ABA Tax Section 2011 Midyear Meeting - Luxembourg Tax Environment

Transcription

1 ABA Tax Section 2011 Midyear Meeting - Luxembourg Tax Environment Christophe Joosen Tax Partner NautaDutilh Avocats Luxembourg Office: Mobile: christophe.joosen@nautadutilh.com

2 Luxembourg Taxes In a Nutshell High nominal tax rate 28.80% Minimum tax on holding/financing companies EUR 1,575 Basis: stand-alone statutory accounts (prepared according to Luxembourg GAAP or IFRS) unless tax law provides otherwise. but reduced tax base: 100% participation exemption for qualifying capital gains and dividends; No CFC legislation; 80% exemption for qualifying IP income; Capital losses and write-downs tax-deductible; Exemption method for foreign branch profits from treaty countries; Flexible transfer pricing rules; Use of hybrid entities and instruments; Tax consolidation; Functional currency election possible; Flexible and investor friendly ruling regime. Page 2 Belgium, Luxembourg, the Netherlands and Switzerland 2

3 Luxembourg Participation Exemption 100% of dividends and capital gains exempt from income tax provided that the following conditions are met: Holding requirement: For dividends: shares representing 10% or more of the capital (or Euro 1.2 million acquisition value) directly for 12 months (retroactively or prospectively). For capital gains: shares representing 10% or more of the capital (or Euro 6 million acquisition value) directly for 12 months (retroactively or prospectively). Subject to equivalent taxation requirement: Deemed met for EU resident companies (listed in Parent Subsidiary Directive). For other subsidiaries, subject to equivalent taxation requirement. - ETR of 10.5% computed under Luxembourg principles - A number of exceptions apply to the 10.5% taxation requirement (e.g. qualifying tax holidays, exemption provided under certain tax treaties without taxation condition, e.g. Swiss treaty) Page 3 Belgium, Luxembourg, the Netherlands and Switzerland 3

4 Luxembourg Taxes In a Nutshell In addition: Wide treaty network: 61 in force 14 in negotiation/ratification No capital duty 0.5% net worth tax: Exemptions (participations, IP, foreign assets) Credit against corporate income tax Lowest VAT rate (15%) in the EU Favorable Expat Regime introduced effective 2011 Unlimited loss carry-forward Page 4 No stamp duties Belgium, Luxembourg, the Netherlands and Switzerland 4

5 Flexible company law Non-tax Drivers Wide network of investment protection agreements with most emerging countries Political stability Page 5 Belgium, Luxembourg, the Netherlands and Switzerland 5

6 Repatriation of Profits No withholding taxes on interest and royalties 15% default rate of dividend WHT reduced to 0% if: - Paid to qualifying EU/EEA resident companies; - Paid to qualifying entities in treaty jurisdictions which meet a subject-to-tax test (e.g. US); or, - Paid to Luxembourg permanent establishments of qualifying entities in treaty countries. Various widely used repatriation planning techniques available. Page 6 Belgium, Luxembourg, the Netherlands and Switzerland 6

7 LUXEMBOURG HOLDING AND FINANCING STRUCTURES Page 7 Belgium, Luxembourg, the Netherlands and Switzerland 7

8 Repatriation Dividend Distributions Luxembourg Company EEA / EU Company Tax Treaty Country Company Parent EEA/ EU Company Directive 90/435/CEE as amended Parent Tax Treaty Country (comparable tax) PE Luxembourg PE Luxembourg EUR 1.2 Mio 10% 12 months Luxembourg Company 8

9 Luxembourg Holding Company Classics US Loan / IP License LUX LP LUX Loan / IP Sub-license CH/US/ IRL Sect 110 SWISS Hong Kong AUSTRIA Malta TAX HAVEN PRC TAX HAVEN 9

10 Luxembourg : Lux1 - Lux2 US LUX1 Loan Luxembourg consolidation: Under new proposed tax consolidation regime (caveat NWT 50 bp cost); or PEC between Lux1 and Lux2; or RPS between Lux1 and Lux2 (with stock dividend) No interest withholding tax Taxation limited to spread LUX2 Loan Subs EU EU 10

11 Double Tier Distressed Debt Structure Profit Participating Instrument Investors LP LuxCo 1 LuxCo 2 Investment portfolio Steps LuxCos are set up with minimum capital LuxCo 1 financed with profit participating instrument LuxCo 2 equity financed Luxembourg tax benefits No Luxembourg withholding tax on interest paid or repayments of principal of the debts The tax base of LuxCo very limited Good arguments for beneficial ownership LuxCo 2 benefits from double tax treaties and EC Directives Considerations Implemented for several different types of investments and with different jurisdictions Net worth tax and FX can be managed Ruling letter 11

12 Luxembourg Private Equity Classics: Use of Preferred Equity Certificates ( PECs ) US Investors Steps LuxCo is set up with minimum capital Financing of part of the investments to be acquired by/transferred to LuxCo by PECs (can be straight PECs, Convertible PECs or Tracking PECs) CPECs (hybrid) Fund LuxCo TargetCos Management Carried Interest Luxembourg tax benefits PECs/CPECs/TPECs: - debt from a Luxembourg perspective - equity from an US tax perspective Debt-to-equity ratio of 99/1possible No Luxembourg withholding tax on yield paid or redemption of the CPECs above nominal value LuxCo benefits from double tax treaties and EC Directives Implemented for several different types of equity investments and with different jurisdictions 12

13 Luxembourg PE and VC Structuring: Use of Alphabet Stock Investors Steps LuxCo is fully capitalized and issues several classes of shares Alphabet Stock Fund A B C D E LuxCo Luxembourg tax benefits Repatriation of proceeds through redemption of class of shares should qualify as a partial liquidation (Partial) liquidations are not subject to Luxembourg withholding tax TargetCos 13

14 Financing with interest-free loan Steps US FCo grants an interest-free loan (IFL) to LuxCo With the funds received, LuxCo grants an interest-bearing loan to FCo2 (e.g. USCo) Blocker Tax Benefits FCo* LuxCo FCo2 LuxCo has beneficial ownership over interest income (from legal and accounting perspective) LuxCo entitled to an imputed interest deduction on the IFL IFL IBL The spread to be realized depends on the amount of the financing activity and the level of risk of LuxCo (e.g. 0.25% or lower) Spread is taxable at a rate of 28.59% in Luxembourg * From a Luxembourg tax perspective, FCo can be Irish, Barbados, Cayman, etc. 14

15 Luxembourg Financing Structures US parent RH holdco Overview: Hybrid loan: Lux hold/fin grants hybrid loan(s) to its subsidiaries Branch structures: Lux hold/fin allocates its receivable towards group companies to a finance branch Belgian Finco with notional i-deduction Hybrid loan Belgium Brazil France Ireland Italy Netherlands Russia Spain Sweden Switzerland Belgian Finco Lux hold/fin Loan Subs/ operations Loan US/CH branch Potential benefits: Hybrids allow for a deduction of interest expenses at the level of operating entities/subsidiaries, and exemption of the corresponding receipt in Luxembourg (ETR 1.5% or lower) Setting up a finance branch allows for deduction of interest expense at the level of operating entities/subsidiaries and limited/no corresponding taxation at the level of the branch nor at the level of its Luxembourg head office (ETR 1.5% or lower) Participation exemption on dividends received from Belgian Finco Luxembourg tax clearance advised Belgium, Luxembourg, the Netherlands and Switzerland 15

16 Regulated Private Equity Investment Vehicle: SICAR Investors (Fully taxable / tax exempt ) SICAR Legal/Regulatory Framework No requirement for risk diversification but investment in risk capital only (PE and venture capital) Corporate forms (SA, SARL, SCA, SCOPSA) and SCS partnerships Lighter supervision of the Luxembourg regulator CSSF Open to well- informed investors; Open ended or closed-ended; Compartments (new) Target 16

17 SICAR (Cont d) Investors(Fully taxable/ tax exempt) SICAR Tax Framework (opaque entities) No capital duty Fully taxable but exempt from tax on income from investments in transferable securities No withholding tax on income allocated to investors Management services to SICAR exempt from VAT No taxation upon disposal SICAR SOPARFI If required Target 17

18 Regulated Investment Vehicles: SIF Qualifying Investors SIF (FCP, SICAV or SICAF) Legal/regulatory aspects Well informed investors Any kind of assets eligible Diversification (30% rule) Corporate or contractual form Open ended or closed-ended Supervision of the CSSF - Initiator of SIF needs to be disclosed to regulator Luxembourg based custodian and external auditor Central administration in Luxembourg Transferable securities, debt instruments, money market instruments, real estate, private equity, commodities and financial derivative instruments 18

19 Regulated Investment Vehicles: SIF Qualifying Investors Tax treatment No capital duty (2009) Not subject to CIT, MBT and NWT Annual subscription tax of 0.01% on net asset value of SIF (some exemptions) No WHT tax on distributions to investors Management services to SIF exempt from VAT SIF (FCP, SICAV or SICAF) Transferable securities, debt instruments, money market instruments, real estate, private equity, commodities and financial derivative instruments 19

20 Alternative vehicle: SIF (Real Estate and/or Alternative Asset Classes) Fund/ Investors Investors No WHT Debt (Notes or other instruments) SIF FCP Luxco Loans Luxco Financing loan PropertyCo Life Settlement Portfolio 20

21 Alternative vehicle: Securitisation Vehicle Noteholders SV Notes Legal/Regulatory Aspects No license required, unless notes are offered to the public more than 3 times/year Performance of notes (e.g. tranches) linked to the performance of the portfolio Security package Either corporate form or fund Issuance of securities (other leverage limited) Portfolio of securitized assets 21

22 Securitisation Vehicle (Cont d) Noteholders SV Notes Tax treatment No capital duty (2009) Funds: no income taxation (transparency) Companies: fully taxable but all income minus - Expenses - Obligations assumed vis-à-vis investors and creditors (e.g. interest, dividends) No WHT on securities issued (e.g. notes) Management to SV exempt from VAT Portfolio of securitized assets 22

23 NautaDutilh Avocats Luxembourg Challenge the obvious T F E. 2, rue Jean Bertholet L-1233 Luxembourg Grand Duchy of Luxembourg 23