III. Migration to Luxembourg 22 A. Transfer of residence 22 B. Migration of seat for companies 23

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1 private wealth

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5 Table of contents I. Introduction 4 A. Luxembourg in a nutshell 4 B. Wealth structuring: Solutions to address the client s concerns 6 C. Luxembourg, a business-oriented environment 6 II. Fiscal environment 7 A. Overview of the taxation rules for individuals 7 B. Transparency and exchange of information 14 C. Overview of the taxation rules for corporate entities 17 III. Migration to Luxembourg 22 A. Transfer of residence 22 B. Migration of seat for companies 23 IV. Private wealth structuring options and solutions 24 A. Overview and key features 24 B. Overview of the different corporate tools 24 C. Overview of the different contractual tools 30 V. Real estate 32 A. Luxembourg resident individuals owning Luxembourg real estate 32 B. Non-resident individuals with real estate property located in Luxembourg 34 VI. Transmission of wealth in Luxembourg 35 A. Overview of Luxembourg property law 35 B. Overview of Luxembourg matrimonial property law 37 C. Overview of Luxembourg inheritance and gift law 38 D. Inheritance issues from an international perspective 39 E. Philanthropic actions in Luxembourg 40 Annex 42 Double tax treaty network 42 Investment Protection Treaties concluded by the Belgium-Luxembourg Economic Union 44 Summary table - Luxembourg vehicles 46 Definitions 48 Private Wealth practice area 50 Arendt & Medernach Private Wealth Team 51 About Arendt & Medernach 52

6 I. Introduction A. Luxembourg in a nutshell Ideally situated at the crossroads between Belgium, France and Germany, Luxembourg is a small but highly stable country boasting one of the highest GDP per capita in the world. The Luxembourg financial centre originally developed as a private banking centre and has grown to become a truly diversified hub for investment funds, banks, insurance and reinsurance companies, holding companies and family offices.

7 Constitutional monarchy Head of State: the Grand Duke Executive power: the Prime Minister and his government Legislative body: the Parliament (Chambre des Députés), advised by the State Council (Conseil d Etat) Judicial power: judicial and administrative courts Political environment characterised by continued stability over the past 60 years enabling the implementation of investor-friendly legislation Population > 576,000 Official languages: French, German and Luxemburgish English widely spoken Significant expatriate population Highly-skilled and cosmopolitan workforce of > 385,000 (incl. > 150,000 cross-border commuters) Situated in the heart of Europe Territory +/- 2,600 km 2 Easy access Daily flights to/from major European cities such as London, Frankfurt, Paris, Munich, Milan, Zurich, Geneva and Amsterdam (1 hour) and excellent rail connections Founding Member of the European Union (EU), the United Nations (UN), the North Atlantic Treaty Organization (NATO), the Organisation for Economic Co-operation and Development (OECD), the Financial Action Task Force (FATF) Seat of several EU institutions (e.g. Court of Justice of the European Union, European Investment Bank, European Investment Fund, Secretariat of the EU Parliament, European Court of Auditors) Founding Member of the Eurozone 141 credit institutions (total balance sheet EUR 768 billion) 3,888 investment funds (EUR 3,640 billion Assets Under Management) making Luxembourg the 2 nd largest investment fund centre worldwide 307 insurance and reinsurance companies Most important private banking centre in the Eurozone Forerunner in implementing EU legislation Investment fund legislation since 1983 Parent-subsidiary, interest and royalties directives Continued improvement of investment legislation through alternative vehicles such as specialised investment funds (SIF), investment companies in risk capital (SICAR), reserved alternative investment funds (RAIF), securitisation companies Extensive double tax treaty network Flexible and practical corporate law Various legal forms of companies, partnerships and associations No governmental or judicial authorisation required for company formation Legal existence of companies as from the execution of the incorporation deed by the founders and the notary Rapid company formation 5

8 I. Introduction B. Wealth structuring: Solutions to address the client s concerns Individuals and their families a reflection of their times and today s globalised environment. More than ever before, they cross many borders many times throughout their lifetimes for professional and private reasons. Those born in one country often move to study, work and reside abroad. At a certain point, with an increase in their business opportunities and assets to manage in different countries and children and heirs spread over the world, individuals inevitably raise legitimate concerns as to the preservation of what they have acquired and what they will acquire in the future through their professional activities or heritages. When families take decisions requiring advice on their estate, they first seek confidentiality in relation to the assets they own as well as the business operations they run. Second, they seek to secure their assets. Indeed, they pay increasing attention to the political, legal and financial environment of their country of residence or of the country where the estate is structured and managed. Finally, families show great interest in the way the succession is planned, always privileging a smooth and efficient transition to the next generation to sustain what they or their parents often built with their own hands. C. Luxembourg, a business-oriented environment Luxembourg has a long tradition of private wealth activities. The country has always promoted a stable and flexible legal and political environment favourable to the preservation, enhancement and transmission of patrimonies. As early as 1929, Luxembourg offered the opportunity to individuals to benefit from a dedicated legal and tax framework in order to structure private wealth, the so-called Holding 1929 regime. This regime has been replaced in the meantime although Luxembourg still maintains its willingness to offer appropriate solutions taking into account international standards. As an AAA country, Luxembourg is one of the most attractive places to carry out business activities within the European Union. In finding the right balance between being EU law compliant and promoting stimulating economic policies, Luxembourg shows its strong determination to contribute to the development and prosperity of wealthy families. This long history of private wealth promotion is not sufficient in itself to explain Luxembourg s position as a leading private wealth management centre without mentioning the important cluster of professionals which contributes to the reputation of the country s financial sector around the world. This highly qualified expertise allows for a perfect understanding of clients needs, quick responses to meet their expectations, the proposal of tailored solutions and a very confidential and personalised approach vis-à-vis clients. Finally, in addition to the fact that the private wealth pillar constitutes one of Luxembourg s main attractions, the country is also the second largest investment fund centre in the world. Many banks, insurance companies, investment fund promoters (in the fields of private equity, real estate, hedge funds or any other alternative investment of any kind), family offices and specialised service providers choose Luxembourg to run their businesses within Europe and worldwide. This diversity in the activities performed in Luxembourg decidedly benefits the private wealth sector. 6

9 I. Introduction Luxembourg provides a platform for asset protection, international investments and estate planning. Many families wish to manage their wealth properly irrespective of their country of residence. Luxembourg provides a perfect platform for them to realise these goals and offers many different opportunities. To assist individuals in reaching these goals, Arendt & Medernach has longstanding and comprehensive expertise allowing for confidential wealth structuring. This expertise, far from being a static concept carved in stone, is always renewed and evolves to respond to clients needs, to comply with international standards and to better fit the economic context. This brochure addresses issues facing persons intending to structure their personal estate with a view to preserving, enhancing and transmitting their wealth. The document will provide a summary overview of the Luxembourg fiscal environment and the most used Luxembourg private wealth dedicated structures. The brochure will also outline the taxation of Luxembourg real estate, the transmission of wealth and will finally raise migration issues. II. Fiscal environment A. Overview of the taxation rules for individuals 1. Main features Individuals having their domicile or usual place of abode in the Grand Duchy of Luxembourg will be considered tax residents. More precisely, individuals are deemed Luxembourg tax residents if their place of residence is actually used and they have indicated their intention to maintain it or if they spend more than six consecutive months in Luxembourg (even if the period overlaps two fiscal years or is interrupted by short periods of absences). Should an individual be considered a tax resident under more than one country s domestic legislation, the relevant double tax treaty concluded between Luxembourg and such country will determine tax residency. Individuals who are not considered tax residents in Luxembourg acquire non-resident status and will be subject to Luxembourg income taxes only on Luxembourg source income. By contrast, Luxembourg tax residents are subject to tax on their worldwide income (with available treaty and non-treaty relief). 7

10 II. Fiscal environment Residents and non-residents with Luxembourg source income may be subject to Luxembourg income tax on an annual basis (i.e. calendar year) at progressive income tax rates (ranging from 0% to 42%). For the purpose of income tax, individuals are granted a tax class depending on their personal situation (family status). The employment fund contribution is assessed as a surcharge on such rates (i.e. 7% for income not exceeding EUR 150,000 (for single taxpayers) or EUR 300,000 (for couples jointly taxed) and 9% for income above these amounts).the current progressive rates of Luxembourg income tax (including the surcharge) may be presented as follows: Income range in EUR Taxe rate (base) % Taxe rate (effective) % 0-11, ,265-13, ,137-15, ,009-16, ,881-18, ,753-20, ,625-22, ,569-24, ,513-26, ,457-28, ,401-30, ,345-32, ,289-34, ,233-36, ,177-38, ,121-40, ,065-42, ,009-43, ,953-45, , , , , , , /44.69 Over 200, /45.78 Non-residents are generally subject to the aforementioned progressive rates but with a minimum rate of 15%. Income subject to Luxembourg income taxes is restricted only to the following eight categories defined by the Luxembourg tax legislation: Trade and business income; Agriculture and forestry income; Income from independent professional services; Employment income; Pension and annuities income; Investment income (i.e. interest and dividends); Rental and royalty income; Miscellaneous income including capital gains. 8

11 II. Fiscal environment Income from each category is subject to specific calculation rules which, after netting, are aggregated in order to determine the total net income. Specific expenses are moreover deducted so as to determine the annual taxable income. Losses arising in one category are set against the total net income in other categories, if not otherwise determined. The tax treatment of the main categories of income may be summarised as follows: Type of income Business income Employment income Director s fees Interest Dividends Royalties Rental income Capital gains on movable assets Capital gains on real estate Individual taxation Luxembourg resident individual Progressive income tax rates All income and capital gains attributable to the business activity is included in this category Income from an independent economic activity can be subject to VAT Progressive income tax rates. Wages are withheld at source 20% WHT creditable on progressive income tax rates. Activities performed for day-to-day management are subject to progressive income tax rates Director s fees are, as a rule, subject to 17% VAT, unless they remunerate the management of a regulated investment fund or a regulated/unregulated AIF (VAT exemption for fund management services) Progressive income tax rates Exception when paid by a Luxembourg paying agent (20% final WHT) 15% WHT on gross amount paid by Luxembourg companies and creditable on progressive income tax rates Exemption of 50% of the gross amount received from qualifying entities Progressive income tax rates Generally subject to 17% VAT, unless located abroad Progressive income tax rates and application of specific expenses For VAT purposes, a voluntary option to tax is possible under certain conditions Progressive income tax rates No taxation of capital gains after a six-month holding period, except where the seller holds a substantial participation of more than 10% in the target company which will lead to taxation with a reduced tax rate (half of global rate, i.e., 0% to 22.89%) Step-up on basis for immigrants (see III. A. below) Progressive income tax rates applicable if the sale occurs within two years after the acquisition. Reduced tax rate if the disposal takes place more than two years after the acquisition No taxation on capital gains in connection with the main residence For VAT purposes, a voluntary option to tax is possible under certain conditions Non-resident individual Only to the extent that the non-resident individual operates through a permanent establishment or a fixed place of business located in Luxembourg Only if Luxembourg source income Only if Luxembourg source income 20% final WHT under certain conditions (optional) 17% VAT can become due under the reverse charge mechanism at the level of the Luxembourg company, receiving the director services No taxation No WHT Only if Luxembourg source income 15% WHT No taxation No WHT Only if Luxembourg source income No WHT For VAT purposes, a voluntary option to tax is possible under certain conditions No taxation of capital gains after a six-month holding period Only if Luxembourg source income For VAT purposes, a voluntary option to tax is possible under certain conditions 9

12 II. Fiscal environment 2. Social security contributions Wage and salary are, in general, subject to social security contributions which cover health insurance, old-age pension and dependency insurance in support of the elderly and disabled. Partial or additional contributions are borne by the employer. Such contributions are computed on an employee s yearly gross salary and capped at the annual social security ceiling. Foreign employers having an employee working in Luxembourg are obliged to register with the Luxembourg social security system. Self-employed individuals must register for social security purposes and are subject to social security contributions on their net business profits which are capped at the annual social security ceiling. Furthermore, any Luxembourg resident individual who does not benefit from a mandatory health insurance can request voluntary insurance via the optional or continued health insurance scheme. As of 1 January 2017, the Luxembourg social security contributions are as follows: Coverage Employee s part Employer s part Self-employed Sickness * ** 3.05% 3.05% 6.10% Pension * 8% 8% 16% Mutual insurance * *** % to 2.92% 0.51% to 2.92% Accident * - 1% 1% Health at work * % - Dependence insurance 1.4% - 1.4% Total 12.45% 12.67% to 15.08% 25.01% to 27.42% * Capped at an annual celling; tax deductible ** Rate depends on the nature of the remuneration *** Depends on the average rate of absenteeism 3. Status of the taxpayer The progressive rates of Luxembourg income tax may also vary depending on the class of imposition of the Luxembourg resident individual. The class of imposition (i.e. class 1, class 1a, or class 2) of the taxpayer depends mainly on his marital status, age and number of children. In this respect, a class 1 taxpayer (e.g. a single, separated or divorced individual without children after a three-year transition period) does not benefit from any adjustment. However, individuals falling within class 1a and class 2 benefit from adjustments and include mostly taxpayers who are married and collectively taxed as well as non-married individuals having one or more children and widowers. Category Application of tax rates 1 No tax adjustments 1a Tax rates applied to total of the adjusted taxable income, less one half of the amount by which it exceeds EUR 45,060 provided that the maximum assessment rate may not exceed a certain percentage (i.e. 39% to 42% depending on the tranche of revenue) 2 Applied twice on one half of the net taxable income 10 Married individuals are, by default, jointly taxed while registered partners are, by default, separately taxed but can elect to file jointly. The tax year follows the calendar year. Taxpayers must file annual tax returns by 31 March of the year following the year for which the income is subject to taxation. The filing deadline may be extended on the request of a taxpayer.

13 II. Fiscal environment Employees who are subject to withholding tax and who do not have another source of income must file tax returns only if their annual taxable remuneration exceeds EUR 100,000. As a rule, the employer must withhold wage tax. 4. Special tax regime for qualifying international employees In order to facilitate temporary assignments or the direct recruitment of highly skilled workers to Luxembourg by a Luxembourg enterprise that is part of an international group, Luxembourg has introduced a specific tax regime for qualifying international employees. In this respect, if the conditions to benefit from the impatriate regime are met, certain expenses (i.e. housing and annual travel costs, moving and furnishing costs as well as travel expenses on special occasions) paid by the employer to the highly skilled employee are not taxable in the hands of the latter, although they remain deductible business expenses in the hands of the employer. The regime is limited to 5 years following the impatriate s starting date in Luxembourg. 5. Taxation regime of carried interest A specific tax regime for carried interest has been implemented by the Law of 12 July 2013 in Luxembourg. Carried interest is a variable remuneration for the management of an Alternative Investment Fund ( AIF ) consisting in a share of the profit on the gain realised on the exit of the investments held. Under such regime, carried interest derived by individuals who are employees of AIF Managers ( AIFM ) or of management companies of AIFs are taxable at ordinary income tax rates. But a special regime is provided for employees who migrate to Luxembourg, within 5 years after the entry into force of the law. In that case, they benefit from a reduced tax rate (1/4th of the global rate, i.e. a maximum of 11.45%). The following conditions must be fulfilled to benefit from this exception: Transfer of residency to Luxembourg as from 2013 to 2018; No tax residency in Luxembourg for the 5 years preceding 2013; No advance payment on carried interest received; Carried interests must be paid after investors have recovered the totality of their investment. 11

14 II. Fiscal environment 6. Other taxes a. Net wealth tax ( NWT ) Luxembourg net wealth tax for individuals has been abolished since 1 January b. Municipal business tax ( MBT ) A municipal business tax is levied on Luxembourg resident individuals who carry on business in Luxembourg or non-residents who have a permanent establishment in Luxembourg. The tax is levied on business income with a number of adjustments. The tax rate of the municipal business tax varies from municipality to municipality and amounts to 6.75% for Luxembourg City in c. Property tax Property tax (impôt foncier) is levied by municipalities in Luxembourg on the unitary value (market value as of 1 January 1941) of real estate properties, built on or otherwise, located in Luxembourg. The communal tax rate varies according to the municipality and depending on the situation and the type of the property. d. Gift tax Gift tax may be due on a gift or donation only if the gift is recorded in a deed signed before a Luxembourg notary. By contrast, donation of immovable properties must be registered in a notarial deed and is therefore always levied on the donee of the gift. Gift tax is computed on the fair market value of all gifts received by a donee from the same donor in a calendar year. The rates vary depending on the relationship between the donor and the donee. Relationship between the donor and the donee Applicable rates Direct ascendants or descendants 1.8% or 2.4% Spouses and registered partners* 4.8% Brothers and sisters 6% Uncles/aunts and nephews/nieces, parents-in-law 8.4% Great-uncles/great-aunts and great-nephews/great-nieces 9.6% Others 14.4% * The partnership must be registered for at least 3 years before the opening of the estate Furthermore, a municipal surcharge of 50% is applicable on the amount of the registration duty for certain properties located in Luxembourg City. Additionally, donations of real estate are also subject to a 1% transcription duty (droit de transcription). Donations of immovable property located abroad are exempt from gift tax in Luxembourg, even though they have been registered in Luxembourg. e. Inheritance tax 12 Inheritance tax is levied in Luxembourg on the estate of the deceased only if his or her last residence was located in Luxembourg at the time of death. However, inheritance of immovable property located abroad is expressly exempt from Luxembourg tax, even though this property is not subject to tax in the jurisdiction where it is located. Symmetrically, if the last residence of the deceased was not Luxembourg, a transfer tax is still charged on the deceased s real estate located in Luxembourg.

15 II. Fiscal environment Luxembourg has not concluded any double tax treaties on inheritance tax. However, Luxembourg is generally more competitive in terms of inheritance tax rates than its neighbouring countries France, Belgium and Germany. The tax rates vary according to the value of the estate and the degree of relationship between the heir/ beneficiary and the deceased. Relationship between beneficiaries/deceased Applicable rates (legal part only) Direct ascendant or descendant 0% Spouses or registered partners* with common children/descendants 0% Spouses or registered partners* without descendants ** 5% Brothers and sisters 6% Uncles/aunts and nephews/nieces, adoptive parents and adopted persons 9% Great-uncles/great-aunts and great-nephews/great-nieces, adoptive 10% parents and descendants of the adopted person Others 15% * The partnership must be registered for at least 3 years before the opening of the estate ** A rebate of EUR 38,000 applies before application of the rate Any inheritance with a net value exceeding EUR 10,000 is subject to a surcharge tax varying between 1/10 and 22/10. f. Value added tax ( VAT ) An involvement in economic activities (i.e. in principle any supply of goods or services on an independent and continuous basis against remuneration) is generally subject to VAT and procures the status of a taxable person for VAT purposes. Depending on the nature of the activities and the circumstances under which they are exercised, VAT may become applicable, requiring VAT registration and compliance with certain VAT reporting obligations. VAT exemption regimes are available in the investment fund sector and the financial/insurance sector. Furthermore, the acquisition/sale or renting of real property is, as a rule, exempt from VAT (a voluntary option to tax is however possible under certain conditions). Mere shareholding activities do not qualify as economic activities for VAT purposes and are not subject to VAT. Any involvement in VATable activities allows, in turn, for the recovery of VAT paid on related costs (neutrality principle). An involvement in VAT exempt activities generally does not allow for the recovery of VAT paid on related costs (exceptions are however possible, e.g. for financing activities with non-eu borrowers). The standard VAT rate in Luxembourg is 17%. Reduced VAT rates (14%, 8% and 3%) apply to certain transactions. g. Advantages of Luxembourg as a tax residency Based on the aforementioned, Luxembourg resident individuals may thus enjoy various tax benefits such as: Limited taxation of savings income and dividend; No wealth tax; No inheritance and succession tax on direct line descendants; No taxation on capital gains for shares held under 10% and for more than six months; No taxation on capital gains and redemption value in connection with a life insurance contract; No taxation on capital gains in connection with the main residence and reduced rates for real estate held for more than 2 years; and Step-up migration (see III. A. below). 13

16 II. Fiscal environment B. Transparency and exchange of information Luxembourg has traditionally denied any exchange of information ( EOI ) in tax matters and maintained the protection of tax secrecy (i.e. 22 of the General Tax Law of 22 May Abgabenordnung - Loi générale des impôts) and bank secrecy (i.e. article 41 of the law of 5 April 1993, as amended). However, in the light of recent European and international initiatives, Luxembourg has had to mitigate its position in favour of a more cooperative approach. 1. Foreign Account Tax Compliance Act ( FATCA ) The law of 24 July 2015 implemented the intergovernmental agreement ( IGA ) signed by Luxembourg and the United States on the implementation of the Foreign Account Tax Compliance Act ( FATCA ) in Luxembourg. The IGA aims at facilitating the exchange of information on specified US persons, as defined by FATCA, between Luxembourg and the United States, while at the same time easing the compliance obligations for, amongst others, Luxembourg financial institutions by specifying local exemptions and deemed compliant classifications with no reporting duties. As Luxembourg has opted for and has negotiated a Model 1 IGA with the United States, the exchange of information between Luxembourg financial institutions ( FIs ) and the United States Internal Revenue Service ( IRS ) takes place indirectly via the Luxembourg tax authorities, who in a first step gather the relevant FATCA information on the identity of, as well as, the amounts owned and the income received by US persons from Luxembourg FIs and then pass such information on in an automatic manner to the IRS. There is no duty for Luxembourg FIs to directly communicate information on their clients to the IRS. 2. Exchange of information upon request ( EOIR ) Luxembourg adopted the standards of the Organisation for the Economic Cooperation and Development ( OECD ) further to the law of 31 March 2010 which approved new double tax treaties ( DTT ) and protocols including the extensive EOI provision of Article 26 (5) OECD Model Tax Convention and provided for a specific procedure for the EOIR related to income taxes of all kinds, withholding taxes, wealth taxes and wage taxes (not limited to taxes covered by the relevant DTT). Through reference to the relevant DTTs and OECD guidelines, the EOIR is limited to foreseeable relevant information and thus excludes so-called fishing expeditions. Furthermore, there is no obligation to supply information which would disclose any trade, business, industrial or commercial secret or trade process, or information the disclosure of which would be contrary to public policy. Article 5 of Directive 2011/16/EU on Administrative Cooperation ( DAC 1 ) concerning the EOIR between authorities of EU Member States was transposed into Luxembourg domestic law by the law of 29 March 2013 which refers to the current regime of the EOIR introduced by the law of 31 March The Convention on Mutual Administrative Assistance in Tax Matters ( Convention ) was signed by Luxembourg on 29 May 2013 and implemented on 11 July 2014, entering into force on 1 November This Convention provides for the EOIR and automatic EOI on taxes of all kinds (including VAT, excise duties and compulsory social contributions).

17 II. Fiscal environment 3. Automatic exchange of information ( AEOI ) On 9 December 2014, the EU adopted Directive 2014/107/EU ( DAC 2 ) amending DAC 1 which now provides for an automatic exchange of financial account information between EU Member States. The adoption of DAC 2 implements the OECD Common Reporting Standard ( CRS ) and generalises the AEOI within the EU as of 1 January Moreover, on 29 October 2014, Luxembourg signed the OECD s Multilateral Competent Authority Agreement ( MCAA ) to automatically exchange information under the CRS. Under this agreement Luxembourg, as an early adopter country, will automatically exchange financial account information with other participating jurisdictions as of 1 January 2016 (list of jurisdictions published and updated by a Grand Ducal Regulation). The MCAA together with DAC 2 introducing the CRS has been implemented in Luxembourg under the Law of 18 December Additionally, the Luxembourg law of 23 July 2016 implemented Directive (EU) 2015/2376 on the automatic exchange of information on advance cross-border tax rulings and advance pricing agreements which entered into force on 1 January 2017 ( DAC 3 ). However, the persons within the scope of the DAC 3 are only legal persons, thus individuals should not be directly impacted by the provisions of the DAC 3. Finally, the Luxembourg law of 13 December 2016 implemented Directive (EU) 2016/881 ( DAC 4 ) which introduces a private country-by-country reporting for corporate entities on certain financial information such as revenues, profits, taxes paid and accrued, accumulated earnings, number of employees and the disclosure of certain assets they have worldwide. Similarly to the DAC 3, the scope should be limited to legal persons and should not directly impact individuals. 4. The 4 th anti-money laundering directive The 4 th anti-money laundering directive was published on 5 June The purpose of this directive is to strengthen EU rules on anti-money laundering and terrorist financing. Among many important new measures, the directive will increase transparency notably through the creation of national central registers of beneficial owners. 15

18 II. Fiscal environment Summary table of the AEOI initiatives having an interest for individuals Initiatives FATCA DAC 1 OECD CRS inside the EU via DAC 2 OECD CRS outside the EU via MCAA Implementation into national law Law dated 24 July 2015 Law dated 26 March 2014 Law dated 18 December 2015 Law dated 18 December 2015 Persons within the scope - US citizens or resident individuals (presumption rules apply) - Certain US entities - Passive non-financial entities with US beneficial owners (other than US entities) - Non-participating Financial Institutions (for 2015 and 2016 only) Natural persons resident in an EU Member State other than Luxembourg The following persons resident in an EU Member State other than Luxembourg: - Natural persons - Certain non-financial entities (NFEs) - Beneficial owners of passive NFEs The following persons resident in the (non- EU) jurisdictions that are signatories to the MCAA: - Same as for DAC 2 Income within the scope - Account balance at year end - For Depository Accounts : gross interests paid or credited to the account during the calendar year - For Custodial Account : (i) gross amount of interests, dividends and other payments made to the account (ii) gross sales and redemption proceeds with respect to assets held in the account paid or credit to the account during the calendar year (Additional, specific rules apply for cash value insurance contracts and annuity contracts) - Salaries - Director s fees - Pensions - Certain Life insurance products - Property and income in relation to real estate Similar scope as in FATCA: - Account balance at year end - For Depository Accounts : gross interests paid or credited to the account during the calendar year - For Custodial Account: (i) gross interests, dividends and other payments made to the account (ii) gross sales and redemption proceeds with respect to assets held in the account (additional, specific rules apply for cash value insurance contracts and annuity contracts) - For all other accounts, the total gross amount paid or credited to the account holder during the calendar year or other reporting period - Same as for DAC 2 Reporting Entity Financial Institutions Luxembourg tax authorities Financial Institutions Financial Institutions Date of entry into force 01/07/ /01/ /01/ /01/ st reporting period 31/12/2014 (account balances) 2015 (interests, dividends and other payments) 2016 (gross proceeds) st reporting

19 II. Fiscal environment C. Overview of the taxation rules for corporate entities 1. Corporate income tax ( CIT ) Luxembourg levies an annual corporate income tax (impôt sur le revenu des collectivités) on the net worldwide profits (subject to double tax treaties) of Luxembourg companies (SAs, Sàrls and SCAs) while partnerships (CLPs and SLPs) are considered transparent entities for tax purposes and thus are not subject to CIT. Taxable profits are computed in accordance with the provisions of the amended income tax law dated 4 December 1967 (the ITL ), which define them as the annual variation of the net assets of the company during the fiscal year, increased by withdrawals and reduced by contributions. As a general rule, taxable profits are determined on the basis of the accounting profits as established in accordance with the Luxembourg generally accepted accounting principles (the Lux GAAP ), except when the valuation rules for tax purposes demand otherwise. Profits and expenses (e.g. amortisations, depreciations, interest and other business expenses) are taken into account for the financial year during which they have been realised or exposed, irrespective of the actual payment. Several exemptions from CIT may apply, such as the participation exemption regime on eligible shareholdings and roll-over reliefs may be available for reinvested capital gains in certain circumstances. As of 1 January 2017, fiscal losses incurred in a given tax year may be carried forward for a maximum of 17 years under certain conditions by the company who has suffered them. Carry backs, however, are not allowed. Luxembourg tax law does not provide for detailed thin capitalisation. However, with respect to transfer pricing, tax payers must comply with the arm s length principle in line with the OECD guidelines and related adjustment methods. In 2017, the CIT rates are as follows: In 2018, the CIT rates will be as follows: Taxable income Rate Taxable income Rate EUR 25,000 15% EUR 25,000 15% > EUR 25,000 > EUR 25,000 3,750 euros + 39% EUR 30,000 EUR 30,000 3,750 euros + 33% > EUR 30,000 19% > EUR 30,000 18% A solidarity surcharge for the employment fund is currently levied on companies at a rate of 7%, which leads to an effective CIT burden of 20.33% in 2017 and 19.26% in 2018 for taxable profits exceeding EUR 30, Municipal business tax ( MBT ) Luxembourg levies an annual municipal business tax (impôt commercial communal) on the net profits realised by Luxembourg companies. Partnerships may be subject to MBT if (i) the partnership carries out a business activity or (ii) if, by virtue of the business-taint theory (Geprägetheorie), the partnership s general partner owns 5% or more of the capital or economic interests in the partnership. With respect to item (i), note that a partnership which qualifies as an AIF within the meaning of the law of 12 July 2013 on alternative investment fund managers (the AIFM Law ) is deemed not to be conducting a business activity according to the Circular Letter L.I.R. n 14/4 issued by the Luxembourg tax authorities on 9 January The taxable base for the determination of the taxable result under the MBT is generally the taxable result as determined under the CIT (with minor adjustments). The MBT is governed by the amended municipal business tax law dated 1 December The MBT rates vary depending on the municipality in which the company s registered office or undertaking is located. 17 In 2017, the MBT rate is 6.75% in Luxembourg City.

20 II. Fiscal environment 3. Net wealth tax ( NWT ) Luxembourg levies an annual net wealth tax (impôt sur la fortune) on the net assets of Luxembourg companies in accordance with the net wealth tax law dated 16 October 1934 while partnerships are not subject to NWT as transparent entities for tax purposes. Net wealth is referred to as the unitary value as determined at 1 January of each year in accordance with the valuation rules set forth by the valuation law dated 16 October The unitary value is basically calculated as the difference between (i) assets generally estimated at their fair market value and (ii) liabilities vis-à-vis third parties. Several exemptions from NWT may apply, e.g. the participation exemption regime on eligible shareholdings. Real estate assets situated abroad are generally exempt under the applicable double tax treaties. As from 1 January 2016, a new minimum NWT has been introduced in Luxembourg to replace the minimum advance CIT abolished by the Law of 18 December Companies whose financial assets, transferable securities and cash deposits cumulatively exceed (i) 90% of their total balance sheet, and (ii) EUR 350,000 will be subject to a minimum NWT of EUR 4,815. For other companies, the minimum NWT due will be calculated on the basis of the amount of their total balance sheet at year end (minimum NWT charge from EUR 535 to EUR 32,100 respectively for a total balance sheet from up to EUR 350,000 to equal or more than EUR 30,000,001). Furthermore, securitisation companies and undertakings for collective venture capital investments (Société d investissement à capital risque or SICAR ) remain exempt from NWT but are liable to the minimum NWT. The minimum NWT does not constitute an advance and is not creditable against any future tax charge due by the taxpayer. However, the NWT charge for a given year can further be avoided or reduced to the minimum NWT if a specific reserve, equal to five times the NWT, is created before the end of the subsequent tax year and maintained during the five following tax years. The NWT rate is 0.5% on the unitary value as determined at 1 January of the fiscal year. The Law of 18 December 2015 introduced a new reduced NWT rate of 0.05% that will apply to the part exceeding EUR 500 million. 4. Withholding taxes ( WHT ) a. Dividends Dividends distributed by a Luxembourg company to its shareholder(s) are as a rule subject to a withholding tax ( Dividend WHT ) at a rate of 15% (17.65% if borne by the distributing company). The Dividend WHT must be levied by the distributing company on behalf of the recipient and remitted to the tax authorities within 8 days from the date on which the dividend is placed at the shareholder s disposal. An exemption from or reduction of the Dividend WHT is however possible under the participation exemption regime or the applicable double tax treaties. For resident shareholders, the Dividend WHT may be credited against their income tax liabilities and any excess is refundable. For non-resident shareholders, the Dividend WHT is the basic tax on their Luxembourg-source dividends. A partial or total refund may be available by virtue of a double tax treaty. 18

21 II. Fiscal environment b. Interest Interest paid by a Luxembourg company is generally not subject to WHT, except in the following limited cases: profit allocations paid to a silent partner investing in a business and remunerated in proportion to the business s profits may be subject to a 15% WHT; interest paid on certain profit-sharing bonds or notes may be subject to a 15% WHT; payments of interest or similar income by a Luxembourg-based paying agent, or under certain circumstances by an EU-based paying agent, to or for the immediate benefit of a Luxembourg-resident individual may be subject to a WHT of 20%. Such WHT is in full discharge of income tax, if the beneficial owner is an individual acting in the course of the management of his/her private wealth. c. Liquidation proceeds Liquidation proceeds (deriving from a complete or partial liquidation) paid by a Luxembourg company are not subject to WHT in Luxembourg. d. Royalties Royalties paid by a Luxembourg company are generally not subject to WHT in Luxembourg. e. Directors fees Fees (tantièmes) paid to directors or statutory auditors are subject to a WHT levied at the rate of 20% on the gross amount paid (25% if the withholding cost is borne by the payer). The WHT is the final tax for non-resident beneficiaries if their Luxembourg-source professional income is limited to directors fees not exceeding EUR 100,000 per fiscal year. 5. Participation exemption regime Under the participation exemption regime, the following exemptions are available: dividends, liquidation proceeds and capital gains received and realised on qualified shareholdings in eligible subsidiaries are exempt from CIT and MBT; dividends distributed to eligible parent companies are exempt from the 15% dividend WHT; qualified shareholdings in eligible subsidiaries are exempt from NWT except from the minimum NWT. In order to qualify for the participation exemption regime, the following conditions must be met: Qualified subsidiary Qualified Parent LuxCo Dividend WHT exemption Qualified subsidiary Qualified subsidiary Qualified subsidiary Exemption of dividends, capital gains and liquidation proceeds 19

22 II. Fiscal environment Qualified parent Qualified subsidiary Holding period Level of participation Participation exemption on dividends and liquidation proceeds Participation exemption on capital gains Participation exemption for NWT Luxembourg resident fully-taxable company Luxembourg permanent establishment ( PE ) of a company covered by Article 2 of Directive 2011/96/EU of 30 November 2011, on the common system applicable in the case of parent companies and subsidiaries of different Member States (the EU Parent-Subsidiary Directive ) Luxembourg PE of a company resident in a country having a double tax treaty with Luxembourg Luxembourg PE of a company which is resident in a Member State of the European Economic Area ( EEA ), other than an EU Member State Luxembourg resident fully-taxable company company covered by Article 2 of the EU Parent-Subsidiary Directive non-resident company liable to a tax corresponding to the Luxembourg CIT holding or commitment to hold the n/a participation for an uninterrupted period of at least 12 months 10% or acquisition price EUR 1,2 million 10% or acquisition price EUR 6 million 10% or acquisition price EUR 1,2 million Participation exemption on outbound dividends Luxembourg resident fullytaxable company company covered by Article 2 of the EU Parent-Subsidiary Directive or a Luxembourg PE thereof company resident in a country having a double tax treaty with Luxembourg and liable to a tax corresponding to the Luxembourg CIT or a Luxembourg PE thereof Swiss resident company which is subject to corporate income tax in Switzerland without benefiting from an exemption company resident in an EEA Member State other than an EU Member State and liable to a tax corresponding to the Luxembourg CIT or a Luxembourg PE thereof Luxembourg resident fullytaxable company holding or commitment to hold the participation for an uninterrupted period of at least 12 months 10% or acquisition price EUR 1,2 million In addition to the domestic participation exemption regime, almost all of the double tax treaties concluded by Luxembourg grant relief on dividends under conditions which may be more favourable than domestic ones. Furthermore, the participation exemption regime contains rules intended to avoid a double benefit (exemption of income and deduction of expenses). Capital losses realised upon disposal of the shares remain tax deductible. 20 The Law of 18 December 2015 applicable as of 1 January 2016 has introduced an anti-hybrid and general anti-abuse rule ( GAAR ) in the domestic provisions regarding participation exemption. Thus, the benefit of participation exemption rules may be denied if the main purpose of the arrangement defeats the object of the EU Parent-Subsidiary Directive and is not genuine having regard to all relevant facts and circumstances.

23 II. Fiscal environment If the conditions of the participation exemption regime are not satisfied, the following tax treatment is applicable: dividends are as a rule fully liable to CIT and MBT at the ordinary rates. By way of exception: a 50% exemption is available for dividends derived from a participation in one of the following entities: - a Luxembourg resident fully-taxable company limited by share capital, or - a company resident in a State with which Luxembourg has concluded a double tax treaty and liable to a tax corresponding to the Luxembourg CIT, or - a company resident in an EU Member State and covered by Article 2 of the EU Parent-Subsidiary Directive; a full exemption from MBT is available for dividends derived from a participation representing, at the beginning of the taxable year, at least 10% of the share capital of the distributing company which is: - a Luxembourg resident fully-taxable company limited by share capital, or - a non-resident company limited by share capital fully liable to a tax corresponding to the Luxembourg CIT. capital gains are treated as ordinary profits and are as a rule fully liable to CIT and MBT at the ordinary rates; dividends paid by a Luxembourg company to its shareholder(s) are as a rule subject to the 15% dividend WHT. In principle, distributions made to treaty country resident shareholders benefit from reduced dividend WHT rates provided for by double tax treaties concluded by Luxembourg. Foreign WHTs on received dividends may generally be credited against any CIT liability in Luxembourg. Such CIT credit is however limited to the amount of CIT due in Luxembourg on such dividends, i.e. no credit is generally available if the dividends are exempt under the participation exemption regime. 6. Value added tax An involvement in economic activities (i.e. in principle any supply of goods or services on an independent and continuous basis against remuneration) is generally subject to VAT and procures the status of a taxable person for VAT purposes. Depending on the nature of the activities and the circumstances under which they are exercised, VAT may become applicable, requiring VAT registration and compliance with certain VAT reporting obligations. VAT exemption regimes are available in the investment fund sector and the financial/insurance sector. Furthermore, the acquisition/sale or renting of real property is, as a rule, exempt from VAT (a voluntary option to tax is however possible under certain conditions). Mere shareholding activities do not qualify as economic activities for VAT purposes and are not subject to VAT. Any involvement in VATable activities allows, in turn, for the recovery of VAT paid on related costs (neutrality principle). An involvement in VAT exempt activities generally does not allow for the recovery of VAT paid on related costs (exceptions are however possible, e.g. for financing activities with non-eu borrowers). The standard VAT rate in Luxembourg is 17%. Reduced VAT rates (14%, 8% and 3%) apply to certain transactions. 21

24 III. Migration to Luxembourg A. Transfer of residence Individuals may find Luxembourg an attractive place of residence as a result of the various advantages mentioned in sections I and II. The integration of foreign nationals forms part of the history, culture and identity of the country. Today almost 46% of inhabitants are foreigners and the multilingualism of the local population enables them to integrate rapidly into daily life. Nationals of the Member States of the European Union, the Swiss Confederation, Iceland and Norway may legally take up a professional activity and/or reside in Luxembourg without being required to obtain a prior temporary residence authorisation and/or long-term permit. Foreign nationals from third country States are required to undergo a more complex procedure and obtain a valid temporary authorisation to stay and a long-term permit before they may legally take up service and reside in Luxembourg. In this regard, the Immigration Act as amended (loi du 29 août 2008 sur la libre circulation des personnes et l immigration telle que modifiée) provides for different categories of residence permits for which a foreign national may apply: employed person, highly qualified employee, self-employed person, seconded employee, sportsman, research professor, student, family member and for private reasons. On 8 March 2017, a new law substantially reforming the Immigration Act was enacted which profoundly changes and enlarges the currently applicable provisions of the Immigration Act. One of the main innovations is the creation of four new residence permits: a residence permit for seasonal workers, a residence permit for temporary intra-company transfers ( ICT ), a residence permit for investors and a residence permit for business continuity plans for non-eu companies based in Luxembourg. The most common of the categories used so far for the purpose of obtaining such residence authorisation and permit are those of employed person (including highly qualified employees, European Blue Card), self-employed person as well as private reasons. To qualify for the residence permit for private reasons, the foreign national from third country States should fulfill, amongst others, one of the following conditions: prove that he can live of his own financial resources (beware bank savings alone might not be considered sufficient, the applicant should prove a regular income); or in case the applicant does not fulfill the conditions for family reunification he may apply for a residence permit for private reasons by proving that personal or family ties are of such an importance that a refusal to grant him residence would violate his right to respect for private and family life in a disproportionate manner compared to the motives of refusal. The existing ties are evaluated on how strong, old and stable they are. In addition to this current option to apply for residency without working in Luxembourg, the new provisions of the Immigration Act have introduced a new category of residence permit, known as the investor s regime under which the temporary authorisation to stay may be granted subject to certain investment requirements. 22 Foreign nationals from third countries States can ask for residency provided that they invest in Luxembourg. The investment options are as follows: - To invest at least EUR 500,000 in an existing Luxembourg company (with commercial, industrial or craft activities) and commits himself to maintain the existing employment for 5 years, except if the company is in difficulty at the time of the purchase, in which case the aforementioned employment condition is not applicable; or