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Luxembourg launches new vehicle for private wealth investment
Following the repeal of the 1929 Holding Company legislation, the Luxembourg Government has introduced a new investment vehicle for private wealth investment.
The draft law introducing the "Soci?t? de Gestion de Patrimoine Familial" (or "SPF") has now been passed by the Parliament today.
What has changed compared to the initial version of the drat law?
Beside several minor formal amendments, the law, as it was passed by the Parliament today does only contain the following 2 amendments, as compared to the initial draft:
- No restrictions apply anymore to the number of investors allowed;
- The wording according to which a Grand Ducal Regulation will specify the conditions applicable to the supervision and control of the SPF and the related administrative procedures has been removed.
The SPF regime
What is an SPF?
SPF stands for "Soci?t? de Gestion de Patrimoine Familial" and is defined in the law as a company:
- that is set up under the legal form of a public limited liability company, a limited liability company, a company limited by shares or a cooperative organized under the form of a public limited liability company;
- whose purpose is limited to the acquisition, holding, management and disposal of financial assets excluding any type of commercial activity;
- the shares of which are exclusively held by eligible investors (as defined below), and;
- the bylaws of which make a specific reference to the present law.
SPFs perform private wealth management activities only
The definition of the activity of a SPF allows this type of entity to acquire, hold and realise any financial asset, as an individual managing his private wealth would. Any commercial activity is therefore prohibited. In this respect the commentaries to the draft law say that commercial activity has to be understood in its fiscal sense, i.e. within the meaning of article 14 of the Income Tax Law (intention to make profits, permanent, etc).
Article 2 defines the assets that can be held by the SPF. These assets are financial instruments within the meaning of the Law of August 5, 2005 on Financial Guarantees; e.g. shares in companies, other securities equivalent to shares/units in companies, undertakings for collective investment, bonds and other forms of debt instruments as well as cash and assets of any kind held in a bank account. Based on the commentaries on article 2 of the draft law, this includes investments in structured products or derivatives, put/call options on securities, indexes and currencies.
The SPF may also hold participations in the share capital or the voting rights of other companies, but only to the extent the SPF does not involve itself in the management of these companies. The SPF will therefore not be allowed to exercise any management role in its subsidiary. It will also not be allowed to render any kind of services, including granting interest bearing loans, even to companies in which the SPF holds a participation. It may however make advances or guarantee liabilities of a company in which it holds a participation, but only on an ancillary and non-paid basis.
It is understood that while an SPF may not invest directly into real estate, it may acquire holdings in corporations or other non transparent entities that hold such real estate.
Who can invest into an SPF?
Eligible investors within the meaning of the law are:
a. individuals managing their private wealth, or
b. private wealth entities acting for one or several individuals, or
c. intermediaries acting on behalf of a. or b
Based on the commentaries to the draft law, private wealth entities are intended to include (but not exclusively), entities such as trusts, foundations, stichtings or any such other type of entity to the extent the purpose of such entity is the management of the private wealth of one ore more individuals.
Entities holding the shares of the SPF on a fiduciary basis on behalf of an individual or a private wealth management entity are also eligible investors.
Finally the shares of the SPF cannot be used for public placement and cannot be quoted on a stock exchange.
Tax regime of SPFs
The SPF is exempt from corporate income tax, municipal business tax and net worth tax. It is also exempt from Luxembourg withholding tax on distributions.
The reason for having exempted this type of entity is that the SPF is not deemed to realize business profits. It is only acting in the interest of the private investor and thus does not realize any economic activity. Income from financial assets is therefore exempt at the level of the SPF as it would be in a "transparent" partnership or civil company, but will be taxed subsequently once the income is distributed to the private investor:
- interest paid by the SPF on its debts towards individuals are subject either to the final 10% withholding tax for individuals resident in Luxembourg or subject to withholding tax under the provisions of the so called "EU Savings Directive" mainly for EU resident individuals,
- dividends paid to Luxembourg shareholders (individuals) will be fully taxed in their hands and may not benefit from the 50% exemption defined in article 115, 15a, given the subjective exemption granted to the SPF.
Beyond the withholding tax on interest under the EU Savings Directive, interest and dividends paid to non residents will not generally be subject to any Luxembourg tax.
Gains realized by non-residents upon the sale of a participation in a SPF, either upon sale or upon liquidation of the company will not be subject to tax in Luxembourg (i.e. no application of article 156 8 LIR, in the same way as for SICARs).
Given the exemption applicable to all its income, the SPF will not be able to benefit from the provisions of the double tax treaties concluded by Luxembourg.
The SPF is excluded from the exemption regime for a given financial year if at least 5% of the total dividend income it receives during that year, is derived from participations in non-resident non listed companies that are not subject to an income tax similar to Luxembourg corporate income tax within the meaning of the Law of December 4, 1967.
To be comparable to Luxembourg corporate income tax, a foreign income tax must be compulsory and levied by public authorities at an effective rate of not less than half the rate of the Luxembourg corporate income tax (given the current Luxembourg Corporate Income Tax rate of 22%, the rate may therefore not be lower than 11%). In addition, the tax base must be determined according to rules and criteria similar to those applying in Luxembourg. A company which is resident of an EU contracting State and which falls within the scope of article 2 of the Parent-Subsidiary Directive 90/435 of July 23, 1990 will be deemed to fulfil the above-mentioned condition, i.e. it will be deemed to be subject to a tax on its income which is similar to the Luxembourg corporate income tax.
The SPF is subject to subscription tax at a rate of 0,25% applicable on its share capital, including any share premium. The minimum tax is EUR 100 and the maximum tax is EUR 125.000 a year. Subscription tax will also apply to the part of the debt (if any) that exceeds an equity to debt ratio of 1 to 8, as this part will be recharacterised into equity and thus subject to the subscription tax in the same way as the share capital.
Supervision and control of SPFs
The right to benefit from the specific tax regime has to be certified by the domiciliation company of the SPF, by an authorised auditor within the meaning of the Law of June 28, 1984 or by an authorised chartered accountant within the meaning of the law of June 10, 1999. The certificate declares that the SPF fulfils all the requirements set by the Law in order to benefit from the specific tax regime.
The certificate is established once a year and sent to the authority in charge of the supervision of the SPF, the indirect tax authorities ("Administration de l'enregistrement et des Domaines") by July 31 at the latest.
The indirect tax authorities will inform the direct tax authorities in case the above-mentioned certificate was not issued (as this would mean that the company no longer fulfils the conditions to benefit from the SPF regime and has become fully subject to corporate income taxes).
In case the indirect tax authorities notice that the SPF no longer fulfils the conditions to benefit from the SPF tax regime they may decide to notify the SPF about the loss of its tax regime. The notification has to be done in writing. The loss of the SPF tax regime applies as from the notification date.
It is understood that the indirect tax authorities may or not decide to revoke the status of an SPF, if such company does not fulfill one of the conditions set fourth by the Law. As a result, if on condition is not fulfilled, this does not entail the automatic loss of the SPF tax status.
EU dimension: no state aid
As with any new tax law within the EU the question arises as to whether the provisions could be in breach of EU rules notably on illegal state aid or "discrimination" in the broad sense of the term.
The EU dimension was taken into account in the preparation of the draft law. As detailed below the state aid rules do not apply to SPFs. As regards a series of rules which we will broadly refer to as "discrimination", firstly, any investor can invest in a SPF regardless of nationality, secondly, although it is less apparent, the legal form used does not ultimately change the tax treatment; for example a non-Luxembourg company of the same nature would also be exempt from taxes in Luxembourg under general principles.
The SPF is a passive investment vehicle that is dedicated to the management of the private wealth of investors and that does not interfere in the management of any subsidiary that it may hold. Consequently it does not realise any economic activity. It will therefore not be seen as benefiting from so called "state aid", within the meaning of article 87 of the Treaty of Rome as this article deals with aids granted to enterprises carrying on an economic activity. Recent jurisprudence of the European Court of Justice (ECJ January 10, 2006, cassa di Risparmio di Firenze) confirms this position:
"Merely holding a shareholding (even a controlling shareholding) in another company is not sufficient to involve the owner of the shares in the economic activity, where the shareholder's only interest and actions relate to protecting the rewards arising from its investment. For the shareholding entity to be regarded as an undertaking for the purposes of competition law, it must exert its rights of control and be involved, directly or indirectly, in the management of the company which is performing the economic activity."
Discussions between the Luxembourg Government and the European Commission that took place by the end of last year have showed that the European Commission shares this view, the Luxembourg Government having discussed a proposal of draft law with the European Commission before presenting the draft law. This initiative has been welcomed by private investors and their advisers, since this will give legal security to this new vehicle. This way, investors willing to manage their private wealth via the new SPF will be able to feel safe without fearing any potential EU state aid procedure.