1.1. What is the legal system in your jurisdiction based on?
The legal system of the Grand-Duchy of Luxembourg (“Luxembourg”) is based on written civil law inspired by the French Napoleonian civil code inherited from the Roman civil law tradition. Companies are governed by the law of 10 August 1915, as amended (the “Company Law”), which was heavily inspired from the liberal Belgian corporate legislation. Although amendments have been made over time to keep corporate law in line with Luxembourg’s economic development, the legislature has been able to maintain a great amount of flexibility in respect of EU standards.
2.1. What are the main forms of business vehicle used in your jurisdiction? What are the advantages and disadvantages of each vehicle?
Luxembourg law recognizes seven different types of company, each of which has a legal personality distinct from that of its members:
Société anonyme (SA) – public limited liability company
Société à responsabilité limitée (S.à r.l) – private limited liability company
Société en commandite par actions (SCA) – partnership limited by shares
Société par actions simplifiée (SAS) – public simplified company
Société en nom collectif (SENC) – general partnership
Société en commandite simple (SCS) – common limited partnership
Société coopérative (SC) – cooperative company.
Luxembourg law also recognises the société en commandite spéciale (special limited partnership - SCSp) which does not have any legal personality.
Luxembourg has also faithfully implemented the EU legislation allowing for the incorporation of a company under the European Company form (Societas Europeae – SE).
The choice of a company type over another depends either on economic considerations (e.g. amount of share capital, capacity to raise funds from the public, credibility) and legal considerations (e.g. scope of member’s liability, flexibility of corporate organisation or free transferability of shares).
2.1.1. Limited liability companies (SA, SAS, S.à r.l., SC and SE)
The SA and the S.à r.l. are the most widely used forms of company. The difference between them lies mainly in the fact that the S.à r.l. may not raise funds from the public by means of issuance of shares although they may issue public bonds.
Companies may have their share capital in euros or in other freely traded currencies. The minimum subscribed share capital for an SA or an SAS amounts to €30,000.- of which at least a quarter must be fully paid up as of the incorporation date. The minimum subscribed share capital for an S.à r.l. is fixed at €12,000.- and must be fully paid up. The SA, the SAS and the S.à r.l. can have one single shareholder. The SA is managed by one director or a board of directors (of at least 3 members) and must appoint a statutory auditor. The shareholders in a SA must meet at least once a year. The SA may also have a two-tier management system (with a board of directors and supervisory board). An SAS is managed by a single president and must appoint a statutory auditor. The S.à r.l. is managed by a single manager or a board of managers, acting solely or jointly, and the partners must meet at least once a year if their number exceeds 60.
The SA is designed for large businesses whilst the S.à r.l. is the most frequently used vehicle for mid-sized businesses and financial investments.
2.1.2. Partnerships (SCA, SCS and SCSp)
A Luxembourg partnership’s share capital is held by a general partner, bearing an unlimited liability with the company and one or more limited partners, endorsing a liability limited to their contribution in the company.
The SCA is recommended when the management intends to retain full control of the company’s investments. The SCS and SCSp are generally used for their tax transparency efficiency (taxation of the SCS or SCSp is directly borne by the partners). The SCA, SCS and SCSp are the preferred vehicles for private equity houses or venture capital investors.
3. ESTABLISHING A PRESENCE FROM ABROAD
3.1. What are the most common options for foreign companies establishing a business presence in your jurisdiction?
Overseas companies may establish a presence in Luxembourg by appointing a local agent, a distributor or a franchisee. Depending on the type and size of commercial activity they wish to establish on the territory, foreign companies may prefer to set up a subsidiary or a local branch.
For financial activities (investment, holding of participating interest, real estate acquisition in other countries), foreign investors would generally establish a Luxembourg special purpose vehicle (“SPV”) under the form of a limited liability company (SA, SCA or S.à r.l.,) or a partnership (SCS or SCSp).
The choice for either form of limited liability companies over a partnership structure will generally depend on the expected tax treatment of the structure on the contemplated investment and its internal governance rules. Partnership are generally tax transparent while limited companies are opaque structure from a tax standpoint. Whilst a partnership is mainly governed by the partners’ contractual arrangements, limited liability companies must follow certain imperative governance rules imposed by the Company Law.
3.2. How can an overseas company trade directly in your jurisdiction?
The carrying out of commercial, craft and industrial activities, as well as certain liberal professions (e.g. economic advisors, chartered accountants, architects, etc) are subject to the prior obtaining of a business license (autorisation d'établissement or autorisation de commerce). These rules are fixed by the Law dated 2 September 2011 on the access to commercial, craft and industrial activities and apply to any company willing to trade in Luxembourg, whether established in Luxembourg or abroad.
This business license is granted to businesses (i.e. in fact to the individual professional operating under his own name or the trading company) within a 3 month-deadline, if:
the person responsible for the operation or management of the business satisfies the required legal conditions of qualification and professional integrity for the concerned activity; and
the business has a fixed and substantial place of establishment in Luxembourg (no so-called 'letterbox companies').
The future manager/director of the company, agent or branch applying for the business license must also provide evidence – by means of a notarized declaration - that he was not formerly involved in an insolvent business.
Applications must be submitted to the General Directorate for SMEs and Entrepreneurship (which is a division of the Ministry of Economy) by standard mail or by online application. Tacit authorisation is granted if no decision is rendered within the time allowed.
3.3. What are the formalities for setting up a partnership?
As described under Business Vehicle section, the Company Law recognises and governs three forms of partnerships: the partnership limited by shares (SCA), the common limited partnership (SCS) and the special limited partnership (SCSp).
In each form of partnership, there must be at least one unlimited partner (associé commandité) who is jointly liable for all obligations and liabilities of the partnership on an unlimited basis and one limited partner (associé commanditaire ) endorsing a liability limited to his contribution in the partnership. Since July 2013, the management of a partnership may be entrusted with one or more persons who are not partners of the partnership.
Whilst the partnership limited by shares must be incorporated in front of a notary who will enact its articles of incorporation, the SCS and SCSp are not required to pass their partnership agreement in front of a notary. The SCA articles of incorporation must be published entirely although SCS and SCSp are required to publish only limited information.
The SCSp does not have the legal personality, but must register with the Luxembourg Trade and Companies Registry.
The partners in the SCS and SCSp may freely determine the rules which will apply to the partnership (governance, partners ‘rights, investments and returns etc.) in the partnership agreement. The SCA’s partnership agreement will generally be implemented in the articles of incorporation and will have to comply with restrictions and apply rules set up for public limited liability companies with regard to governance, shareholders’ mandatory rights and distributions.
The main reasons for using the common limited partnership (SCS) or the special limited partnership (SCSp) are the relative flexibility in their legal structuring and design of partnership agreements as well as their tax transparency features.
3.4. What are the formalities for setting up a joint venture?
Luxembourg is the favoured jurisdiction in Europe for international joint ventures (JVs). JVs are generally implemented through a Luxembourg SPV under the form of a limited liability company or a partnership, depending on the tax implications on the structure and the contemplated investments and the corporate flexibility sought by investors.
The JV Partners generally enter into a JV or shareholder agreement, which is not published. Some clauses of the JV agreement are typically reproduced in the articles of incorporation of the JV company which become of public matter through their publication, and to a certain extent, made enforceable against third parties.
3.5. Are trusts available in your jurisdiction?
Luxembourg law does not have a so-called trust institution distinguishing between legal and beneficial ownership of assets. Luxembourg however recognises trusts validly created in foreign jurisdictions, in accordance with the law dated 27 July 2003 on trust and fiduciary agreements (the “2003 Law”), which ratifies the Hague Convention on the law applicable to trust and their recognition of 1st July 1985.
Under the 2006 Law, fiduciary agreements whereby ownership of assets are transferred to a fiduciary agent (equivalent to a trustee), who must be a credit institution or a professional of the financial sector, may be created. In such instance, the assets of the transferor are segregated from other assets of the fiduciary agent and protected from collective proceedings.
A draft bill was introduced in March 2013 to implement the foundation in Luxembourg (with equivalent or similar features to those of an Anglo-Saxon trust) but has not been passed yet.
4. Forming a private company
4.1. How is a private limited liability company or equivalent corporate vehicle most commonly used by foreign companies to establish a business in your jurisdiction formed?
4.1.1. Regulatory framework
The Company law governs private limited liability companies.
Depending on the type of business to be run by the company, other legislation may apply and companies may be subject to the supervision of specific authorities:
Business licenses requirements for trading activities (see Question 4);
Credit institutions and professionals of the financial sector must comply with the law dated 5 April 1993 on the financial sector and are subject to the supervision of the regulatory authorities i.e. Commission de Surveillance du Secteur Financier (CSSF);
Investment funds must comply with specific legislation depending on their form, purpose and investment policies and are subject to the supervision of the CSSF;
Alternative investment fund managers must comply with the law dated 12 July 2013 on alternative investment funds managers and are subject to the supervision of the CSSF;
Insurance companies are subject to the law dated 6 December 1991 on the insurance sector and supervised by the Commissariat aux Assurances.
Corporate governance guidelines have been set up by the Luxembourg Stock Exchange (LSE) and are generally recognised by practitioners as reference rules for governance in non-listed companies.
For more information on the regulatory authorities see box: The Regulatory authorities.
4.1.2. Tailor-made or shelf companies
Luxembourg Company law and corporate practice is based on freedom of contracts and provide high flexibility on the way articles of incorporation for private limited liability companies are drafted. Some local service providers offer shelf companies, i.e. companies with standard articles of incorporation.
However, their use is limited to the extent that KYC and tax substance requirements but also the amendment of subsequent articles render their proper acquisition costly and dilutive.
Investors prefer usually to incorporate directly their company tailored to their own needs, since once the bank account is opened the company can be incorporated in 24 hours.
4.1.3. Formation process
The incorporation of a private limited liability company requires the following steps:
Check of company name availability with the Luxembourg Trade and Companies Registry;
Opening of a blocked bank account for the company under incorporation; on which the minimum amount for the share capital must be sorted;
Blocking the capital on the bank account and certification by the bank, addressed to the notary, that the share capital is available for incorporating the company;
Anti-money laundering declarations from the ultimate beneficial owners of the company;
Set up of the company’s articles of incorporation (with a mandatory translation in German or French);
Incorporation of the company in front of a Luxembourg notary;
Release of the share capital by the notary’s certification addressed to the bank that the company has been incorporated;
Electronic filing of the company’s articles of incorporation by the notary with the Luxembourg Trade and Companies Registry;
Publication of the articles on the electronic platform “Recueil Electronique des Sociétés et Associations” (RESA).
The company exists immediately after its incorporation, but its articles of incorporation are only enforceable against third parties as from their publication, which is now made electronically, reducing any adverse delay or timing issues in this respect.
As from its incorporation, the company’s share capital is freely available for the company and the directors may use this amount to run the company business.
The articles of incorporation are the sole legal documents required to incorporate a private limited liability company. There is no legal model, but local practitioners have somehow standardised the structure and drafting of articles of incorporation for companies.
Articles of incorporation of limited liability companies and partnerships limited by shares are fully published. Partnerships agreements are published by extracts.
Shareholders agreements are frequently used in Luxembourg and are not published. Some provisions of those agreements may be inserted in the articles.
5. Financial reporting
5.1. What financial reports must the company submit each year?
Luxembourg companies must draft and publish financial statements and profit and loss accounts in accordance with the law dated 19 December 2002 on the Trade and Companies Registry and the accounting and annual accounts of companies (the “Accounting Law”).
The format of the balance sheet and profit and loss accounts must follow the Luxembourg Standard Chart of Accounts (as per the grand ducal regulation dated 10 June 2009).
Branches of foreign companies must publish in the RESA certain accounting documents from the foreign company and prepared in accordance with Lux GAAP, as referred to in the Accounting Law.
6.1. What are the statutory trading disclosure and publication requirements for private companies?
Limited liability companies and partnership limited by shares must reproduce on their letterhead, invoices or any document issued by them the following information:
Form of the company (SA, S.à r.l., SCA, etc.)
Luxembourg Trade and Companies Registry number
Where companies are providing services or selling goods and are registered for VAT purposes, they must add their VAT number on their documentation.
6.2. How do companies execute contracts or deeds?
A contract executed by a company will be validly binding on the company if it has been signed by its directors or authorised representatives, in accordance with the company’s articles of incorporation and/or the Company Law. There is no other formality required under Luxembourg law (such as witnesses required for common law deeds).
7.1. Are there any restrictions on the minimum and maximum number of members?
Limited liability companies can be incorporated by one single shareholder. Partnerships must be incorporated by at least one unlimited partner and one limited Partner.
Private limited liability companies (S.à r.l.) cannot have more than sixty (60) shareholders.
8.Minimum capital requirements
8.1. Is there a minimum investment amount or minimum share capital requirement for company formation?
The minimum share capital for an SA, SAS or an SCA amounts to EUR 30,000.- of which a quarter must be fully paid up.
The minimum subscribed share capital for an S.à r.l. is fixed at €12,000.- and must be fully paid up.
There is no minimum share capital requirement for the SCS or SCSp, and the partners may freely determine their contribution to the company.
8.2. Are there restrictions on the transfer of shares in private companies?
Shares of an SA, SCA and SAS are freely transferable unless otherwise restricted by their articles of incorporation.
Transfers of shares in a S.à r.l. to a non-shareholder are subject to the prior approval of the shareholders representing 75% of the share capital or in case their articles of incorporation foresees it 50% of the share capital
Partners interest in the SCS or the SCSp are freely transferable unless otherwise provided by the partnership agreement.
9. Shareholders and voting rights
9.1. What protections are there for minority shareholders under local law? Can additional protections be given?
The Company Law provides for certain minimum minority shareholders rights as follows:
Right in a SA, SAS or SCA for shareholders representing 10% of the company’s voting rights to initiate a liability claim against the management;
Right in a SA, SAS or SCA for shareholders representing 10% of the company’s share capital to request the adjournment of a general meeting of the shareholders or to request that certain items be added to the agenda of the general meeting of the shareholders;
Right to information;
Right in any company for shareholders representing 10% of the share capital and/or the voting rights to ask questions to the management body on certain operations of the company or one of its affiliates;
Right in S.à r.l. of prior approval on transfer of shares to non-shareholders for shareholders representing more than 25% of the share capital;
Majority thresholds in certain companies for decisions to amend the company’s articles of incorporation or to transfer its seat in another jurisdiction;
Rights and protection against dilution in share capital increases in cash (preferred subscription rights)
Additional rights may be granted to minority shareholders in the articles of incorporation based on the contractual bargaining among the shareholders.
9.2. Are there any statutory restrictions on quorum or voting requirements at shareholder meetings? Must quorum or voting rights be proportionate to shareholdings?
Although the principle of one share equal one vote generally applies in Luxembourg, the Company Law was amended in August 2016 to introduce a type of plural vote in the SA, SAS and SCA, allowing the companies to implement plural votes commensurate to the shareholders’ interest in the company’s share capital.
Depending on the nature of the decisions to be taken by the general meeting of the shareholders, the Company Law provides for the following general rules, unless otherwise restricted by the company’s articles of incorporation:
Ordinary general meetings of shareholders in SA, SCA and SAS are held without quorum and decisions are adopted by the majority of the votes of the shareholders present or represented;
Ordinary general meetings of shareholders in S.à r.l. must be adopted by shareholders representing more than half of the company’s share capital on a first call. On a second call, the decisions will be validly adopted by the majority of the votes, regardless of the portion of the company’s share capital represented.
Rights to vote may be suspended by the management under certain conditions. A shareholder may also renounce to his voting right, temporarily or definitively.
9.3. Are specific voting majorities required by law for any corporate actions (for example, increasing share capital, changing the company's constitution, appointing and removing directors, and so on)?
Any decision related to shares, share capital, rights of the shareholders, change of the company’s name, requires the amendment of the company’s articles of incorporation.
An amendment to the company’s articles of incorporation is passed by means of an extraordinary general meeting of the shareholders passed in front of a Luxembourg notary and decisions are adopted as follows:
For the SA, SCA or SAS : amending the company’s articles of incorporation requires, on a first call, the approval of 2/3rd of the shareholders representing half of the company’s share capital. On a second call, the decisions are adopted by the majority of the shareholders present or represented, without need to comply with quorum requirements.
For the S.à r.l. amending the company’s articles of incorporation requires the approval of the shareholders representing 3/4 of the company’s share capital.
The decision to appoint and remove a director or manager in a company is a matter resolved in accordance with the majority requirements of the ordinary general meeting of the shareholders (see Question 16).
9.4. Can voting majorities required by law be disapplied to protect a minority shareholder (for example, through class rights or weighted voting)?
Quorum requirements and voting majorities provided by law can only be increased and implemented through the company’s articles of incorporation. They cannot be reduced.
In certain type of companies, non-voting shares may be issued. Beneficiary interest (parts bénéficiaires) with or without voting rights may be created in the company’s articles of incorporation.
10. Sectoral restrictions
10.1. What are the conditions or restrictions on establishing a business in specific industry sectors? Are there industry sectors in which it is not permitted to establish a business?
Commercial, craft or industrial activities are subject to a business license (see Question 4).
Any business which is related to the financial sector (banks, professionals of the financial sectors) requires the prior approval of the Finance Ministry.
Insurance companies must obtain the prior authorisation from the Insurance sector supervisory authority, the Commissariat aux Assurances.
10.2. Are there any restrictions on foreign shareholders?
There exists no restriction on foreign shareholders.
10.3. Are there any exchange control or currency régulations?
There exists no regulation on exchange control or currency.
10.4. Are there restrictions on foreign ownership or occupation of real estate, or on foreign guarantees or security for ownership or occupation?
There is no such restriction in Luxembourg.
11.1. Are there any general restrictions or requirements on the appointment of directors?
Luxembourg Company Law does not provide for any requirement regarding the age, the gender, the nationality, residence or domicile of the directors.
In certain businesses areas (trading, credit institutions, professional of the financial sectors, insurance sector), the directors must be authorised by the relevant authority to act as director of the company. In such instances, directors are required to provide the authority with information such as résumés, total number of directorships held, absence of former insolvency, extract of criminal record. In addition, the authority may request that the director resides in Luxembourg or in the great area of Luxembourg, including neighbouring regions.
The Company Law provides that the company must have its place of central administration at its registered office in Luxembourg, which means that decisions of the board of directors and shareholders meetings must be held at the company’s registered office.
A corporate entity may act as director of a company, but will need to appoint an individual as its representative at the board. This rule does not apply in the SCA or the S.à r.l..
12. Board composition
12.1. What are the legal requirements for the composition of a company's board of directors?
In the Luxembourg market, companies are generally managed by a single director or a board of directors.
The Company Law allows also for a two-tiered management structure which can be implemented only in a SA where the management board acts under the supervision of the supervisory board.
12.1.2.Number of directors or members
Depending on their form, companies may be either managed by a single manager (S.à r.l.), a sole director (SA with one shareholder), a chairman (SAS), a single manager (SCA, SCS, SCSp) or by a board of managers (S.à r.l.) or board of directors (SA).
In SA, there must be a minimum of three members in the board of directors.
In a SA with a two-tier structure, the same rule applies for the management board (at least 3 members). There is no minimum requirement for the supervisory board.
Employees’ statutory rights to board representations are limited by the Luxembourg labour code in companies which have or had more than 1,000 employees working on the Luxembourg territory during three consecutive years.
The employees sitting at the board of directors are appointed by the company’s staff delegation, must represent 1/3rd of the board members and benefit from the same rights than the other directors.
13. Reregistering as a public company
13.1.What are the requirements for a business to reregister as a public company?
As the public limited liability company (SA) may exist with one shareholder, there is no minimum number of shareholders required to reregister a public company.
A public company (SA) must have a minimum share capital of EUR 30,000.- and no minimum amount of shares are required to be set up. As an example, transforming a S.à r.l. into a SA only requires that the S.à r.l.’s net assets prior to the conversion, equal at least the minimum share capital amount set forth by law (EUR 30,000.-).
Only SA or SCA may issue shares in the public to be further listed on a stock exchange. The requirements for listing shares in Luxembourg are fixed in specific legislation and subject to the LSE and CSSF supervision.
14.1. What main taxes are businesses subject to in your jurisdiction?
Companies established in Luxembourg are subject to corporate income tax and municipal business tax (hereinafter referred as “CIT”).
CIT is broadly calculated on the basis of the profit as set out in the commercial balance sheet and adjusted by adding non-deductible items such as income that is tax exempt under a double tax treaty and subtracting losses carried forward. Losses can be carried forward either indefinitely if generated prior to 1 January 2017, or for an limited period of 17 years if generated after 1 January 2017.
The income derived by a resident company from all sources worldwide is included in its taxable income for the purposes of the CIT. Indeed, Luxembourg taxes its corporate residents on their worldwide income and the non-residents companies only on their Luxembourg sourced income.
From 1 January 2017, the effective CIT rate on the profits of a company exceeding of EUR 30,000 has been reduced from 29.22% to 27.08% for companies established in Luxembourg City.
Luxembourg companies are also subject to net worth tax (“NWT”) which is levied annually on their taxable wealth being the difference between their assets and liabilities.
As from 1 January 2016, the NWT rate applies on a digressive scale as follows:
On taxable wealth up to EUR 500 million – 0.5%
On taxable wealth above EUR 500 million – EUR 2.5 million plus 0.05% on the taxable wealth exceeding EUR 2.5 million.
The tax year for a company is, in principle, the calendar year. Alternatively, it may be an accounting year which is different from the calendar year. Companies must file their tax returns by 31 May of each year following the calendar year during which the income was earned. As from 2017, the tax returns for companies liable to corporate income tax have to be mandatorily filed electronically.
The tax authorities can assess the tax due on the basis of the tax return filed by these taxpayers without verifying their tax return. Subsequently, the tax position becomes final after the five-year statute of limitation period expires.
Companies are required to make four quarterly advance payments of tax based on the latest assessment.
As regards to the value added tax (“VAT”), supplies of goods and services, which are deemed to take place in Luxembourg, are subject to VAT at the standard rate of 17%, which is one of the lowest standard VAT rate in the European Union or, on certain transactions, at 14%, 8%, or 3%.
Corporations whose activities are subject to VAT are entitled to offset against their VAT payable the amount of such tax charged to them by their suppliers or reverse charged (i.e. self-accounted) by them on import or acquisitions of goods or services from abroad.
Banking, financial, insurance, and reinsurance transactions are generally VAT exempt activities.
Finally, there is no stamp duty in Luxembourg.
14.2. What are the circumstances under which a business becomes liable to pay tax in your jurisdiction?
14.2.1. Tax resident / Non-tax resident
Based on Luxembourg’s domestic law, a company is considered to be resident in Luxembourg if either its registered office or place of central administration is located in Luxembourg. The registered office is designated to be in Luxembourg as set out in the Company’s articles of incorporation.
It is to be noted that the place of central administration is generally understood to mean the place where the company is managed or controlled. While this term is not legally defined, the location of the company’s major place of management and control is determined by facts and circumstances, including the following:
The place where meetings of the board of directors are held;
The place where the shareholders meetings are held;
The place where the company’s officers make their decisions;
The place where the company’s books and records are kept; and / or
The place where other, similar factors evidencing management control occur.
A non-resident company having neither a fixed place of business, a permanent establishment nor a permanent representative in Luxembourg is not liable to any Luxembourg tax.
Luxembourg non-resident companies are taxable on their Luxembourg sourced income only. However, this taxation is generally alleviated or mitigated through the application of the tax treaties for avoidance of double taxation.
The provisions on permanent establishments included in the tax treaties concluded by Luxembourg, currently 81, generally follow the principles of the OECD model.
Likewise, under Luxembourg domestic tax law, a similar permanent establishment concept exist but is defined in a broader way and is to be understood as every fixed piece of equipment or place that serves for the operation of an established business.
14.3. What is the tax position when profits are remitted abroad?
Profits remitted abroad to Luxembourg non-residents are taxable in principle in Luxembourg which is the territory where the income is sourced. However, this taxation is generally alleviated or mitigated through the application of the tax treaties for avoidance of double taxation, (currently 81 treaties are inforce).
To this extent, the Luxembourg sourced income refers mainly to the categories as referred below:
Dividends include any distributions of corporate profit to holders of shares or participating certificates or similar claims, whether paid in cash or in any other form. Dividends are taxed as investment income. Distributions of profits by fully taxable Luxembourg tax resident companies are subject to a 15% withholding tax.
However, dividend distribution shall not be subject to any Luxembourg withholding tax, provided that the Luxembourg entity distributing dividends complies with the requirements set out in Article 147 of the amended Income Tax Act of 4 December 1967 (“Tax Act”), as follows:
The distributing entity is a fully taxable Luxembourg joint-stock company;
The recipient of the dividends is an entity which is subject to corporate tax rate similar to the Luxembourg corporate income tax rate or at least 10.5%; and
At the date on which the income is made available, the recipient entity has been holding or undertakes to hold directly, a participation of at least 10%, or with an acquisition price of at least EUR 1.2 million in the share capital of the Luxembourg entity for an uninterrupted period of at least 12 months.
As a consequence, any dividend distributions shall not be subject to any Luxembourg withholding tax, provided that the company complies with threshold and holding period requirement set out in Article 147 of the Tax Act.
Nevertheless, the withholding tax exemption granted pursuant to the article 147 of the Tax Act shall not apply in case of artificial arrangements between companies which do not reflect the economic reality, even if the recipient would be regarded as a participation to which this specific exemption should apply.
Interest income means any revenue from fixed-income investment. Interest paid by a Luxembourg company is in principle not subject to any Luxembourg withholding tax. The law provides for a final withholding tax of 20% on interest income paid by a paying agent established in Luxembourg to the beneficial owners residing in Luxembourg.
Royalty payments to both residents and non-resident are not subject to any Luxembourg withholding tax.
Capital gains realised upon speculative transactions are taxable in Luxembourg. A transaction is deemed speculative when:
Immovable property is sold within 2 years from the date of purchase; or
Movable property is sold within 6 months from the date of purchase; or
The sale precedes the purchase.
A speculative gain is calculated as the sales proceeds minus the purchase price and minus incidental costs i.e. notary’s fees, transfer tax, agents’ commission, advertising, improvement costs, etc.
14.4. What thin-capitalisation rules and transfer pricing rules apply?
Luxembourg does not have specific thin capitalization rules but the arm’s length principle applies. If a Luxembourg resident obtains a loan from a related party on terms that differ from those which an independent party would have provided, the tax authorities can recharacterize all or part of the debt as capital. Consequently, interest payments may be regarded as hidden profit distributions.
In practice, the tax authorities use a debt to equity ratio of 85:15 for the holding of participations. Where this ratio is exceeded, the surplus may be considered as a contribution to capital. Interest on this surplus may be deemed non-deductible and treated as a dividend distribution potentially subject to a withholding tax of 15% which may be deducted or exempt under a tax treaty.
As regards to the transfer pricing, Luxembourg largely follows the transfer pricing guidelines issued by the Organisation for Economic Co-operation and Development (“OECD”).
As far as transfer pricing documentation is concerned, the taxpayers are required to disclose their transactions with related parties and evidence by adequate documentation their compliance with arm’s-length principles.
No specific guidelines are provided on the nature and extent of the documentation required, which should depend on the circumstances of the case under consideration. However, as Luxembourg is an OECD country, these documentation requirements will be aligned with the OECD guidelines on the transfer pricing documentation requirements.
Similarly, the transfer pricing methods to determine the arm’s-length nature of an intercompany transaction should follow the general guidelines set for by the Luxembourg tax law which are based on the transfer pricing methods provided for in the OECD transfer pricing guidelines.
The remuneration of the Luxembourg company should be determined based on the functions performed, assets employed, and risks assumed. A written clearance from the Luxembourg tax authorities on the set criteria for the determination of the transfer pricing for the financial on-lending transactions can be obtained assuming that the Luxembourg company meets certain substance and equity at risk requirements.
It is worth to note that if the remuneration earned by a Luxembourg company that acts as an intermediary is not supported by a transfer pricing report, the tax authorities will consider, for simplification purposes, that the relevant financing transactions shall sufficiently comply with the arm’s length principles if they generate a minimum return on the financed assets. Currently, a return of 2% (two percent) after taxes is considered as the minimum acceptable return by the Luxembourg tax authorities.
The intermediary company benefits from this simplification measure only if the Luxembourg company has a majority of its board members with the capacity to bind the company (a) residing in Luxembourg or if not (b) are taxable in Luxembourg for more than 50% of their income, and key decisions are being taken in Luxembourg. In addition, where this simplification rule applies, the transaction will be subject to the automatic exchange of information.
15. Grants and tax incentives
15.1. Are grants or tax incentives available for companies establishing a business in your jurisdiction?
Luxembourg tax law provides for various incentives in the areas of risk capital, audio-visual activities, environmental protection, R&D, professional training, and recruitment of unemployed persons.
Amongst the most popular tax incentive are the tax credit for investments. Eligible assets primary consist of depreciable tangible goods other than buildings, livestock and deposits and vessels operating in international traffic. A global investment tax credit is available on the acquisition price of investments made during the year, which amounts to 8% for the first EUR 150,000 of such expenditure and 2% on the excess over EUR 150,000.
Luxembourg is also a domicile of choice for cross-border distribution of investment products. In particular, Luxembourg investment funds may benefit from a wide range of deductions or exemptions: non taxation on income and capital gains, no withholding tax no net wealth tax. Only a subscription tax and the minimum net worth tax may apply to a fund i.e. EUR 4,815 per year as minimum net worth tax.
In addition, a company in Luxembourg which carries out innovative and R&D activities can benefit from financial support such as innovation loans which may carry a fixed interest lower than the market rate.
It is worth noting that the Luxembourg parliament has deposited a new draft bill which currently envisages introducing a new intellectual property regime (“IP”), which should replace the prior IP regime which was repealed as from 1 July 2016 and allowed a tax exemption on 80% of the net income and capital gains derived or deemed to be derived from a wide variety of IP.
This new IP regime, limited to patent and software rights, should reinforce research and development activities in Luxembourg and stimulate the R&D spending of foreign investors in Luxembourg.
16.1. What are the main laws regulating employment relationships?
The Labour Code governs the employment relationship. Specific legislation on certain sectors also applies.
The Labour Code provides for mandatory rules applying to any employment contracts governed by Luxembourg law, but also for foreign employees working on the Luxembourg territory: minimum salary, working hours, paid holidays, non-discrimination, health and safety.
16.2. What prior approvals (for example, work permits, visas, and/or residency permits) do foreign nationals require to work in your jurisdiction?
Nationals from EU Member States, Switzerland, Norway, Liechtenstein and Iceland benefit from the freedom of work and are allowed to work in Luxembourg without working permit or visa.
Luxembourg immigration rules apply to nationals from other third party countries. A foreign national willing to work in Luxembourg for more than 3 months must obtain a working permit and residence authorisation (autorisation de séjour). The requirements to obtain the working permit depend on the type of work to be performed, the foreign national’s qualifications etc.
17. The regulatory authorities
Commission de Surveillance du Secteur Financier - CSSF
Main activities: supervisory authority for the financial sector.
Web address - www.cssf.lu
Ministère de l’Economie
Main activities: authority providing business licenses.
Web address: http://www.guichet.public.lu/entreprises/en/creation-developpement/autorisation-etablissement/autorisation-honorabilite/autorisation-etablissement/index.html
Trade and Companies Registry
Main Activities: Official directory of all the natural and legal persons engaged in trade.
Web address: www.rcsl.lu
Commissariat aux Assurances
Main activities: supervisory authority for the insurance sector.
Web address: www.commassu.lu
Main activities: supervising and operating the Luxembourg Stock Exchange market (EU-regulated Bourse de Luxembourg and the exchange-regulated EURO mtf Market°
Web address: www.bourse.lu
18. Online resources
This website is the online platform to Luxembourg legislation
Web addess: www.legilux.public.lu