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Private Wealth Management Companies (SPFs) Regime Improvements from 2012
The Luxembourg Government recently adopted a Bill that amends the regime applicable to SPFs (Private Wealth Management Companies) starting 1 January 2012, SPFs are investment vehicles dedicated to private investors which benefit, under certain conditions, from an exemption from corporate income tax (CIT) and municipal business tax (MBT) on profits and capital gains as well as from net wealth tax (NWT). Taxand Luxembourg explains why the SPF regime had to be amended and why this amendment will make SPFs even more attractive than before.
Why did the regime have to be amended?
The aim of the amendment is to remove the 5% dividend limitation that applies to shareholdings in non-resident unlisted companies that are not subject to tax.
Indeed, according to this rule, an SPF would currently lose its privileged tax status if more than 5% of the dividends it received in a given year came from shareholdings in non-resident unlisted companies that are not subject to a tax considered to be comparable to Luxembourg CIT.
The EU Commission considers that this provision is not in line with EU law, as it envisages different tax treatments for situations which, according to the Commission, are comparable: while an income tax exemption applies to all income from Luxembourg shareholdings (dividends and capital gains), income from foreign shareholdings may cause the SPF to forfeit its tax exempt status.
Why is the amendment positive?
Should the Bill be passed in its current form, SPFs will be able to hold interests in any type of entity, no matter which jurisdiction the subsidiary is located in and no matter what tax regime is applicable to the subsidiary in that jurisdiction. This will simplify the management of an SPF and increase the range of situations in which using an SPF will be appropriate. Nevertheless it is necessary to bear in mind that the SPF remains a holding vehicle only for investments made by private individual investors.
The amended SPF regime in brief:
We summarise below the regime that will apply to SPFs as from 2012, assuming that the Bill is passed in its current form (as published on 15 July 2011).
SPFs were created by the Law of 11 May 2007 in order to replace the repealed 1929 holding companies regime and are aimed at the private wealth management sector. The object of this vehicle is limited to holding passive investments (acquisition, holding, management and disposal of financial assets excluding any type of commercial activity). Furthermore, the circle of investors is restricted to private individuals (individuals managing their private wealth or private wealth entities acting for one or more individuals, or intermediaries acting on behalf of either of the above).
SPFs are exempt from CIT, MBT and NWT. They are also exempt from Luxembourg withholding tax on distributions.
Income from financial assets is therefore exempt at the level of the SPF but will be taxed subsequently once the income is distributed to the private investor:
- Dividends paid to Luxembourg shareholders (individuals) will be fully taxed in Luxembourg.
- Dividends paid to nonresidents are subject to tax in accordance with the laws of their country of residence.
Interest paid by the SPF on its debts to individuals may be 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 "Savings Directive" mainly for EU-resident individuals,
Gains realised by non-residents upon the disposal of a participation in an SPF, either by way of sale or upon liquidation of the company, are not taxable in Luxembourg.
The SPF is subject to subscription tax at a rate of 0.25% on its share capital, including any share premium. The minimum tax is EUR 100 and the maximum tax is EUR 125,000 per year. Subscription tax also applies to the part of the debt (if any) that exceeds a equity-to-debt ratio of 1 to 8.
Given their tax regime, SPFs cannot qualify for relief under the double tax treaties concluded by Luxembourg.
It is currently too early to take any steps based on the above changes as the Bill will first have to be scrutinised by the various chambers and the State Council before being voted, and might undergo further changes in the course of this process.
Should the Bill be passed in its current form before year-end, SPF investors might want to consider restructuring investments now, in 2011, as opposed to waiting for the new regime to come into force in 2012. Should they restructure now, they will have however to make sure that the SPF does not receive bad dividends before 2012, since the so-called "bad dividends" limitation might still, until the end of 2011, result in the SPF forfeiting its tax exempt status.
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