Luxembourg – robust, versatile and durable cross-border investment platforms – a corporate lawyer’s perspective.
By Ronnen J. Gaito, Attorney-at-Law, RJ Gaito and Thierry Derochette, CPA and Tax Advisor, Tax Connected, Luxembourg.
Published on the Offshore Investment magazine, January 2016.
Much has been written about the Luxembourg corporate environment; however, now more than ever, it is interesting to revisit the Luxembourg corporate and legal framework in the context of jurisdiction selection when considering cross-border investments.
Due to global investment trends, tax and corporate counsel are often required to determine the optimal jurisdictions for their clients through which to conduct joint ventures, co-investments or establish unregulated and regulated pooled investment vehicles.
For the reasons stated in this review, Luxembourg has become the front-runner in jurisdiction selection and provides international advisors an excellent platform through which multiparty investor vehicles are able to launch or conduct shared investments or co-investments via a single corporate platform.
Compliant tax framework
The Luxembourg corporations that have designated their corporate object to hold participations are fully subject to corporate income tax (CIT) and net wealth tax (NWT); however, with a view to encouraging investments, Luxembourg corporate vehicles benefit from the so-called participation exemption regime,1 the European Parent Subsidiary Directive,2 and therefore benefit from CIT and NWT exemptions associated with the underlying investments in those shares in participations qualifying under these regimes. It should be noted that the exemptions also apply to participations held in a qualifying company through tax transparent entities.
To put it in a nutshell, the participation exemption, combined with a favourable treatment of investments via debt instruments, as well as distributions by way of liquidation proceeds, provides for the following transaction structuring advantages.
Income received by the Luxembourg platform
The net effect of the regime is to enable the recipient Luxembourg corporation to receive the dividends from a qualifying participation exempt from taxation and future capital gains on the sale of a qualifying participation may also be exempt.
Income distributed to shareholders
The shareholders of a Luxembourg company can benefit from distribution with no withholding tax at source in the case of:
- remittance via distribution of liquidation proceeds;
- investment financed via debt instruments where the repayment of interest will not be taxed at source;
- if a non-resident shareholder is tax resident in a country that has a double tax treaty with Luxembourg, the treaty usually allocates the taxation right for capital gains to the country of residence of the shareholder; and
- distributions to entities in jurisdictions that benefit from a tax exempt status, such as pension and insurance funds, will therefore be able to benefit from a structure that will conduct distributions without harming their local exempt tax treatment.
Luxembourg has a large network of tax treaties with 76 treaties currently in force and 24 under negotiation that enhance the possibility of investment structuring.
These features provide foreign investors with a platform for transacting business via Luxembourg in a fiscally optimised transaction structure and within well-established corporate vehicles. These platforms enable institutional co-investors from established Organisation for Economic Co-operation and Development (OECD) jurisdictions, such as the USA, Canada and Israel, to work together with the “classic” offshore jurisdictions, such as Jersey, the Cayman Islands and the British Virgin Islands, given that each jurisdiction is able to meet its structuring objectives using the essential elements of the Luxembourg fiscal framework.
Sophisticated and versatile corporate framework
The Luxembourg corporate legal framework provides for a variety of investment vehicles that furnish investors with solutions for structuring their co-investment and pooled investment vehicles.
The most prominent investment vehicles are: the SA (société anonyme), a public company limited by shares which may be publically traded and are freely transferrable; the SARL (société à responsabilitée limitée), shares of which must be privately held and are not freely transferrable; and the SCA (société en commandite par action), a partnership limited by shares, which may be publically traded and its shares are freely transferrable.
It is interesting to note that the articles of association of those corporate entities may be drafted in English with a French or German translation; however, the English version prevails.
In one of the latest developments, Luxembourg introduced an improved regime for the SCS (société en commandite simple) and created a new form of limited partnership, the SCSp (société en commandite spéciale).3 This regime is now more akin to the Anglo-American limited partnership and therefore can be easily understood by international investors wishing to work almost exclusively with English language text and without the involvement of a notary public (which is required for certain actions within the Luxembourg corporate framework).
It should be noted that the SCSp is fully tax transparent, provided that:
- the general partner holds less than 5% of the partnership interest if it is established as a public or private limited company; and
- the partnership does not carry on or is not deemed to carry-on commercial trade.
These vehicles provide investors with various structuring options within Luxembourg and the ability to plan for customary shareholders’ rights, and investment exists by way of trade sale or an initial public offering.
This flexibility has resulted in institutional investors establishing or migrating their entities to Luxembourg from other jurisdictions with a view to conducting complex corporate cross-border finance transactions that will be attractive to other institutional investors.
Regulated investment vehicles
At times, investors will be required to use a vehicle which is a regulated fund platform to attract institutional investors. In such cases, promoters of such pooled investment funds have the option of structuring those funds in the form of a Luxembourg SIF (specialised investment fund) or a SICAR (société d’investissement en capital à risque). The establishment of these fund vehicles requires the scrutiny and authorisation of the Luxembourg financial sector regulator, the Commission de Surveillance du Secteur Financier (CSSF) and is restricted to “well-informed investors”, who either invest at least EUR125,000 or have been certified as such by a credit institution, investment firm or a management company.
These vehicles take the corporate form of the unregulated vehicles or a contractual arrangement (fonds commun de placement) and, unlike most of the unregulated corporate platforms, may have a variable capital which is a function of their net asset value. It is important to note that, as a matter of a regulatory requirement, these fund vehicles require the appointment of a custodian bank and a fund administration agent to supervise and safe keep the assets of those fund vehicles.
These vehicles carry a considerable tax advantage given that the SIF is not subject to CIT and NWT and distributions made by the SIF to non-resident are not subject to withholding tax at source.
The SIF is only subject to an annual subscription tax of 0.01% on their net asset value.
The SICAR in the form of a corporation is subject to CIT. However, the SICAR benefits from a CIT exemption for income and capital gain derived from investment in “securities” to which a large interpretation may be attributed being shares, bonds and debt instruments. SICARs are not subject to a subscription tax.
As a byproduct, the SIF and the SICAR are not constrained by the conditions of the participation exemption which provides for structuring flexibility.
In a recent development, the Luxembourg government adopted a draft bill for a new and exciting alternative investment fund platform, the reserved alternative investment fund (RAIF), that will benefit from the advantages of the SIF and the SICAR but will not be subject to the approval of the CSSF and instead will require the appointment of an authorised alternative investment manager (AIFM). This will, on the one hand, reduce investor protection, but will offer a significant time-to-market advantage for fund promoters and their advisors.
This will provide investment managers, corporate and tax counsel with another platform through which to structure cross-border transactions.
International transaction environment
Luxembourg boasts a strong and robust banking sector with over 140 commercial, private and custodian banks. These banks are an essential component for serving the Luxembourg investment platforms and they are able to execute sophisticated investment instructions, support corporate treasury and lending activities, as well as serve other securities transactions.
The Luxembourg banks have taken the required measures to implement the necessary anti-money laundering and Foreign Account Tax Compliance Act regulations and therefore benefit from an excellent reputation. Notwithstanding the implementation of the now established international compliance framework, the banks serving international corporate transactions have put in place processes that enable new clients to open accounts quickly and with relative ease.
When considering the establishment of investment platforms, the support of a local banking environment is critical in order to be able to operate worldwide.
In the context of M&A and corporate finance activities, Luxembourg provides for legislation enabling cross-border mergers or demergers and such transactions may also be conducted in a tax neutral manner.4
The Luxembourg investment platforms also benefit from clear legislation relating to the granting of financial collateral5; consequently, lenders and bondholders receiving financial collateral from Luxembourg vehicles also feel comfortable that they benefit from the necessary protection to enable them to lend to or receive collateral from Luxembourg vehicles. This further facilitates liquidity for investors via Luxembourg vehicles.
Last but not least, Luxembourg is party to 68 bilateral investment treaties currently in force (BITs)6. These treaties are often overlooked by corporate and tax counsel, but they provide essential protection from expropriation for private investment by nationals and companies of one state in another jurisdiction. An investor that suffers expropriation would usually have recourse to an international arbitration procedure. The BITs framework offers a further layer of protection in a cross-border investment context.
Although, traditionally, choice of jurisdiction was primarily driven by tax neutrality, due to a changing tax and legal landscape, investors need to look to a jurisdiction that:
- is sustainable in the long term and has a stable banking system;
- is an internationally tried and accepted OECD jurisdiction;
- is able to serve the greatest number of jurisdictions possible; and
- can provide a long-term horizon for corporate development, M&A and corporate finance activities.
The use of the Luxembourg investment platforms provides investors with these elements and hence facilitates cross-border transactions and access to international funders and capital markets, thereby turning the investors into global players from the outset.
- Article 166 LITL 1967
- Law of July 12, 2013
- Article 170bis (1)&(2) LITL 1967
- Law of 5 August 2005 on financial collateral arrangements