luxembourg tax opportunities for us · pdf fileinternational corporate tax. luxembourg tax...

International Corporate Tax

Luxembourg tax opportunities for US investorsHouston, 4 November 2010

Luc Alexandre

Senior Manager, KPMG Tax Luxembourg

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Today’s agenda

I. Overview

II. Typical structures

I. Holding

II. Financing

III. Licensing

IV. Trading

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I. Overview

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OverviewLuxembourg country facts

•At the heart of Europe and founding member of the European Union (member since 1951)

•A renowned international financial centre

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OverviewLuxembourg country facts

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Statutory tax rate:28.59% in 201028.80% in 2011

Possible to maintain the ETR to a minimum for any type of activity through tax planning

Favorable IP tax regime: • Effective tax rate of 5.72% for royalty income• A tax ruling is in principle not required

Advance tax ruling system to secure upfront the tax treatment of transactions (prompt and flexible tax authorities – written confirmation is obtained within 2 to 6 weeks): pragmatic approach

No capital / stamp duties

Extensive network of tax treaties that helps reduce/eliminate withholding taxes on foreign income receipts

• Almost 60 treaties currently in force incl. Mexico, Brazil, HK, etc.• 14 treaties currently in negotiation

OverviewA favourable tax environment

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No withholding tax on royalties, interest & liquidation proceeds (in principle)

No withholding tax on dividends paid to US corporations (subject to conditions)

Luxembourg participation exemption (incoming dividend and capital gain exempt)

No or minor taxation upon exit or refinancing strategy

Access to EU Directives (Parent/Subsidiary, Interest/Royalties, and Merger Directives)

No CFC rules

Bilateral Investment Treaties

OverviewA favourable tax environment (Cont’d)

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OverviewHot topics in Luxembourg

Increase in aggregate corporate tax rate: from 28.59% (2010) to 28.80% (2011)

Transfer pricing studies for newly established back-to-back financing entities

Minimum flat tax of EUR 1,500 for corporate entities (SOPARFIs)• Of which financial assets (including transferable securities, receivables, bank deposit etc.)

exceed 90% of their total assets;• That do not perform activities subject to a business license or approval of supervisory authority;• in fiscal unity cases only applicable once at the level of the integrating Luxembourg parent

company or permanent establishment;• But not before 2012

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II. Typical structures

USCo

Dividends

LuxCo

EU / non-EU

Typical structures : HoldingEU subsidiaries or “high-taxed” non-EU subsidiaries

Dividends Capital gains

Benefits• Full exemption on incoming dividends and capital gains

(participation exemption regime):• 10% ownership or acquisition price of EUR 1.2m

(dividends) / EUR 6m (capital gains)• 12 months holding period• “Subject to tax” requirement (except for EU subsidiairies)

• No Luxembourg withholding tax on dividends paid to USCo under domestic rules

• In principle, no foreign withholding tax on incoming dividends from EU/non-EU subsidiaries pursuant to EU Directive and tax treaties

Other Considerations• Luxembourg tax clearance• Luxembourg substance requirements

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Typical structures : HoldingUtilisation of tax losses in Luxembourg

USCo

LuxCo1

OpCos

Benefits• Upon disposal of participations in OpCos to LuxCo2,

crystallisation of write-downs into permanent tax losses at the level of LuxCo1

• The tax losses of LuxCo1 becoming permanent, may be used against income deriving from e.g. financing, trading… activities

• Losses at the level of OpCos remain tax deductible

Other Considerations• Luxembourg tax clearance• Change of control at OpCos level

LuxCo2

OpCos

USCo

Dividends

LuxCo

Low-taxed non-EU

Typical structures : Holding“Low-taxed” non-EU subsidiaries (tax havens)

Dividends Capital gains

Benefits• No or low taxation on incoming dividends and capital gains from

“low-taxed” subsidiaries (e.g. Tax havens) that do not benefit from the Luxembourg participation exemption regime

• No Luxembourg withholding tax on the accrual (or payment) of yield on TPECs (Tracking Preferred Equity Certificates)

Tax analysis• TPECs are a hybrid and are treated as debt for Luxembourg tax

purposes – accrual yield treated as tax deductible interest expense

• TPECs bear (i) a fixed interest rate equal to 0.1% of the nominal value of the TPECs and (ii) a variable interest rate calculated as 99% of LuxCo’s net income

• LuxCo taxed on margin between the dividends/capital gains and the yield on TPECs – effective taxation can be as low as 0.3%

Other Considerations• Luxembourg tax clearance• For US purposes, TPECs are treated as equity under certain

conditions – as long as the yield is accrued but not paid there is no taxation in the US (no Luxembourg requirement to pay the yield before exit)

TPECs

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Typical structures : HoldingUtilisation of foreign tax treaty PE losses

USCoBackground

• The tax rate applicable to income realised by a LuxCo in Luxembourg, should be determined as if LuxCo’s worldwide (i.e. domestic & foreign) income were subject to tax in Luxembourg (Circular on article 134 of Luxembourg Income Tax Law).

• This applies to the extent that foreign income is realised in a tax treaty country

LuxCo

Foreigntax treaty PE

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Typical structures : HoldingUtilisation of foreign tax treaty PE losses (Cont’d)

USCo

LuxCo

Foreigntax treaty PE

Example (simplified)

AssumptionsLuxembourg profit/(loss): 100 millionForeign PE profit/(loss): (120 million)

Step 1Worldwide profit/(loss): (20 million)Tax rate computed thereon: 0% (due to

negative result)

Step 2Luxembourg income: 100 million

Step 3Luxembourg income: 100 millionApplicable tax rate (see step 1): 0%Luxembourg corporate tax due: -

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Typical structures : Holding US Foreign tax credit

USCo

PECs

LuxCo

OpCos

Benefits• USCo is in excess of FTC carry forward and incurs an important

annual interest expense. USCo apportions interest expense using an asset method (Treas. Reg. 1.861 – 9T)

• USCo subscribes to PECs issued by LuxCo and contributes its foreign subsidiaries to LuxCo (Sect 351)

• Reduction of interest expense to be apportioned to foreign source and increasing USCo’s FTC limitation

• From US tax point of view, PECs treated as equity, not subject to US tax until repatriation

• Luxembourg participation exemption on OpCos dividends, capital gains, liquidation proceeds at the level of LuxCo.

Other Considerations• Luxembourg tax clearance• Terms/conditions of PEC (term of years, fixed interest, etc.) to

confirm hybrid treatment (US: equity / Lux: debt)

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Typical structures : Holding

HavenCo

Background

• Existing HavenCo will re-domicile to Luxembourg

Benefits

• Access to EU Directives, extensive tax planning opportunities, absence of CFC rules

• Tax capital for dividend distribution free of Luxembourg withholding tax

LuxCo

GroupCos GroupCos

USCo

LuxCo

ForeignSubs

Typical structures : Holding & FinancingLuxembourg holding/financing company (CPECs)

Benefits• Taxation on a small margin in Luxembourg• No Luxembourg withholding tax on accrual (or payment) of yield on

CPECs (Convertible Preferred Equity Certificates)• Due to the hybrid nature of CPECs, USCo can push debt down to the

ForeignSubs to obtain local country interest expense deduction without incurring any additional US taxable income

Tax analysis• CPECs are a hybrid and are treated as debt for Luxembourg tax

purposes – accrual yield treated as tax deductible interest expense• Taxable margin between 3bp and 25bp

Other Considerations• Luxembourg tax clearance• For US purposes, CPECs are treated as equity under certain conditions

– as long as the yield is accrued but not paid there is no taxation in the US

• When financing activities are combined with holding activities in Luxembourg, there is no effective taxation in most cases as the interest expenses on the tranche of CPECs relating to the acquisition of shares (CPECs A) allows to offset the taxable margin left on the back-to-back financing activity. In this case, recapture should apply except in case of liquidation (disposal) of ForeignSubs

CPECs A

Loans

CPECs B

Shares

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Typical structures : FinancingLuxembourg back-to-back hybrid

USCo

PECs

OpCos

Benefits

• Luxembourg participation exemption on OpCos’ dividends, capital gains and liquidation proceeds at the level of LuxCo

• From US point of view, PECs treated as equity, not subject to US tax until repatriation

• Interest income taxes on a margin in Luxembourg• No Luxembourg withholding tax on dividends (subject to

conditions) paid to USCo

Other Considerations

• Luxembourg tax clearance• Terms/conditions of PEC (term of years, fixed interest, etc.) to

confirm hybrid treatment (US: equity / Lux: debt)

LuxCo

Loan

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Typical structures : FinancingOpCos financing using reverse hybrid entities

USCo

Loan

LuxCo

OpCos

Lux SNC/SCS

Loan

Benefits

• Interest deduction in OpCos with no corresponding pick up in the US (deferral) or in Luxembourg

• No withholding tax on interest (i) paid by OpCos to LuxCo (tax treaty, EU Directive) and (ii) from LuxCo to Lux SNC/SCS

• Small net margin left in LuxCo on financing activity• No withholding tax on dividends paid to LuxCo (tax treaty, EU

Directive)• Participation exemption on dividends, capital gains, liquidation

proceeds from OpCos• No withholding tax on dividends paid by LuxCo and Lux SNC/SCS

(subject to conditions)• Dividends and interest received by Lux SNC/SCS can be lent through

LuxCo (facility agreement)• Lux SNC/SCS has legal body (checkable)• One single holding and financing structure and cost reduction• No anti-debt creation rule

Points of attention

• Luxembourg tax clearance.

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Typical structures : Financing UK financing using UK LLP: Same country exception

USCo

UK OpCo

Equity

UK LLP

LuxCo

Loan

Summary of Tax Consequences

• UK OpCo deducts interest paid to LuxCo

• UK – Lux tax treaty eliminates UK withholding tax

• Interest paid by UK OpCo qualifies for same country exception (since LuxCo is disregarded)

• Minimum fully taxable margin left in Luxembourg

• No Luxembourg withholding tax on interest paid to UK LLP (under Luxembourg domestic law)

Benefits

• Interest deduction in UK; no corresponding UK . Deferral of US taxes

• Only minimal tax in Luxembourg, which should be creditable


• Luxembourg tax clearance

•Can use Scottish Partnership instead of UK LLP

• UK thin capitalization, worldwide debt cap and transfer pricing rules

Loan

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Typical structures : FinancingCanada financing using Can LP: Same country exception

USCo

PECs

LuxCo

Can OpCoCan LPLoan

Summary of Tax Consequences

• Can Opco deducts interest paid to Can LP

• Interest subject to 10% Canadian withholding tax under Canada –Luxembourg tax treaty

• Interest paid by Can OpCo qualifies for same country exception

• Minimum fully taxable margin left in Luxembourg

Benefits

• Net tax savings in Canada (interest deduction, less 10% withholding tax); no corresponding US taxes

• Only minimal Luxembourg tax



• Canadian thin cap limitation (2:1)

•Fifth Protocol to US-Canada tax treaty

•Can LP: Permanent establishment

USCo

LuxCo

Typical structures : FinancingCash & treasury management

Benefits

• LuxCo taxed on a margin between (i) its net interest income and (ii) the yield on TPECs – effective taxation approx. 0.3%

• No foreign exchange exposure on short-term loans in multiple currencies in the context of treasury management and cash pooling activities

• No Luxembourg withholding tax on the accrual (or payment) of yield on TPECs (Tracking Preferred Equity Certificates)



TPECs

Intra-group short-term loans in

Intra-group short-term loans out

Cash pooling activities

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Typical structures : FinancingLuxBranch of a Hungarian company

USCo

GroupCos

Benefits

• Financing and holding activities can be located at the level of the LuxBranch including FX and derivatives

• Small Hungarian tax• Luxembourg effective tax rate approx. 1.2% – 1.5%


• Luxembourg tax clearance• Substance

HungCo

LuxBranch

Loans

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Typical structures : FinancingBeneficial ownership test

USCo

0% MRPS

LuxCo2

OpCo

LuxCo1

IB Loan

PECs

USCo

LuxCo2

OpCo

LuxCo1

IB Loan

US branch

IF Loan or

IB Loan

USCo

LuxIPCo

ForeignSubs

Typical structures : LicensingLuxembourg IP tax regime

Benefits

• 80% exemption is granted for income and gains deriving from a wide range of qualifying IP assets (software copyrights, patents, trademarks, domain names, designs & models) resulting in an effective taxation of approx. 5.72%

• Connected or third party acquisition, or self-developed• R&D of IP can be carried out in Luxembourg or abroad (e.g. US) by

means of cost-sharing agreement – also Law of 5 June 2009 on Research, Development and Innovation providing State-backed financial incentives for R&D activities carried out in Luxembourg

• No capital or stamp duties due on the injection of cash by USCo to LuxIPCo for incorporation or future financing of the activities

LicensingIP

Royalties

USCo

LuxIPCo

ForeignSubs

Typical structures : LicensingTPEC structure for licensing activities

Benefits

• LuxIPCo taxed on a margin equal to the difference between its net royalty income and the yield on the TPECs – effective taxation between approx. 0.5% and 1.5%

Tax analysis

• No Luxembourg withholding tax on accrual (or payment) of yield on the TPECs



TPECs

Licensing

IP

Royalties

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Typical structures : Licensing Migration of IP – Lux/Swiss hybrid

USCo

LuxCo

Background

• Migration of TaxHavenCo from TaxHaven to Luxembourg• Immediately thereafter, incorporation by LuxCo of SwissCo

and transfer of IP thereto against a hybrid instrument• SwissCo performs licensing activities with the IP it owns

against royalty income

Benefits

• Hybrid instrument should qualify as equity for Luxembourg corporate tax purposes, and as debt in Switzerland

• Income should qualify for the Luxembourg participation exemption at LuxCo level.

• Expenses should be deductible at Swiss level

Other considerations

• Safe harbour thin cap rules• Apply to related party debt• 30% equity for IP

• Luxembourg tax clearance• Arm’s length interest rate

USCo

TaxHavenCo

SwissCo

Hybrid

Licensing

IP

IP

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Typical structures : TradingMaquiladora structure

Background

• USCo plans to reorganise part of its business, with the creation of a Luxembourg company, and the migration of profit from the US to a Luxembourg company

• Currently, most of the Group’s operations, personnel and intangible value is in the US. Outside the US, its activities are mainly limited to a Mexican manufacturing plan

Fact pattern

• USCo incorporates LuxCo, and contribute the shares in MexCo to LuxCo against share capital/share premium

• USCo sells existing equipment to LuxCo at book value• LuxCo enters into service agreements with MexCo, e.g.

•MexPlant agrees to make available personnel to LuxCo to work under the control of the latter•A plant manager, controller... will perform their services under the supervision, direction and control of LuxCo and shall be granted authority to represent and act on behalf of the latter in Mexico

USCo

LuxCo

MexCo

MexBranch

Sale of equipment at

book value

Services agreements

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Typical structures : TradingMaquiladora structure (Cont’d)

Luxembourg tax treatment

• The sale of the Mexican assets to LuxCo should be made at book value. However, if the fair market value of the assets exceeds the book value, the difference should be considered non-taxable informal capital contribution at the level of LuxCo

• As a result of the activities realised by LuxCo in Mexico through the secondment and services agreements, LuxCohas a permanent establishment in Mexico within the meaning of the Luxembourg – Mexico double tax treaty

• An arm’s length margin of 8% – 12% of the costs (i.e. operating charges incurred in connection with the activities of the head-office, but not current or future interest expenses accrued on debt attributable to the holding or financing activities of LuxCo) in connection with the head-office’s commercial activity should be left at the level of the latter and fully taxable in Luxembourg, leading to a very low ETR in Luxembourg.

USCo

LuxCo

MexCo

MexBranch

Sale of equipment at

book value

Services agreements

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Typical structures : Trading Carbon Trading

LuxCo

Background

• LuxCo is incorporated to acquire carbon dioxyde emission allownces (also called Carbon Credits), for resale on public markets

• LuxCo to be financed 99% with CPECs and 1% with equity

Benefits

• CPECs to be considered debt for Luxembourg corporate tax and net wealth tax purposes.

• Yield due under the CPECs to qualify as interest (and in principle free of Luxembourg withholding tax)

• Minimum net taxable margin to be left in Luxembourg, measured on the total outstanding annual average outstanding principal amount of CPECs.

Other considerations


99% CPECs1% equity

ResalePurchase from third parties

Funds

CO2 emission allowances

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USCo

TPECs

LuxCo

OpCos

Risk assumption agreement

Typical structures : TradingTrading structure – Assumption of risks

CV

USCo

TPECs

LuxCo

OpCos

NL BV

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Typical structures : Trading and ForexLuxBranch / LuxCo

USCoBackground

• A notional deduction at LuxBranch level to offset interest income by LuxCo on its loan portfolio under the fiscal unity regime

• LuxBranch and LuxCo file a fiscal unity

Benefits

• Net wealth tax computed at LuxBranch and LuxColevels

• Arm’s length margin• Currency gain/losses effectively neutralised• Withholding tax at ForeignCo level may be reduced

where tax treaty applies

Other consideration


ForeignCo

LuxBranch

Foreign currency loans

LuxCo

0% PEC

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Contact Details

Luc AlexandreSenior Manager

Tel: ++352 22 51 51 – 5464Mobile: ++352 621 87 – 5464E-Mail: [email protected]

10, rue Antoine JansL-1820 LUXEMBOURG

mailto:[email protected]�

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Disclaimer

• This presentation provides for several tax planning ideas that may be implemented via Luxembourg.• Even though the information given in this presentation reflects the tax treatment as experienced in

implemented structures, the facts and circumstances of certain cases need to be analysed beforehand.

• As regards the tax treatment in foreign jurisdictions, our description should be understood as purely indicative. Should a restructuring be envisaged, the foreign tax treatment would have to be analysed by foreign tax advisors.

• The Luxembourg tax treatment of a structure has to be confirmed by the Luxembourg tax authorities – a common practice in Luxembourg with respect to important restructurings.

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