January 6, 2014
The New Program of Luxembourg’s Coalition Government
Luxembourg’s new coalition government, led by Prime Minister Xavier Bettel, released its comprehensive political program on December 2, 2013. With respect to finances, the strategy of the government is to re-balance the public budget via a two pronged initiative by both reducing government spending and promoting measures (including tax measures) aimed at stimulating the growth of Luxembourg’s economy.
The proposed legislation supporting the program remains to be issued (the government just took office earlier this month). We will continue to monitor the status of these important reforms going forward.
Summary on tax measures
In announcing its policy, the new government emphasized predictability and stability as essential components for maintaining Luxembourg’s international competitiveness. The coalition declared that it will focus on stimulating economic growth as the means to increase tax revenue, rather than simply increasing tax rates. According to its program, this growth can be supported by further improving the tax environment in Luxembourg in order to attract new business (headquarters are specifically mentioned) while minimizing any tax increases to have the least impact (increase of the VAT rate but still maintaining the lowest VAT rate in the European Union).
Direct tax measures such as a new notional deduction on equity, as well as modernizing both the intellectual property tax regime and the “participation exemption regime” are mentioned. In addition, the agenda includes:
- An affirmation of the political will to further improve Luxembourg as the international platform to structure investments and financing (including further developing its double tax treaty network);
- Confirmation to implement changes in line with the trends in the OECD and European Union, i.e., additional corporate governance and substance rules, as well as transfer pricing rules in line with internationally applied standards;
- Intention to take measures to attract private equity funds (including measures improving the Luxembourg “carried interest” rules);
- Various tax procedural reforms, inter alia, to increase transparency and timely collection of revenue.
Program Highlights: Focus on Tax Measures
Corporate Income Tax
· Modernization of the Luxembourg intellectual property regime.
AMMC additional comments: Such modernization harmonizes with further increasing Luxembourg’s economy in both ICT and bio-tech which Luxembourg has seriously developed in the past years in terms of infrastructure and attracting major high tech giants (Amazon, eBay, PayPal, iTunes, etc.) as well as encouraging start-ups (incubators, pro-active support for entrepreneurs, recruiting key talent to Luxembourg, etc.).
· Notional interest deduction on equity to encourage investors to fund Luxembourg companies with equity rather than debt.
AMMC additional comments: This should support the development of Luxembourg as a location for centralizing group treasury, which would help to attract headquarters in Luxembourg. However, the details of the proposed measure will be of importance, such as: the determination of the amount of the notional deduction, assets that can be financed with equity carrying notional deduction, qualification (or not) of such equity as debt for debt/equity purposes, etc.
· Intention to maintain Luxembourg’s attractiveness for international investments and financing. The government intends to introduce a legal and tax framework for group financing (reference is made to “cash pooling”).
· Modernization of the Luxembourg’s “participation exemption regime”.
AMMC additional comments: The Luxembourg “participation exemption regime” allows a Luxembourg resident company (e.g. SARLs), under some conditions, to exempt dividends and capital gains derived from shares in a subsidiary. On the other hand, a Luxembourg resident company can, under conditions, distribute profit without withholding tax.
· Corporate governance and substance rules to assure that Luxembourg companies have sufficient presence in Luxembourg to be introduced. Transfer pricing legal provisions should also be enacted.
AMMC additional comments: These regulations and laws should (1) reinforce the position of Luxembourg as a key on-shore location to carry investments, financing or hold and manage intellectual property and (2) support the development of Luxembourg, as prime location for establishing group headquarters while done in harmony with OECD and EU tax principles.
· Codification of functional currency rules allowing tax returns in a foreign currency.
AMMC additional comments: Luxembourg companies establishing their statutory financial statements in a foreign currency (e.g. USD) would, under such a new lawbe entitled to file their tax returns in that same currency. The result of this measure should in principle be that no forex would arise from the conversion of (for instance) assets denominated in the currency in which the financial statements are established (e.g. USD) into EUR when preparing Luxembourg tax returns (EUR is currently the default tax currency).
· For small and medium size companies, a mechanism allowing tax deferral is contemplated.
· More systematic application of penalties, fines and respect of deadlines is mentioned and the will to enhance the fight against tax fraud is expressed.
· Commitment not to increase the subscription tax applicable to UCITS and SIF funds and to maintain the tax regime applicable to SICARs.
AMMC additional comments: UCITS (Undertaking for Collective Investment in Transferable Securities) are mutual funds that can be distributed to the public throughout the EU (EU passport).
The SICAR (Société d’Invstissement en Capital à Risque) is a vehicle designed to invest in capital carrying a certain level of risk (e.g., in start-up). While it is generally subject to corporate income tax, income from transferrable securities (as well as income derived from cash under certain conditions) is exempt.
The SIF (Special Investment Fund) can be set up as a company or in a contractual form. It is not subject to income tax but to a subscription tax (in principle 0.01%) computed on the Net Asset Value of the Fund.
Both the SICAR and the SIF are set up as investment vehicles, often by private equity players. The SIF is used as well by the real estate funds and hedge funds industry to structure investments. The SIF-SICAV (SIF-Société d’Investissement à Capital Variable) is the corporate form of the SIF and may benefit from some of the double tax treaties concluded by Luxembourg.
· With respect to the automatic exchange of information, Luxembourg will continue to participate to the work carried out at EU and OECD levels aimed at developing international standards in that area but implementation and timing of such rules should not jeopardize the stability and competitiveness of the financial sector.
· See below in the Individual tax sub-section as to “carried interest” in connection with the funds industry.
International · Intention to promote diversification of activities and diversification of potential investors. Luxembourg will continue to support establishment of Chinese financial players (banks amongst others) in Luxembourg and the development of Luxembourg as the first center for Renminbi (Chinese official currency) outside China. Middle East states (“Persian Gulf” countries) are as well referred to in the program to confirm that Luxembourg will continue to reinforce links with those countries and wish to position itself as the first non-Muslim country for Islamic finance (the government should shortly vote a law authorizing issuance of Luxembourg sovereign sukuks).
AMMC additional comments: Recently, three top Chinese banks have established a subsidiary in Luxembourg (besides Chinese branch presence). The government intends to build on that success to attract further Chinese banks (and probably additional non-EU based financial institutions) relying on the advantages of Luxembourg (high end service providers, efficient and flexible regulatory and tax environment, long standing experience as to international / cross border transactions, etc.).
· The same intention of the former government not to apply the European Financial Transaction Tax (FTT) is re-confirmed by the new coalition government.
AMMC additional comments: On 14 February 2013, the European Commission issued a proposal for a Council Directive concerning the implementation of the FTT. The FTT is a tax applied to financial transactions consisting of the exchange of securities, bonds, shares and derivatives between banks or other financial institutions. The proposed minimum tax rates are 0.1% for shares and bonds, units of collective investment schemes, money market instruments, repurchase agreements and securities lending agreements and 0.01% for derivative products. Each party is separately liable for the tax, so transactions between two financial institutions may be taxed twice. Germany, France, Italy, Spain, Belgium, Estonia, Greece, Austria, Portugal, Slovenia and Slovakia decided to implement the FTT.
· Acknowledgement that attracting key professional talent to Luxembourg is a top priority and personal tax will be reviewed carefully for optimal improvements in this respect.
AMMC additional comments: As we enter into the “BEPs” world of international tax. Key personnel and functions may play an increasingly important role in determining where profit is to be located for tax purposes. The government is aware of this and so further enhancers (not just tax measures) to encourage key personnel to relocate to Luxembourg should be an integral part of the overall policy of attracting new business and increasing tax revenue.
· In connection with the fund industry, enhancement of the tax regime of “carried interest”, which would apply to all new funds set up in Luxembourg without limit in time.
· Within the framework of the development of Luxembourg as a Private Banking center, the government made it clear that it is not the intention to apply net worth tax to individuals or to change the current regime on inheritance tax (in Luxembourg there simply is no inheritance tax on transfers between parents and children).
· The taxable tranches, tax rates and personal allowances will be reviewed.
· Confirmation of the intention to increase the general VAT rate, but still keeping it the lowest in the European Union.
Administrative practice and regulation of tax advisors
· New procedures for Advance Tax Confirmation letters to assure transparency and consistency in application of international and EU standards.
· Modernization and simplification of the tax procedure rules.
· A tax consultative committee will be set up within the Ministry of Finance. This committee should be composed of tax experts of both the public and private sectors and will advise the Ministry of Finances on the evolution of the tax laws, attractiveness and competiveness of Luxembourg.
AMMC additional comments: The government is already reaching out to Luxembourg’s financial services and international business community.
· Introduction of a regulation, authorization and supervision for the profession of tax advisor.
Contacts at AMMC Law:
Senior Tax principal/Head of Tax
Tel: +352 26 27 22 50
firstname.lastname@example.orgXavier is leading the Tax Practice of AMMC Law. After one year at the bar in Belgium, he acquired more than 18 years of experience as tax advisor in Luxembourg, initially in PWC and thereafter for 11 years in EY Luxembourg, out of which more than 7 years as Tax Partner. Over his career Xavier focused on international tax structuring for Multinationals, Funds (i.e. Private Equity and Real Estate Funds, Sovereign Wealth Funds and Hedge Funds), and Financial Institutions based in USA, Canada, UK and China and Middle East amongst others. Xavier acquired over those years an in depth expertise in mergers and acquisition transactions, holding, financing and intellectual property structures as well as in structuring tax efficiently investments for Funds located across continents.
Tel: +352 26 27 22 40
email@example.comJames is an American tax lawyer with over 11 years of international tax experience in Luxembourg and 14 years total. James has advised Fortune 500 companies, start-ups, and institutional investors on a broad range of Luxembourg tax planning solutions including IP management, cross-border financing, M&A, and many restructuring projects. Prior to joining AMMC, James was a Director of International Tax at KPMG in Luxembourg. He has multiple published articles on Luxembourg tax aspects.
For details on foreign exchange aspects, please refer to: IFA, Cahier de droit fiscal International, Volume 94b, 2009, “Foreign exchange issues in international taxation”, Luxembourg chapter, by Xavier Hubaux and Jean-Yves Lhommel.
 In that respect, according to a report dated December 2013 from the Luxembourg Ministry of Finances, as of the date of the report, Luxembourg would count 147 banks (107 subsidiaries and 38 branches) from 26 different countries, including: Germany (37), France (14), UK (9), USA (6), China (6), Japan (5), Brazil (4), Qatar (3), Canada (2), Russia (1), etc.
 In that respect, according to the report from the Luxembourg Ministry of Finances mentioned above, Luxembourg is AAA rated by the three main rating agencies; the Public Debt in 2012 is 21.7% (i.e. < 60%) and the General Government Deficit in 2012 was only -0.6% (