This text has been produced by our TELFA partner firm in Luxembourg, Tabery & Wauthier
The protocol to the Russia-Luxembourg double tax treaty has been ratified by both countries in 2013; it will enter into force as from January 1, 2014. This is the right time to re-examine the potential of Luxembourg structures for Russian investors and multinationals.
The main advantages of Luxembourg are:
- a flexible and business-minded approach by the tax authorities (open discussions, advance tax clearances);
- political authorities who endeavour to keep the Luxembourg tax regime as favourable as possible;
- stable laws and regulations, with no retrospective effect upon change; an expanding network of double tax treaties with 64 treaties in force as of June 1, 2013;
- a law on commercial companies enabling:
- to have the share capital of public limited companies represented by bearer share certificates
- to create different kind of shares with different rights
- international cross-border mergers
- a cross-border transfer of the registered office with no loss of the legal personality which allows for cost efficient relocation of companies and of their assets
- contributions in kind with no audit report for the private limited companies and an audit report confirming that the contributed assets have a value at least equivalent to the issued share capital for public limited companies;
- a tradition of bank secrecy, where exchange of information is strictly limited to what is compulsory under current double tax treaties (information “fishing” enquiries are not permitted) and other international commitments of the Luxembourg State;
The main vehicles are:
- the soparfi which activity consists in the management and control of investments in other companies with usually appointment of Luxembourg directors for reasons of substance, benefiting under some conditions from:
- a full exemption of corporate tax on dividends received and of capital tax
- a full exemption on capital gains realised on the sale of participations
The conditions to fulfil are:
- holding or undertaking to hold for an uninterrupted period of at least 12 months
- a participation representing either at least 10% of the subsidiary’s capital or having an acquisition price of at least EUR 1,200,000 regarding dividends / EUR 6,000,000 regarding capital gains and,
- the participation must be subject to a corporate tax rate of at least 10.5%;
- a dividend withholding tax exemption in most cases, or a reduced rate under double tax treaties, i.e. 5% for Russian companies holding a participation in the Luxembourg subsidiary of at least 10% or EUR 80,000 under the new protocol;
- no withholding tax on the attribution of liquidation proceeds;
- no withholding tax on interest and royalties paid to corporate creditors/licensors
- the possible use of “hybrid” financial instruments either profit participating or not;
- the securitisation vehicle allowing a seller to transfer the risks associated with the holding of any property and those resulting from undertakings by third parties; compartments permitting the separate management of a group of assets and of related liabilities; benefiting from:
- an exemption of wealth tax;
- distributions and other allocated income considered as income arising from movable capital and qualified as interest fully deductible without being subject to a withholding tax;
- the family wealth management company providing a new legal framework for the management of private assets and offering an alternative to the past 1929 holding companies, reserved to individuals acting within the framework of the management of their private assets (including “investors” clubs), estate entities acting exclusively in the interest of the private assets of one or more individuals and intermediaries acting on behalf of such investors, benefiting from:
- an exemption from income tax, municipal business tax and wealth tax (being subject to an annual subscription tax at a rate of 0.25% on its total paid up share capital increased by share premiums and the part of the debts that is more than 8 times larger than the total amount of this share capital and these premiums, limited to EUR 125,000 per annum);
- a withholding tax exemption on dividends
- but not from double tax treaties nor from the parent-subsidiary directive;
Concerning intellectual property rights:
- Luxembourg tax law provides for a partial exemption of up to 80% for profits and a complete net worth tax exemption for wealth derived from certain intellectual property (trademarks, patents, copy-rights in computer software, designs, models and domain names) rights.
- This leads to an effective taxation rate of 5.84% for Luxembourg City.
- Any individual can, in principle, whatever his notoriety, register a trademark with his name. Sportman/sportwoman, for instance, can commercialise sportswear under his/her own trademark. Royalties received under use of or the right to use such trademarks may benefit from the above exemption. Image rights cannot benefit from the exemption as they do not correspond to the use or the right to use of trademark;
- Luxembourg wealth tax (capital tax) for resident and non-resident individuals has been abolished in January 2006;
- Interest income paid to Luxembourg residents via a Luxembourg bank are subject to a 10% withholding tax which is the final tax ; said income does not need to be reported in the individual’s tax return. The same tax regime can be applied if the paying agent is established in another country of the European Economic Area.
- There is also no inheritance rights in direct line or between spouses having children for the amount allocated which does not exceed the legal portion (i.e. percentage attributed by law to the different heirs).