Luxembourg is adapting and putting itself on the map as the
most reliable and stable Asset Hub:
To manage, preserve and transmit one ‘s wealth in a peaceful
and stable manner, Luxembourg has enacted
a legislation for families: the new Family Wealth Management Company
(“FWMC*) : A Corporate vehicle
for wealthy individual in a politically stable country in the middle of the EU
which offers confidentiality and a tax free environment. (1) To register in the
middle of Europe Internet domain names and trademarks, Luxembourg enacted a law
in 2007 providing a tax favorable environment:
Indeed 80 % of the Royalties will be exempted from tax making a final
tax burden of 5.93 % (probably 5.1 % next year) and benefiting from Double
taxation treaties entered into by Luxembourg . (2)To benefit from the growth of
investments in Asia, Luxembourg signed a favorable double taxation treaty with
Hong Kong and is discussing a new treaty with India.(3)
These new developments are explained below:
he law of 14 May 2007 introduces a
new type of investment vehicle for the wealth management of families
and individuals in replacement of the HOLDING 1929.
The family wealth management company or “FWMC” is designed for the
structuring of the wealth of families. This will increase substantially the
attraction of Luxembourg as a stable and reliable center for family and estate
planning. The situation is the following:
1.
To qualify
as a FWMC, the vehicle must fulfill the following conditions:
1.1.
It must have the form of a limited liability company (S.A.,
S.à r.l., S.C.A., Scop);
1.2.
Its activities must be limited to the acquisition,
management and sale of financial assets as such term is defined under the law
of 5 August 2005 on financial instruments and other financial assets held in
accounts. This might include precious metals, derivatives and other
instruments;
1.3.
The FWMC must not
have any commercial activities, it cannot hold any real estate;
1.4.
The FWMC must
specify in its articles of incorporation that it wishes to be subject to
the law applicable to FWMC;
1.5.
The shares issued by the FWMC can only be held by
individuals or by “ family entities” (i.e., trusts, foundations to the
exclusion of any commercial companies);
1.6.
The FWMC must not interfere in the management of
companies in which it has a participation;
1.7.
The FWMC must not receive more than 5% of its dividend
income from a company which is taxed at a rate of less than 11% and whose
taxable basis is determined in a similar way as for Luxembourg companies and
which is not quoted (EU companies are deemed to fulfill these conditions);
2.
Taxation
2.1.
The FWMC is not subject to any Luxembourg income tax,
capital gain tax, wealth tax, withholding tax on dividends payments;
2.2.
The FWMC is subject only to an annual “taxe d’abonnement “(subscription tax) of
0.25% based on the paid up capital plus the share premium plus the amount of
debt which is over eight times the amount of the paid up capital plus share
premium. The minimum amount of tax is set at EUR 100 and the maximum at EUR
125,000;The FWMC should not benefit from double taxation treaties entered into
by Luxembourg although this may be subject to discussions as most treaties
exclude the so called “Holding 1929 “but not explicitly the FWMC.
2.3.
The new FWMC will benefit from the secrecy protection
which is applicable by virtue of the
Grand Ducal regulation of 24 March 1989.
The absence of inheritance tax in
Luxembourg for direct heirs, the draft European rules on the harmonization of
wills, the benefit of a tax free vehicle in the center of the EU makes
Luxembourg one of the most attractive places for families and their wealth. New
entrepreneurs can also benefit from the attraction of Luxembourg.
he global business of Internet Domain Names Distribution,
including such well known names such as Google, Alta Vista, Mozilla Firefox and
Thunderbird, and Wikipedia, amongst others, was estimated to be worth around
100 million Euros in 2007. An important event scheduled to take place in Paris
this year is that the domain names regulating body, the ICANN (Internet
Corporation for Assigned Names and Numbers) is due to launch a tender for new
‘outstanding level domains’, which could boost the e-commerce business in
Luxembourg.
2.1.
Double
Taxation Treaties
A Luxembourg resident will be entitled to benefit from a
reduction in withholding tax levied on income received from abroad, by the
application of either the current EU directive on royalty payments or of
relevant double tax treaties.
2.2.
Patent
definition
Given the extremely general and comprehensive wording of the
law, all Domain name patents trademarks should be eligible for the exemption,
there is no distinction made between Luxembourg and non Luxembourg patents,
European patents or patents registered outside the European Union. The only
prerequisite is that the intellectual property right must have been created or
acquired after 31 December 2007.
2.3.
Taxation
This new exemption will benefit all Luxembourg tax payers,
whether private individuals or corporate entities who derive income from the
use of any patent, software copyright, domain name , trademark, design or
model. Capital gains as well will be exempted up to 80 %.
2.4.
Luxembourg
income taxation
Income derived from a patent qualifies only if it is
included in the tax payer’s result taxable in Luxembourg.
Any net income derived by a Luxembourg tax payer as
consideration in counterpart for the use of any copy right on software, patent,
trade mark, design or model will benefit from an 80% exoneration. Net income is
defined as the gross income reduced by the expenses in direct economic relation
with this income, including depreciation and write down. The effective tax rate
for such income would thereby be reduced from the general rate of 29.63% (for
Luxembourg City) to 5.93%.
Furthermore royalties paid out of Luxembourg do not suffer
any withholding tax.
2.5.
Luxembourg
Capital gains taxation
Net capital gains arising from the alienation of
intellectual property rights are also benefit from the 80% exemption, albeit
that net losses stemming from the alienated intellectual property rights during
the year of disposal or previous years are ‘recaptured’, meaning that the
exemption is not applicable to the extent of such losses.
This new tax régime will undoubtedly render Luxembourg more
interesting for innovative and research oriented companies, specializing in the
exploitation of intangible assets, and more particularly, in the e-commerce
sector. In fact, with the passing of this new law, Luxembourg is one of the
pioneer EU countries to offer a legislative framework designed to develop
investment in internet domain names. This new law successfully complements the
other laws regulating e-commerce in Luxembourg.
n 2 November 2007, the Grand Duchy of Luxembourg and Hong
Kong signed a double taxation treaty (the “Tax Treaty”). After completion of
the ratification procedure by both parties, the agreement will come into force
with retrospective effect as from 1 January 2008 in Luxembourg and as from 1
April 2008 in Hong Kong.
Major tax benefits and
specificities of the tax agreement
3.1.
Tax
residency issue
The definition of tax resident as contained in article 4 of
the Tax Treaty is wider than the current OCDE model. For instance, it includes
foreign companies whose place of effective management is located in Hong Kong, regardless of their place of
incorporation or establishment.
3.2.
Branch
definition
The definition of branch or ‘établissement stable’ as
provided in article 5 of the Tax Treaty has also been widened to encompass
service providers, including consultancy services, by an enterprise acting
either directly or through the intermediary of salaried personnel employed by
the enterprise for that purpose, over a period of 12 months. Such a definition
will allow Luxembourg companies, operating in Hong Kong via a branch, to be
taxed in Hong Kong instead of Luxembourg and at a lower corporate income tax
rate of 17.5% (HK) instead of 29.63 %
(L) which is the current corporate income tax rate in Luxembourg.
3.3.1.Taxation
Dividends
As set out at article 10 of the Tax Treaty, the maximum rate
of withholding tax levied at source on dividends is limited to 10%. However,
dividends are exempt from withholding taxes when the beneficiary is a company
having a shareholding of at least 10% in the share capital of its subsidiary or
having acquired the shareholding for a price of at least EUR 1.2 Million. These
conditions are less strict than those prevailing under Luxembourg domestic law
in as much as the additional prior/ post holding period of 12 months is not
required.
This advantageous tax treatment of dividends under the Tax
Treaty is interesting in the case of dividends having their source in
Luxembourg since the current withholding tax rate in Luxembourg is 15%. The
Hong Kong domestic law, on the other hand, does not provide for the levying of
withholding taxes on dividends.
3.3.2.Interest
income
No withholding taxes will be levied on interest income paid
by either country to a beneficiary having its/his tax residence in the other
country as per article 11 of the Tax Treaty.
3.3.3.Royalties
In accordance with article 12 of the Tax Treaty, the maximum
rate of withholding taxes retained on royalties at source is 3% and this will
be applicable only to royalties derived from Hong Kong as there is no
withholding tax levied on royalties having their source in Luxembourg.
3.3.4.Capital
Gains
As provided at article 13 of the Tax Treaty, capital gains
derived from the sale of shares of a company are normally taxable in the
country of residence of the seller. Thus capital gains derived by a Hong Kong
resident pursuant to the sale of its shareholding in a Luxembourg company will
only be taxable in Hong Kong. Interestingly, as Hong Kong does not levy capital
gains tax, these gains will be taxed neither in Luxembourg nor in Hong Kong in
the above case.
On the other hand, capital gains derived by a Luxembourg
resident seller will be taxed in Luxembourg as per the provisions
of Luxembourg domestic law. However, the capital gains will
be tax exempt in Luxembourg in cases where the 2 following conditions are
satisfied: (i) the seller has a shareholding of at least 10% or of EUR
6,000,000 in the share capital of the company being disposed of, (ii) At the
time of disposal, the seller actually holds or engages to keep the 10 %
shareholding for a period of at least 12 months.
It is to be noted that the capital gains realized by a
resident of either country upon the disposal of its share investment in a
company will be taxable in the other country if more than 50% of the asset
value of the company being disposed of comprises, directly or indirectly,
immovable property located in the other country. Here again, there exist a
number of conditions which allow for tax exemption in the country of location of
the immovable property.
3.3.5.Limitation
of benefits
There is no express limitation of benefits provision in the
tax treaty that specifically prevents treaty shopping by parties who were not
intended to benefit from the tax agreement. Thus the benefit of this tax
agreement may be understood as extending to entities like private asset
management companies or spfs (Société de gestion de patrimoine familial),
introduced in Luxembourg by the recent law of 11 May 2007.
Conclusion
As outlined above, the major interest of the present Tax
Treaty is that it offers a particularly advantageous tax treatment of
dividends, royalties and capital gains. On the other hand, interests deriving
from either Luxembourg or Hong Kong will be exempt from withholding taxes at
source. Under Hong Kong domestic law, there are no withholding taxes on
dividends, interests and capital gains so that a Luxembourg investor might
derive such income, free from withholding taxes from Hong Kong. On the other
hand, under Luxembourg law, interests and royalties are completely tax free
whereas dividends and capital gains are exempt under certain circumstances.
These tax benefits will be extended to Hong Kong investors deriving the above
income from Luxembourg.
Family wealth companies, domain name registration, Hong Kong
treaty, reinsurance companies, Soparfi, investments funds, banking and
political stability make Luxembourg ,a founding member of the EU, the best
reliable and stable Asset Hub for worldwide investments .
