Table of Contents. Acknowledgements. Foreword. and Essential Legal and Accounting Knowledge 1

Transcription

1 Acknowledgements Foreword v ix Chapter 1: An Introduction to Luxembourg and Essential Legal and Accounting Knowledge An introduction to Luxembourg General information Geography People and languages History Political and legal factors Financial and economic information Currency and the movement of funds Major industries Luxembourg as a financial centre The Luxembourg Stock Exchange Essential company law knowledge The different forms of company Incorporation of an SA or an Sàrl Share capital at the time of incorporation Issued shares Registered or bearer shares Voting rights attached to the shares Authorized share capital Transfers of shares Share buy-backs (purchase of own shares) Share capital reduction The duties and responsibilities of directors and managers Shareholders meetings Number of shareholders Shareholders meetings Notification Quorum Audit requirements Interim dividends 22 xi

2 Transfer of the registered office Transfer of registered office to Luxembourg Transfer of registered office out of Luxembourg Winding up and liquidation Standard liquidation Simplified liquidation Mergers and demergers Merger by absorption The merger plan Written management report The auditor s report The merger and its effective date Merger by incorporation Demerger Essential accounting knowledge Fundamental accounting law and disclosure Asset revaluation Equity accounting Depreciation Intangibles Other areas of interest Other accounting valuation matters Consolidated accounts Luxembourg direct tax law and procedures A brief history of Luxembourg direct tax law Luxembourg tax law and international tax law or agreements Abuse of law legislation Business purpose and economic substance Corporate tax assessment and dispute procedures 43 Chapter 2: Resident Businesses and Branches of Non-Resident Businesses The presence considered to generate taxable commercial income Fundamentals Income held to be commercial profits The definition of a PE Profits-based taxes Background The calculation of commercial income 50 xii

3 Calculation of the net assets invested in a business Assets to be included in the balance sheet Assets (liabilities) deemed to be part of the business by their nature Assets (liabilities) being part of the business by option Assets (liabilities) excluded from the business by their nature Economic ownership The treatment of finance leases The basic principle Financial leasing Other situations Leasing of real estate Accounting considerations The relationship between the commercial balance sheet and the tax computation Altering an already filed balance sheet for tax purposes The concept of adequate and orderly accounting records and how far accounts can be adjusted to reduce tax liabilities What is meant by adequate and orderly accounting records The taxation effect of not having adequate and orderly accounting records The valuation rules The classification of assets The fundamental principles of valuation Valuation based on the circumstances at the period end Exchange of securities The fundamental valuation rule Applying the valuation rules Valuing debtors Valuing stock Valuing substantial shareholdings The introduction of the EUR and the valuation rules The valuation of assets which should be depreciated Determining the expected useful life Splitting the price paid for land and buildings The capitalization (or not) of small-value assets 73 xiii

4 The point in time from which an asset may be depreciated Unexpected loss of value Extra depreciation to encourage certain activities Reducing-balance depreciation The deductibility of provisions Provisions for future repairs and similar costs Warranty and guarantee provisions Internal provisions for pensions Tax balance sheets and functional currency for tax purposes The deductibility of expenses and exempt income The general rule of deductibility of expenses Examples of items which are tax deductible in Luxembourg Non-deductible items in Luxembourg Expenses that are specifically non-deductible Expenses that are specifically tax deductible Tax deductions for the provision of pensions Items that are exempt or non-deductible following a tax treaty Other exempt income Debt waivers and carry-forward of losses The basic rules Loss carry-forward and the effect of debt waiver Capital gains and rollover relief The fundamentals Using the rollover provisions Tax credits and incentives Tax credit for investment Tax credit for hiring the unemployed Tax credit for continuing professional training Assistance for new enterprises and new manufacturing projects Corporate income tax Entities subject to corporate income tax Residents Non-residents Entities exempt from corporate income tax The calculation of profits subject to corporate income tax The application of the rules that apply to individuals 98 xiv

5 The effect of profit distributions Hidden profit distributions Hidden or disguised introductions of capital Transactions involving the use of an asset at an undervaluation Thin capitalization Deductible and non-deductible expenses and taxfree income of companies Classification of instruments as debt or equity Consolidated tax returns Calculating the tax due The relationship between the accounting period and the rate of taxation Final adjustments in calculating taxable profits for corporate income tax The rate of corporate income tax Minimum corporate income tax The effect of tax treaties on the rate of corporate income tax Municipal business tax and its interaction with corporate income tax Background Entities not subject to municipal business tax The calculation of the profits subject to tax The calculation of the tax due The effective rate of tax on profits Example of the calculation of the profits taxes Chamber of Commerce contribution Net worth tax Background Entities liable to net worth tax The tax rate The tax base The unitary value The general valuation rule Setting the unitary value The importance of unitary value assessments The unitary value of real estate The unitary value of businesses Real estate valuation The use of the market value of fixed assets other than real estate The exemption of certain large shareholdings 131 xv

6 The non-deductibility of certain debts and liabilities The market value of securities Valuation adjustments for businesses with noncalendar year-ends Branches Items exempt under a tax treaty Basic planning points concerning the unitary value Distribution of profits that will not cause a tax liability in the hands of the recipient shareholder Payment of interim dividends Liquidation before 1 January Repatriation of branch profits during the year Investment in exempt or favourably valued assets Minimum net worth tax and payment of tax Net worth tax reduction A basic example of the calculation of the net worth tax Registration duties Background Definition of registration Acts requiring registration Different types of registration duty The fixed registration duty Proportional registration duties Penalties Valuation insufficiency Sham ( misrepresentation ) Registration duties and company documents Events subject to taxation Contributions in kind Anti-abuse provisions 152 Chapter 3: The Taxation of Non-Residents Not Operating through a Branch The taxation exposure of non-residents Income from capital including dividends The income covered Dividends, profit shares and other benefits to shareholders The silent partner Bond interest 158 xvi

7 The method of taxation The basis of liability to withholding tax The rate of withholding tax The mechanics of withholding tax in Luxembourg Exemptions from withholding tax under Luxembourg law Distributions made by taxable Luxembourg companies Amounts distributed by SPFs, Luxembourg investment funds and SICARs Liquidation The effect of tax treaties Exemption from withholding tax under Luxembourg s tax treaties Procedures for obtaining reduced withholding tax Reducing withholding tax Finance with debt Make use of the exemption for liquidations Transformation into a family wealth management company (SPF) Using a foreign holding company Using a Luxembourg branch Sale of the Luxembourg company Rental income Taxable income The taxation of rental income Taxation of net profits made in Luxembourg Rate of tax The effect of tax treaties Capital gains of non-residents Gains of non-residents that are taxable in Luxembourg The taxation of such gains The taxation of capital gains on real estate The taxation of capital gains on major shareholdings The effect of tax treaties The disposal of real estate The disposal of substantial shareholdings Net worth tax and non-residents The net worth of non-residents taxable in Luxembourg Tax rate 183 xvii

8 The effect of tax treaties The taxation of directors fees paid to non-residents The taxation of directors fees The taxation of directors fees paid to non-residents The effect of tax treaties 185 Chapter 4: The Taxation of Partnerships Background Legal aspects Taxation of resident partnerships Corporate income tax Municipal business tax Net worth tax Registration duties upon contribution International aspects The tax treatment of foreign partnerships and other entities Background Comparison of legal forms Taxation of payments made to foreign entities The foreign entity is considered as partnership The foreign entity is considered as corporation Investments in foreign entities The foreign entity is considered as partnership The foreign entity is considered as corporation 204 Chapter 5: Transfer Pricing Rules Legal background The arm s length principle Transfer pricing documentation Transfer pricing requirements for financing companies 210 Chapter 6: The Participation Exemption The basis of the participation exemption Background The development of the exemption The legal basis The dividend exemption 220 xviii

9 The capital gains exemption Important common terms General The conditions applying to the investing company Fully taxable resident companies Luxembourg branches of a company resident in the European Union, the EEA or a treaty country Economic ownership The conditions applying to the subsidiary A collective entity covered by the Parent-Subsidiary Directive A fully taxable resident capital company not listed in the appendix to paragraph A foreign capital company fully liable to a tax that corresponds to corporate income tax The level of shareholding required The required holding period The underlying rule Income received when the holding period is not yet satisfied Changes in shareholding level during the holding period Exchange of shares and the holding period Calculating the income that is exempt from tax Income from a participation Dividends Profits on liquidations and other reductions of capital Dividends and value adjustments for a decrease in value of the participation Other income from the participation The exemption of capital gains The transfer of securities Determining the exempt gain Other factors to consider when computing the exempt gains The exemption for participations from net worth tax The conditions for the exemption Issues for net worth tax and the participation exemption The deductibility of debts The impact of the timing of dividends 256 xix

10 6.5. Other issues arising in relation to holding activities Thin capitalization The legal basis and the consequences Debt-to-equity ratios in practice Accounts (or liabilities) in a foreign currency The valuation of a participation when the company accounts in foreign currency Financing with loans in foreign currencies The participation exemption and tax treaties The effect of a change in status of one of the companies involved Change of form of the parent Change of form of the subsidiary Change in the tax regime of a subsidiary Migration 266 Chapter 7: Financing Activities Group financing companies Background and context The 2011 Administrative Circulars Introduction Scope Conditions and validity of APAs Specific transfer pricing requirements Treasury activities and multinational cash pooling Multinational cash pooling Tax and transfer pricing aspects of multinational cash pooling Tax aspects Transfer pricing considerations Determination of the remuneration on a cash pooling activity The notion of netting benefit Advance tax clearance and APA Derivatives Futures, forwards and options Introduction and definitions Accounting treatment Tax treatment Swaps 287 xx

11 7.4. Repos, collateral arrangements and security lending Collateral arrangements Repos Security lending Islamic finance The basic principles of Islamic finance Islamic methods of finance Tax treatment of Islamic finance instruments Direct taxes Indirect taxes 298 Chapter 8: Partial Exemption of IP Income History and background IP regimes in an international context Qualifying IP rights Patents Trademarks Domain names Software copyrights Designs and models Non-qualifying IP Income included within the scope of the partial exemption Ownership Royalties Split of income streams Conditions to apply the partial exemption Acquisition date Transfer from an associated company Taxation of qualifying IP rights Remuneration for the use or the right to exploit IP rights Use of self-developed patents by a company for its own activities Disposal of IP rights Intra-group transactions Net worth tax Foreign taxes 314 xxi

12 Chapter 9: Other Benefits The expatriate tax regime Conditions affecting the expatriate regime The benefits of the expatriate regime Audio-visual and venture capital investment certificates Background Audio-visual investment certificates Venture capital investment certificates Real estate certificates Legal and accounting Tax treatment The Luxembourg Maritime Flag Background Access to the Luxembourg Maritime Register The taxation of ships in Luxembourg The basic rules The exemption from municipal business tax Depreciation of the purchase price Tax credit for investment Rollover of capital gains Taxation of non-resident employees Social security of non-resident seamen International tax aspects of the Luxembourg Maritime Register Luxembourg resident enterprises Entities not resident in Luxembourg 330 Chapter 10: Corporate Reorganizations The taxation of liquidations The basic law Practical and company law matters Calculation of the liquidation profit The taxation of the liquidation profit Special factors surrounding the taxation of a liquidation The application of the participation exemption The revaluation of land and buildings The revaluation of the capital introduced in other currencies 336 xxii

13 The taxation of the shareholders Withholding tax The taxation of a resident corporate shareholder or a PE The taxation of a non-resident shareholder Changes in the nature of a company, mergers and divisions Background Merger-type operations involving only Luxembourg companies The taxation of the transferring company Liquidation The standard treatment Transfer of the net assets at less than market value The exception The taxation of the shareholders The taxation of the share-issuing entity Other transactions within Luxembourg Divisions within Luxembourg Change of form of a collective entity Merger-type operations involving EU and EEA resident companies The taxation of a Luxembourg transferring company The taxation of a transferring company in another EEA member state Transfer of registered office Transfer of registered office from Luxembourg The taxation of such transactions Company law matters Transfer of registered office to Luxembourg Registration duty Profits taxes Net worth tax Withholding tax on distributions Transfer of a business to a company Transfer to a Luxembourg company The taxation of the disposing entity/business The normal situation Taxation of any unrealized gains The exception Deferral of the tax liability The taxation of the person receiving the shares when part of the hidden reserves is not taxed 359 xxiii

14 Transfer involving a company resident in an EEA member state A Luxembourg entity transfers a PE A Luxembourg PE is transferred to an EU/EEA resident entity A PE in an EEA member state is transferred to an EEA resident entity An entity resident in another EEA member state transfers a PE A PE in another EEA member state is transferred to a Luxembourg entity A Luxembourg PE is transferred to an entity in another EEA member state Switching from a tax-exempt to a fully taxable company 363 Chapter 11: Advance Tax Clearances Background Administrative circulars Private tax rulings The situation until 31 December The situation from 1 January APAs 373 Chapter 12: Luxembourg Tax Treaties Luxembourg tax treaty policy Treaty entitlement Business profits and PEs PE definition PE profits PE losses The Swiss finance branch example Background Swiss tax treatment Luxembourg tax treatment Real estate income Dividends, interest and royalties paid by Luxembourg companies Capital gains The participation exemption 392 xxiv

15 12.8. Credit for foreign tax The fundamentals of the system Background Foreign income and the foreign tax Tax credits for Luxembourg PEs Calculating the credit for foreign tax The underlying principles Calculating double tax relief Double tax relief where municipal tax is itself deductible The country-by-country method of calculating relief for foreign tax The global method of calculating credit for foreign tax Credit for foreign taxation and notional tax credits The concept of notional tax credit Notional tax credits in Luxembourg s tax treaties The relationship between notional tax credits and ordinary credits for foreign tax Credit for notional foreign tax in the absence of any real foreign tax Credit for notional foreign tax when real foreign tax is concerned Interaction of tax credits with an exemption Exchange of information Exchange of information on request Moving towards automatic exchange of information? The particular case of the Luxembourg-United States Income and Capital Tax Treaty (1996) Background Residence Limitation on benefits Qualified residents The base erosion test Benefits available to certain non-qualified residents Triangular situations Exclusion of certain entities Repatriation of profits Branch or subsidiary for investing from Luxembourg into the United States? 419 xxv

16 Chapter 13: Banking in Luxembourg Background Legal and regulatory issues The regulation of banks and credit institutions Banking secrecy EU Savings Directive Administrative cooperation in the field of taxation Important accounting and tax rules for banks Bad debt provisions AGDL provision Other important accounting provisions The potential effect of mark-to-market transactions US reporting requirements The US Qualified Intermediary rules FATCA The neutralization of exchange gains on equity for tax purposes The problem The solution chosen The principles of the law on the neutralization of exchange gains Taxpayers able to neutralize exchange gains The calculation of the exchange gain that can be neutralized Determination of the currency of the capital contributed The order in which equity is deemed to be invested and the actual assets concerned Calculation of the exchange gain to neutralize The effect of a reduction in the value of the assets deemed to represent equity The effect of a disposal, cessation of trade, or liquidation 438 Chapter 14: Investment Funds and Related Companies Luxembourg s investment fund business Background Types of Luxembourg investment funds 441 xxvi

17 14.2. Taxation of Luxembourg investment funds in Luxembourg Profits and net worth taxes Registration duty Subscription tax Standard treatment Reduction in subscription tax for investments in other Luxembourg investment funds Reduction in subscription tax for money market investment funds Reduced subscription tax for institutional funds and SIFs Exemptions from subscription tax Investment funds established under foreign law The taxation of Luxembourg investment funds in the countries in which they invest The taxation of the income of funds with corporate personality Claiming under a tax treaty The residence of corporate SICAVs/SICAFs States that will grant treaty benefits to SICAVs/SICAFs States that will not grant treaty benefits to SICAVs/ SICAFs Tax refunds under domestic law The taxation of the income of funds without corporate personality Benefiting from tax treaties Tax refunds under the domestic law of the country in which the investment is made Tax refund based on ECJ case law The taxation of capital gains of Luxembourg investment funds in the countries in which they invest The taxation of the unitholders In Luxembourg Taxation of the investor in his country of residence The taxation of income The taxation of capital gains Anti-avoidance rules Credit for tax suffered by the fund Recovery of tax from foreign tax authorities 456 xxvii

18 14.5. The taxation of companies supplying services to investment funds The taxation of mutual fund (FCP) management companies The reason for and the requirements of a management company The tax regime of a company with the exclusive object of managing one particular fund The taxation of advisory companies to SICAVs (and SICAFs) The reason for an advisory company and its requirements 458 Chapter 15: Reinsurance Companies in Luxembourg Economic and legal factors Introduction Reinsurance and captives How a captive reinsurance company works Possible advantages of reinsurance The catastrophe provision or equalization reserve Legal and supervisory requirements The conditions for authorization as a reinsurance company in Luxembourg Supervision The taxation of reinsurance companies in Luxembourg Fundamentals Why the catastrophe provision is tax deductible Limits on the catastrophe provision The current catastrophe provision regime The catastrophe provision going forward The catastrophe provision and losses The release of the catastrophe provision Factors to consider when dealing with Luxembourg reinsurance companies Exchange gains on capital Exchange losses on capital The eventual taxation of the profits protected by the catastrophe provision Foreign treatment of Luxembourg reinsurance companies 473 xxviii

19 Reinsurance companies and Luxembourg s tax treaties Other taxes to consider VAT Insurance tax 476 Chapter 16: Private Wealth Management Family wealth management companies The legal definition Taxation of SPFs Exemption from income-based taxes and net wealth tax Subscription tax (taxe d abonnement) Withholding tax and other foreign taxes The taxation of a foreign investor Conditions for benefitting from the SPF regime The legal form and the objects clause Eligible shareholders Permitted activities Prohibited activities Control, supervision and publicity Audit and accounts Official supervision The private wealth management foundation or fondation patrimoniale Legal framework Definition Legal deed Permitted activities Management Legal obligations Dissolution and liquidation Taxation of the private wealth management foundation Indirect taxes Direct tax The taxation of the beneficiary(ies) Tax treatment of income derived from non-resident foundations Fiduciary contracts Introduction 495 xxix

20 The legal background Types of fiduciary contracts The taxation of fiduciary contracts The taxation of the income The effect of the transfer of the property 497 Chapter 17: Other Funds and Investment Entities International pension funds Background Pension funds regulated by the CSSF Legal matters specific to the SEPCAV Legal matters specific to the ASSEP Pension funds regulated by the CAA Luxembourg taxation of international pension funds Direct taxation of the SEPCAV Direct taxation of the ASSEP Direct taxation of CAA regulated pension funds Registration duties and Luxembourg pension funds Luxembourg withholding tax and pension funds Foreign taxation of Luxembourg pension funds The taxation of the employees/pensioners In Luxembourg In other states Securitization vehicles Background Definitions and benefits Legal, regulatory and administrative factors Luxembourg taxation of securitization vehicles Qualification as a securitization company for direct tax purposes Direct taxation of the securitization company Direct taxation of the securitization fund Luxembourg taxation of investors Non-residents Resident companies and non-residents with a Luxembourg PE Foreign taxation of securitization companies The SICAR Venture capital fund and private equity entity Background Legal, regulatory and administrative factors 518 xxx

21 Luxembourg taxation of SICARs Direct taxation of the corporate SICAR Direct taxation of the unincorporated SICAR Luxembourg taxation of investors Resident companies and non-resident companies with a Luxembourg PE Luxembourg taxation of non-resident investors Foreign taxation of SICARs 520 Appendix I Luxembourg Company Accounts Presentation 523 Appendix II The Full Definition of a Permanent Establishment in the Original Languages with an English Translation (Article 16 of the Tax Adaptation Law, StAnpG) 527 Appendix III List of Entities Referred To in the Appendix to Article 166(10) of the LIR 529 Appendix IV Appendix V Appendix VI Credit for Foreign Taxation: Derivation of Formulae 533 Credit for Foreign Taxation: Calculation Comparing the Different Methods 537 Withholding Tax Rates for Payments from Luxembourg (Agreements in Force as at 1 January 2015) 539 Appendix VII Withholding Tax Rates on Dividends, Interest and Royalties Received by a Resident of Luxembourg (Agreements and Domestic Laws in Force as at 1 January 2014) 545 Appendix VIII Luxembourg Double Tax Treaties Containing an OECD Standard Exchange-of-Information Clause (Article 26(5) of the OECD Model) 551 Appendix IX Luxembourg Tax Treaty Developments 553 Appendix X Useful Institutions (and Their Website Addresses) 555 xxxi

22 Appendix XI Relevant Tax Jurisprudence 559 Glossary 569 Bibliography 575 LIR Reference Tables 581 xxxii