax aspects and VAT. Loyens & Loeff Luxembourg S.à r.l. Frank van Kuijk August 2014

5 CONTENTS Page Abbreviations and definitions used in this booklet 5 Reason number 1: Luxembourg s holding regime 8 Reason number 2: Luxembourg s intra-group financing regime 14 Reason number 3: Luxembourg s fiscal unity regime 17 Reason number 4: Luxembourg s intellectual property regime 20 Reason number 5: Luxembourg s investment tax credits 24 Reason number 6: Luxembourg s company reorganization facilities 27 Reason number 7: Luxembourg s SIF and SICAR regime 33 Reason number 8: Luxembourg s SPF regime 35 Reason number 9: Luxembourg s securitization regime 37 Reason number 10: Luxembourg s unregulated funds structured as limited partnerships 39 Reason number 11: Luxembourg s carried interest regime 42 Reason number 12: Luxembourg s tax treaty network 44 Reason number 13: Luxembourg s expatriate regime 45 Reason number 14: Luxembourg s VAT regime 48 Reason number 15: Luxembourg s APA/ATR practice 50 Contacts 52

6 Abbreviations and definitions used in this booklet APA Advance pricing agreement. ATR Advance tax agreement. CIT Corporate income tax, levied at a general combined rate of 29.22% and composed of income tax at a rate of 21% (but 20% for taxable income not exceeding EUR 15,000), a 7% surcharge on the income tax rate and municipal business tax (MBT) levied at a rate of 6.75% for Luxembourg City in ITA The Luxembourg income tax act of 1967 (Loi du 4 décembre 1967 concernant l impôt sur le revenu). COOP S.A. A Luxembourg cooperative organized as a public limited liability company, Société Coopérative organisée sous forme d une société anonyme. CSSF Commission de Surveillance du Secteur Financier, Luxembourg s supervisory commission for the financial sector. EU The European Union, which currently compromises the following 28 Member States: Austria, Belgium, Bulgaria, Croatia, Cyprus, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, Netherlands, Poland, Portugal, Romania, Slovakia, Slovenia, Spain, Sweden, United Kingdom. EEA The European Economic Area, which consists of all 28 Member States plus Norway, Liechtenstein and Iceland. 5 loyens & loeff Fifteen tax reasons for choosing Luxembourg as an investment centre

7 Financing Circulars The circulars issued by the Director of the Luxembourg direct tax authorities on 28 January 2011 (164/2) and 8 April 2011 (164/2) on intragroup financing companies. IP Intellectual property. IP Circular The Circular issued by the Director of the Luxembourg direct tax authorities on 5 March 2009 (50bis/1). Interest and Royalty Directive Directive 2003/49/EC on a common system of taxation applicable to interest and royalty payments made between associated companies of different Member States. LTA The Luxembourg direct tax authorities (administration des contributions directes). Member State A country belonging to the EU. NWT Net wealth tax, levied at a rate of 0.5% on a Luxembourg company s net wealth on 1 January of each year. Parent-Subsidiary Directive Directive 90/435 EEC on the common system of taxation applicable in the case of parent companies and subsidiaries of different Member States, as amended. S.C.A. Public partnership limited by shares, Société en Commandite par Actions. S.A. A Luxembourg public limited liability company, Société Anonyme. S.à r.l. A Luxembourg private limited liability company, Société à Responsabilité Limitée. 6 loyens & loeff Fifteen tax reasons for choosing Luxembourg as an investment centre

8 Savings Directive Directive of 2003/48/EC of 3 June 2003 on taxation of savings income in the form of interest payments, implemented in Luxembourg by the laws of 21 June Treaty A treaty for the avoidance of double taxation concluded between Luxembourg and another state. 7 loyens & loeff Fifteen tax reasons for choosing Luxembourg as an investment centre

9 Reason 1: Luxembourg s holding regime I Introduction Soparfi (Societé de Participations Financières) is the term used for a company incorporated under Luxembourg law whose corporate object is the holding of participations in other companies. A Soparfi is fully subject to CIT and NWT and may benefit from the participation exemption regime, which generally provides for a CIT exemption on income and capital gains derived from shares, and a NWT exemption on net wealth allocable to these shares. Shareholders of a Soparfi may benefit from a wide range of withholding tax exemptions for dividends distributed by the Soparfi. II The participation exemption Dividends received (including liquidation proceeds) and capital gains (including foreign exchange rate gains) derived from participations in the social capital of a subsidiary held by a Soparfi are fully exempt from CIT, provided that the following requirements are met: a. the subsidiary is: (i) an entity covered by article 2 of the Parent-Subsidiary Directive, (ii) a fully taxable resident company, or (iii) a company subject to an income tax comparable with Luxembourg corporate income tax (in practice, a minimum rate of 10.5%, levied on a basis determined in accordance with Luxembourg standards, is required); and b. at the time when the dividend or the capital gain is realized, the Soparfi has held for an uninterrupted period of at least 12 months (or undertakes to continue to hold for an uninterrupted period of at least 12 months), a participation of at least 10% in the subsidiary s social capital, or alternatively, a direct participation having an acquisition price of at least EUR 1.2 million for dividends, or EUR 6 million for capital gains. The 10% threshold should be assessed on the overall social capital and not on a share class per share class basis. The acquisition price is an off-balance sheet item and only recorded in the tax return of the shareholder. The acquisition price includes the expenses which are attributable to the acquisition (e.g. lawyers fees). However, even if the above conditions are met, the participation exemption on the dividends and capital gains can be refused for a period of five years following acquisition 8 loyens & loeff Fifteen tax reasons for choosing Luxembourg as an investment centre

10 if a non-qualifying participation has been exchanged in a tax-neutral manner (see Reason 6) for a qualifying participation. The conditions for the participation exemption for dividends (not capital gains) are generally relaxed under the Treaties Luxembourg has concluded with other countries (see Reason 12). III Deduction of costs and recapture rule and loss carryforward If a dividend is tax-exempt, the directly and economically related costs (typically interest costs on loans that finance the participation) are tax-deductible in a given year, but only insofar as they exceed the exempt dividends from the participation in the same year. An impairment of a participation in the tax books is tax-deductible. A later revaluation accounted for in the tax books is taxable. However, an impairment of a participation triggered by a distribution of exempt dividends is not tax deductible. A later revaluation of the participation is assimilated to a dividend up to the amount of the impairment triggered by the distribution of exempt dividends and is therefore tax-exempt. Such deductible costs and impairments, and also impairments on loans granted to the participation, may be offset against other income such as income from financing or commercial activities, or may result in tax losses that can be carried forward indefinitely. At the time when an exempt capital gain is realized on the relevant participation, the net negative revenues derived from the participation and loans granted to the participation in the year of realization and previous years reduce the exempt part of the capital gain ( recapture rule ). There should in fact be no effective taxation on the non-exempt part of the capital gain owing to the available losses and unlimited loss carry-forwards, provided the costs or losses were not set off against income from other activities. Loss carry-forward can be refused in the case of abuse, i.e. when the purpose of a transaction is to avoid Luxembourg tax. In this context an abuse may arise if in case of the transfer of shares in a company with tax losses to a new shareholder, with the sole aim of the new shareolder is to take advantage of the losses. A circular issued by the LTA explains that the relevant circumstances indicating abuse are when the termination of the loss-generating activities by the former shareholder coincides with the share transfer, and the company possesses no real substantial assets at the time of the transfer. IV Debt to equity ratios As a matter of policy, the Luxembourg direct tax authorities apply a debt to equity ratio of 85/15 for holding activities. The return paid on excessive debt financing is re-qualified as a dividend distribution and is subject to withholding tax unless a withholding tax exemption applies. The excess interest which is re-qualified as a distribution is also considered as non-deductible. This should not trigger adverse tax effects if the Soparfi only has tax- 9 loyens & loeff Fifteen tax reasons for choosing Luxembourg as an investment centre

11 exempt income under the participation exemption regime and has a shareholder entitled to a dividend withholding tax exemption. V Net wealth tax aspects NWT is levied at a rate of 0.5% on January 1 of each year on a company s net wealth (generally the fair market value of the assets minus the liabilities). The value of the participations meeting the requirements as set out under section II (except the minimum holding period) net of allocable liabilities, is exempt from NWT. The conditions for the participation exemption for net wealth tax purposes are generally relaxed under the Treaties Luxembourg has concluded with other countries, (see Reason 12). A reduction for NWT purposes can be claimed if: (i) an amount equal to five times the NWT due is allocated to a net wealth tax reserve as recorded in the commercial accounts, (ii) the reserve must be formed no later than the closing of the financial year following the year for which the reduction is claimed, (iii) the reserve must be maintained for five years, (iii) the reserve must be formed from the commercial profits for the relevant year; if there are insufficient profits for the relevant year, it can be formed from freely distributable reserves from prior years. The amount of the reduction is capped at the amount of the corporate income tax (calculated prior to any tax credits) for the relevant year, and is reduced by the amount of the minimum tax (see section VI) that would have been due for the relevant year. VI Minimum taxation A company with its central management or effective place of management in Luxembourg is subject to an annual minimum CIT levy. A Luxembourg permanent establishment of a foreign company is not subject to this levy. This minimum CIT levy (including the 7% surcharge for the unemployment fund) is EUR 3,210 for a company more than 90% of whose assets are composed of fixed financial assets, receivables on related parties, cash and cash equivalents as referred to in accounts 23, 41, 50 and 51 of the Luxembourg standard set of accounts (plan comptable normalisé), at the end of the relevant taxable year. Interest in Luxembourg and foreign partnerships are considered to qualify under account 23. Considering the nature of a Soparfi s activities, it should normally be subject to this minimum tax. Companies which do not meet the above asset test are subject to a progressive minimum tax contingent on the balance sheet total. The lower minimum tax bracket amounts to EUR 535 for a balance sheet total of up to EUR 350,000 and the higher bracket amounts to EUR 21,400 for a balance sheet total of up to EUR 20,000,000. Assets which generate revenues that are exclusively taxable in a Treaty state (e.g. real estate situated in a Treaty country) are excluded when assessing the 90% threshold. Tax credits cannot reduce the minimum tax. The minimum tax itself reduces the CIT tax charge in a later year insofar as it exceeds the minimum tax charge of that later year. 10 loyens & loeff Fifteen tax reasons for choosing Luxembourg as an investment centre

12 The minimum tax thus functions as a non-reimbursable pre-levy. In the case of a fiscal unity (see Reason 3), the minimum tax liability levied from the head of the fiscal unity is determined on a company per company basis, but the aggregate amount may not exceed EUR Minimum tax also applies to SICARs and SVs (see Reasons 7 & 9 respectively). VII Taxation of a Soparfi s shareholders Dividends Dividends paid by a company with its statutory seat or central administration in Luxembourg are subject to 15% withholding tax, unless a lower Treaty rate applies. An exemption however applies if the distributor is a Luxembourg company which is fully subject to tax in Luxembourg with either a Luxembourg legal form or a legal form of Member State or a fully taxable capital company which has a legal form of a non-member State and the recipient is: (i) a company covered by article 2 of the Parent-Subsidiary Directive or a permanent establishment thereof; (ii) a fully taxable resident capital company with a legal form of a non-member State or a permanent establishment thereof; (iii) a company resident in a Treaty state and subject to a tax comparable to Luxembourg CIT, or a Luxembourg domestic permanent establishment thereof; (iv) a Swiss company subject to tax in Switzerland and not benefiting from a tax exemption, and; (v) a capital company or a cooperative company resident in an EEA country other than a Member State and fully subject to a tax comparable to the Luxembourg CIT regime, or a permanent establishment thereof; provided the parent company has held shares in the Soparfi which represent at least 10% of the Soparfi s social capital or with an acquisition cost price of EUR 1.2 million for an uninterrupted period of at least 12 months (or undertakes to continue to hold them for an uninterrupted period of at least 12 months). 11 loyens & loeff Fifteen tax reasons for choosing Luxembourg as an investment centre

13 Liquidation distributions and capital repayments Liquidation distributions are not subject to withholding tax. Repayments of social capital contributed by the shareholders and capitalised retained earnings are also subject to withholding tax. If sound economic reasons for the repayment of contributed social capital can be demonstrated withholding tax does not apply. The LTA consider that no such reasons exist if the payer disposes of meaningful retained earnings. Capitalised profit reserves are deemed to be distributed first in case of a repayment for social capital. If the social capital repayment is subject to withholding tax, the exemptions explained above may be applied, provided the relevant conditions are met. Share premium and capital contributions under private seal are in practice considered to benefit from the same treatment as applied for social capital, although formally they do not qualify as social capital. Capital gains and liquidation proceeds realized by non-resident shareholders Non-resident shareholders (those without a Luxembourg permanent establishment to which the shares in a company are allocable) are only taxable on the realization of a capital gain (or liquidation gains) in respect of shareholdings of more than 10% in a company having its statutory seat or central management in Luxembourg if they realize that capital gain within six months after acquisition, or if they became nonresident taxpayers less than five years before the realization took place and have been Luxembourg resident taxpayers for more than 15 years. However, shareholders resident in a country with which Luxembourg has concluded a Treaty are generally not taxable on such capital gains in Luxembourg. VIII Functional currency A Luxembourg corporate tax payer may use a currency (other than Euro), of which the exchange rate is determined and published by the European Central Bank, for tax purposes under the following cumulative conditions which are reflected in the Circular of 16 June 2014: (i) The Luxembourg tax payer must have its capital denominated in such functional currency and prepare financial statements in such currency; (ii) A request must be filed with the Luxembourg tax authorities at the latest three months before the first financial year for which it is intended that the functional currency will be applied. For newly established tax payers the request must be filed prior to the end of the intended first financial year; 12 loyens & loeff Fifteen tax reasons for choosing Luxembourg as an investment centre

14 (iii) The functional currency will remain applicable as long as the tax payer has its capital denominated in such functional currency (although such correspondence is not required by Luxembourg commercial law); and (iv) All tax payers that are part of a fiscal unity must use the same functional currency as of the first financial year in which the fiscal unity starts. The taxable amount determined in the functional currency will need to be converted into Euro by using the exchange rate as published by the European Central Bank. The Luxembourg tax authorities will continue to determine domestic tax credits, tax assessments and notices in Euro. IV Debt forgiveness The Luxembourg ITA contains a specific provision for avoiding direct adverse tax effects from (partial) debt forgiveness. If a debt is fully or partially waived with a view to the financial recovery of the company, so that the waiver profit is eliminated from the debtor s profits, and insofar as the result is a net profit for that company in the relevant year (prior to loss carry-forward). However, the eliminated amount reduces the company s available loss carry-forwards. If the debt waiver is motivated by non-business reasons, i.e. shareholders reasons, the waiver should qualify as an informal capital contribution to the debtor and should therefore not be subject to taxation. Shareholders reasons are likely to be present if a third party would not have initiated the waiver e.g. because the debt is not distressed. V Treaty entitlement A Soparfi should be entitled to benefit from the Treaties, (see Reason 12). 13 loyens & loeff Fifteen tax reasons for choosing Luxembourg as an investment centre

15 Reason 2: Luxembourg s intra-group financing regime I Introduction Luxembourg is an attractive jurisdiction for (intra-group) financing companies, as it generally does not levy withholding tax on interest or impose a debt-to-equity ratio for financing activities. It also has an extensive Treaty network (see Reason 12), and gives access to the Interest and Royalty Directive, which respectively generally provide for reduced withholding taxes on foreign source interest and for an absence of withholding taxes on certain intra-group interest. II The Financing Circular Financing companies may obtain advance confirmation of the arm s length character of the remuneration they earn. In 2011 the LTA issued a Circular specifying the policy for providing such confirmation to intra-group financing companies, i.e. financing companies which lend money to related parties and borrow from another party, whether related or not (FinCos). A company is considered to be related to the lender if one participates (in) directly in the other s management, control, or the same person participates (in)directly in two other companies (e.g. sister companies). III Requirements imposed by the Financing Circular The Circular imposes certain substance, risk and transfer pricing requirements on FinCos seeking advance confirmation of the arm s length nature of the renumeration they report on their financing transactions. Substance requirements On the substance side, the Circular requires the FinCo to be effectively managed in Luxembourg. This means in particular that a majority (half plus one) of its directors must be Luxembourg (professional) residents. Corporate directors are permitted provide they have their registered office and central management in Luxembourg. The directors must have the necessary professional knowledge to perform their functions. Key decisions should be taken in Luxembourg. The Circular does not clarify when a decision qualifies as a key decision, but decisions on seeking and granting financing should qualify as such. Taking decisions should mean that a decision should not be merely ratified in Luxembourg but actually made elsewhere. It can generally be held that a decision is taken in Luxembourg if it is passed during a board meeting organized in Luxembourg. The Circular 14 loyens & loeff Fifteen tax reasons for choosing Luxembourg as an investment centre

16 does not impose a minimum number of annual board meetings, the Circular requires that the FinCo has a Luxembourg bank account, meet its Luxembourg tax filing obligations and is not considered as a tax resident of another country. It does not require the FinCo s books to be kept in Luxembourg, but from a general substance perspective it is advisable to keep them in Luxembourg as well. Risk requirement The Circular also require a minimum amount of the FinCo s equity to be at risk in relation to its financing activities (1% of on-lent funds or EUR 2 million, whichever is lower). A FinCo which is solely engaged in financing activities (its only asset being the loan granted), with an actual amount of equity in accordance with the above equity cap, meets this risk profile by definition. However, such a FinCo might become insolvent if the loan granted is defaulted for an amount in excess of the equity. To avoid insolvent FinCos the LTA require in practice the relevant loan contract to contain a limited recourse clause. Such a clause provides that the loan obtained is automatically waived for an amount equal to the defaulted amount under the loan granted, insofar as the defaulted amount exceeds the equity at risk. If a FinCo has more equity than the minimum equity cap, a limited recourse clause may limit the potential erosion of the equity in accordance with the cap. The latter would entail a reduced risk profile, and in consequence a lower taxable margin. In the case of a third-party lender a limited recourse clause is normally unacceptable, in such a case a keep-well agreement which limits the FinCo s risk profile to the cap can for example be concluded with the parent of the FinCo. Alternatively it may be shown that the lender will take control of the borrower (e.g. via a share pledge) and will restructure the financing arrangement without triggering the bankruptcy of the FinCo. Transfer pricing requirement In addition, the remuneration reported by a FinCo must be substantiated in a transfer pricing report. The report will define and analyse the company s functions and risks in order to calculate the relevant remuneration which follows from the specific transfer pricing software program. Failure to comply with the Circular requirements may mean that the Luxembourg tax authorities may not endorse the FinCo s position that it is the beneficial owner of the interest it receives. It should be clearly understood that this does not mean the FinCo s claim of beneficial ownership is only endorsed if advanced tax confirmation is obtained: merely complying with the Circular should suffice. If the LTA do not endorse a beneficial ownership claim, this might result in the refusal of Treaty or Interest and Royalty Directive benefits by the country where the FinCo s debtor is situated (e.g. refusal to grant reduced interest withholding tax rates). 15 loyens & loeff Fifteen tax reasons for choosing Luxembourg as an investment centre

17 Reason 3: Luxembourg s fiscal unity regime I Introduction Luxembourg provides for a fiscal unity regime which allows Luxembourg groups to assess their CIT charge on an integrated basis. This facility may lead to substantial tax savings when some group companies are in a profitable and others in a loss-making position. The fiscal unity regime does not apply to NWT. II Eligibility criteria The following requirements must be met to form a fiscal unity: (i) The head of the fiscal unity must be: (i) a fully taxable Luxembourg resident capital company, or (ii) a permanent establishment of a non-resident capital company which is subject to a tax corresponding to the CIT (together referred to as the Parent); (ii) The subsidiaries must be fully taxable Luxembourg resident capital companies; (iii) The Parent must hold directly or indirectly at least 95% (75% in very specific cases subject approval by the Ministry of Finance) of the subsidiary s capital; the percentage held in the capital of subsidiaries which are held via tax transparent Luxembourg entities is assessed on a pro-rata basis; (iv) If the Parent holds the subsidiary indirectly, the foreign intermediate company must be a fully taxable capital company subject to a tax that corresponds to the CIT; and (v) The companies must open and close their accounting periods on the same date. The functional currency of the entities which form part of the fiscal unity should be the same as expressed by the LTA in their Circular on Functional currency (see Reason 1). Although they qualify as fully taxable Luxembourg resident capital companies, a SICAR (Reason 7) and a securitization company (Reason 9) may not form part of a fiscal unity. The threshold of 95% must be maintained without any interruptions from the beginning of the first accounting year for which the fiscal unity is requested. This last requirement means that in principle it is not feasible to integrate a subsidiary in a fiscal unity during a 16 loyens & loeff Fifteen tax reasons for choosing Luxembourg as an investment centre

18 financial year. The fiscal unity regime does not impose any requirements on economic and organizational integration. III Fiscal unity application The Parent and the subsidiaries may form a fiscal unity subject to a written application filed with the LTA in the name of the Parent and all the subsidiaries. The application must be filed before the end of the first accounting year for which fiscal unity is requested and should be maintained for at least five accounting years. IV Effects of fiscal unity All companies (Parent and subsidiaries) in the fiscal unity determine their taxable results on a stand-alone basis and each file a separate tax return. The fiscal unity companies have to apply the at arm s length principle in dealings with each other. The profits and losses of the Parent and subsidiaries are added together, apart from some small adjustments (to avoid double (non-) taxation), and the Parent will file an extra tax return on the basis of which the tax charge for the fiscal unity is determined. Tax assessments will only be issued to the head of the fiscal unity. The Parent is responsible for paying the CIT for the members of the group. Luxembourg tax legislation does not specify whether the fiscal unity members may be held jointly or severally liable for the taxes due by their Parent. The ITA only provides for loss carry-forward rules (loss carry-back is impossible), without limitation. Only the company which has suffered the losses may deduct these from its future profits. Pre-fiscal unity losses can thus only be carried forward for offset against taxable profits of the member of the fiscal unity that incurred them. In practice this principle is applied not only for subsidiaries, but also for the pre-fiscal unity losses of the fiscal unity s parent. Fiscal unity losses which are deemed to be suffered by the parent may only be carried forward for offset against the fiscal unity s profits in future years, which are also deemed to be generated by the parent. This means that if a company is demerged from the fiscal unity, it will not be able to use its stand-alone losses for the term of the fiscal unity. The fiscal unity may also affect the possibility to reduce the net wealth tax burden. A reduction is granted if certain conditions are met, but a cap equalling the annual corporate income tax due applies. If the company which applies for the credit is merged in a fiscal unity the cap is assessed on the basis of the total corporate income tax due by the fiscal unity. 17 loyens & loeff Fifteen tax reasons for choosing Luxembourg as an investment centre

19 V The term and termination of a fiscal unity Fiscal unity status applies for a period of at least five accounting years. If the fiscal unity is divided earlier, the advantages enjoyed under the fiscal unity regime are clawed back with retroactive effect. Fiscal unity is automatically extended after the end of the five-year period, provided the relevant conditions are still met. If they are not met, the fiscal unity is divided with effect from the beginning of the accounting year during which the conditions were not met. According to current practice, absorptions or liquidations of entities within the fiscal unity should not terminate the fiscal unity. 18 loyens & loeff Fifteen tax reasons for choosing Luxembourg as an investment centre

20 Reason 4: Luxembourg s intellectual property regime I Introduction Luxembourg s IP regime provides for an 80% exemption from CIT for net positive income and capital gains derived from IP acquired or created after 31 December Thus the effective tax rate in the IP regime is reduced from the general combined rate of 29.22% to 5.84% for 2014 in Luxembourg City. Luxembourg provides for a tax credit/deduction for royalty withholding tax imposed by source countries. Net wealth allocable to qualifying IP is not subject to Luxembourg net wealth tax. II Ownership requirement The IP regime may only be applied by the IP s owner. In the case of a discrepancy between legal and economic ownership, the latter prevails. The economic owner is the party who generally exercises effective control over the IP and can exclude the legal owner from his economic influence during the IP s expected lifetime. The fact that the economic owner can apply the IP regime is a very welcome feature, as it may avoid burdensome re-registration of the IP rights needed to transfer the legal ownership. III Qualifying IP requirement To benefit from the IP regime, the net positive income and capital gains must be attributable to the following categories of IP: (i) software copyrights; (ii) patents; (iii) trademarks; (iv) service marks; (v) designs; (vi) models; and (vii) top level and lower level domain names. The concept of a patent also covers utility models and pharmaceutical supplementary protection certificates. The Circular on the IP regime also stipulates that name and image rights which are registered as trademarks may benefit from the IP regime, provided they are used to commercialize products or services. 19 loyens & loeff Fifteen tax reasons for choosing Luxembourg as an investment centre

21 IV Qualifying revenue requirement Net positive income and capital gains related to the IP benefit from the IP regime. Net positive income is defined as gross income, less costs in a direct economic relationship to that income, including depreciation and amortization. To qualify for the IP regime, the income must have the form of a royalty for the use of or entitlement to use the IP. A royalty is a payment for the use or entitlement to use the IP which would infringe the protection right if no licence agreement exists. Compensation payments for the infringement of IP rights should rights qualify as well. The form of the payment (for example, a lump sum, instalments or contingency payments) is irrelevant. Capital gains on the alienation of IP are 80%-exempt in the year of alienation. The exempt amount is reduced by the sum of 80% of the net negative revenues stemming from the alienated IP in the year of alienation and previous years, but only insofar as these net negative revenues have not been capitalized under the capitalization requirement explained in section VI below. Losses from prior years may be carried forward for their full amount and offset against the non-exempt part of the capital gain. V Creation and acquisition date requirement To qualify for the IP regime, the IP must be acquired or self-developed after 31 December From a Luxembourg tax point of view, the time when the economic ownership is acquired should be decisive for determining the time of acquisition. For an acquisition of the legal or economic ownership of IP, determining the date on which the ownership passed should not pose a problem. No new acquisition date is recognized when, inter alia, a permanent establishment (not a legal distinct entity) is created in Luxembourg to which the IP is allocated, or a company owning IP is migrated to Luxembourg. VI Capitalization requirement Before the IP regime can be applied, all costs, including depreciation and amortization costs attributable to the IP, must be capitalized and will be integrated in the taxable result for the first year in which the regime applies. The capitalized cost may be amortized for tax purposes over the IP s useful lifetime. The profit realized as a result of this capitalization does not benefit from the IP regime. However, losses from prior years may be carried forward and will offset the profits originating from the capitalization. 20 loyens & loeff Fifteen tax reasons for choosing Luxembourg as an investment centre

22 VII Anti-abuse requirement To avoid possible abuse, IP acquired from related companies as opposed to individuals does not qualify for the IP regime. Related companies are defined as entities: (i) which directly own at least 10% of the Luxembourg taxpayer s capital; (ii) at least 10% of whose capital is directly owned by the Luxembourg taxpayer, or; (iii) at least 10% of whose capital is directly owned by a company which also directly holds at least 10% of the Luxembourg taxpayer s capital. The related party test is to be applied immediately before the transfer of the IP takes place. This means that a company which contributes its IP on the incorporation of its Luxembourg subsidiary would not be considered as related to that subsidiary, because the subsidiary did not yet exist immediately prior to the contribution. The related party test does not prevent the taxpayer from applying the IP regime to royalty income received from related parties. Since the anti-abuse requirement only has an effect in the case of direct relationships, it should not in practice substantially hinder intra-group transfers of IP. VIII Tax credit/deduction for royalty withholding tax A royalty withholding tax credit may be granted against Luxembourg CIT under certain conditions, including the surcharge for the unemployment fund, but not against municipal business tax due. Withholding taxes that cannot be credited may be deducted from the Luxembourg company s corporate income tax base. The credit is equal to the relevant net foreign income (after foreign withholding tax), grossed up against the Luxembourg CIT rate, multiplied by the Luxembourg CIT rate, but may not exceed the foreign taxes paid. Royalty withholding taxes may only be credited under the per country method, meaning that the credit is limited to the Luxembourg tax, calculated on the basis of the net income derived from the relevant state. The Luxembourg tax authorities apply the following formula to calculate the credit if income benefits from the IP regime, which in essence provides for a gross-up at the effective tax rate under the IP regime: IP regime tax credit = R * T / 5 - T, where R = foreign income net of foreign taxes and T = corporate income tax rate. 21 loyens & loeff Fifteen tax reasons for choosing Luxembourg as an investment centre

23 IX Self-developed (pending) patents used in the owner s business When a self-developed (pending) patent is used in the taxpayer s own business a deduction equalling 80% of the net positive income which would be generated if the patent was licensed to a third party is granted. The net positive income equals the fictitious gross income which would be generated under a licence to a third party, minus allocable expenses. The deduction is granted from the time when the patent is filed. If the patent is refused, the tax benefits obtained as a result of the deduction are recouped in the year of refusal. 22 loyens & loeff Fifteen tax reasons for choosing Luxembourg as an investment centre

24 Reason 5: Luxembourg s investment tax credits I Introduction To encourage taxpayers to invest in tangible assets, the ITA provides, on a request by the taxpayer, for generous tax credits for such investments. Shipping, transport and aviation companies in particular favour Luxembourg as their place of establishment because of these credits. Licensed shipping companies operating vessels in international maritime traffic benefit from relaxed tax credit rules. The credits can be claimed against CIT charged on any type of income in the year the investments are made, but not against MBT and NWT. Investment tax credits can be carried forward for 10 years. The credits are available for so-called increasing investments and for global investments, and can be claimed cumulatively. II General requirements The tax credit provision currently specifies that the credits can only be claimed if the investment: (i) is made within a Luxembourg business establishment; (ii) is intended to remain permanently within the Luxembourg business establishment; and (iii) will actually be used in Luxembourg. As a result of Luxembourg s geographical situation (no coastline), investments in vessels operating in international maritime traffic by licensed Luxembourg shipping companies are exempt from condition (iii). On 31 March 2011 the Luxembourg tax authorities issued a circular which expands the geographic scope of the investment tax credits to assets physically used in EU and EEA territory, as requirement (iii) was considered to breach the EU rules on freedom to provide services. The ITA has not yet been amended in this respect, but taxpayers can rely on the circular. 23 loyens & loeff Fifteen tax reasons for choosing Luxembourg as an investment centre

25 III Investment credit for increasing investments The tax credit for increasing investments is 12%. The base is the annual additional investments in tangible assets (thus not e.g. IP) assets which can be amortized (Qualifying Assets), not including buildings, agricultural livestock and mineral and fossil deposits or: (i) assets which are amortized in less than three years; (ii) assets acquired for consideration as part of an enterprise, an autonomous part of an enterprise or a fraction of an enterprise; (iii) second-hand assets, but not vessels used in international maritime traffic by licensed shipping companies; (iv) assets acquired for no consideration, and; (v) certain motor vehicles. Under certain conditions the assets under (ii) and (iii) above do qualify if made within the first three calendar years after establishment, but their value is capped at EUR 250,000. The amount of the increasing investments is equal to the value of the Qualifying Assets at the end of the accounting year, minus the reference value of the Qualifying Assets. This result is increased by the value of the amortization on the Qualifying Assets (including those acquired or constituted in that year) during the relevant accounting year. The reference value is equal to the average value of the Qualifying Assets at the end of the five preceding accounting years, and is at least EUR 1,850. However, the amount of the increasing investments is the amount invested in Qualifying Assets during the relevant accounting year. IV Investment credits for global investments An investment credit for global investments can be obtained for investments in Qualifying Assets in a specific accounting year. The credit is calculated on the acquisition price or the price of investments made during the accounting year. The credit amounts to 7% for the first EUR 150,000 of investments and 2% for the investments exceeding that amount. These percentages amount to 8%, and 4% for certain environmentally friendly assets. 24 loyens & loeff Fifteen tax reasons for choosing Luxembourg as an investment centre

26 V Investment tax credits and lease arrangements In the case of a financial lease (a lease which is irrevocable by either party, during which the lessee pays the acquisition price and the additional cost to the lessor), only the lessee is entitled to the investment tax credits in relation to the relevant asset. The lessee rather than the lessor is the economic owner of the asset and thus the owner for tax purposes, and should be entitled to the credit. In the case of any other type of lease, the lessor is entitled to the tax credit, provided that the lessee uses the asset in a Luxembourg taxable business activity. Similarly, if the relevant asset is a vessel operated in international maritime traffic, the lessor cannot claim a tax credit. 25 loyens & loeff Fifteen tax reasons for choosing Luxembourg as an investment centre

27 Reason 6: Luxembourg s company reorganization facilities I Introduction Luxembourg s tax legislation provides for CIT-neutral (cross-border) company reorganization facilities for both the company undergoing the transaction and its shareholders, and for specific valuation facilities to accommodate the requirements for obtaining potential tax neutrality in another EEA country. This section focuses also on the Luxembourg reinvestment reserve and the tax aspects of inbound and outbound migrations of enterprises. As the relevant legal provisions are in practice difficult to distinguish on the basis of the ITA, references to those provisions are provided in this section. II Tax neutrality for the company undergoing reorganization The following domestic transactions may benefit from CIT neutrality: (i) Mergers (fusions): the transfer by a Luxembourg company (transferor) of all its assets and liabilities to another fully taxable Luxembourg company (transferee), in exchange for shares (and to some extent cash payments) issued by the transferee to the transferor s shareholder, or a cancellation of shares held in the transferee in the case of an upstream merger (170 (2) ITA); (ii) Transformation of legal form (transformations): the transfer by a Luxembourg company (transferor) of all its assets and liabilities to another Luxembourg taxable company (transferee), in exchange for shares (and to some extent cash payments) issued by the transferee to the transferor s shareholder (170 (2) ITA); (iii) Demergers (scissions): the transfer by a Luxembourg company (transferor) of all or part of its assets and liabilities constituting an enterprise or an autonomous part thereof to one or more Luxembourg fully taxable companies (transferee(s)), in exchange for shares issued by the transferee(s) to the transferor s shareholder, or a cancellation of shares held in the transferor in the case of an upstream demerger (170 (3 sub 3) ITA). The assets retained by the transferring company must constitute an enterprise or an autonomous part thereof (170 (3) ITA); and (iv) Contributions (apports): the contribution of a business or an autonomous part of a business by a fully taxable Luxembourg company to another fully taxable 26 loyens & loeff Fifteen tax reasons for choosing Luxembourg as an investment centre

28 Luxembourg company (the transformation of a Luxembourg partnership in a Luxembourg company is assimilated to a contribution (59 (7) ITA) in exchange for shares issued to the contributor (59 (3) ITA). The following cross-border transactions may benefit from CIT tax neutrality: (i) Mergers (fusions): the transfer by a fully taxable Luxembourg company (transferor) of all its assets and liabilities to a company resident in another Member State (transferee), in exchange for shares (and to some extent cash payments) issued by the transferee to the transferor s shareholder, or a cancellation of shares held in the transferor in the case of an upstream merger (170bis (1) ITA); (ii) Demergers (scissions): the transfer by a fully taxable Luxembourg company (transferor) of all or part of its assets and liabilities constituting an enterprise or an autonomous part thereof to one or more companies resident in another Member State (transferee), or to a taxable Luxembourg company and a company resident in another Member State, in exchange for shares (and to some extent cash payments) issued by the transferee to the transferor s shareholder, or a cancellation of shares held in the transferor in the case of an upstream demerger. The assets retained by the transferring company must constitute an enterprise or an autonomous part thereof (170bis (2) ITA); (iii) Transformation of legal form (transformation): the transfer by a non-resident company (transferor) of a Luxembourg permanent establishment to another nonresident company (transferee), in exchange for shares (and to some extent cash payments) issued by the transferee to the transferor s shareholder (172 (5) ITA); (iv) Contributions to a Luxembourg permanent establishment (apports): the contribution of a business or an autonomous part of a business by a fully taxable Luxembourg company (transferor) to a Luxembourg permanent establishment of a Member State company (transferee) other than Luxembourg, in exchange for shares issued to the transferor (59 (3) ITA); (v) Transfer of a Luxembourg permanent establishment: the transfer of a business or an autonomous part of a business, which constitutes a Luxembourg permanent establishment, by a company of a Member State other than Luxembourg (transferor) to a company of a Member State (transferee), in the framework of a contribution, a merger or a demerger (172 (4) ITA); and, (vi) Transfer of a foreign permanent establishment: the transfer by a fully taxable Luxembourg company (transferor) of a permanent establishment situated in a EU/ 27 loyens & loeff Fifteen tax reasons for choosing Luxembourg as an investment centre

29 EEA Member State with which Luxembourg has concluded a Treaty to a company resident in a EU Member State other than Luxembourg (transferee) in the context of a contribution (59bis (1 sub 1) ITA), merger or demerger (170bis (3) ITA). With certain exceptions, full or partial tax-neutral exchange of Luxembourg assets and liabilities is only possible on condition that the neutralized profit is taxable in Luxembourg at a later stage (170 (2, sub 2) ITA). Luxembourg assets must therefore remain within the Luxembourg tax framework, and the transferee must continue the book values of the transferred assets and liabilities as recorded by the transferor directly prior to the transfer (170 (2, sub 2) ITA) for mergers and demergers and (59 (3) ITA) for contributions. In the case of cross border transactions this means that the transferred assets must remain within the Luxembourg tax framework and thus from a permanent establishment there. The continuation of the book values means that the acquisition date of the assets is deemed to be the acquisition date as recorded by the transferor (170 (5) ITA) for mergers and demergers, article (170ter ITA) for inbound transactions and (59 (3a) ITA) for contributions). If the transferor cancels its shares as a result of the merger or demerger, those shares are deemed to be realized at their exploitation value (171 (1 and 2) ITA). The participation exemption regime remains applicable in the case of such a realization, and applies in any event if the participation held in the transferor exceeds 10% (171 (3) ITA). In principle, tax losses present at the level of the transferor do not follow the transferred assets, except in the case of certain types of mergers. The transformation of the legal form of the Luxembourg company (172 bis (1) ITA), and the transformation of the legal form of the head office of a Luxembourg permanent establishment (172 bis (2) ITA) has no effect on the loss to carry forward of the Luxembourg company or the permanent establishment respectively. III Valuation facilities to meet the requirements for obtaining tax neutrality in another country The following transactions may benefit from a receipt at a value between book value and exploitation value (i) Mergers (fusion): the transfer to a Luxembourg fully taxable company (transferee) by a company resident in an EEA state other than Luxembourg (transferor) of all its assets and liabilities, in exchange for shares (and to some extent cash payments) issued by the transferee to the transferor s shareholder, or a cancellation of shares held in the transferor in the case of an upstream merger (170ter (1) ITA); and (ii) Demergers (scission): the transfer by a company resident in an EEA state other than Luxembourg (transferor) of its assets and liabilities constituting an enterprise 28 loyens & loeff Fifteen tax reasons for choosing Luxembourg as an investment centre