During the period 2004 to 2007, Luxembourg introduced and updated a number of its laws relevant to Luxembourg as a financial centre.
Without question, the financial and banking community has been very pleased with the new legislation. The new laws have made Luxembourg both more competitive and attractive. There is clearly good communication between the government of Luxembourg and the financial community, which leads to confidence that Luxembourg is able to adapt to the modern world.
Some examples of new legislation are:
- SPF Family Holding Company
- Securitisation Vehicle
- The Sicar Venture Capital Vehicle
- Luxembourg Trust
- SIF Specialised Investment Vehicle
- Residence for wealthy individuals
In addition to new legislation, Luxembourg signed a double tax agreement on 2 November, 2007 with Hong Kong, which should take effect from 1 January, 2008. Hong Kong and Singapore are the great funnels for business into and out of China.
Hong Kong now has four tax treaties, namely with China, Belgium, Thailand, and now Luxembourg. Apparently, the treaty with Belgium has proved to be very successful, which suggests that Luxembourg will soon be able to implement other opportunities.
It will not be long before China allows its ‘Nouveau Riche’ and various new institutions to invest abroad. Luxembourg is clearly a stepping stone for both investments into Europe and out of Europe into China.
The SPF Family Holding Company
The initials SPF stand for “Société de Patrimoine Familiale” (Family Wealth).
The SPF law took effect from 2007, and it is supposed to be the main replacement for the 1929 Holding. Out of the approximately 14,000 1929 Holdings, apparently the SPF will be able to replace about 80 per cent of that number.
After 77 years in operation, the 1929 Holding came to an end on 10 July, 2006, as a result of pressure from the European Commission. As of 10 July, 2006, the existing 1929 Holdings, must adapt to the new legislation by 31 December, 2010, subject to certain restrictions.
The SPF, in many respects, has similar advantages to a 1929 Holding. The annual government tax is to be 0.25 per cent on capital, share premium, and loan exceeding eight times the capital, but subject to a maximum tax of €125,000.
The shareholders will be restricted to family members or a small group of individual members. A SPF may lend money to its subsidiaries, but may not charge interest. The directors of a SPF may not actively manage its subsidiaries, nor may it provide remunerated services to its subsidiaries. Subsidiaries must be subject to tax at a rate of 11 per cent, which is half of the basic Luxembourg rate. There will still be the 5 per cent dividend test for Offshore Companies. The shares of a SPF may not be listed ona stock exchange.
The SPF will not benefit from Luxembourg’s tax treaties since it virtually pays no tax.
In summary, the SPF is a useful way of owning private companies, as well as a portfolio of listed shares which should not be aggressively traded.
Luxembourg is clearly creating a space for itself in the capital markets, evidenced by the creation of The Securitisation Vehicle (SV) in 2004.
The SV is liable to tax at the normal rate of around 30 per cent, which allows it to benefit from Luxembourg’s tax treaties. Nevertheless, there are differences. There is no withholding tax on dividends, no subscription tax and no wealth tax. It is exempt from VAT, and Capital Duty is a maximum of a mere €1,250. Loan interest is a deductible expense, and interestingly so too are dividends.
The SV can be regulated or unregulated, and where the “informed investor” is involved, there is very little or regulation at all. In summary, the SV is a tax-neutral vehicle, very much based on the concept of ‘spread of risk’.
The Sicar Venture Capital Vehicle
Luxembourg’s venture capital vehicle came into being in June 2004.
Venture capital is much needed in the European Union and theoretically the Sicar is a tax-attractive vehicle. In actual fact it has been slow to take off, and is subject to approval by the Luxembourg Regulator (CSSF).
There is still a learning curve as to the definitions of venture capital. A Sicar acquires assets in order to sell them, whereas a holding company tends to keep its assets.
Any “well-informed” member of the public may invest in a Sicar.
A “well-informed” investor is someone who invests a minimum of €125,000 or delivers a certificate from a credit institution that he has the knowledge and experience to understand the risks involved.
The Sicar is subject to tax, but with exemptions such as no dividend withholding tax and no capital gains tax. The Sicar benefits from Luxembourg’s tax treaties. It may bring its subsidiaries to the market, and equally may seek a listing of its own. Once authorised, the Sicar is a lightly regulated vehicle. A custodian bank is a requirement.
A Luxembourg Trust tends to be a fiduciary contract. It is used mainly for capital market instruments and portfolios. By adopting a trust law, Luxembourg recognised the Hague Convention on the international recognition of trusts. Normally in Luxembourg, only banks and their equivalent institutions may act as trustees. Trustees act for bond issues and securitisations. From a Luxembourg point of view, the trust instrument – is a great help for holding assets off balance sheet.
Specialised Investment Funds (SIF)
This vehicle came into effect in 2007, and has proved to be a very attractive and successful vehicle in the short time of its existence as an alternative to setting up offshore. The annual tax at 0.01 per cent on the net asset value is minimal.
There is a minimum capital of €1,250,000, which must be reached one year after formation.
The SIF is restricted to “wellinformed” investors (over €125,000), is subject to a certain ‘spread of risk’, is easily administered, and has ‘lighttouch’ regulation.
Residence in Luxembourg
Since 1 January, 2006, with the abolition of the wealth tax, Luxembourg has suddenly become an attractive choice of residence for wealthy individuals within Europe.
Luxembourg can now be added to the likes of Monaco, Belgium, Switzerland, the United Kingdom, and Ireland, and, in some respects, Luxembourg may become an alternative to the recently announced United Kingdom non-domiciled rules. Luxembourg also has a final tax on savings interest of 10 per cent, which is not added to other income.
Indeed, Luxembourg continues to be an important investment fund centre. It is the headquarters of the biggest steel company in the world, Arcelor Mittal, private banking continues to grow, and the single premium insurance policies continue to remain attractive as a way of protecting assets.
Francis Hoogewerf, Hoogewerf & Cie, Luxembourg