corporate taxation in Luxembourg

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1 corporate taxation in Luxembourg

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3 corporate taxation in Luxembourg

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5 Table of contents 1. Introduction 6 2. Overview of relevant taxes Corporate income tax Municipal business tax Net worth tax Withholding taxes Dividends Interest Liquidation proceeds Royalties Directors fees Value added tax Registration duties Customs and excise duties Fiscal environment Tax authorities Tax courts Transfer pricing Tax compliance Tax advances VAT registration process Investment vehicles SOPARFI Participation exemption regime IP box Intra-group financing activities Fiscal consolidation Other tax incentives VAT The Luxembourg Partnerships Definition and purpose Main features Tax regime SICAR Definition Purpose Tax regime 32

6 4.4. Securitisation undertakings Definition Purpose Tax regime Investment funds Types of investment funds and purpose Tax regime Banks and financial institutions Insurance and reinsurance companies Pension fund regimes SPF Definition Purpose Tax regime The Luxembourg maritime flag Identification of the most appropriate investment vehicle International context Luxembourg tax residence Permanent establishment Double taxation elimination method Double tax treaty network Taxation on highly-skilled workers International initiatives on cross-border taxation issues Exchange of information Anti-tax avoidance initiatives Accounting Lux GAAP IFRS and Lux GAAP with fair value option Definitions Summary table - Luxembourg vehicles 56 Tax at Arendt & Medernach 58 Arendt & Medernach Tax Team 59 About Arendt & Medernach 60 A broad range of practice areas

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8 1. Introduction 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.

9 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 EU, 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 7

10 I. Introduction Luxembourg thus has many advantages to offer to foreign investors, of which the following are particularly attractive: a favourable legal and fiscal environment for investment; a multilingual and experienced network of professional service providers; investor friendly, accessible and pragmatic governmental administrations. As the scope of this brochure is necessarily limited, it focuses on companies limited by share capital (unless indicated otherwise). It is not intended to address all legal and fiscal aspects in relation to investment and is only designed to provide a basic understanding of Luxembourg corporate taxation. Under no circumstances should the information contained herein be understood or construed as legal or tax advice. To the best of our knowledge, the information contained in this document is correct as of 1 January The delivery of this document however does not imply any spontaneous update from our side. 8

11 2. Overview of relevant taxes 2.1. Corporate income tax Luxembourg levies an annual corporate income tax (impôt sur le revenu des collectivités - CIT ) on the net worldwide profits (subject to double tax treaties) of Luxembourg companies. Taxable profits are computed in accordance with the provisions of the amended income tax law dated 4 December 1967 ( ITL ), which defines 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 ( Lux GAAP ), except where the valuation rules for tax purposes require 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 actual payment. Several exemptions from CIT may apply, such as the participation exemption regime on eligible shareholdings or the exemption from certain intellectual property rights (once enacted), and roll-over reliefs may be available for reinvested capital gains in certain circumstances. Fiscal losses incurred since tax year 2017 may be carried forward for a maximum of 17 years under certain conditions by the company who has suffered them. Losses incurred between 1 January 1991 and 31 December 2016 may be carried forward without time limitation. Luxembourg tax law does not provide for detailed thin capitalisation rules, except as regards intra-group financing transactions. Taxpayers must comply with the arm s length principle. The OECD transfer pricing guidelines ( OECD TPG ) and related adjustment methods are followed by the Luxembourg tax authorities. In 2018, the CIT rates are as follows: Taxable income Rate EUR 25,000 15% EUR 25,000 < X EUR 30,000 3,750 EUR + 33% of the net income exceeding EUR 25,000 > 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 19.26% in 2018 for taxable profits exceeding EUR 30,000. 9

12 2. Overview of relevant taxes 2.2. Municipal business tax Luxembourg levies an annual municipal business tax (impôt commercial communal - MBT ) on the net profits realised by Luxembourg companies. 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. In 2018, the MBT rate is 6.75% in Luxembourg City Net worth tax Luxembourg levies an annual net worth tax (impôt sur la fortune - NWT ) on the net assets of Luxembourg companies in accordance with the net wealth tax law dated 16 October Net worth 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. The NWT rate is 0.5% on the unitary value as determined as at 1 January of the fiscal year. A reduced NWT rate of 0.05% applies to assets exceeding EUR 500 million. As from the 1 January 2016, a minimum NWT ( MNWT ) has been introduced in Luxembourg. Companies whose financial assets, transferable securities and cash deposits exceed cumulatively (i) 90% of their total balance sheet and (ii) EUR 350,000 will be subject to an MNWT of EUR 4,815. For other companies, the MNWT is calculated according to the amount of their total balance sheet at year end (MNWT charge from EUR 535 to EUR 32,100 respectively for a total balance sheet from EUR 350,000 to equal or more than EUR 30,000,001). Securitisation companies and SICAR remain exempt from NWT but are liable to the MNWT. The MNWT 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 MNWT 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. 10

13 2. Overview of relevant taxes 2.4. Withholding taxes Dividends Dividends distributed by a Luxembourg company to its shareholder(s) are as a rule subject to a withholding tax ( WHT ) at the 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 Interest Arm s length 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 made by a paying agent established in Luxembourg to or for the benefit of an individual beneficial owner who is resident of Luxembourg, will be subject to a WHT of 20%. Such WHT will be in full discharge of income tax if the beneficial owner is an individual acting in the course of the management of his private wealth. Responsibility for the WHT is assumed by the Luxembourg paying agent Liquidation proceeds Liquidation proceeds (deriving from a complete or partial liquidation) paid by a Luxembourg company are not subject to WHT in Luxembourg Royalties Royalties paid by a Luxembourg company are generally not subject to WHT in Luxembourg 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. 11

14 2. Overview of relevant taxes 2.5. Value added tax As a Member State of the European Union ( EU ), Luxembourg has transposed into its national law (i.e. the amended law dated 12 February 1979) the provisions of the EU Directives on value added tax ( VAT ), including the amended sixth VAT Directive (abolished as from 1 January 2007 and replaced by Directive 2006/112/EC of 28 November 2006 for the purposes of rearranging the articles only). Consequently, the interpretation of Luxembourg VAT law is widely based on the case law of the Court of Justice of the European Union ( CJEU ). In 2018, the standard VAT rate in Luxembourg is 17%. Reduced rates of 3%, 8% and 14% apply to supplies of goods and services which are specified in three appendices to the Luxembourg VAT law. These appendices cover the specific scope of application of the reduced rates and must be interpreted in a strict sense. All supplies of goods and services carried out (or deemed to have been carried out) in Luxembourg for consideration and by a person carrying out an economic activity fall within the scope of the Luxembourg VAT law. The rules governing the place of supply and VAT exemptions follow the provisions the EU VAT Directives as interpreted and further defined by CJEU case law. Services received by taxable persons established in Luxembourg are deemed to be located in Luxembourg (with some exceptions). This is called the reverse charge mechanism, whereby the person liable for the declaration of the supplies and the payment of the related VAT is the recipient of the supplies. While located in Luxembourg, certain supplies of goods and services may benefit from a VAT exemption. The most frequently used VAT exemptions relate to (i) the supply and letting of real property, except where taxation is opted for, (ii) financial transactions, (iii) insurance and reinsurance and connected services, (iv) management of regulated undertakings for collective investment SICAR, SIF, alternative investment funds ( AIF ), pension funds and Luxembourg securitisation vehicles. Generally, input VAT incurred on goods and services by a Luxembourg taxable person in relation to its business is recoverable. No input VAT recovery is allowed for VAT paid on goods or services used to supply VAT exempt transactions, except in the case of VAT incurred on supplies used for exempt banking, financial and insurance transactions supplied to recipients established outside the EU. If a taxable person carries out transactions entitling it to an input VAT deduction (i.e. subject to VAT or exempt with an input VAT recovery right) and transactions that are exempt from VAT or outside the scope of VAT, it will have a limited right to deduct input VAT. This right will, in principle, be calculated on the basis of a recovery ratio rule, unless a segregation of goods and services purchased for the taxable activities and the exempt activities is possible (direct allocation methodology). In this case, input VAT incurred in relation to taxable activities may be fully recovered. VAT incurred on costs which are not strictly business expenditures, such as luxuries, amusements or entertainment, is not deductible. 12

15 2. Overview of relevant taxes 2.6. Registration duties Registration duties are generally levied on the transfer of certain assets and are collected by the tax authorities upon the actual registration of the deed evidencing the transfer. Certain transfers must further be evidenced by a written deed that has to be registered on a mandatory basis. Registration duties are either levied at a fixed rate or at an ad valorem rate. Main registration duties Fixed rate Ad valorem rate Mandatory registration Incorporation of a company EUR 75 n/a yes Amendments to the articles of incorporation of a company Transfer to Luxembourg of a company s registered office or central administration Sale of movables EUR 75 n/a yes EUR 75 n/a yes 6% no Except shares EUR 12 Sale of immovables n/a 6% yes + Transcription duty 1% + Municipal surtax (Luxembourg City) 3% Claims 0.24% no Except negotiable bonds, notes, etc. EUR 12 Corporate reorganisations remunerated by a majority of shares EUR 12 n/a yes Mortgage n/a 0.05% yes Lease EUR 12 (if the lease is subject to VAT) 0.6% (if the lease is exempt from VAT) no 2.7. Customs and excise duties As an EU Member State, Luxembourg is part of the single market without customs barriers, which ensures the free circulation of goods. Imports from another EU Member State are not subject to any customs duties. However, goods imported from outside the EU may be subject to customs duties levied on their customs value determined according to the Common Customs Tariff. Goods are classified according to the TARIC (Integrated Community Tariff) code. Several bilateral and multilateral treaties have been signed by the EU (e.g. with Australia, Canada, the USA, Norway, Switzerland) and are applicable in Luxembourg. 13 Excise duties are levied on certain products, especially on spirits, petrol and tobacco in accordance with European regulations.

16 3. Fiscal environment 3.1. Tax authorities The Luxembourg tax authorities are divided into three administrations, each being responsible for a particular area of competence: the Administration des contributions directes is mainly competent for CIT, MBT and NWT, as well as dividend WHT and WHT; the Administration de l enregistrement et des domaines is mainly competent for VAT and registration duties; the Administration des douanes et accises is mainly competent for customs and excise duties. Regarding CIT, MBT and NWT, advance tax confirmations ( ATC ) may be delivered by the Commission des décisions fiscales anticipées of the Administration des contributions directes. The ATC has a legally binding effect for a maximum period of 5 years, unless i) the situation or operations described in the application were incomplete or inaccurate, ii) the situation or operations eventually realised differ from those described in the request. The ATC is subject to an administrative fee ranging between EUR 3,000 and EUR 10,000 depending on the complexity of the request and the volume of work associated therewith. The same rules apply for applications for advance pricing agreements ( APA ). 3.2 Tax courts In Luxembourg, tax litigation may be brought either before the administrative courts (tribunaux administratifs) or the judicial courts (tribunaux judiciaires), depending on the nature of the tax disputed. The administrative courts are competent to rule on litigation regarding the assessment of direct taxes such as CIT, MBT or NWT, whereas the judicial courts are competent for matters regarding the assessment of VAT or registration duties, as well as the recovery of taxes in general. Regarding tax matters, the judicial courts are divided into the lower District Court (Tribunal d arrondissement) and a Court of Justice (Cour Supérieure de Justice) which may either rule as a Court of Appeal (Cour d appel) or as a Supreme Court (Cour de Cassation). The administrative courts are divided into a lower Administrative Court (Tribunal administratif) and an Administrative Court of Appeal (Cour administrative). 14

17 3.3. Transfer pricing The Luxembourg transfer pricing legislation is contained in Articles 56, 56bis and 164(3) of the ITL, as well as paragraph 171 of the General Tax Law dated 22 May 1931 ( GTL ) and closely follows the OECD TPG. In addition, the tax authorities have issued certain circular letters and internal notes regarding transfer pricing: Circular letter No 56/1 56bis/1 dated 27 December 2016 relating to the transfer pricing rules applicable to companies engaged in intra-group financing transactions; Circular letter No 164/1 dated 23 March 1998 relating to the interest rates on shareholders corporate current accounts; Internal note No 164/1 dated 9 June 1993 relating to hidden profit distributions within the context of shareholders corporate current accounts. Article 56 ITL enshrines the arm s length principle in Luxembourg tax law, following the wording of article 9 of the OECD Model Tax Convention. Accordingly, if (i) an enterprise participates directly or indirectly in the management, control or capital of another enterprise, or if (ii) the same persons participate directly or indirectly in the management, control or capital of two enterprises, and in either case, the two enterprises are, in their commercial or financial relations bound by conditions agreed or imposed which differ from those which would be made between independent enterprises, the profits of these enterprises are determined and taxed on the basis of the conditions agreed upon between independent enterprises. Article 56bis ITL provides further guidance as to the methodology regarding the application of the arm s length principle based on the conclusions of Actions 8-10 of the OECD Base Erosion and Profit Shifting ( BEPS ) Report that revise Chapter I Section D of the OECD TPG. Accordingly, it requires that an enterprise must, within the context of its transfer pricing documentation, determine a price that complies with the arm s length principle. The determination of the arm s length price is based on the comparability analysis. Article 56bis ITL does not impose any specific transfer pricing method to be used. Based on the existing practice, the compared uncontrolled price ( CUP ) method, the transactional profit split ( TPS ) method and the transactional net margin ( TNM ) method seem however to be the most frequently used methods in Luxembourg, although all methods provided for by the OECD TPG are acceptable. The use of a particular method primarily depends on the tested transaction: the CUP method is mainly used for the determination of arm s length pricing where sufficient comparables are available. Given the size of Luxembourg, it is difficult to base a comparability analysis on mere domestic comparables. Therefore, pan-european comparables are generally accepted to the extent that the conditions of the markets from which these comparables are derived are not completely different from those prevailing in Luxembourg; the TPS method is likely to be applied when a multinational entity s business operations are highly integrated. Furthermore, the TPS method is typically used for the pricing of the fees of the various service providers (managers, advisors, distributors, etc.) in the asset management industry; the TNM method, and in particular the net cost-plus method, is most often applied for manufacturing and certain intra-group services (e.g. human resources, IT, marketing, advertising, accounting); the resale price method is usually deemed more useful for determining an arm s length price for distribution/ selling functions. Article 164(3) ITL requalifies any advantage that a shareholder, member or other interested party receives directly or indirectly from a company or an association and which he would normally not have received absent his quality, as a hidden profit distribution. 15

18 3. Fiscal environment Paragraph 171 GTL requires that, upon request, taxpayers must evidence the accuracy of their tax return and provide clarifications, including the relevant documentation. This includes the appropriate transfer pricing documentation in case of transactions between associated enterprises. Strictly speaking, there is no mandatory requirement to file the transfer pricing documentation with the annual tax returns although the tax authorities may at any time request the taxpayer to disclose it. Hence, taxpayers are required to duly document compliance with the arm s length principle of all intra-group transactions. The transfer pricing documentation must be updated if the factual or legal circumstances change. It should be noted that paragraph 171 GTL operates a reversal of the burden of proof whereby the taxpayers must prove that the pricing of their controlled transactions is arm s length. This is an exception to the general principle according to which the burden of proof regarding the facts that trigger a tax liability lies with the tax authorities while proof of facts which releases the taxpayer from such tax liability or reduce said tax liability lies with the taxpayer. In addition, Luxembourg has implemented the conclusions of Action 13 of the OECD s BEPS Action Plan regarding country-by-country reporting ( CBCR ) obligations. Accordingly, Luxembourg entities falling within the scope of the CBCR law dated 13 December 2016 ( CBCR Law ) are required to communicate economic, financial and tax information for financial years as of 1 January 2016 in the form of a CBCR to the Luxembourg tax authorities who will in turn exchange the information received with the other EU and non-eu jurisdictions concerned. If a Luxembourg resident reporting entity fails to file the CBCR, files it late or files false or incomplete information, or fails to inform the Luxembourg tax authorities that the ultimate parent refuses to provide key information for the purpose of the CBCR filing, it could be fined up to EUR 250,000. Finally, in case of transfer pricing adjustments, Luxembourg tax treaties generally follow Article 25 of the OECD Model Tax Convention that provides for a mutual agreement procedure. In such case, if none of the Contracting States provide for unilateral relief, the latter shall endeavour to reach a mutual agreement, even though practically speaking there is no obligation to reach such an agreement. For transactions between enterprises of different Member States of the EU, the resolution of double taxation disputes resulting from transfer pricing adjustments can be made through the EU Arbitration Convention (90/436). The EU Arbitration Convention provides for mandatory arbitration where Member States cannot reach mutual agreement on the elimination of double taxation. The competent authorities must reach an agreement within 2 years from the date on which the file was submitted to one of the competent authorities. In Luxembourg, the Minister of Finance is the competent authority. In case the Member States were not able to reach an agreement within this 2-year period, the competent authorities shall set up an advisory commission whose opinion on the elimination of the double taxation ultimately binds the competent authorities. On 7 June 2017, Luxembourg also signed the multilateral instrument ( MLI ) developed by the OECD under Action 15 of the BEPS Action Plan. Article 14 of the MLI introduces a mandatory mutual agreement procedure: a person who considers that the actions of one or both of the Contracting States result in taxation not in accordance with the provisions of the covered treaty, may present the case to the competent authority of either Contracting State within 3 years. The competent authority must then resolve the case, either by itself or by mutual agreement with the competent authority of the other Contracting State. Article 17 of the MLI further introduces a mandatory corresponding adjustment of tax charged on profits in one Contracting State in case the other Contracting State includes a portion of those taxable profits under applicable transfer pricing rules. An optional clause for mandatory binding arbitration is contained in the MLI which will allow participating countries to limit the cases eligible for arbitration (based on reciprocal agreements). 16

19 3. Fiscal environment 3.4. Tax compliance Tax compliance of a company closing its accounts annually on 31 December may be summarised as follows: Tax Filing obligation Due date Extension CIT MBT annual 31 May of the year following the year for which the return is filed NWT annual 31 May of the year following the year for which the return is filed Dividend WHT VAT EU Sales Listings (ESL) For services For goods at each payment subject to WHT annual and, in addition, monthly or quarterly (depending on the turnover) monthly or option for quarterly monthly or quarterly (depending on the value of the supplied goods) 8 days after the funds subject to WHT have been made available to the beneficiary monthly return: 15th day of the following month quarterly return: 15th day of the month following the quarter single annual return: before 1 March of the following year annual recapitulative return: before 1 May of the following year electronic filing mandatory for taxpayers subject to monthly or quarterly filing electronic filing (ecdf system): 25th day of the month following the month or quarter hard paper filing (if quarterly): 15th day of the month following the quarter electronic filing (ecdf system): 25th day of the month following the month or quarter hard paper filing (if quarterly): 15th day of the month following the quarter CBCR Annual notification due on the last calendar day of the relevant fiscal year with the exception for the fiscal year 2016 which has a notification deadline extended to 31 March 2017 filing due 12 months after the last day of the fiscal year covered by the report electronic filing may be granted on demand on a case-by-case basis may be granted on demand on a case-by-case basis may be granted on demand on a case-by-case basis up to 2 months for periodical VAT returns up to 8 months for single and recapitulative VAT returns Up to 1 month Up to 1 month n/a 17

20 3. Fiscal environment 3.5. Tax advances The basis for the computation of tax advances is the estimated taxable income based on the income of the previous year or the estimated value of the company. Advances are payable on a quarterly basis (with final payment upon assessment) by the following deadlines: CIT: 10 March, 10 June, 10 September, 10 December; MBT: 10 February, 10 May, 10 August, 10 November; NWT: 10 February, 10 May, 10 August, 10 November. The advance tax payments to be made by a newly incorporated company are calculated by the tax authorities according to an estimated result for the year, and correspond at least to the MNWT VAT registration process Entities performing an activity which gives them the quality of a taxable person must as a rule register with the competent tax administration (Administration de l enregistrement et des domaines) for VAT purposes within 15 days after commencement of this activity. However, VAT registration is not compulsory if, among other conditions, all the activities carried out by the taxable person are exempt from VAT (e.g. financial and insurance transactions) and these activities do not entitle it to deduct input VAT. In such a case, the taxable person remains nevertheless obliged to register for tax under a simplified regime only if it receives taxable services from foreign service providers governed by the reverse charge mechanism and for which it is liable to declare and pay VAT. Such simplified VAT registration has to be made prior to the receipt of the services. Any substantial change in a taxable person s activities, such as the start of a new type of activity, the opening of a branch or a change in the company s legal form has to be notified to the VAT administration. If the taxable person wholly or partially ceases its activities, it must respectively deregister from VAT or notify the tax administration. Upon VAT registration, Luxembourg taxable persons or foreign taxable persons having a permanent establishment in Luxembourg receive two numbers: a VAT code to be used in all correspondence with the Luxembourg VAT administration (i.e. matricule/ reference number); a European VAT identification number, composed of the letters LU followed by eight digits, with the digits corresponding to the previous IBLC number (the VAT identification number must be used for all intracommunity acquisitions or supplies of goods and services). 18

21 4. Investment vehicles 4.1. SOPARFI The term SOPARFI is an acronym for société de participations financières (financial holding company) and refers to ordinary unregulated Luxembourg resident companies fully subject to CIT, MBT, and NWT, whose main activity is to hold the shares in subsidiaries benefiting from the participation exemption regime. It is governed by the amended Law of 10 August 1915 on commercial companies ( Company Law ) and pertains to investment in qualifying financial participations. Depending on the need of the shareholders or investors, the SOPARFI can adopt several legal corporate forms (SA, SARL or SCA). The statutory minimum amount of share capital depends therefore on the legal form. The SA and the SCA must have a minimum paid up share capital of EUR 30,000 while an SARL requires a minimum paid-up share capital of EUR 12,000. Since SOPARFIs are Luxembourg tax residents, they benefit from Luxembourg s double tax treaty network. The relevant tax residence certificates may be obtained from the Luxembourg tax authorities. Several advantages of the SOPARFI are noteworthy, such as the participation exemption regime, the IP Box (once implemented), the fiscal consolidation regime and the investment tax credits 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 MNWT) Qualified Subsidiary Qualified Parent LuxCo Dividend WHT exemption Qualified Subsidiary Qualified Subsidiary Qualified Subsidiary Exemption of dividends, capital gains and liquidation proceeds 19

22 4. Investment vehicles In order to qualify for the participation exemption regime, the following conditions must be met: Qualified parent Qualified subsidiary Holding period Level of participation 1 Participation exemption on dividends and liquidation proceeds Participation exemption on capital gains Participation exemption for NWT a Luxembourg resident fully-taxable company a Luxembourg permanent establishment ( PE ) of a company covered by Article 2 of the Directive 2011/96/ EU of 30 November 2011 as amended on the common system applicable in the case of parent companies and subsidiaries of different Member States ( PSD ) a Luxembourg PE of a company resident in a country having a double tax treaty with Luxembourg a Luxembourg PE of a company which is resident in a Member State of the European Economic Area ( EEA ), other than an EU Member State a Luxembourg resident fully-taxable company a company covered by Article 2 of the PSD a 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 a Luxembourg resident fullytaxable company a company covered by Article 2 of the PSD or a Luxembourg PE thereof a 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 a Swiss resident company which is subject to corporate income tax in Switzerland without benefiting from an exemption a 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 a Luxembourg resident fully-taxable 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 1 The holding of a participation through a tax-transparent entity is deemed to be a direct participation in the proportion of the net assets held in the tax-transparent entity. 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. Anti-abuse measures do not permit the exemption in certain circumstances, notably when a non-eligible participation is exchanged for an eligible participation in a tax-free manner. Further to the amendments to the PSD, the law of 18 December 2015 applicable as of 1 January 2016 has introduced an anti-hybrid principle and a general anti-abuse rule ( GAAR ) which denies the benefits of the PSD to an arrangement or series of arrangements which, having been put into place for the main purpose or one of the main purposes of obtaining tax advantage that defeats the object or purpose of the PSD, are not genuine having regard to all relevant facts and circumstances. An arrangement or a series of arrangements are considered not genuine to the extent that they are not put into place for valid commercial reasons which reflect economic reality. 20 Furthermore, the participation exemption regime contains rules intended to avoid a double benefit (exemption of income and deduction of expenses). If the acquisition of a participation is financed through an interestbearing debt, such interest has an implication for the application of the participation exemption. To the extent that received dividends or liquidation proceeds are exempt, the following expenses are not deductible: (i) business expenses in direct economic relation to the income and (ii) a value adjustment booked on the participation as a consequence of the distribution (the deductibility denial is to be determined in this order).

23 4. Investment vehicles If in a given year, related expenses exceed the exempt income derived from the given participation, the excess is tax deductible. When a participation is disposed of, the capital gain exemption does not apply to the sum of the related expenses and value adjustments that have reduced the tax result of the current or preceding years. This rule is referred to as the recapture rule. No taxation should however arise if the company realises only exempt income (i.e. no taxable income such as interest, management fees, and so on), since the taxable portion of the capital gain should be fully offset against existing tax losses created by the expenses which are recaptured. The following is a simplified example which illustrates this mechanism: The parent acquires a participation in the eligible entity on 01/01/n at the price of 1,000. The acquisition is entirely financed by a debt of 1,000 (with an annual interest of 50). In the year n, no income is derived from the participation. In the year n+1, a dividend of 30 is received. In the year n+2, a dividend of 70 is received. in the year n, the interest of 50 is deductible and creates a tax loss of 50; in the year n+1, the dividend is entirely exempt; the interest is not deductible up to 30; the excess interest of 20 is deductible and creates a tax loss of 20; in the year n+2, the dividend is entirely exempt; the entire interest expense is not deductible and the tax result is nil; on 01/01/n+3, the participation is sold for 1,500 (capital gain of 500): - the exempt amount of capital gain is reduced by the sum of the related expenses that have decreased the tax result of the preceding years, i.e. the interest of 50 deducted in the year n and the 20 deducted in the year n+1; - the taxable portion of the capital gain, i.e. 70, is entirely offset by the carry-forward of tax losses. Capital losses realised upon disposal of the shares remain tax deductible and may be carried forward (see part 2.1). 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. As an 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 PSD. - a full exemption from MBT is available, subject to the GAAR, for dividends derived from a participation representing, at the beginning of the taxable year, at least 10% in 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; 21 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.

24 4. Investment vehicles 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. Any excess WHTs that could not be credited against the CIT liability may under certain double tax treaties be credited against the MBT liability. As tax returns are filed in EUR only, a roll-over relief is generally available for foreign exchange gains realised on the conversion into EUR of assets denominated in a foreign currency IP box 1 The IP Box regime to be enacted as Article 50ter ITL allows a Luxembourg resident company or business to benefit from a partial exemption of 80% on the adjusted and compensated net income obtained after application of the nexus approach and derived from eligible IP assets that have been created, developed or improved after 31 December The application of such tax incentives leads to an effective taxation rate of maximum 5.2%. The eligible IP assets also benefit from a total NWT exemption. The modified nexus approach Qualifying Expenditures incurred to develop IP asset + uplift for outsourcing and acquisition costs of up to 30% Overall Expenditures incurred to develop Eligible IP Asset Overall Income from Eligible IP Asset Net Income receiving tax benefits a. Eligible assets The IP regime covers net income derived from the use (usage), or the right to use (concession d un usage) an Eligible IP Asset created, developed or improved within the framework of research and development ( R&D ) activities. The list of eligible IP Assets is wider than under the previous regime and includes inter alia patents and software protected by copyrights but also various forms of medicinal product rights. However, the exemption is no longer applicable to IP assets of a commercial nature, excluding intangible assets related to marketing activities, such as trademarks. b. Qualifying Expenditures The eligible expenses ( Qualifying Expenditures ) are those borne by the taxpayer for the purposes of actual R&D activities and which are directly connected with the creation, the development or the improvement of an Eligible IP Asset (e.g. wages, direct costs or overhead costs). They also cover payments made by the taxpayer to an unrelated party for the purposes of its R&D activities and directly connected to the creation, development or improvement of an Eligible IP Asset. Acquisition costs, interest and financing costs, real estate costs and other expenses which are not directly linked to the Eligible IP Asset are excluded from the Qualifying Expenditures At the time of this publication, the IP box regime was not yet enacted. Under the bill of law however, the IP box applies retroactively as from 1st January 2018 once enacted.

25 4. Investment vehicles Qualifying Expenditures borne by the taxpayer during the current or preceding financial years may be increased up to 30%, provided that this increased amount of the Qualifying Expenditures does not exceed the overall expenses borne by the taxpayer during the current or preceding financial years. The notion of Qualifying Expenditures plays a crucial role in the IP regime as it serves as an indicator of substantial activity. It is indeed the proportion of expenditures directly related to R&D activities (i.e. the Qualifying Expenditures) that demonstrate the real value added by the taxpayer. c. Overall Expenditures The total expenses ( Overall Expenditures ) generally include i) Qualifying Expenditures, ii) acquisition costs of an Eligible IP Asset including recurrent expenses such as royalties and iii) expenses necessary for the R&D activities that are directly related to the creation, development or improvement of an Eligible IP Asset and which are paid to a related entity carrying out R&D activities for the benefit of the taxpayer. d. Overall Income The overall income ( Overall Income ) is based on i) the income derived from the license from Eligible IP Assets, ii) innovation income embedded in the sales price of the Eligible IP Assets, iii) capital gains upon the sale of Eligible IP Assets and iv) payments indemnifying a violation of the IP rights. The purpose of the aforementioned adjustments and compensations is to ensure that the income derived from an Eligible IP Asset during a financial year will only benefit from the partial exemption when the aggregate net income exceeds the total business expenses (i.e. direct and indirect expenses) with regard to the said Eligible IP Asset. Specific rules are provided for in case a taxpayer holds more than one Eligible IP Asset. e. Net income The proportion of the income qualifying for the partial exemption regime is equal to the same proportion as that between Qualifying Expenditures and Overall Expenses. A taxpayer will thereby only be able to benefit from the partial exemption on a significant portion of net income from an Eligible IP Asset, where the taxpayer has actually himself/herself undertaken a significant part of the directly related R&D activities. f. Examples Example 1 Income Amount Expenses Amount Income deriving from Eligible IP Asset 1000 Qualifying Expenditures 100 Acquisition costs 10 R&D expenses paid to a related party 40 Total 1000 Total 150 A 30% uplift would apply to the Qualifying Expenditures of 100, which leads to a total of 130 (100+(100*30%)) whereas the Overall Expenditures incurred amount to 150. In order to determine the proportion of IP income in relation to the Qualifying Expenditures, the nexus approach formula should apply as follows: Qualifying Expenditures (130) Overall Expenditures (150) Overall income (1000) Net income (866.6) 23

26 4. Investment vehicles Example 2 In 2018, a taxpayer develops Eligible IP Assets. The taxpayer has incurred overhead costs in relation to these Eligible IP Assets (i.e. Qualifying Expenditures) for an amount of EUR 80,000. As from 2019, the Eligible IP Asset generates an overall income of 55,000 per year. Eligible IP Asset accounted as a charge Tax year TOTAL Overall Income Qualifying Expenditures = Net Income Tax year TOTAL Net income Amount of net negative income to compensate with positive income = Adjusted Net Income Adjusted positive Net Income Intra-group financing activities Luxembourg has been a traditional hub for intra-group financing activities, cash pooling and more generally treasury management activities. In this context, it should be noted that: - Luxembourg does not levy any withholding tax on arm s length interest payments; and - Companies engaged in intra-group financing activities need to evidence that their remuneration complies with the arm s length principle. According to the OECD s arm s length principle, activities that are carried out between affiliated companies must comply with market conditions, i.e. conditions that would apply between independent companies. In order to provide practical guidance to companies engaged in intra-group financing activities, the tax authorities issued a Circular Letter L.I.R. N 56/1 56bis/1 dated 27 December 2016 ( Circular Letter ), which follows the revised Chapter I Section D of the OECD TPG. a. Scope The Circular Letter applies to all companies that are engaged in intra-group financing transactions. Intragroup financing transactions are defined as granting loans or advancing funds to affiliated enterprises and refinancing them through financial instruments such as public issuances, private borrowings, advances or bank loans. Two enterprises are considered to be affiliated if one of them participates directly or indirectly in the management, control or capital of the other, or if the same persons participate directly or indirectly in the management, control or capital of the two enterprises. b. Determination of the arm s length price 24 The comparability analysis is the main element for the application of the arm s length principle: the arm s length principle is based on a comparison of the conditions of a controlled transaction with the conditions that would have been made had the parties been independent and undertaking a comparable transaction under comparable circumstances. The comparability analysis includes the 2 following parts:

27 4. Investment vehicles (i) An analysis of the commercial and financial relations between the affiliated enterprises and the determination of the economically significant circumstances of said relations in order to precisely identify the controlled transaction. This part of the analysis must include: - an analysis of the contractual provisions of the transaction; - a functional analysis, including a value chain analysis, which identifies the activities, the liabilities, the economically significant functions, as well as the assets and risks of each party to the controlled transactions; and - a risk analysis which estimates the economically significant specific risks related to the financing transaction, the functions which have a link or an influence on the assumption or impact of these risks, as well as the party which assumes them. (ii) A comparison of the economically significant conditions and circumstances of the controlled transaction with those of uncontrolled transactions between third parties. Accordingly, the remuneration of the controlled transaction must be benchmarked against the remuneration of uncontrolled transactions. c. Equity at risk Companies engaged in intra-group financing activities must have the financial capacity or equity at risk - to assume the risks related thereto. These risks have been previously identified in the risk analysis. The amount of equity at risk must hence be determined by an appropriate transfer pricing analysis on a case-per-case basis. No specific methodology is foreseen but the equity at risk needs to be determined on the basis of a credit risk analysis which includes a market analysis, a balance sheet analysis as well as all other elements that are relevant for the determination of the risks linked to a financing activity. d. Business substance In order to be able to control the aforementioned risks, an intra-group financing company must have a genuine presence in Luxembourg, which requires a minimum of business substance in Luxembourg, as follows: the majority of the members of the board of managers, directors or managers having power to bind the company must be (i) Luxembourg residents or (ii) non-residents who pursue a professional activity (i.e. a business, agricultural/forestry, independent or salaried activity) in Luxembourg and who are taxable in Luxembourg for at least 50% of their professional revenue. In case a company is part of the management board, it must have its statutory seat and central administration in Luxembourg; the company must have qualified personnel able to control the transactions performed. The company may however outsource functions that do not have a significant incidence on the control of the risks; key decisions regarding the management of the company must be taken in Luxembourg. Companies that are required by corporate law to hold shareholder meetings must hold at least one annual meeting at the place indicated in the articles of incorporation; and the company must not be considered as a tax resident of another State. e. Advance pricing agreements The Luxembourg tax authorities are prepared to enter into APAs with companies that comply with the abovementioned conditions. The APA request must provide quite extensive information on the requesting entity, the transactions and the transfer pricing analysis. The filing of the request is subject to a fee and if the APA is granted, it is valid for a maximum period of 5 years. 25

28 4. Investment vehicles Fiscal consolidation Luxembourg resident companies of the same group are allowed to consolidate their taxable profits and losses for CIT and MBT purposes under certain conditions. Tax consolidation Parent Luxembourg 45% 95% 100% 10% LuxCo LuxCo FrenchCo ItalyCo 45% 55% 95% LuxCo LuxCo Under the fiscal consolidation regime, each of the consolidated members establishes its own tax accounts and files its own tax returns. However, the consolidating member of the group integrates the fiscal accounts of the consolidated members into its own tax accounts. Intragroup transactions that affect a consolidated result are not considered for the consolidated profit/loss. Only the consolidated profit/loss is then assumed for the whole group. The main conditions of the fiscal consolidation regime may be summarised as follows: The consolidating parent company must be either a fully-taxable resident company or a Luxembourg PE of a non-resident company liable to a tax corresponding to Luxembourg CIT; The consolidated subsidiaries must be fully-taxable resident companies; The consolidating parent company must hold, either directly or indirectly, a participation of at least 95% in the share capital of the consolidated subsidiaries. Participations of at least 75% may also qualify for consolidation, but are subject to the approval of the Ministry of Finance and of at least ¾ of the minority shareholders. Indirect participations of at least 95% may further be held through non-resident companies liable to a tax corresponding to the Luxembourg CIT. The participation condition must be uninterruptedly satisfied as from the beginning of the first accounting period for which the consolidation is requested; The regime is granted upon written application filed jointly by the consolidating parent and the consolidated subsidiaries for at least 5 years. The application must be filed before the end of the first accounting period for which the consolidation regime is requested. 26

29 4. Investment vehicles Since 2016, a horizontal consolidation is permitted between qualifying companies that are held by a common parent company established in an EEA Member State and subject to a tax corresponding to CIT. This is a consolidation between two or more Luxembourg-resident companies owned by the same non-resident parent, provided the parent company is resident in a State of the EEA. Additionally, Luxembourg PEs of a non-resident company (irrespective of its fiscal residence) may be included in a tax consolidation, provided however that this company is fully liable to a tax corresponding to Luxembourg CIT. So far, only Luxembourgresident capital companies can be part of a tax consolidation group. The consolidation regime is not available for NWT purposes. The MNWT also applies to companies in a fiscal consolidation but it is capped at EUR 32,100. Before After EEA Country Parent company EEA Country Parent company Luxembourg Luxembourg Permanent Permanent LuxCo 1 LuxCo 3 LuxCo 1 LuxCo 3 establishment establishment LuxCo 2 LuxCo 2 27

30 4. Investment vehicles Other tax incentives Regime Investment tax credit Venture capital investment certificates Tax credit for hiring unemployed persons (temporary tax regime) Basic Requirements granted upon request to Luxembourg companies and Luxembourg PEs of non-resident companies, for qualifying investments physically used in a country of the EEA qualifying investments include tangible depreciable assets other than buildings, livestock, mineral and fossil deposits no tax credit is granted for assets usually depreciable in a period of less than 3 years, assets acquired through the transfer of an enterprise or autonomous part or subdivision thereof, second-hand assets, isolated assets acquired for no consideration, and generally motorised vehicles the following assets may also benefit from the tax credit for global investments: - heating plants and sanitation systems in hotel buildings - certain buildings used for social purposes - investments in immovable property that serve certain environmental purposes (e.g. reduction of water consumption, energy savings and waste management) or enable disabled persons to work - certain ships used in international traffic and purchased by recognised shipping companies - zero emission cars - software acquired by the taxpayer from an unrelated party the venture capital company ( VCC ) must be a Luxembourg fully-taxable resident public limited company (SA) or a private limited company (SARL) with registered shares the products or technologies developed by the VCC must have an innovative nature with both a high growth potential and a high risk component the certificate holders must be (i) Luxembourg individuals or fully taxable resident companies that are (ii) shareholders of the VCC a specific request must be addressed by the shareholder(s) to the Ministry of Finance before the investment is made in the VCC the investment in the VCC must be made as a cash contribution the aggregate amount of the certificate must be comprised between EUR 100,000 and EUR 5,000,000 existence of an employment agreement of a limited or unlimited duration for at least 16 hours per week over 36 months 28 Tax credit for permanent vocational trainings Tax exemption for new companies and new manufactured products at least half of the trainings must be followed during normal working hours the training projects and programmes exceeding EUR 500 are subject to the prior authorisation of the competent minister available to Luxembourg resident taxpayers who (i) set up a new company or who (ii) develop manufactured products particularly suited to the development and the structural expansion of the economy or to the improvement of the geographical distribution of economic activities the exemption is subject to the approval of the Luxembourg Minister of Economy and limited to a maximum period of 8 years

31 4. Investment vehicles Effects the tax credit for additional investments is equal to 13% of the acquisition price of qualifying investment the tax credit for global investments corresponds to (i) 8% for a first tranche of the total acquisition price acquired during the tax year not exceeding EUR 150,000 and (ii) 2% for the tranche exceeding EUR 150,000 the total credit may be credited against CIT exceeding the MNWT amount and any excess may be carried forward for 10 years the risk capital investment certificates entitle their holders to a tax credit against their CIT liability exceeding the MNWT amount of an amount equal to 30% of their face value without exceeding 30% of the holder s income the benefit of the certificate may not be carried forward and the certificate may only be transferred to a Luxembourg fully-taxable resident company the tax credit equals 15% of the gross monthly remuneration the tax credit may be credited against CIT exceeding the MNWT amount (any excess may be carried forward for 10 years) the tax credit equals 10% of the training costs the tax credit is creditable against CIT exceeding the MNWT amount (any excess may be carried forward for 10 years) a 25% exemption on profits derived from manufactured products (limited to a certain percentage of investments) 29

32 4. Investment vehicles VAT For VAT purposes, the concept of taxable person covers any person who independently carries out any economic activity, whatever the purpose or results of that activity. In its judgment in Polysar (Case C-60/90 dated 20 June 1991), the CJEU declared that a holding company whose sole purpose is to take an economic interest in an enterprise without being involved, directly or indirectly, in its management does not qualify as a taxable person. Consequently, pure holding companies, i.e. holding companies receiving income solely in the form of dividends, liquidation proceeds and capital gains accruing to them in their capacity as shareholders, cannot be considered to be taxable persons for VAT purposes and, therefore, do not have the right to deduct input tax. Those activities are commonly described as being outside the scope of VAT. However, where a holding company takes part in the operations of its subsidiaries or is involved in their management, meaning that it renders services to them for consideration (for example, it provides consultancy services, grants loans, or transfers trademark or IP licenses to them), the holding company is considered to be a taxable person in respect of those transactions. The CJEU also clarified that the annual granting by a holding company of interest-bearing loans to companies in which it has a shareholding and placements by that holding company in bank deposits or in securities, such as treasury notes or deposit certificates, constitutes economic activities (C-77/01 dated 29 April 2004). Especially for SOPARFIs, three factors may be highlighted from the CJEU case law in order to reach a definition of what an economic activity is within the meaning of the Luxembourg VAT law. First, the activity must not be carried out merely on an occasional basis. Second, the activity must not be confined to management in the same way as a private investor would do. Third, the activity must be carried out with a defined business or commercial purpose, in particular with a concern to maximise returns on capital investment. These qualifications with regard to economic activities for VAT purposes are important for determining the extent and the calculation of the right to a VAT deduction. Should the Luxembourg SOPARFI be considered a taxable person for VAT purposes, any supply of intangible or intellectual services from abroad would be subject to the VAT of the country of the Luxembourg SOPARFI. Such taxation would be at the rate of 17%, the lowest applicable rate within the 28 EU Member States. In this respect, the CJEU clarified that a person who carries out both an economic activity (e.g. the supply of services) and a non-economic activity for VAT purposes (e.g. the holding of participations) and who purchases consultancy services from a person liable to tax in another Member State, is to be regarded as a taxable person even though the purchase was made solely in respect of the non-economic activity (C- 291/07 dated 6 November 2008). As regards the input VAT deduction right of holding companies, the CJEU ruled in the Larentia + Minerva case (joined cases C-108/14 and C-109/14 dated 16 July 2015) that a holding company which involves itself in the management of all its subsidiaries and which, on that basis, carries out an economic activity is, in principle, entitled to deduct in full any input VAT paid on its general expenditures (unless certain of its activities are exempt from VAT, in which case the input VAT deduction right should be limited accordingly). If the holding company is only involved in the management of some (not all) of its subsidiaries, the input VAT deduction right will be limited. 30

33 4. Investment vehicles 4.2. The Luxembourg Partnerships Definition and purpose Luxembourg partnerships are suitable for structuring joint ventures, holding and fund vehicles. Given the contractual freedom and their flexible governance combined with legal certainty, Luxembourg partnerships prove highly attractive for any structuring of a business or investment activity while offering efficient tax treatment. Luxembourg law foresees several types of partnerships, including an unlimited partnership, a partnership limited by shares and two types of limited partnerships, the common limited partnership ( CLP ) and the special limited partnership ( SLP ). The main specificity of the SLP is that, unlike the CLP, it is not vested with legal personality. Both SLP and CLP regimes have proven to be widely accepted and used by all persons wishing to have an onshore European domiciled partnership with similar features to Anglo-Saxon types of partnership structures Main features The limited partnership agreement ( LPA ) is the document which organises the partnership. It may be entered into under private seal or as a notarial deed and will only be published as an excerpt including limited generic provisions. As a result, partnership arrangements and terms may be largely kept confidential. Contractual flexibility is the key feature of the Luxembourg partnership legislation. Statutory default rules only take effect when the LPA remains silent in respect of certain key points which are of importance in protecting investors. Most of the economic and non-economic terms, including corporate governance, voting rights of the limited partners ( LPs ) (or removal thereof), deployment of capital, profit and losses allocation, may be tailored to the specific need of a project. The management of the partnerships may be entrusted to a managing general partner with unlimited liability or to any other external manager(s), which will be considered the agent(s) responsible for the execution of its (their) mandate(s). LPs will be allowed to participate in internal management without incurring unlimited liability risk. This offers substantial flexibility to organise appropriate governance with participation/supervision from LPs. Various aspects of legal certainty are embedded in the Luxembourg partnership legislation, over and above the previously mentioned LP liability protection for internal management of default rules in the case of LPA omissions. Partnerships may hold and / or manage any type of assets. The situation of each LP may be treated on an individual basis since allocations to their capital account can be freely determined in the LPA Tax regime Both CLPs and SLPs are transparent for CIT and NWT purposes and hence not subject to CIT and NWT in Luxembourg. The partnership may however be subject to Luxembourg MBT if it carries on a commercial activity or in limited circumstances if (i) it pursues a business activity or (ii) its general partner is a Luxembourg commercial company (SA, SCA, or SARL) that owns at least 5% of its interests (which in practice is generally not the case). As regards the business activity, the circular letter n 14/4 dated 9 January 2015 provides that CLPs and SLPs which qualify as AIFs within the meaning of the Alternative Investment Fund Management ( AIFM ) law of 12 July are deemed not to be conducting a business activity Implementing the Alternative Investment Fund Managers Directive 2011/61/EC

34 4. Investment vehicles The Luxembourg resident partners of the partnership are personally subject to income/wealth tax in respect of their share in the profits/assets of these entities, regardless of whether such profits/assets are effectively distributed or not. Non-resident partners may only be subject to taxation in Luxembourg as regards their partnership interests if (i) they hold their interests through a Luxembourg PE or permanent representative or (ii) if the partnership itself is constitutive of a PE or permanent representative. As regard WHT, any distributions by the partnership are as a rule made free of WHT in Luxembourg. Given its tax transparency, the partnership may not benefit itself from double tax treaties but their partners may generally claim the treaty benefits with the source state SICAR Definition The SICAR is a regulated vehicle introduced by the law of 15 June 2004 relating to the investment company in risk capital which offers a flexible investment structure matching the needs of the risk capital investment managers and their investors. A SICAR must be authorised by the Commission de Surveillance du Secteur Financier ( CSSF ) prior to commencing its operations and it can be set up either in a corporate form or in the form of a partnership Purpose SICARs are dedicated to investments in risk and venture capital for the benefit of qualified investors. Investment in risk capital is to be understood as the direct or indirect contribution of assets to entities in view of their launch, their development or their listing on a stock exchange (CSSF circular 06/241). SICARs may only invest in risk capital within the meaning of CSSF circular 06/241 which defines risk capital as an investment characterised by (i) a certain level of risk; (ii) made with a view to developing the underlying investment. With respect to the development criteria, the CSSF considers that (i) the low liquidity of an investment together with (ii) the fact that such investment is intended to be held until it has reached a certain maturity to generate most proceeds upon disposition are important elements. SICARs are not subject to investment diversification rules or lending or leverage restrictions but due to the high risk associated with the investments made by SICARs this vehicle is restricted to institutional investors professional investors or well-informed investors. A SICAR can be set up in the form of an umbrella fund with multiple segregated compartments, each corresponding to a distinct segregated portfolio of assets Tax regime The SICAR s tax regime is extremely favourable and depends on its corporate forms. 32 The SICAR under the form of a corporation is as a rule subject to CIT and MBT at ordinary rates. However, income derived from (i) portfolio items consisting of securities and capital gains deriving from such securities and (ii) temporary investments in liquid assets held for a maximum period of 12 months before investment in risk capital is excluded from the tax base. Distributions made by a SICAR are further not subject to any WHT. A SICAR is furthermore exempt from NWT but remains subject to MNWT. The SICAR may also benefit from a large number of Luxembourg double tax treaties.

35 4. Investment vehicles A SICAR in the form of a partnership is a tax transparent entity and is thus not subject to CIT, NWT or MBT. Its partners will be taxed directly on their interests in the partnership in their state of residence. Nonresident partners are not subject to tax in the SICAR partnerships, unless they hold their interest through a Luxembourg PE or permanent representative. Given the non-commercial nature of the SICAR s investments, a SICAR under the form of a partnership is not constitutive of a Luxembourg PE. From a VAT point of view, Article 44, paragraph 1, under (d) of the Luxembourg VAT law exempts the management of a SICAR from VAT. This exemption is also applicable to similar entities located in other Member States and subject to the supervision of a supervisory body similar to the CSSF. The Luxembourg VAT authorities indicated in circular 723 dated 29 December 2006 (on the implementation of the BBL and Abbey National cases 3 with respect to VAT and investment funds) that all entities benefiting from the specific VAT exemption contained in Article 44, paragraph 1, under (d) of the Luxembourg VAT law (i.e. including SICARs) are taxable persons for VAT purposes with no right to an input VAT deduction. Indeed, the Luxembourg VAT authorities consider that these entities (including SICARs) are only involved in VAT exempt activities. SICARs are not subject to any VAT registration requirements except in case of receipt of taxable services from abroad (such as legal or tax services) Securitisation undertakings Definition The securitisation law of 22 March 2004 ( Securitisation Law ) defines securitisation as the transaction by which a securitisation undertaking acquires or assumes, directly or through another undertaking, risks relating to claims, other assets, or obligations assumed by third parties or inherent to all or part of the activities of third parties and issues securities whose value or yield depends on such risks. Further, securitisation undertakings are defined as undertakings which carry out the securitisation in full, and undertakings which participate in such a transaction by assuming all or part of the securitised risks - the acquisition vehicles - or by the issuing of securities to ensure the financing thereof - the issuing vehicles - and whose articles of incorporation, management regulations or issue documents provide that they are subject to the provisions of the Securitisation Law. Securitisation undertakings which issue securities to the public on a continuous basis require an authorisation from the CSSF Purpose Securitisation products are dedicated to any large company that owns appropriate financial assets, whether debt or equity. The securitisation tool offers advantages to both originators and investors and is used in many different sectors such as banking and insurance but also in real estate and private equity structures, infrastructure financing projects as well as in Islamic finance transactions Tax regime The tax regime applicable to securitisation undertakings is provided in the Securitisation Law which aims to assure the tax neutrality necessary for any successful securitisation transaction. Under the Securitisation Law, securitisation companies and securitisation funds may be established in Luxembourg. 33 Securitisation companies are subject to CIT and MBT at ordinary rates. However, any commitments made by a securitisation company towards investors and creditors are considered tax deductible expenses. 3 Case C-8/03, Banque Bruxelles Lambert SA (BBL) v. Belgian State, 21 October 2004 ( BBL case ) and Case C-169/04, Abbey National, 4 May 2006 ( Abbey National case ).

36 4. Investment vehicles The Securitisation Law makes no distinction in relation to the nature of the securities issued to investors. Such securities may be i.a. bonds, notes, shares or beneficiary units. For shares and beneficiary units, any commitment to distribute (whatever the form it may take from a corporate law viewpoint, e.g. dividends or redemptions) represents a deductible expense. In practice, securitisation companies may thus realise no taxable profits and hence will not actually pay income tax as any income or gain is normally offset by a tax deductible expense. Commitments include allocations to statutory and blocked reserves. In the same manner as debt, all commitments must be valued at the year-end exchange rate. Commitments may either be (i) liquidated in favour of the shareholders at the closing of the financial year, (ii) liquidated upon approval of the annual accounts or (iii) allocated to a blocked reserve. To the extent that there is a timing difference between the realisation of a profit and its distribution to the investors (the latter taking place in a subsequent accounting year), the taxable result of the securitisation company is determined on the basis of a fiscal balance sheet where any net profit shown in the statutory balance sheet is offset in the fiscal balance sheet by a deductible provision corresponding to commitments to be distributed. A discretionary allocation decided by the annual general meeting is not considered a tax deductible commitment. From a transfer pricing perspective, the limited functions and risks of a securitisation company generally justifies a remuneration at cost or on a cost plus basis. Securitisation companies are per se exempt from NWT (except for MNWT), and distributions made by a securitisation company are not subject to dividend WHT. A securitisation company is a Luxembourg tax resident and residence certificates are issued by the competent taxation office upon request. From a Luxembourg tax perspective, a securitisation company may also benefit from double tax treaties concluded by Luxembourg. Securitisation funds are one or more co-ownerships of assets or fiduciary estates. They have no legal personality and are managed by a management company. For direct tax purposes they are transparent and thus not subject to CIT, MBT, NWT or WHT. From a VAT point of view, Article 44, paragraph 1, under (d) of the Luxembourg VAT law exempts the management of securitisation undertakings situated in Luxembourg and similar vehicles located in other Member States. The Luxembourg VAT authorities indicated in circular 723 dated 29 December 2006 (on the implementation of the BBL and Abbey National cases with respect 30 to VAT and investment funds) that all entities benefiting from the specific VAT exemption contained in Article 44, paragraph 1, under (d) of the Luxembourg VAT law (i.e. including securitisation undertakings established in Luxembourg) are taxable persons for VAT purposes with no right to an input VAT deduction. Indeed, the Luxembourg VAT authorities consider that these entities (including securitisation undertakings established in Luxembourg) are only involved in VAT exempt activities. No other precision or nuance, however, is provided in this circular. Securitisation undertakings are not subject to any VAT registration requirements except in case of receipt of taxable services from abroad (such as legal or tax services) Investment funds Types of investment funds and purpose 34 Luxembourg investment funds may be established as common funds (fonds commun de placement - FCP) or investment companies (sociétés d investissement): An FCP is a contractual, unincorporated co-proprietorship of assets. An FCP does not have any legal personality and therefore may not itself enter into contracts or obligations. Neither are the unitholders vested with the power to manage and administer the FCP. Such power is granted to a management company. The management company must manage the FCP in accordance with the management regulations and in the exclusive interests of the unitholders;

37 4. Investment vehicles Investment companies may either be created as a structure with variable capital (société d investissement à capital variable SICAV ) or as a structure with fixed capital (société d investissement à capital fixe SICAF ). Investment companies have a legal personality (except for SICAV/SICAF in the form of an SLP) and are generally managed by a board of managers. Both types of funds may be created as (i) undertakings for collective investment ( UCI ), undertakings for collective investment in transferable securities ( UCITS ) under the amended law of 17 December (the 2010 Law ) or (ii) as SIF under the amended law of 13 February Both types of funds may issue several classes of units/shares allowing for the creation of classes with features which are adapted to the needs of the different investors. They may also be established as an umbrella structure, i.e. one single fund with one or more sub-funds, where each sub-fund corresponds to a distinct portfolio of certain assets and liabilities. As between investors, each sub-fund constitutes a separate pool of assets, which is ring-fenced against the liabilities of any other sub-fund. On 23 July 2016, a new type of Luxembourg investment vehicle, the Reserved Alternative Investment Fund ( RAIF ) was introduced into Luxembourg law. As opposed to SIFs and SICARs, RAIFs are not directly subject to the initial and ongoing supervision of the CSSF. However, RAIFs must be managed by an AIFM through which the regulatory supervision will be performed. The AIFM shall be in charge of at least portofolio and risk management Tax regime a. Taxation of investment funds Luxembourg funds are subject to an annual subscription tax (taxe d abonnement), but are exempt from CIT, MBT, NWT and dividend WHT. As a general rule, funds subject to the 2010 Law are subject to a subscription tax of 0.05% of their aggregate net asset value. SIFs are subject to subscription tax at a reduced rate of 0.01%. The RAIF is in principle subject to the same tax regime as SIFs. However, for RAIFs which exclusively invest in risk capital, in accordance with the RAIF documentation, may also opt for a tax and regulatory regime similar to the SICAR. No subscription tax is payable on the asset value represented by units or shares held in Luxembourg funds by funds which have already been subject to the annual subscription tax and by (i) certain institutional cash funds, (ii) microfinance investment funds, (iii) exchange traded UCIs/UCITS, and (iv) pension pooling funds. Other reduced rates or exemptions may be available. Contributions in cash to investment companies upon incorporation are subject to a fixed registration duty of EUR 75. b. Taxation of investors Non-resident shareholders and unitholders are in principle not subject to tax in Luxembourg on capital gains and income derived from the fund, unless these shares/interests in the fund are owned through a PE or a permanent representative in Luxembourg. No WHT is levied on income distributed by a Luxembourg fund to its investors. c. International aspects UCITS IV The implementation of the Council Directive 2009/65/EC ( UCITS IV ) raises several tax issues that are currently not dealt with at European level, in particular regarding the management company passport, crossborder mergers, master-feeder structures and VAT. In order to allow for the seamless implementation of UCITS IV, EU Member States thus need to adopt appropriate domestic fiscal measures to remove any 35 4 Implementing, among others, the UCITS IV Directive.

38 4. Investment vehicles existing tax barriers. Luxembourg has been a forerunner in this respect and has introduced several tax measures into the 2010 Law. Management company passport The management company passport raises the issue of the possible attraction of the fiscal residence of a fund established in one EU Member State to another EU Member State where its management company is situated. Indeed, the tax laws of several EU Member States use a so-called place of effective management test in order to determine whether an entity is a tax resident covered by its tax sovereignty. If a management company situated in one of those EU Member States manages a fund situated in another EU Member State, the fund may be deemed to be a tax resident of the EU Member State where its management company is located and become subject to tax in that State. Absent any applicable double tax treaty, this dual residence may lead to a double taxation. In order to avoid these uncertainties, the 2010 Law provides that a UCI established outside Luxembourg, whose central administration or effective place of management is located in Luxembourg, is exempt from CIT, MBT and NWT. Accordingly, foreign funds do not become subject to Luxembourg taxation due to the fact that they are managed by a Luxembourg management company. Cross-border mergers Cross-border mergers (as well as purely domestic mergers) may generally trigger tax consequences at the level of both the merged UCITS and the investors: - at the level of the merging UCITS, the transfer of assets/liabilities may trigger the realisation and taxation of hidden reserves; - at the level of the investors, the exchange of the shares/units in the initial UCITS for shares/units of the absorbing UCITS may lead to a capital gain taxation. Regarding Luxembourg UCITS, the merger remains tax neutral at the fund level, since Luxembourg UCIs are not subject to any income or wealth tax. At the level of the non-resident investors in a Luxembourg UCITS, gains realised on the exchange of units/shares are not taxable to Luxembourg income tax and no WHT is levied thereon. SICAV/SICAF FCP Fund level tax neutral tax neutral Investor level Resident individual investor tax neutrality regime available (exchange at book value) gain generally not taxable, unless speculative optional step-up available, but gain not taxable, unless (i) speculative or (ii) gain on a substantial participation Non-resident investor gain not taxable in Luxembourg gain not taxable in Luxembourg Master-feeder structures In a cross-border master-feeder structure, adverse tax consequences may generally arise at the level of the feeder fund when the latter derives dividends from, or realises capital gains on the disposal of, the shares/ units of the master fund (or other assets in case of a conversion of an existing UCITS into a feeder fund). 36 Assuming the master fund is a Luxembourg UCITS, tax neutrality is however ensured: - dividends, share redemption and liquidation proceeds are not subject to any WHT in Luxembourg; - capital gains realised by a non-resident feeder fund are not subject to tax in Luxembourg. On 10 May 2014, Luxembourg adopted a law implementing Directive 2014/91/EU of 23 July 2014 ( UCITS V ) as regards depositary functions, remuneration policies and sanctions.

39 4. Investment vehicles Double tax treaty network The FCP is not a legal entity and is therefore transparent for taxation purposes. The income of the FCP should be attributed proportionately to its investors, and any investor in a State which has concluded a double tax treaty may therefore, to the extent practicable, be able to take advantage of treaty benefits. Since investment companies are legal persons under Luxembourg law, they should generally be eligible and resident in Luxembourg for the purposes of double tax treaties. Certain double tax treaties however contain provisions excluding investment companies from the respective benefits of the double tax treaty, and the application of a given double tax treaty needs to be checked on a case-by-case basis.3 d. VAT From a VAT point of view, Article 44, paragraph 1, under (d), of the Luxembourg VAT law, as revised by the Law of 12 July 2013, exempts from VAT the management of investment funds such as investment companies, FCPs and AIFs. The Luxembourg VAT authorities indicated in circular 723 dated 29 December 2006 (on the implementation of the BBL and Abbey National cases with respect to VAT and investment funds) that investment funds benefiting from the specific VAT exemption contained in Article 44, paragraph 1, under (d) of the Luxembourg VAT law are taxable persons for VAT purposes with no right to an input VAT deduction. Indeed, the Luxembourg VAT authorities consider these investment funds to be active in VAT exempt activities only. An FCP, opposed to an open-ended or closed-ended investment company, does not have any legal personality and is considered by the Luxembourg VAT authorities to be a single entity formed with its management company which, in principle, qualifies as a taxable person for VAT purposes. On the contrary, an AIF set up as a SLP should qualify as a separate VAT taxpayer from its general partner. The concept of management services with respect to investment funds encompasses the tasks of portfolio management and also those of administering the funds themselves (such as those set out in Annex II to the UCITS IV directive under the heading Administration). As confirmed by the CJEU in the GfBk case (C-275/11) of 7 March 2013, investment advisory services supplied by third parties also fall under the notion of fund management services for the purposes of VAT exemption (irrespective of whether the advisors are subject to the control of a supervisory authority or not). The VAT exemption may be extended to sub-contracted services if, viewed broadly, they form a distinct whole, and are specific to, and essential for, the management of investment funds. The Luxembourg VAT authorities confirmed in circular 723ter of 7 November 2013 that risk management functions are to be considered as forming part of VAT exempt fund management services. The VAT exemption does not cover the functions of depositary for the control and supervision duties (14% VAT). Similarly, legal, tax and audit services remain subject to VAT in all cases. Should legal or tax services be rendered by non-luxembourg service providers, Luxembourg VAT would be due by the investment funds at the rate of 17% under the reverse charge mechanism without any possibility to recover that VAT. In such case, an investment fund (respectively the management company in case of a FCP) will be required to register for VAT purposes in Luxembourg (although under a simplified regime). 37

40 4. Investment vehicles 4.6. Banks and financial institutions Banks and financial institutions are governed by the amended law of 5 April 1993 relating to the financial industry. They are regulated entities under the supervision of the CSSF. Banks are as a rule subject to CIT, MBT and NWT at ordinary rates. However, they benefit from the Luxembourg participation exemption regime as well as the other tax incentives (e.g. investment tax credits). In addition, they may create certain provisions justified by their specific activities, such as a provision for the deposit guarantee scheme (Association pour la Garantie des Dépôts Luxembourg - AGDL), as well as a provision for currency exchange fluctuations. These provisions constitute in principle tax deductible business expenses. As tax returns are filed in EUR only, a roll-over relief is generally available for foreign exchange gains realised on the conversion into EUR of assets denominated in a foreign currency. In addition, banks may benefit from tax credits for foreign income taxes. Regarding VAT, banks and financial institutions are considered as taxable persons for VAT purposes as they carry out economic activities within the meaning of VAT. Banking transactions may be (i) taxable, (ii) VAT exempt or (iii) out of the scope of VAT. Most of the financial transactions are VAT exempt (e.g. granting of credit, transactions regarding deposits, current accounts, currency and bank notes) with no right to deduct input VAT (except under certain circumstances). Banks are usually required to register for VAT purposes Insurance and reinsurance companies Luxembourg insurance and reinsurance companies are governed by the amended law dated 6 December They are regulated entities under the supervision of the Commissariat aux Assurances ( CAA ). Luxembourg insurance and reinsurance companies are as a rule subject to CIT, MBT and NWT at ordinary rates. Insurance and reinsurance companies are obliged to constitute each year appropriate technical provisions in accordance with the amended law dated 8 December 1994 on accounting principles for insurance companies. Reinsurance companies must constitute a specific equalisation reserve against the risk of fluctuation of future claims. Allocations to technical provisions and reserve are tax deductible. Dividends, liquidation proceeds and capital gains may also be exempt under the participation exemption regime. As tax returns are filed in EUR only, a roll-over relief is generally available for foreign exchange gains realised on the conversion into EUR of assets denominated in a foreign currency. Premiums for non-life insurance policies are subject to an insurance tax of 4%. Premiums related to life insurance policies, as well as the premium paid on reinsurance policies, are exempt from insurance tax. 38 Insurance companies are considered as taxable persons for VAT purposes as they carry out economic activities within the meaning of VAT. As a rule, insurance and reinsurance transactions, including related services performed by insurance brokers and insurance agents, are VAT exempt. This exemption is not applicable to services rendered by experts in relation to the evaluation of insurance indemnities. According to the CJEU in C-349/96 dated 25 February 1999, the essentials of an insurance transaction are, as generally understood, that the insurer undertakes, in return for prior payment of a premium, to provide the insured, in the event of materialisation of the risk covered, with the service agreed when the contract was concluded. The CJEU stated in the Taksatorringen case (C-8/01 dated 20 November 2003) that the concept of related services performed by insurance brokers and insurance agents refers only to services provided by professionals who have a relationship with both the insurer and the insured party. This definition places the emphasis on the external action of the insurance agent i.e. his/her position as a mediator between the policyholder and the insurance company, which necessarily implies the existence of relations with both parties. In the absence of a contractual relationship with both parties, the service cannot qualify as an

41 4. Investment vehicles insurance transaction and thus cannot benefit from VAT exemption. The outsourcing of accounting and administration, the provision or sharing of staff, customer services, and call-centre and back-office functions are taxable. Insurance companies performing VAT exempt insurance services do not have a right to the input VAT deduction, except if the recipients are based outside the EU. Insurance companies are not required to register for VAT purposes, unless part of the insurance activity is provided to non-eu customers or unless they receive taxable services from non-luxembourg suppliers Pension fund regimes Luxembourg pension funds may be established either (i) as pension savings associations (association d épargne-pension - ASSEP ) or pension savings companies with variable capital (société d épargnepension à capital variable - SEPCAV ) under the supervision of the CSSF in accordance with the law of 13 July 2005 on pension funds ( Pension Fund Law ) or (ii) as pension funds under the supervision of the CAA, in accordance with the amended Grand-Ducal decree of 31 August Pursuant to Luxembourg law, a Luxembourg pension fund cannot be set up and provide retirement benefits prior to obtaining the approval of the CSSF and the CAA. The ASSEP, the SEPCAV and the pension funds under the supervision of the CAA are subject to MBT but are exempted from NWT (except MNWT of EUR 4,815). However, ASSEPs and pension funds are obliged to constitute appropriate tax deductible provisions which must cover at all times the future liabilities towards beneficiaries. The SEPCAV benefits from an objective exemption from CIT and MBT for profits derived from investments in securities so that they are only taxed on other financial profits. From a VAT point of view, Article 44, paragraph 1, under (d), of the Luxembourg VAT law exempts from VAT the management of pension funds subject to the supervision of the CSSF or the CAA and also pension funds located in other Member States and which are subject to the supervision of a similar supervisory body SPF Definition Luxembourg introduced the SPF, a non-regulated company, through the amended Law dated 11 May 2007 on the family wealth management company as amended with the purpose of creating a legal framework for the management of family wealth by individuals. It is a simple, flexible wealth management vehicle that complies with EU regulatory requirements. An SPF company may be set up as an Sàrl, SA, a cooperative in the form of a limited company (société cooperative or SCoSA ) or an SCA Purpose The SPF is a non-regulated corporate vehicle and is not subject to any risk diversification rules. It is strictly limited to the acquisition, holding, management and disposal of financial assets including shares, bonds, cash and derivative products. The SPF may hold participation in other companies but only to the extent that the SPF does not become actively involved in the management of these companies. The SPF may not carry out any commercial or financing activities. 39

42 4. Investment vehicles Qualifying shareholders of the SPF are limited to (i) individuals managing their private wealth, (ii) wealth management entities acting exclusively in the interest of the private wealth of individuals, (e.g. family offices, trusts, etc.) and (iii) intermediaries holding the shares of the SPF on a fiduciary basis or in a similar capacity on behalf of investors who are themselves qualifying shareholders Tax regime An SPF is not subject to any specific governance rules but benefits from a preferential tax regime as it is exempt from CIT and MBT as well as NWT. It is, however, subject to a 0.25% subscription tax per year with a minimum of EUR 100 and a maximum of EUR 125,000. This subscription tax is assessed as at 1 January on the paid-up capital, the share premium and debts which are in excess of 8 times the paid-up capital and share premium. The key consequence is that since it is subject to a subjective fiscal exemption, an SPF will in principle not benefit from the Luxembourg treaty network, the PSD or the EU direct tax directives, although additional structuring may be implemented to achieve this. In addition, there is no WHT on dividends distributed by an SPF, as is the case for interest payments. In view of its particular purpose and the impossibility for it to exercise an economic activity under the terms of VAT regulations, the SPF cannot qualify as a taxable person for VAT purposes. Accordingly, an SPF is not allowed to deduct VAT incurred on costs and is in principle not subject to the VAT registration obligations. Fiscal control of SPFs is the responsibility of the Administration de l enregistrement et des domaines and the right to supervise and investigate is exercised under the authority of its director. The SPF s books may be inspected at the head office as part of this control exercise. In order to facilitate the control, compliance by the SPF with the conditions laid down in the SPF Law (written declaration of investor eligibility and received dividends) must be certified by the domiciliary agent of the SPF or, if this is not possible, by an auditor or a chartered accountant. The certification will also include the indication either that the SPF has complied with the paying agent obligations incumbent upon it, or that the SPF has called upon a credit institution to meet these obligations on its behalf. These certifications must be communicated annually by 31 July at the latest to the Administration de l enregistrement et des domaines The Luxembourg maritime flag Under the Luxembourg maritime flag, certain fiscal advantages are granted to companies active in the shipping business. The main fiscal features thereof may be summarised as follows: 40 profits from operating or renting out ships of registered maritime companies are exempt from MBT; a depreciation of the purchase price is possible using straight-line depreciation or reducing balance depreciation at a rate of 25% per annum; vessels registered in Luxembourg may qualify for the investment tax credit (of up to 13%) with a 10-year carry-forward period; a roll-over relief may be available for capital gains realised on the disposal of vessels used in international traffic; the supply, chartering and hiring of a seagoing vessel can, under certain circumstances, benefit from a VAT exemption; tax incentive for leasing of vessels used for international traffic.

43 4. Investment vehicles Identification of the most appropriate investment vehicle Regulation Regulated Non regulated Specific Vehicles UCITS SIF SICAR SOPARFI RAIF SPF Securisation undertakings Activities Diversified Venture/risk capital Shareholding, IP holding, financing, commercial Diversified Holding financials Securisation Investors Retail Institutional Various Elligible investors Individuals Various Legal Forms FCP Investment company FCP Partnership Company/ partnership Company/ partnership/ FCP Company Fund Tax aspects Opaque Flow-trough Opaque/ Flow-trough Opaque/ Flow-trough Opaque Flowtrough Flowthrough 41

44 5. International context 5.1. Luxembourg tax residence Under Luxembourg tax law, a company is a Luxembourg resident if its registered office or its central administration is located in the Grand Duchy of Luxembourg. Registered office means the statutory office as determined by the articles of incorporation of the company. Central administration refers to the place of effective management of the company, where it is commonly understood that the principal establishment designates the place where the company s accounts and records are kept, where the general meetings of the shareholders are held and where the decisions concerning the company s business are taken. If a company is dual resident, the tie-breaker rule of applicable double tax treaty, if any, will usually determine the tax residence based on the place of effective management Permanent establishment A Luxembourg PE of a non-resident company is liable to CIT and MBT on its Luxembourg-source profits. A PE is defined as (i) every fixed piece of equipment or the places which serve for the operation of the established business, including the places where the top-level management is organised; (ii) branches, factories, warehouses, places of purchase and sale, landing areas, offices and other places of business, which the entrepreneur (co-entrepreneur) or his permanent agent (for example a person who has been given a power of attorney) usually carries out the business; (iii) building or construction sites if the duration of their use has exceeded 6 months or is expected to exceed 6 months; (iv) a railway business and (v) an undertaking which supplies gas, water, electricity or heat. Regarding branches that are constitutive of a Luxembourg PE, there are no specific tax rules on the allocation of profits between a branch and its head office. Generally, a branch may either determine its taxable profits by a direct method or an indirect method. In the direct method, the taxable profits correspond to the profits as determined in the branch s separate accounts (to the extent that the valuation principles are acceptable for tax purposes). By comparison, in the indirect method, a portion of the overall profits of the branch and its head office is allocated to the branch according to a determined allocation key. If the branch keeps its own accounts and carries on a separate activity from its head office, the taxable profits will be determined according to the direct method. The use of the direct method supposes that the branch and the head office act as independent enterprises and therefore requires that the branch shall act on an arm s length basis. This tax status of a PE may further evolve with regards the implementation of the BEPS package through the adoption of the Multilateral Instrument (see 5.6.2). 42

45 5.3. Double taxation elimination method Absent a double tax treaty, resident taxpayers are generally subject to Luxembourg income tax on their worldwide income but unilateral credit relief is generally available. Under treaties concluded by Luxembourg, double taxation is generally avoided by way of an exemption method with a progressivity clause which permits the inclusion of the foreign income into the Luxembourg tax base in order to determine the global tax rate. As an exception, Luxembourg generally uses the credit method regarding dividends, interest and royalties. 43

46 5. International context 5.4. Double tax treaty network Luxembourg s double tax treaties are generally based on the OECD Model Convention. Eighty-one double tax treaties are currently in force with the following States: Andorra, Armenia, Austria, Azerbaijan, Bahrain, Barbados, Belgium, Brazil, Brunei, Bulgaria, Canada, China, Croatia, Czech Republic, Denmark, Estonia, Finland, France, Georgia, Germany, Greece, Guernsey, Hong Kong, Hungary, Iceland, India, Indonesia, Ireland, Isle of Man, Israel, Italy, Japan, Jersey, Kazakhstan, Laos, Latvia, Liechtenstein, Lithuania, Macedonia, Malaysia, Malta, Mauritius, Mexico, Mongolia, Moldova, Monaco, Morocco, Netherlands, Norway, Panama, Poland, Portugal, Qatar, Romania, Russia, San Marino, Saudi Arabia, Seychelles, Singapore, Slovakia, Slovenia, South Africa, South Korea, Serbia, Spain, Sri Lanka, Sweden, Switzerland, Taiwan, Tajikistan, Thailand, Trinidad and Tobago, Tunisia, Turkey, Ukraine, United Arab Emirates, United Kingdom, United States of America, Uruguay, Uzbekistan and Vietnam. ALASKA (USA) GREENLAND (DENMARK) CANADA USA MEXICO BARBADOS TRINIDAD AND TOBAGO PANAMA FRENCH GUIANA BRAZIL ARGENTINA 44 URUGUAY

47 5. International context Thirteen new double tax treaties have recently been signed or are or will soon be under negotiation, including treaties with: Albania, Argentina, Botswana, Cyprus, Egypt, Kuwait, Kyrgyzstan, Lebanon, New Zealand, Oman, Pakistan, Senegal and Syria. TREATY IN FORCE 1 LITHUANIA 2 LATVIA 3 ESTONIA 4 SLOVAKIA 5 CZECH REPUBLIC 6 THE NETHERLANDS 7 BELGIUM 8 ISLE OF MAN 9 JERSEY 10 GUERNSEY 11 MONACO 12 SAN MARINO 13 SWITZERLAND 14 LIECHTENSTEIN 15 AUSTRIA 16 HUNGARY 17 SLOVENIA 18 CROATIA 19 MACEDONIA 20 MOLDOVA 21 ANDORRA 22 SERBIA 23 ISRAEL 24 BAHRAIN 25 QATAR 26 UNITED ARAB EMIRATES 27 SINGAPORE 28 AZERBAIJAN 29 ARMENIA 30 GEORGIA 31 TAJIKISTAN 32 BRUNEI TREATY IN NEGOTIATION 33 ALBANIA 34 LEBANON 35 KUWEIT 36 KYRGYZSTAN RUSSIA SWEDEN ICELAND DENMARK NORWAY FINLAND IRELAND 8 UK 6 GERMANY POLAND UKRAINE KAZAKHSTAN 4 FRANCE ITALY ROMANIA UZBEKISTAN BULGARIA SPAIN 31 PORTUGAL TURKEY GREECE MALTA SYRIA TUNISIA CYPRUS 34 MOROCCO PAKISTAN 24 EGYPT 25 SAUDI ARABIA 26 OMAN INDIA MONGOLIA CHINA LAOS HONG KONG SOUTH KOREA TAIWAN JAPAN SENEGAL THAILAND VIETNAM SRI LANKA 32 MALAYSIA 27 SEYCHELLES INDONESIA MAURITIUS BOTSWANA SOUTH AFRICA Double tax treaties in force NEW ZEALAND Double tax treaties signed or under negotiation

48 5. International context 5.5. Taxation on highly-skilled workers On 27 January 2014, the tax authorities issued circular letter L.I.R. No. 95/2 ( Circular Letter 95/2 ) replacing the circular letter dated 21 May 2013 as from 1 January 2014, on the hiring of highly-skilled workers on the international market. According to Circular Letter 95/2, certain expenses assumed by a Luxembourg employer in relation to the international recruitment of an employee becoming Luxembourg resident constitute tax deductible business expenses for the employer without being a taxable benefit in kind in the hands of the employee. The application of Circular Letter 95/2 is subject to several limits and conditions International initiatives on cross-border taxation issues Various measures have been undertaken by Luxembourg to comply with new international tax standards Exchange of information a. FATCA The Intergovernmental Agreement between the United States of America ( US ) and Luxembourg ( IGA ) to improve international tax compliance and to implement FATCA was signed on 28 March 2014 between Luxembourg and the US. It followed the introduction of FATCA legislation which strengthened exchange of information obligations between foreign financial institutions and US tax authorities with the aim of submitting to the US tax authorities information on income perceived by US citizens. In cases where financial institutions would refuse the exchange, they could be subject to a 30% WHT on US sourced income. The IGA is based on Model 1 Intergovernmental Agreement under which financial institutions report tax information to the relevant domestic authority, which will then automatically transmit the information to the US tax authorities. The two contracting parties also adopted a Memorandum of Understanding that determines a temporary application regime and the registration system for Luxembourg financial institutions. Accordingly, the reporting Luxembourg financial institutions should report FATCA matters for the data related to the prior fiscal year by 30 June the following year. The Law of 24 July 2015 implements the IGA and has been effective since 29 July b. The Common reporting Standard ( CRS ) Additional initiatives have been launched to enhance the exchange of information in relation to tax matters. On 29 October 2014, Luxembourg signed the OECD s multilateral competent authority agreement ( Multilateral Agreement ) to automatically exchange information under the CRS. Similarly, on 9 December 2014, the EU Directive 2014/107/EU ( DAC2 ) replaced the EU Savings Directive 2003/48/EC on savings income in the form of interests. It implements the OECD s CRS and generalises the automatic exchange of information. 46 Under these provisions, financial institutions have to review and collect information on their clients and/or investors in order to identify their tax residence and provide certain account information to relevant foreign tax authorities via the Luxembourg tax authorities on an annual basis. This Multilateral Agreement together with DAC 2 have been implemented in Luxembourg under the Law of 18 December Luxembourg has automatically exchanged financial account information with EU Member States and other OECD s CRS participating jurisdictions since 1 January 2016 (list of jurisdictions published and updated by a Grand Ducal Regulation).

49 5. International context c. Country-by-country reporting ( CBCR ) On 25 May 2016, the Council of the European Union adopted Directive 2016/881 ( DAC 4 ) amending Directive 2011/16/EU as regards mandatory exchange of information in the field of taxation. DAC4 could be considered the EU equivalent legislation to partially implement Action 13 of the BEPS Action Plan (see section 3.3) on transfer pricing documentation. On 13 December 2016, Luxembourg therefore introduced CBCR as of 2016 for multinational enterprises ( MNEs ) whether headquartered in the EU or outside with turnover of more than EUR 750 million. MNEs have to disclose financial information such as revenues, profits, taxes paid and accrued, accumulated earnings, number of employees and the disclosure of certain assets they have worldwide. DAC1 d. Other EU initiatives On 15 February 2011, the Council Directive 2011/16/EU ( DAC1 ) provided a first framework for exchange of information requiring mandatory automatic exchange of information between Member States on certain categories of capital and income that taxpayers hold in Member State other than the State of their residence. These provisions have been implemented in Luxembourg by the law of 29 March 2013 on administrative cooperation in the field of taxation. As discussed in section b above, DAC2 extended the scope of the exchange to financial account information. Exchange of tax rulings ( DAC3 ) On 8 December 2015, the Council of the European Union adopted Directive 2015/2376 amending Directive 2011/16/EU as regards mandatory automatic exchange of information in the field of taxation on the automatic exchange of information on cross-border ATC s and APA s which entered into force on 1 January The related provisions were introduced by the Law of 23 July Proposal for public country-by-country reporting ( PCBCR ) On 12 April 2016, the Commission adopted a proposal for Directive 2016/0107 amending the Accounting Directive 2013/34/EU as regards disclosure of income tax information by certain undertakings and branches. This proposal will ensure that the information reported under the CBCR legislation is made available to the public in a comparable, comprehensive and accessible way. Beneficial ownership register ( DAC5 ) On 6 December 2016, the Council of the European Union adopted Directive (EU) 2016/2258 to ensure that tax authorities are able to access anti-money laundering ( AML ) information, procedures, documents and mechanisms for the performance of their monitoring in the correct application of the various forms of administrative cooperation provided in Directive 2011/16/EU as amended. DAC5 also refers to the 4 th AML Directive (EU) 2015/849 ( AMLD ) of 5 June 2015 which requires obliged entities such as credit institutions, financial institutions or natural or legal persons acting in the exercise of their professional activities to identify beneficial owners notably via the creation of a central beneficial ownership register. Bills of law implementing DAC5 and AMLD are being discussed at the time of the publication 5. Proposal for new tax transparency requirements for intermediaries ( DAC6 ) On 21 June 2017, the Commission adopted a proposal for Directive 2017/0138 amending Directive 2011/16/ EU as regards mandatory automatic exchange of information in the field of taxation in relation to reportable cross-border arrangements. The proposal provides an obligation on intermediaries to report potentially aggressive tax planning arrangements which involve more than one Member State or a Member state and a third country Bill of law No 7128 implementing AMLD and Bill of law No 7208 implementing DAC 5 are still under discussion.

50 5. International context Directives Topic Entry into force DAC /16/EU dated Automatic and spontaneous exchange of information between Member States (income from employment, directors fee and pensions) DAC /107/EU dated Automatic exchange of information on financial account between Member States DAC /2376 dated Automatic exchange of information on ATC s and APA s DAC /881 dated Private CbCR for MNEs PCBCR- proposal 2016/0107 dated Public CbCR for MNEs Unknown DAC /2258 dated 6 December 2016 Access to AML information by tax authorities DAC 6 - proposal 2017/0138/EU dated Obligation for intermediaries to report potentially aggressive tax planning arrangements Anti-tax avoidance initiatives a. The OECD initiatives The BEPS package In October 2015, the OECD released the final reports of its BEPS Action Plan. With one report per Action (fifteen in total), the OECD aims to establish new tax transparency standards and eliminate tax evasion in international cross-border transactions. The actions cover the following matters: Action 1 Addressing the tax challenges of the digital economy Action 2 Neutralising the effects of hybrid mismatch arrangements Action 3 Strengthening CFC rules Action 4 Limiting base erosion via interest deductions and other financial payments Action 5 Countering harmful tax Practices Action 6 Preventing the granting of treaty benefits in inappropriate circumstances Action 7 Preventing the artificial avoidance of PE status Actions 8-10 Transfer pricing aspects Action 11 Collecting and analysing data on BEPS Action 12 Disclosing aggressive tax planning arrangements Action 13 Guidance on transfer pricing documentation and CbCR Action 14 Making dispute resolution mechanisms more effective Action 15 Developing an MLI to modify bilateral tax treaties The main impacts in Luxembourg of such BEPS legislation are summarised in the table page

51 5. International context On 7 June 2017, Luxembourg signed the MLI which aims to swiftly implement the tax treaty measures contained in Actions 2, 6, 7 and 14 deriving from the BEPS Project. It is expected that the MLI provisions related to WHT will enter into force on 1 January Other provisions of the MLI may come into force earlier. The MLI allows parties to choose (i) the tax treaties that should come within its scope, (ii) to opt out of some provisions and (iii) to apply optional or alternative provisions. Luxembourg has decided that all of its tax treaties currently in force will fall within the scope of MLI. Besides, Luxembourg has adopted a restrictive approach and has sought to limit the scope and impacts of this new layer of international legislation to the minimum standards to remain BEPS-compliant. The key features include the Principal Purpose Test ( PPT ) clause and an improved dispute mechanism system. Luxembourg will introduce a PPT clause to comply with the minimum standard set in Action 6 of BEPS as well as an extended wording in the preambles of its covered agreements, clarifying that those agreements may not be used to create opportunities for reduced or no taxation through tax evasion. In a nutshell, the PPT clause aims at denying the benefits of covered agreements to taxpayers where there is evidence that a given arrangement or transaction was set up for the principal purpose of obtaining that benefit. The MLI intends to harmonise and render more efficient the Mutual Agreement Procedure ( MAP ) and dispute settlement procedure in double tax treaties. Luxembourg has opted to include the reformed dispute resolution mechanisms (arbitration and MAP) under the MLI to its covered agreements. b. The EU initiatives ATAD I The EU Directive 2016/1164 of 12 July 2016 ( ATAD I ) addresses a coordinated and coherent implementation of the OECD s recommendations on BEPS. Its adoption is the sign of a major political pressure to legislate at the EU level rapidly after the publication of the BEPS final reports. The ATAD sets measures to be adopted by all EU Member States in 5 specific fields: Controlled Foreign Company ( CFC ), exit taxation, interest limitation, hybrids and GAAR. ATAD II On 29 May 2017, the Council of the European Union agreed on a directive 2017/952 ( ATAD II ) amending the ATAD I. The main changes consist in the extension of the scope of the provisions on hybrids from EU Member States to third countries in order to align the ATAD I with the rules recommended by the OECD in the 2015 final BEPS report on Action 2. A comparison of the EU and OECD anti-tax avoidance provisions are summarised in the table page

52 5. International context BEPS ATAD Existing in current Luxembourg Law Action 1 Digital economy Action 2 Hybrid Mismatch Rules (See Action 15 MLI) Action 3 Controlled Foreign Companies (CFC) Rules Hybrid Mismatch Rules CFC Rules No special action needed Included Not included Action 4 Interest Limitation Rules Interest Limitation Rules Partially Included Action 5 Harmful tax practice Other EU legislation (Code of conduct for patent box and DAC3 for exchange of tax ruling and APA) Will be included Action 6 Treaty shopping (see Action 15 MLI) GAAR Partially Included + further changes with MLI Action 7 Permanent Establishment (PE) (see Action 15 MLI) Action 8-10 transfer pricing ATA recommendations Ongoing work (Joint Transfer pricing Forum) Not included Included Action 11 Measuring and monitoring BEPS Action 12 Disclosing aggressive tax planning arrangements Action 13 Country-by-Country Reporting EU study Other EU legislation (DAC6) Other EU legislation (DAC4) N/A Not included Included Action 14 dispute resolution mechanisms (See Action 15 MLI) Other EU legislation Directive 2017/1852 Not included Action 15 MLI ATA recommendations Will be included No BEPS recommendations Exit Taxation Rules Included 50

53 5. International context No special action needed Anticipated changes Entry into force (ATADs) N/A Current hybrid mismatch rule under the participation exemption to be extended (ATAD II) (ATAD I and ATAD II) and (WHT) and (other taxes) for the MLI Limited impact for holding companies (since the participation exemption requires as a general rule a subject to tax condition) and exemption for financial institutions Financing companies: no impact since limitations only apply on net borrowing costs Financial institutions: excluded Holding companies: debt to equity ratio and requalification of excessive interest into nondeductible dividends already applies New provisions based on the new Nexus approach. Partial exemption (80%) available for net income derived from eligible IP assets created, developed or improved within the framework of research and development activities. Current GAAR under the participation exemption to be extended With the adoption of the MLI, introduction of a Principal Purpose Test provision Will require introduction of a new PE definition (extension available up to 2024 for Member State already implementing interest limitation rules) and (WHT) and (other taxes) for the MLI (WHT) and (other taxes) Arm s length principle introduced and transfer pricing documentation required mainly impacting the interest benchmarking in intra-group financing activities. N/A N/A Will require intermediaries to disclose aggressive tax planning arrangements Requires MNE to report income received and taxes paid on a country-by country basis Will introduce new provisions in double tax treaties concluded by Luxembourg (WHT) and (other taxes) Actions 2, 7 and 14 (treaty related provisions) will be implemented via the MLI which will amend automatically all double tax treaties signed by Luxembourg and foreign states. Current unlimited tax deferral to be restricted to 5 years and EU/EEA Member States (WHT) and (other taxes)

54 6. Accounting 6.1. Lux GAAP Lux GAAP are derived from the European Accounting Law, currently Directive 2013/34/EU of the European Parliament and of the Council of 26 June 2013 on the annual financial statements, consolidated financial statements and related reports of certain types of undertakings and are composed mainly of certain provisions of the Commercial Code (bookkeeping) and of the Law of 10 August 1915 on commercial companies (consolidated financial statements), of the amended Law of 19 December 2002 on the register of commerce and companies and the accounting and annual accounts of undertakings (annual financial statements) and of opinions issued by the national standards setters, the Accounting Standards Board (Commission des normes comptables). Lux GAAP requires the observance of i.a. the following basic principles: the annual financial statements must include a balance sheet, a profit and loss account and the notes to the accounts; the formal presentation of the annual financial statements must follow specific rules; the annual financial statements must give a true and fair view of the company s assets and liabilities; any set-off between the assets and liabilities, as well as between profit and expenses, is generally prohibited; the annual financial statements for a given financial year must include the figures of the previous year and the presentation of the annual financial statements must follow the presentation of the previous year; the company is presumed to be carrying on its business as a going concern; the valuation methods for a given financial year must follow the valuations used the previous year; the valuations must be made following the principle of prudence (e.g. unrealised profits shall not be taken into account and unrealised losses shall be taken into account); profits and expenses are taken into account for the financial year in which they have been realised or exposed, irrespective of the actual payment; the assets and liabilities must be valued separately; the opening balance sheet for a given financial year corresponds to the closing balance sheet of the previous year. 52

55 Companies have the option to present amounts within the profit and loss account and the balance sheet by referring to the substance of the reported transaction or arrangement rather than to their legal form ( substance over form approach). The Grand-Ducal decree of 10 June 2009 determines the content and presentation of standardised chart of accounts (Plan comptable normalisé - PCN ). The PCN is compulsory for all commercial companies, as defined in Article 8 of the Commercial Code. This includes all corporations under Luxembourg law, such as the SA, the SARL and the SCA. The rules do not apply to companies that have opted for the preparation of their annual accounts according to IFRS. However, companies are still allowed to use another chart of accounts to keep their books, insofar as they are able to file the required PCN. The main objective of the PCN is to facilitate reporting to the competent government agencies, including the tax authorities and the statistical office IFRS and Lux GAAP with fair value option Since the amendment of the above-mentioned Law of 19 December 2002 by the Law of 10 December 2010, Luxembourg companies have the option of preparing their annual financial statements according to IFRS as adopted according to Regulation (EC) No 1606/2002 of the European Parliament and of the Council of 19 July 2002 on the application of international accounting standards. The Law of 10 December 2010 also offered Luxembourg companies the possibility to apply Lux GAAP with the option of measuring certain financial instruments and investment properties (as defined by IAS 40 Investment Property) at fair value. Where measurement at fair value has been applied, companies must show, as the case may be, deferred tax liabilities in the balance sheet as a cumulative amount. Finally, it must be noted that companies having prepared their annual financial statements according to IFRS or having exercised the fair value option, may not distribute or use for any other purposes unrealised income and gains and positive variations of capital and reserves recorded in the opening balance sheet of the first annual accounts drawn up according to IFRS. These items must be allocated to an undistributable reserve, either immediately or subsequently upon the allocation of the results for the financial year. Such undistributable reserve may not be used for an increase of capital, an allocation to the legal reserve. 53

56 7. Definitions Law Law of 17 December 2010 on undertakings for collective investment (UCI) as amended AIF Alternative Investment Fund AIFM law Law on Alternative Investment Fund Management of 12 July 2013 AML Anti-Money Laundering AML Directive AML Directive 2015/845 of 5 June 2015 APA ASSEP Advance Pricing Agreement Association d Epargne-Pension ATADs Anti-Tax Avoidance Directives (Directive 2016/1164 of 12 July 2016 (ATAD I) and Directive 2017/952 of 29 May 2017 (ATAD II) amending ATAD I) ATC Advance Tax Confirmation BEPS Base Erosion Profit Shifting CAA Commissariat Aux Assurances CBCR Law Country by Country Reporting Law of 23 December 2016 CBCR CFC CIT CJEU CLP CSSF CUP DAC EEA EU FCP GAAR Country by Country Reporting Controlled Foreign Companies Corporate Income Tax (impôt sur le revenu des collectivités) Court of Justice of the European Union Common Limited Partnership (société en commandite simple) Luxembourg supervisory authority of the financial sector (Commission de Surveillance du Secteur Financier) Compared Uncontrolled Price method Directive 2011/16/EU of 15 February 2011 as amended European Economic Area European Union Common fund (Fonds Commun de Placement) General Anti-Abuse Rule GTL General Tax Law of 22 May 1931 IBL number Intrastat identification number of companies ITL Income tax law of 4 December 1967 LP LPA Limited Partnership Limited Partnership Agreement

57 Lux GAAP MBT MNE MNWT NWT OECD OECD TPG PCBCR PCN PE PSD RAIF SCoSA Securitisation Law SEPCAV SICAR SIF SLP SOPARFI TNM TPS UCITS IV VAT VCC WHT Luxembourg Generally Accepted Accounted Principles Municipal Business Tax (impôt commercial communal) Multinational enterprise Minimum Net Worth Tax Net Worth Tax Organisation for Economic Cooperation and Development OECD Transfer Pricing Guidelines Proposal for Council Directive 2016/0107 of 12 April 2016 on Public Country by Country Reporting Plan Comptable Normalisé Permanent Establishment Directive 2011/36/EU of 30 November 2011 on the common system of taxation applicable in case of parent companies and subsidiaries of different Member States as amended by Directive 2015/121/EU of 27 January 2015 Reserved Alternative Investment Fund Cooperative in the form of a public limited company (Société Coopérative organisée sous forme de Société Anonyme) Law of 22 March 2004 on securitisation as amended Société d Epargne-Pension à Capital Variable Investment company in risk capital (Société d Investissement en Capital à Risque) Specialised Investment Fund Special Limited Partnership (Société en commandite special) Financial participation company (société de participations financières) Transactional Net Margin Method Transactional Profit Split method Directive 2009/65/EC of 13 July 2009 on the coordination of laws, regulations and administrative provisions relating to undertakings for collective investment in transferable securities (UCITS) Value Added Tax Venture Capital Company Withholding tax 55

58 8. Summary table - Luxembourg vehicles Companies Investment funds Securitisation undertaking SOPARFI SPF SICAR and RAIF-SIC- AR UCI SIF and RAIF-SIF Company Fund SICAV/F FCP SICAV/F FCP CIT applicable but exemptions n/a applicable but exemptions n/a n/a applicable but no tax base n/a MBT applicable but exemptions n/a applicable but exemptions n/a n/a applicable but no tax base n/a NWT applicable but exemptions. Subject to MNWT n/a n/a but subject to MNWT n/a n/a Subject to MNWT n/a Subscription tax n/a 0.25% maximum EUR 125,000 p.a. n/a 0.01 to 0.05% of NAV with exemptions 0.01 to 0.05% of NAV with exemptions n/a WHT on dividends7 WHT on interest WHT on capital gains 15% but exemptions/ reductions available n/a n/a n/a VAT no VAT exemption for management services n/a VAT exemption for management services 56 Double tax treaties (DTT) applicable n/a applicable several DTTs applicable n/a several DTTs applicable n/a several DTTs applicable n/a

59 57