A stable and rewarding tax environment
The tax framework is considered among the most stable and rewarding in Europe for companies, their shareholders and their employees. This is a key component of Luxembourg’s development.
The tax authorities lead a constructive dialogue with taxpayers, have a business friendly attitude and the quick and pragmatic regime of advance tax agreements (“ATA”) respond to the requirements of international investors.
Luxembourg is not a tax haven but it offers one of the most flexible and attractive tax regimes within the EU.
Taxes in Luxembourg at a glance
- Attractive effective tax rates
- Broad participation exemption regime
- Significant exemptions from withholding tax on dividends
- No withholding tax on non-profit linked interest, royalties and liquidation proceeds (in principle)
- No controlled foreign companies (CFC) rules
- No capital / stamp duties. No transfer taxes on the sale of shares in a Luxembourg company
- Exchange of information – OECD “white-listed”
- Broad double tax treaty network
- Light administrative requirements in terms of transfer pricing and thin capitalizations
- Advance tax clearance system
- Attractive tax regimes in the field of any other investment funds, securitization, IP, investment in risk capital and reinsurance
- Attractive taxation of employees and low social security contributions for employers and employees.
One of the key factors in favour of a decision to base Private Equity operations in Luxembourg remains its favorable tax environment. Attractive tax legislation, social security system (for companies, employers and employees) and the lowest VAT rate in Europe greatly contribute to making Luxembourg an attractive jurisdiction for Private Equity.
Of key importance remains, however, the double tax treaty network that Luxembourg has concluded over many years.
Luxembourg’s Double Tax Treaty Network
Luxembourg has bilateral tax treaties with all EU Member States (except Cyprus) and with a number of other countries (including almost all OECD Member States).
This network of tax treaties (currently 62) is constantly being expanded (with 21 new treaties and 10 protocols pending).
SICARs and SOPARFIs, as Luxembourg taxable companies, are entitled to treaty benefits and therefore benefit from double tax treaties concluded between Luxembourg and third countries.
The application of tax treaties to SIFs in a corporate form is to be assessed on a case-by-case basis depending on the wording of the treaty provisions and their interpretation by the relevant foreign authorities.
SIFs in a contractual form may generally not benefit from treaty provisions as those are transparent for tax purposes.
As a special purpose corporate vehicle subject to normal corporate taxation and not subject to a specific regulatory regime, the SOPARFI benefits from Luxembourg’s extensive network of double-taxation treaties and from the EU Parent-Subsidiary Directive. Despite being a fully taxable company the SOPARFI allows for tailor-made structuring providing for the exemption of many income and exit tax charges for Private Equity investments.
SICARs in the form of a Limited Partnership (S.C.S):
At SICAR level, the SICAR is not subject to corporate, municipal business and net wealth tax; management fees and carried interest are VAT-exempt. At investor level, the SICAR set up in the form of an SCS does not qualify as a permanent establishment for non-resident investors who avoid thus local taxation.
SICARs in the form of a partnership limited by shares (S.C.A):
The SICAR is a fully taxable vehicle; revenues from transferable securities are exempted under specific conditions; they benefit from an exemption net wealth tax and withholding tax on distributions.
Management fees and carried interest are exempt from VAT and the SICAR can claim double tax treaty access at the SICAR level. At investor level no taxation is levied in Luxembourg on the disposal of an interest in a SICAR by non-resident investors.
SIFs are not subject to any Luxembourg taxes on capital gains or income; the sole tax due is a subscription tax of 0.01% on the quarterly net asset value which is waived in certain cases. SIFs in corporate form can claim double tax treaty access (in some cases).
The application of the EU Savings Directive (“EUSD”) depends on the legal structure of the SIF and on the type of investments made by the SIF.
Distributions made by a SIF having the form of a SICAV as well as capital gains realized from the sale, refund or repurchase of the shares in a SICAV should be out of the scope of the EUSD since it is not a UCITS while FCPs are always potentially in scope for the EUSD.