Luxembourg holding companies: competitive and tax-efficient

Transcription

1 Luxembourg holding companies: competitive and tax-efficient June 2009

2 Table of contents 1. Introduction Standard holding company (SOPARFI) Double taxation treaties Registration taxes Corporate income tax Dividend exemption Capital gains exemption Withholding tax exemption Use of hybrid instruments Debt-equity ratio and financing costs Financing activity Capital gains realised by non-resident shareholders Net worth tax and exemption Conclusion Summary in chart form...7 Contact...8 2

3 1. Introduction Although Luxembourg is one of the smallest European Union ("EU") Member States, with about 450,000 inhabitants, its financial centre is among the most important in Europe and the second largest investment fund centre worldwide. Luxembourg offers the entire spectrum of financial services in both corporate and private banking as well as an attractive business environment. The country's economic fundamentals are sound and it is noted for its openness and diversity. Situated between Belgium, Germany and France, Luxembourg has a highly qualified and multilingual workforce. Luxembourg's legal framework is highly flexible as a result of the willingness of the government (including the regulatory authorities) to listen and respond to the concerns of the financial and business sectors. 2. Standard holding company (SOPARFI) The main purpose of using a standard Luxembourg holding company, also called a "SOPARFI", is to ensure the tax efficiency of the group's repatriation of profits to investors and its intra-group financing operations. The recent abolition of capital duty, the reduction of the corporate income tax rate from 1 January 2009 and the abolition of withholding tax on dividends paid to entities established in a country which has concluded a double taxation treaty ("DTT") with Luxembourg will no doubt make SOPARFIs even more attractive. A SOPARFI is a fully taxable, Luxembourg-resident company that can be set up by any type of investor without restrictions and usually takes the form of a public limited liability company (société anonyme) or private limited liability company (société à responsabilité limitée). A SOPARFI can benefit from the DTTs concluded by Luxembourg and from EU directives such as the Parent-Subsidiary Directive and the Interest and Royalties Directive. 3. Double taxation treaties Luxembourg has concluded a substantial number of DTTs with countries both within and outside the EU and is working on expanding its treaty network even further. Currently there are more than 50 DTTs in force and SOPARFIs have access to all of these (provided of course that the relevant conditions are met). 4. Registration taxes A SOPARFI is subject to a fixed, non-recurring capital (or capital contribution) tax of EUR 75 upon incorporation, the amendment of its articles of association or the transfer of its corporate seat to Luxembourg. No other taxes are payable upon the establishment of a SOPARFI, other than in exceptional circumstances (mainly where the capital contribution consists of real estate located in Luxembourg). In that event, a non-fixed registration tax, the amount of which depends on the value of the assets contributed, may be payable. 3

4 5. Corporate income tax Companies established in Luxembourg are subject to corporate income tax and municipal business tax, both of which are calculated on an almost identical tax base (for convenience, these two taxes will be referred to together as corporate income tax, "CIT"). From 1 January 2009, the effective CIT rate on the profits of such companies in excess of EUR 15,000 has been reduced to 28.59% (for companies established in Luxembourg City). 1 Taxable income is broadly calculated on the basis of the profit as set out in the commercial balance sheet and adjusted by adding all non-deductible items (e.g. excessive depreciation, directors' fees, nondeductible taxes, etc.) and by deducting exempt income (e.g. income that is exempt under a DTT or the participation exemption) as well as losses carried forward. Losses can be carried forward indefinitely, but cannot be carried back. In principle, foreign withholding tax suffered by a Luxembourg company may be credited against CIT only within certain limits (it may not be credited against the municipal business tax). Foreign withholding tax that is not creditable may be deducted as an operating expense, as long as it does not relate to exempt income. Provided the relevant conditions (see below) are met, dividends and liquidation proceeds received from a qualifying shareholding and capital gains realised on the sale of the shareholding will be exempt from CIT. 6. Dividend exemption Dividends (and liquidation proceeds) received by a SOPARFI are exempt from CIT if: the SOPARFI holds at least 10% of the shares of the distributing company, or the shares were acquired for at least EUR 1.2 million; the distributing company is a fully taxable Luxembourg company, a collective entity (organisme à caractère collectif) meeting the conditions set out in Article 2 of the EU Parent-Subsidiary Directive or a non-resident capital company (société de capitaux) liable to a tax comparable to the Luxembourg corporate income tax; 2 and the shares have been held for an uninterrupted period of at least 12 months or the SOPARFI undertakes to hold them for that period. This means that the holding period requirement may be complied with before or after the distribution. The SOPARFI may hold the relevant shares through a tax-transparent entity. 3 1 A company established in Luxembourg City whose annual profit does not exceed EUR 15,000 is subject to CIT at an effective rate of 27.55%. 2 The Luxembourg tax authorities generally require that the foreign tax be levied at a rate of at least 10.5% and be applied to a similar tax base. 3 A member of a qualifying partnership is considered to hold a direct participation in the subsidiary proportionate to the size of his/its holding in that partnership's net assets (Art. 175 of the Luxembourg Income Tax Act, "LITA"). 4

5 If dividends received by the SOPARFI are exempt, expenses that have a "direct economic connection" therewith in a given year (e.g. interest expenses incurred to finance the acquisition of the relevant shareholding) are not tax deductible, except to the extent they exceed the amount of the dividends. There are also rules regarding write-downs in connection with the distribution of an exempt dividend. 7. Capital gains exemption Capital gains realised by a SOPARFI on the sale of shares are exempt from CIT under largely the same conditions as apply to the exemption for dividends received. The only difference is that, for capital gains to be exempt, the SOPARFI must have a shareholding of at least 10% in the relevant company or have acquired its shareholding in that company for at least EUR 6 million (as opposed to EUR 1.2 million, see above). Notwithstanding the above, capital gains realised on the sale of shares are subject to a "recapture" rule under which although otherwise exempt the capital gains remain subject to tax up to the sum of all connected expenses deducted for tax purposes in the financial year of the sale or in previous financial years. Examples of such deductions are interest expenses on debt instruments issued to purchase the relevant shares and write-downs of the participation. In general, this "recapture" rule is neutral and simply aims at preventing double benefits. 8. Withholding tax exemption Dividends distributed by a SOPARFI to corporate investors are in principle subject to a withholding tax (WHT) currently set at 15%. WHT may be reduced under a tax treaty or eliminated altogether under the EU Parent-Subsidiary Directive. An exemption from WHT is available if: the recipient of the dividend is (i) a fully taxable capital company resident in Luxembourg, (ii) an EU-resident company as referred to in Article 2 of the EU Parent-Subsidiary Directive, (iii) a Switzerland-resident company subject to Swiss tax and not benefiting from an exemption in Switzerland, (iv) a company located in an EEA jurisdiction and subject to a tax comparable to the Luxembourg corporate income tax, or (v) a shareholder with a "collective character" (e.g. a company) which is resident in a country with which Luxembourg has concluded a tax treaty and is subject in that country to a corporate income tax comparable to the Luxembourg corporate income tax; 4 and at the time the dividends are distributed, the recipient must have held, or undertake to continue to hold, for an uninterrupted period of at least 12 months (i) a shareholding of at least 10% in the SOPARFI or (ii) a shareholding in the SOPARFI that was acquired for at least EUR 1.2 million 5. As with the exemption for dividends received by a SOPARFI, this means that the holding period requirement may be complied with before or after the distribution. 4 The recipient may also be a Luxembourg permanent establishment of an EU-resident company as referred to in Art. 2 of the Parent-Subsidiary Directive or a Luxembourg permanent establishment of a company resident in a state with which Luxembourg has concluded a tax treaty. See also footnote 2. 5 As with the exemption for dividends received by a SOPARFI, the recipient of dividends paid by a SOPARFI may hold the relevant shares through a tax transparent entity as defined under Art. 175 (1) LITA. See also footnote 3. 5

6 9. Use of hybrid instruments In situations where the dividend withholding tax exemption is not applicable, hybrid instruments such as convertible preferred equity certificates ("CPECs") or other convertible instruments, preferred equity certificates ("PECs") and income sharing loans ("ISLs") may be used to allow for a tax-efficient repatriation of profits to the investors, irrespective of the latter's country of residence. Hybrid instruments such as CPECs are, in general, considered as debt for Luxembourg purposes and as equity in the holder's country of residence (this is the case in the United States, for example). This means, on the one hand, that the SOPARFI can make payments under these instruments free of WHT and, on the other hand, that the income derived from the CPECs will be treated as income from equity in the holder's country of residence. However, the characterisation of these payments and the benefits derived in any specific case will depend on the exact terms of the relevant instrument. 10. Debt-equity ratio and financing costs In principle, a SOPARFI may not finance the acquisition cost of its shareholdings using only funds borrowed from related parties. Although this is not a statutory requirement, the tax authorities responsible for holding and finance companies in practice demand a minimum debt-to-equity ratio of 85:15 for such financing. Both arm's-length interest on debt instruments and financing costs are tax deductible (unless connected with tax-exempt income) and are not subject to withholding tax (with certain rare exceptions). 11. Financing activity A SOPARFI may also be engaged in borrowing and on-lending activities within its group. In connection with these activities, the SOPARFI is required to report an arm's-length interest spread for tax purposes. This spread is subject to CIT. If the SOPARFI does not have any bad debt risks or currency exposure, the interest spread to be applied for tax purposes can be minimal (e.g. between 0.5% and %) and agreed in advance. The level of the minimum interest spread will in practice be determined on the basis of the average amounts borrowed and on-lent. In the event of an advance tax agreement, the SOPARFI will in the absence of special circumstances be taxable on the agreed minimum spread even if it is not realised in the SOPARFI's commercial accounts. Conversely, any profit in excess of that spread will normally be taxable. 12. Capital gains realised by non-resident shareholders Capital gains realised by a non-resident shareholder upon the disposal of shares in a Luxembourg company (including a SOPARFI) are, in principle, not subject to tax in Luxembourg unless his/its shareholding exceeds 10% and the shares are sold less than six months after their acquisition. However, this situation is highly unusual in practice and can be avoided in most cases. In addition, the rule does not apply if an appropriate DTT has been concluded between Luxembourg and the shareholder's country of residence. 6

7 Liquidation proceeds distributed to a non-resident shareholder are not subject to Luxembourg withholding tax. 13. Net worth tax and exemption Luxembourg companies are subject to an annual net worth tax ("NWT") of 0.5% levied on the relevant company's adjusted net asset value as at 1 January of each year. Broadly speaking, the net asset value is equal to assets less liabilities and corresponds to the company's net equity. If the conditions for the exemption from CIT for dividends received by a SOPARFI are met, other than the holding period requirement (see above), shares held by a SOPARFI will be excluded from its assets in calculating NWT. Since 1 January 2009, an exemption from NWT has also applied to certain intellectual property rights. In practice, a company's NWT can often be reduced to the minimum nominal amount. If not, a tax credit made available through the creation of a special five-year reserve can be used for this purpose. 14. Conclusion The use of a SOPARFI to conduct holding and financing activities has many substantial advantages. Firstly, the taxes payable when forming, and in order to maintain, the SOPARFI are low. The main benefit, however, is of course the possibility of receiving dividends from shareholdings in other jurisdictions without having to pay CIT, and to sell such shareholdings free of tax. The right to benefit from Luxembourg's substantial network of DTTs is another major advantage, especially with respect to the dividend withholding tax exemption. With effect from 1 January 2009, dividends paid to corporate investors resident in any country with which Luxembourg has concluded a DTT and which meet certain other conditions are exempt from WHT. Where a normal dividend would otherwise be subject to WHT, the SOPARFI can use hybrid instruments to repatriate its profits to its shareholders free of such tax. 15. Summary in chart form No WHT on interest and dividends Dividends and capital gains exempt Investors (EU, DTT) SOPARFI TARGET Investors (Others) No WHT on income from hybrid instruments ( CPECs, ISLs and PECs ) 7

8 Contact I hope you found this publication useful and welcome the opportunity to answer any questions you may have with respect to its contents. Jean-Marc Groelly Christophe Joosen Tax Partner Tax partner T: +352 / T: +352 / E: jean-marc.groelly@nautadutilh.com E: christophe.joosen@nautadutilh.com This publication contains general information on current and upcoming legal issues and is not intended to be comprehensive or to constitute legal advice. It does not create a lawyer-client relationship. No rights whatsoever can be derived from this publication. NautaDutillh Avocats Luxembourg is not liable for any damage which may arise as a result of any incorrectness or incompleteness of the information included in this publication. This publication does not suggest that NautaDutilh Avocats Luxembourg or any of its lawyers are practising law of any jurisdiction other than Luxembourg. Should you require any legal assistance regarding any of the topics addressed herein, please contact NautaDutilh Avocats Luxembourg. 8

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