Luxembourg a location ideally suited to Chinese investors

Transcription

1 Luxembourg a location ideally suited to Chinese investors September 2015

2 The following top tier Chinese banks have stamped their imprints in Luxembourg: Bank of China (BoC) the first Chinese bank to operate in Luxembourg, since 1979 Industrial and Commercial Bank of China (ICBC) established in Luxembourg since 1998 China Construction Bank Agricultural Bank of China China Merchants Bank Bank of Communications Some of them use Luxembourg as their European headquarters; surveys suggest that others will follow...

3 3 Location of choice for Chinese investors Foreword 1 st European country in terms of labour productivity. Source: OECD Many Asian sovereign wealth funds, pension funds and other investors allocate their investments to European alternative assets such as private equity and real estate. These investors need to consider various holding locations that would be most suitable as an investment platform. We designed this brochure to provide Chinese investors with the appropriate information that will enable them to take an informed decision. PwC is the European market leader, amongst other matters, in structuring cross border investments. We are convinced that a Luxembourg investment platform provides a competitive solution and is better than any other offshore location, such as the Cayman Islands. The recent establishment of six of the largest Chinese banks in Luxembourg stands as a proof of our viewpoint. In this brochure we explain why Luxembourg is so attractive for Chinese investors. We want to be your partner for an open discussion and help you find the solution that helps create the value you re looking for.

4 4 PwC Luxembourg The ten most frequently asked questions from Chinese investors coming to Europe. Luxembourg is home to many Chinese investment/holding platforms. Other investment managers have gone through a similar process like you. Based on our experience as a market leader, we summarised below the ten most frequently asked questions from Chinese investors who want to invest in European assets. Direct access to Government officials. Luxembourg is the world's second largest domicile for asset management after the US. Luxembourg is AAA rated. 1. How do we choose the best location for a holding/ investment platform? Here are the main drivers: geographic accessibility, political and economic stability, tax efficiency, no foreign exchange control, professional infrastructure, favourable business culture and environment and the regulatory framework. A risk free business environment with an excellent reputation is a must. 2. How do we make sure that an investment platform location remains the best for the future? Countries where governments abruptly change their political orientation in terms of ideology or doctrine are politically unstable. This means that business incentives and tax laws could also change drastically, and that economic stability cannot be guaranteed. General government debt (in % of GDP) Luxembourg Ireland UK Netherlands EU27 France Germany Italy Source: Eurostat General government deficit/surplus (in % of GDP) Luxembourg Ireland UK Netherlands France Germany Italy Source: Eurostat For example, the frequent changes in the Belgian and Dutch governments have triggered changes in local tax laws every year. On the contrary, the political regime in Luxembourg is among the most stable in Europe. The tax law hasn t changed significantly since the introduction of transfer pricing rules in Some new regulations were introduced on 1 January 2015 to improve the transparency of the tax regime (e.g. the new Advance Tax Confirmation procedures) and to provide more clarity on transfer pricing requirements. The Grand Duchy is one of the founding countries of the European Union and upholds a very strong reputation. It has an extremely stable government and the lowest sovereign debt in Europe.

5 5 Location of choice for Chinese investors Access to European tax Directives. Dividend payments to corporate shareholders in China are exempted from withholding tax under Luxembourg law. Lowest VAT rate in Europe. 3. Which tax aspects should we consider? Taxation is important for three levels: (i) the level of invested assets and their flow of payments to the investment platform, (ii) the level of the investment platform itself and (iii) the repatriation of proceeds to the investors. (i) Local tax treatments at asset level can only be optimised locally, for example through debt push down and good cost allocation or through specific local tax incentive regimes. The reduction of withholding tax on payments to the investment platform is very important to make sure investors are not suffering more tax costs than if they had invested directly. This is achieved through European directives and tax treaties. It doesn t matter how many treaties a country has, but what kind of treaties and how good they are. Given that offshore locations usually don t have any tax treaties, using such locations often triggers withholding taxes. This is why an offshore platform is certainly not a good solution. (ii) Generally, your investment platform should either be tax exempt (in case of regulated structures) or incur only minimal taxes. The taxable basis of an investment platform is typically designed to cover running costs only. You may consider using a Luxembourg regulated vehicle like the Specialised Investment Fund (SIF). This is only available to well informed investors and is subject to approval by financial authorities. This type of company is exempted from corporate tax and allows you to treat each asset in a different compartment, avoiding contamination of bad assets. Alternatively, you could consider a normal Soparfi structure. A Soparfi is a taxable entity subject to the normal corporate tax regime, but it is only taxed on income earned by the company itself (so not on e.g. foreign real estate income) or on a very small margin on proceeds flowing through Luxembourg. Both structures are widely used among the biggest global real estate and private equity funds. Furthermore, in July 2013 the Luxembourg limited partnership (Lux LP) regime has been improved and the Luxembourg special limited partnership has been added to the legal arsenal of investment vehicles, which offers new solutions to investment fund managers and promoters. ( private-equity/docs/pwc-private-equity-luxlimited-partnership.pdf). Last but not least, Luxembourg has the lowest VAT rate in Europe (17%). (iii) Your holding location should allow you to extract proceeds from your investments with a great flexibility and without running into withholding taxes at every step of the repatriation process. Unlike other European locations, where companies have to rely on tax treaties to repatriate proceeds from investments to China, Luxembourg, as a unique location in Europe, provides them with a wide spectrum of financial instruments and domestic exemptions to repatriate proceeds to investors without withholding taxes. The wide spectrum of worldwide investors based in Luxembourg is unique in the EU

6 6 PwC Luxembourg Always engaged in an open dialogue with our tax and regulatory authorities. 4. What kind of costs should we expect? Realistic budgeting avoids unpleasant surprises that decrease the return on your investments. Therefore, you should include at least the following categories of costs: setup of the legal structure, registration duties, costs of authorisations and approvals (in case of regulated structures), advisory costs, bookkeeping costs, compliance costs, employee costs, travel costs, audit costs, other running costs. Based on our surveys, Luxembourg is perceived by our clients as a very good compromise between high quality and cost. In other words: value for money. 5. How do we know if we can easily do business in a holding location? Business culture, skilled workforce and an experienced professional infrastructure are critical. This will translate in professional organisations and associations for funds, financial institutions, investors and advisers who know what you re going through and share their experience on the market. Easy access to government officials is essential if you want to design an efficient investment structure. Though geographically close together, European countries can have different ways of doing business, different cultures and different habits and customs. A multilingual workforce in a multicultural environment breaks down these barriers. This is why Luxembourg provides foreign investors with excellent opportunities. The Luxembourg government is committed to maintain its attractiveness in a BEPS compliant world. Stability, effectiveness and transparency will remain key priorities.

7 7 Location of choice for Chinese investors A Luxembourg platform offers the benefits of European tax directives and double tax treaties that an Asian platform couldn t provide for you. An example for your European investment structure INVESTOR LEVEL The flow of funds between investors and the investment platform needs to be: Flexible; Safe and secure; Tax efficient. Investment fund (China/Luxembourg) Tax free repatriation of proceeds PLATFORM LEVEL The investment platform needs to be: Safe and secure; Easy to manage; Low set-up and running costs; Sustainable for future; Tax efficient; Compliant with regulations; No foreign exchange control Small taxable margin according to OECD standards Luxembourg investment platform Tax free repatriation of proceeds Lux Co 1 Lux Co 2 Lux Co 3 ASSET LEVEL The investment structure from the investment platform into assets should facilitate: Tax minimisation through debt push down and cost allocation Maximum withholding tax protection at asset level; Flexible repatriation structures. Tax free repatriation of proceeds after local taxation dividends, interest, capital gains French Companies German Companies UK Companies Income and capital gains

8 8 PwC Luxembourg 6. Which regulations should we be aware of when investing in Europe and how flexible are regulators? Short and daily communication lines with regulators In response to the global financial crisis, the US and European governments have toughened their regulatory environment. The result: a spider web of regulations (AIFMD, MIFID, Basel, Solvency, IORP, Fatca, Dodd-Frank). As a non-european investor, being or not under the scope of these regulations depends on the type of structure you choose, how you manage your investments, what you invest in, etc. Each EU member state transposes European directives in its domestic legislation in a different manner. Make sure that choosing a certain location will not cause you unnecessary regulatory burdens and that your advisers know how to deal with potential challenges. Regulators in various jurisdictions have different approaches. In most European countries the regulators are sceptic and manage applications in a bureaucratic way. The Luxembourg regulators are open for dialogue with investors and apply a business oriented approach. 7. Why should we consider sending some of our people over to the European investment platform? Having your people on the ground at your holding location is important because: they integrate with the local business environment, steer your service providers and manage the assets closely in the local time zone; they can translate the appropriate reporting to you, according to your requirements; they provide substance to the European investment platform, which is strongly needed for tax and regulatory purposes, and they can deal with any issues directly in Europe. Your holding location should provide state of the art facilities and (tax) benefits for your expatriates in Europe. Luxembourg offers specific incentives for employers who

9 9 Location of choice for Chinese investors attract foreign specialists in Luxembourg and offers attractive advantages for people who come to work in Luxembourg. 8. What timeline are we looking at to set up a holding / investment structure? Setting up a holding structure should be an easy and straightforward process. Local lawyers, notaries and advisers usually fulfil the incorporation of a company in a matter of days. Depending on the complexity of the investment structure, you ll need more time to draft and obtain legal documents and get approvals. If the investment structure includes a fund vehicle, it requires more time, depending on whether regulatory licenses should be obtained or not. The routine of the local professional infrastructure is critical in this process. The Luxembourg professionals working in the financial services and investment industry understand how important a smooth incorporation process is. Notaries, lawyers, bankers, regulators and tax administrations are all very well aware that their pro-activeness impacts the attractiveness of the Luxembourg business platform. Therefore, a company can be incorporated within a week. Short communication lines are critical for all investors. 9. How easy can we liquidate our structure? Once you decide to dispose of certain assets you need to be able to repatriate the proceeds to the investors. The most common pitfalls are referred to as cash traps. A poorly designed structure could block the repatriation of proceeds for several reasons: the legal or contractual form is inappropriate; the contamination of unyielding assets has not been taken into account; the local legislation doesn t allow for easy repatriation of profits in the course of a liquidation. The Luxembourg legislation allows for a preliminary liquidation dividend payment, which means that a liquidation process doesn t have to be completed to repatriate proceeds to an investor. And, unlike many other jurisdictions, liquidation proceeds are not subject to withholding or exit taxes. This allows an easy, quick and complete repatriation of proceeds to investors. 10. How do we achieve low effective tax rates on our investments in Europe? Here s what you can do to have a tax efficient and tax neutral structure: (i) Avoid the use of offshore locations: offshore structures are more and more under scrutiny from worldwide tax administrations, governments and NGOs. (ii) Choose a location that falls within the scope of EU laws - they eliminate withholding taxes and make the use of tax treaties in most cases unnecessary. (iii) Use a holding location with stable and neutral tax regimes that are in line with OECD standards and guarantee that proceeds coming up from your investments are not taxed differently than if investors had invested directly in the assets. (iv) Use a holding location with the most flexible repatriation techniques possible to repatriate the proceeds from the investment platform to the investment fund / the investors. (v) Get full security through advance tax agreement that confirms the tax treatment of the structure. (vi) Do not use structures that are overly aggressive or can be challenged on grounds of lack of business rationale. Economic reality is the first element to be tested by foreign tax authorities. We recommend sustainable and fair tax planning. Your structure should pass the Financial Times test, so that you and your investors sleep well at night. (vii) Look for a low Total Tax Rate: use the holding location where your structure is the least exposed to different types of taxes, such as stamp duties, transfer taxes, crisis contributions, labour taxes, indirect taxes, communal taxes etc. Total tax comparison for most European countries is set out on the next page.

10 10 PwC Luxembourg With a Total Tax Rate of 20.2%, Luxembourg has the 2 nd lowest TTR rate in the European Union. Total Tax Rate (%) Croatia Luxembourg Cyprus Ireland Denmark Bulgaria Switzerland Iceland Slovenia United Kingdom Latvia Poland Netherlands Finland Norway Malta San Marino Portugal Lithuania Romania Hungary Czech Republic Slovak Republic Germany Estonia Sweden Greece Austria Belgium Spain Italy France EU & EFTA average (41.0%) Profit taxes Labour taxes Other taxes Total Tax Rate / TTR: cost of all taxes borne including labour taxes, social security, property taxes, indirect taxes, environmental taxes Source: Paying Taxes 2015, World Bank, International Finance Corporation, PricewaterhouseCoopers (

11 11 Location of choice for Chinese investors Our Credentials Setting up of a Luxembourg investment platform by a Middle-East sovereign wealth fund for USD 2bn Investor advised by PwC Luxembourg advised on set up of a Luxembourg investment platform with a view to acquire Brazilian private equity assets. The investment platform was provided with funds in excess of USD2bn. Our services included accounting & tax compliance support. Top-tier private equity Funds Structuring services provided by Many real estate and private equity house use Luxembourg as a fund location. Applying for Luxembourg banking licenses on behalf of a top tier Chinese bank PwC Luxembourg helped the bank obtain the universal banking licenses in Luxembourg for a subsidiary and a branch, which enabled it to provide a wide range of activities in Europe and internationally. Our services included banking licenses application, tax compliance and consultancy service, and audit support. Setting up of a Luxembourg investment platform by a Middle-East sovereign wealth fund for USD 2,1bn Investor advised by PwC Luxembourg structured funds and investment platforms for a number of promoters in the Middle East region. Our services included tax structuring and regulatory support in connection with regulated and unregulated fund vehicles. At PwC Luxembourg we have over 2,450 people, of 55 nationalities, to serve our clients.

12 12 PwC Luxembourg Luxembourg is at the heart of the European market No other European territory has such a widespread spectrum of financial instruments available for the repatriation of profits to investors as Luxembourg. Types of income: recurring vs at exit taxable vs non-taxable equity vs debt Types of investors: regulated vs non-regulated taxable vs non taxable treaty protected vs non treaty equity preference vs debt preference Depending on the type of income and the type of investor, different repatriation instruments are available in practice. Tax efficient income repatriation to any investor

13 13 Location of choice for Chinese investors Multilingual Over 66% expats N 1 Fund location in Europe On-shore reputation Skilled workforce Multicultural society Europe's financial services centre 100% OECD compliant Direct access to government Officials Founding member of the EU In the heart of Europe Virtually crime-free Luxembourg Lowest VAT rate In Europe AAA status Open dialogue with tax authorities Europe's best professional infrastructure No foreign exchange control Access to all European tax Directives No. 2 fund platform in the world(after the US) Crisis Resistant government finance 1 st private banking sector in the euro area Chinese community

14 14 PwC Luxembourg How we can help you The European investment environment is complex and you will have to deal with numerous regulatory, commercial and legal challenges. We ve done this many times before. We can help you avoid unpleasant surprises, control costs and create value! PwC is not only a global player, but also the market leader in Luxembourg. We want to be your partner and bring aboard our strongly connected network of European specialists.

15 15 Location of choice for Chinese investors Contacts Matthew E. Moran Partner (M&A) China Market leader Insurance sector leader Michael Frigo Partner (Tax) Xiaoyan Huang Senior Manager (Tax) China Country Programme Director

16 PwC Luxembourg ( is the largest professional services firm in Luxembourg with 2,450 people employed from 55 different countries. It provides audit, tax and advisory services including management consulting, transaction, financing and regulatory advice to a wide variety of clients from local and middle market entrepreneurs to large multinational companies operating from Luxembourg and the Greater Region. It helps its clients create the value they are looking for by giving comfort to the capital markets and providing advice through an industry focused approach. The global PwC network is the largest provider of professional services in audit, tax and advisory. We re a network of independent firms in 157 countries and employ more than 195,000 people. Tell us what matters to you and find out more by visiting us at and PricewaterhouseCoopers, Société coopérative. All rights reserved. In this document, PwC Luxembourg refers to PricewaterhouseCoopers, Société coopérative (Luxembourg) which is a member firm of PricewaterhouseCoopers International Limited ( PwC IL ), each member firm of which is a separate and independent legal entity. PwC IL cannot be held liable in any way for the acts or omissions of its member firms. Follow us