Luxembourg is not a tax haven. It is not a country where you can hide assets in case of criminal investigations or amidst money laundering operations. Luxembourg has implemented all of the international standards in terms of the exchange of information for tax purposes. It has also implemented the Organization for Economic Co-operation and Development [OECD] standards.
It’s important to distinguish between offshore and onshore. The BVI companies are offshore International Business Companies (IBC) that are not subject to any taxes and hence not entitled to any double tax treaties and blacklisted in many jurisdictions. The Luxembourg companies are residents subject to corporate income taxes at a current maximum rate of 29.22% which is comparable to the tax rates in the other EU member States. In addition, Luxembourg companies are subject to a net worth tax levied at 0.5% per annum on their net assets. Hence, the may benefit from Luxembourg’s vast double tax treaties’ network, as well as the European Union Directives (e.g. Parent-Subsidiary Directive, Interest and Royalties Directive …). Combined with certain specificities of domestic tax law, (e.g. absence of withholding tax on interest, royalties and liquidation proceeds) transactions and investments may be transparently structured via a Luxembourg company in a tax efficient manner.
What makes Luxembourg a particularly strong choice for investors?
Luxembourg is a highly developed and safe financial center. It has been a forerunner in the implementation of fund legislation in Europe, with the first law on investment funds dated 25 August 1983. In 1988, Luxembourg was also the first European Union member state to implement Council Directive (EEC) 85/611 on undertakings for collective investment in transferable securities (UCITS). Luxembourg has solid experience in this field – from industry people such as lawyers, accountants, custodians, bankers, as well as from the administrative side, e.g. the Commission de Surveillance du Secteur Financier (CSSF), which supervises the funds, or the tax authorities. Given the expertise, technical issues may thus be solved in an expedient and pragmatic manner.
[box type=”note”]Luxembourg has been widely hailed as an international investment center for years. The Association of the Luxembourg Fund Industry (ALFI) provides a number of reasons underlying the country’s designation as a top fund-industry choice. Its legal and regulatory framework for investment funds is recognized for its excellence by the global asset-management community. Luxembourg boasts a AAA economy as well as political and social stability. It’s the largest investment fund center in Europe, with net assets in excess of EUR 2,400 billion. The country features a concentration of investment fund experts specializing in many different areas.[/box]
Luxembourg company law is flexible and offers a complete range of different types of companies and partnerships, as you can expect from a highly-developed jurisdiction: joint stock companies, limited liability companies, general partnerships, limited partnerships, etc. Last year, Luxembourg introduced a limited partnership (société en commandite spéciale) corresponding to the Anglo Saxon limited partnership. Companies can be incorporated very rapidly and exist as soon as the articles of incorporation have been executed by the founder and the notary. Historically, the Luxembourg company law dated back from 1915 (based on the former Belgian company law from 1912) which is characterized by its liberal approach towards business (the underlying principle being that of the freedom to act, unless expressly prohibited). Other features of Luxembourg corporate law include straight-forward rules as regards the appointment and dismissal of managers, recognition of other governing laws, arbitrage clauses, enforceability of shareholders’ agreements (tag along / drag along clauses also).
The OECD confirmed that the current Luxembourg legislation in place is OECD compliant. It is rather the handling of the cases in practice which needs to be improved. In this respect, it has to be noted that any new legislation may always give rise to practical issues or delays. As a comparison, the European Union Savings Directive which provides for a EU-wide exchange of information dates back to 2003 and there are still a lot of practical issues in certain EU Member States. Also, the significant number of requests, arising mostly from France and Germany, need to be taken into account, in particular as regards the limited infrastructure of the Luxembourg tax authorities. The Luxembourg government has publicly committed to comply with the OECD standards and it is expected that such will be the case within a short period.
US clients often invest in Europe and they need a platform for organizational and commercial reasons. Luxembourg is geographically very well situated (heart of Europe) and is often used as a gateway to Europe. Clients can set up an investment platform in Luxembourg which invests in real estate, private equity, banking and at the same time provides intra-group services throughout Europe. We have witnessed the same trend with our Asian clients seeking a European platform. Situation, know-how and reputation are very often key decision factors. So there are other reasons beyond tax and corporate law considerations.
Luxembourg was the first state in the European Union that had an anti-money laundering law back in 1973. We take it very seriously. Luxembourg is a founding member of both the OECD and the EU. So it’s clear that if international standards are being set Luxembourg will also implement those standards and play by the rules. But Luxembourg is not looking to implement legislation that would create competitive disadvantages in comparison to other jurisdictions.
The companies that showed a genuine interest in moving to Luxembourg were the most “sophisticated” companies with significant amounts of investments. Indeed, the tax structuring in Luxembourg is sometimes more complex and a certain degree of business substance is needed. These additional costs are of course less relevant for significant businesses that are used to more complex tax structuring through their international activities.
You can perfectly well have a Luxembourg company or fund, and a shareholders agreement that is governed by English law, which is usually the case. Internationally, English law is more or less the preferred governing law in these kinds of international transactions because English law is very protective and expedient. On top of that, in terms of litigation, Luxembourg courts are efficient and reliable. They recognize foreign governing laws, and enforce foreign judgments.
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