Luxembourg

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COUNTRY: Luxembourg.

Luxembourg Holding Company. The term ’offshore’ is not used in Luxembourg legislation or in describing company forms.

Legal form: The Luxembourg Holding 1929 Company and ’Soparfi’ (Societe a Participation Financiere) are the forms, which permit ’offshore’ activity in Luxembourg. However, they are not separate legal forms as such, and employ one of the above forms, either SA, SARL or Societe en Commandite par Actions, as a legal base. There are two types of Holding status in Luxembourg: - the 1929-type holding - its activities are restricted to the holding of shares and certain other financial instruments and the company may not invest in commodities or futures, or carry out any sort of commercial or industrial activities;

- the SOPARFI type holding, sometimes called as ‘mixed holding’ - SOPARFI may carry out normal industrial and commercial activities and It benefits from an exemption of taxation on dividends and capital gains on share transfers, provided certain requirements are met.

Abolition of Holdings 1929 in Luxembourg: The European Commission has announced on 19/7/2006 that the Holding 1929 regime was to be cancelled by the end of 2010. The Luxembourg government stays confident in its legislation and has taken this opportunity to announce that the new fiscal regime for private asset management was to be launched in the next couple of months; the Luxembourg will stay attractive for private finance, which is important for Luxembourg.

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SOME LEGAL EXPLANATIONS:

Name of the company: Name can be in any language using the Latin alphabet. The Public Registry may request a French or German translation if a foreign language is used. Name Restrictions: Any name that is similar or identical to an existing name; Any name of a major international corporation, where written consent to incorporate is not available; Any name which in the opinion of the Trade Registry is undesirable or offensive. There are no other specific rules regarding name restrictions. However it is normal practice for the Trade Registry to refuse names that are associated with the banking and insurance industries and any name that would suggest Government patronage. Names requiring Consent or a License: French and German names for Bank, Buildings Society, Savings, Insurance, Assurance, Re-Insurance, Fund Management, Investment Fund, Council, Municipal, Co-operative or the foreign language equivalent.

Memorandum and Articles of Association: The Articles of Incorporation (The Acte de Constitution), must be prepared in the form of a deed. This deed should include: The name of the person(s) wishing to form the corporate entity; The address of the Registered Office; The amount and currency of the authorized and issued share capital; Type of shares and classes; Amount of capital paid up; Voting rights and shares; Names, addresses and nationalities for the proposed directors and auditors. A Certificate of Name Acceptability issued by the Trade Register is required, together with a Certificate of Blockage produced by the proposed company’s Luxembourg bankers confirming that the paid capital has been deposited with them. These documents and information must be presented before a Notary Public by the proposed company’s appointed representative. After notarization, the Notary Public lodges the Articles of Incorporation and By-Laws with the Department of Registration and Trade Register. The Articles of Incorporation are then published in the Official Gazette.

Shareholders: A minimum of two shareholders is required for SA and one for SARL types of company. Details of the shareholders appear on the public file. Bearer shares are allowed, however, if bearer shares to be issued then the full amount of the authorized capital must be paid up on incorporation. If anonymity is required it is advisable to use nominee shareholders.

The minimum share capital: The minimum authorized share capital for SA type of company is 31,000 Euro of which at least 25% must be paid up at the incorporation and for SARL type of company it is 12,500 Euro which has to be fully paid-in upon subscription.

Directors of the company: A minimum of three directors is required for SA type of company and one for SARL type of company. Directors may be bodies corporate or individuals of any nationality or residence. Details of the directors appear on the public file. Anonymity may be retained by using nominee directors.

Registered office and secretary: As requested by law, every Luxembourg registered company is required to have a registered office in Luxembourg, and must also have Luxembourg licensed auditor for statutory audits. The Luxembourg Companies Acts do not provide for the appointment of a company secretary.

Basic Tax Principles:

Corporate Income Tax (IRC) for Luxembourg companies is charged at 20.80% to 22.88% on worldwide income exceeding EUR 15,000, subject to foreign tax relief, in accordance with applicable double tax treaties.
A Municipal Business Tax (ICC) on profits of 7.5% is charged on taxable income exceeding EUR 17,500. The maximum effective rate is 30.38%. Losses may be carried forward indefinitely. Fiscal integration is also possible if the parent company owns at least 75% of the subsidiary. Capital gains for corporation are treated as ordinary income and taxed accordingly. Wealth Tax is charged on the net asset value of a company as at 1st Janauary of each year. There is a Withholding Tax of 20% on dividends (zero on dividends paid to an EC parent), one of 10% on royalties, but no one on interest. These may be reduced by tax treaties. The Capital Registration Duty of 1% (Droit d’Apport) is also to be paid on incorporation and substantial capital incresases.Trading companies can benefit from Investment Tax Credit. These companies are subject to the Value Aded Tax and must register for VAT when their turnover exceeds EUR 10,000.

1929 Holding Companies (will be effective until 2010)

1929 Holding companies, registered before 1 January 2004 pay only two taxes, being:

- a capital duty (droit d’apport) on incorporation, at a rate of 1% on share capital and subsequent capital increase;

- an annual subscription tax (taxe d’abonnement) at a rate of 0.2% p.a., calculated quarterly, based on share capital.

Holding companies income is exempt from corporate income tax, wealth tax, communal taxes, capital gains taxes and taxes on liquidation.

Luxembourg is being forced to comply with the EU’s Code of Conduct Committee’s campaign against ’harmful tax practices’ by modifying the dividend taxation regime for 1929 holding companies. 1929 holding companies were exempt from all Luxembourg taxes, with the exception of the annual subscription tax levied on their net asset value and the capital contribution tax. Thus, a 1929 holding company could receive dividends from a foreign subsidiary and claim an exemption, even if the distributing subsidiary was not subject to tax or was subject to a tax regime that was notably more advantageous than the regime applicable to fully taxed Luxembourg resident subsidiaries.

Under new legislation, a 1929 holding company will lose its tax-exempt status if at least 5% of its dividends received relate to foreign participations that are not subject to tax at a rate comparable to the Luxembourg corporate income tax rate. An effective tax rate will be considered to be comparable if it is at least 15% equating to approximately one-half of the current corporate income tax rate that applies to regular resident taxpayers and is in line with the tax rate generally applicable to dividends received from participations that do not qualify for a full exemption.

Further, the taxable base will need to be determined under a method similar to the methods used in Luxembourg. An auditor or accountant will be required to certify annually that the eligibility requirements have been met. A 1929 holding company that loses its tax-exempt status will be subject to the normal corporate income tax regime.

For newly incorporated 1929 holding companies, the amendment will apply as from 1 January 2004. For existing 1929 holding companies (i.e. those incorporated under the law applicable before 1 January 2004), the new rules will apply as from 1 January 2011.

SOPARFI Companies

In the December 1990 Tax Reform, new fiscal privileges have extended the old "parent-subsidiary" regime to create what many regard as a "new" style holding company. In fact, the benefits are available to any Luxembourg incorporated company that is not set up as a classic holding company under the law of 1929. These benefits are also applicable to Luxembourg branches or permanent establishments of foreign companies. One does not even need to create a Luxembourg company to benefit from the participation exemption.

In other words, a Luxembourg registered or foreign company, branch or permanent establishment and partnerships in which a SOPARFI is a partner, that is subject to Luxembourg corporate tax may, if it fulfils the ownership conditions, exclude dividend income and capital gains derived from its shareholdings in Luxembourg or foreign companies from its taxable revenues. In addition, Luxembourg companies subject to Luxembourg corporation tax, fall within the scope of Luxembourg’s Double Tax Agreements, and are less vulnerable to anti-avoidance legislation in the country of residence of the shareholders.

Dividends received by the Luxembourg SOPARFI from any company in which the SOPARFI has at least a 10 % shareholding (or if less, whose acquisition cost was at least EUR 1.200.000) are excluded from taxable profit of the SOPARFI if the company gives the Luxembourg tax authorities an undertaking that it intends to hold the shares for at least 12 months.

Capital gains derived from the sale of shareholdings in other companies are excluded from taxation if held for at least 12 months and if they represent at least a 10 % shareholding (or if less, whose acquisition cost was at least EUR 6.000.000). In addition, the following conditions must be met:

- The SOPARFI, branch or permanent establishment, must be liable to Luxembourg tax;

- The distributing company, if resident in Luxembourg, must also be liable to Luxembourg tax; if non-resident, it must be subject to a system of foreign tax similar to Luxembourg income tax (i.e. at least 15 %).

Although dividends and capital gains are tax exempt, the financing costs due to borrowing for the purchase of a participation which exceed the exempt dividend income received or capital gain made and valuation adjustments on the participation remain tax deductible. This allows a SOPARFI to tax protect other financial or trading income. When a capital gain is made, a portion of the gain equivalent to the amount of other financial or trading income that was tax protected in the past, will be subject to taxation in the financial year the gain is made.

Audit and financial returns: Proper books of account must be kept and maintained in Luxembourg. Valuation rules are determined by both company and tax law, and follow closely the EC Fourth Directive. The format and the amount of information to be given in the annual financial statements is determined by the size of the company as defined in the EC Fourth Directive and as adopted into local company law. Whether or not a company is required to be audited is also determined by the size of the company. The accounts containing the information required by the law in accordance with the size of a company must be filed with the Registrar of Companies within 12 months of its financial year end and are available for public inspection.

Time needed for formation: Usually it is 10 working day, but we need up to 30 working days for legalization of the documents and delivery by courier.

Annual meetings: The first AGM must be held no later than 18 months from the date of incorporation and then each year on the date specified in the statutes. It can be postponed for up to four weeks by resolution of the Board of Directors. If all the shares are registered, the meeting can be convened by registered letter containing the agenda of the meeting; otherwise, notice must be published (in the Mémorial and a Luxembourg newspaper) at eight day intervals, the second notice appearing at least eight days before the meeting.

 

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