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multinational companies:luxembourg, an unrivalledgateway to europe

multinational companies:luxembourg, an unrivalled gateway to europe

Table of contents

Foreword: About Luxembourg 4

Luxembourg, a favourable environment 6

n A key hub at the centre of Europe 7

n Excellent infrastructure and logistical network 8

n A politically stable environment favourable for business 8

n Research and innovation, a priority for the Luxembourg government 9

n Attractive tax and legal environment 9

n Top level financial centre 10

n A competent, multilingual labour pool renowned for its efficiency 10

n High quality of life and safe country 11

Some specific legal and tax advantages offered by Luxembourg 14

n Luxembourg SOPARFIs 15

n Group financing and cash-pooling activities 16

n Securitisation transactions 16

n Financing: high level of protection granted by Luxembourg law 17

n Luxembourg: a domicile for properties 18

n VAT related advantages 18

n Intellectual property (IP) activities 20

n Captive reinsurance: how groups can efficiently manage their risks 20

n Pension funds: a secured and flexible environment for cross-border pension vehicles 21

Arendt & Medernach multinational companies team 23

About Arendt & Medernach 24

A broad range of practice areas

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Foreword:About Luxembourg

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Foreword: About Luxembourg

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. It is a founding member of the main international organisations (e.g., European Union (EU), OECD, United Nations, OSCE, WTO) and a home to some of the EU’s most important institutions, including the European Investment Bank and the European Court of Justice. Around 150 banks are established in Luxembourg and the world’s largest bank, ICBC, has recently set up its European headquarters there.

GDP per capita in 2011 (in purchasing power standard)Source: Eurostat

"Luxembourg,the highest GDP per capita in the world"

The second largest investment fund centre in the world

The Luxembourg financial centre which originally developed as a private banking centre has grown to become the second largest investment fund centre in the world, the largest captive reinsurance market in the European Union and the premier centre for private banking in the Economic Monetary Union (EMU). Its mature legal and regulatory systems have been continuously updated and, in recognition of the fact that banking and financial services account for the majority of Luxembourg’s economic output, numerous specific regulatory frameworks have been created notably for Undertakings for Collective Investment in Transferable Securities (UCITS) and alternative investment funds, banking, insurance and reinsurance activities, securitisation vehicles and family wealth management companies.

Some examples of multinational companies settled in Luxembourg

Multinational companies have also recognised the advantages of Luxembourg, such as its geographical situation in the middle of the European market with good travel connections, its international and skilled labour force, easy access to government bodies and an attractive and stable tax environment.

Some examples of multinational companies outside the financial activities having chosen to successfully settle down in Luxembourg are ArcelorMittal, SES, Intelsat, Goodyear, DuPont Teijin Film, Guardian Industries Group, Millicom, which have their European headquarters in Luxembourg, as well as Delphi, IEE, Sam Hwa Steel, Husky, Hutchison Whampoa, Ferrero and Panalpina, China Airlines, DHL, Nippon Express, TNT for the international logistic providers. In recent years, multinational companies active in the high-tech and e-commerce industries such as Microsoft, AOL, Amazon, iTunes, Rakuten and Skype have also decided to set up their European/worldwide headquarters in Luxembourg.

The combination of its central Western European location, highly-skilled international workforce, favourable tax regime and stable political environment not only makes Luxembourg the destination of choice for the European headquarters of multinational companies but also offers them an unrivalled gateway to Europe.

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Luxembourg,a favourable environment

n A key hub at the centre of Europe

Diverse cultures and peoples have always felt at home in Luxembourg, a multicultural, multilingual country with a noted affinity for international contact.

Thanks to its geographical situation, Luxembourg benefits from a strategic position at the crossroads of the European market, with direct routes by train (including high speed train) and plane to the most important European cities, such as Paris, London, Dublin, Amsterdam, Brussels, Berlin, Frankfurt, Zurich, Milan and Geneva. Luxembourg international airport is located 15 minutes from Luxembourg city and serves around 80 European airports operated by 20 airlines.

Sharing borders with Belgium, Germany and France, Luxembourg has developed an export-driven industry and enjoys a high level of cross-border trade, investment and employment.

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Luxembourg, a favourable environment

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n Excellent infrastructure and logistical network

At the heart of the 500 million strong European consumer market, Luxembourg enjoys a strategic position for road, train and air-related logistics activities. Many key international logistics providers are thus located in Luxembourg, such as Kuehne + Nagel and Panalpina.

The Luxembourg government has notably developed a logistics hub offering efficient access to cargo railways and highway connections throughout Europe (from the North Sea to the Mediterranean Sea). It has also recently announced the creation of a free trade zone near the airport.

In addition, the Luxembourg airport is the 5th largest European cargo airport and provides one of the fastest delivery services to customers. Fifteen cargo airlines operate to and from the airport, including Luxembourg’s Cargolux.

As Europe’s largest all-cargo airline (in 12th position worldwide), Cargolux is the leading European air cargo hub operating a modern fleet to over 90 worldwide destinations.

With one of the highest public investment rates in Europe, Luxembourg has created and continues to develop the infrastructure necessary for economic growth.

n A politically stable environment favourable for business

Luxembourg is a parliamentary democracy presided over by a constitutional monarch. An ethos of consensus underpins Luxembourg’s political stability.

The regular dialogue that brings together government, employers’ representatives and trade unions is a key feature of Luxembourg’s social system. The cohesion between these major actors plays a significant role in maintaining social harmony and in fostering decision-making in the social and economic spheres. With the least number of strike days among OECD countries, Luxembourg can take pride in its social achievements.

In addition to a stable inflation rate, the public debt of Luxembourg was only 18.2% of the GDP in 2011, placing it in third place among European countries (with an average of 80% for the 27 EU Members).

Decision-makers and entrepreneurs are well received in a political environment which is favourable for business. Indeed, Luxembourg’s politicians are open to dialogue and attentive to the concerns of the economic actors. Attracting international players is a priority for building an efficient business framework and for stimulating economic growth.


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n Research and innovation, a priority for the Luxembourg government

The Luxembourg government encourages the creation of clusters in different innovative research areas. A research cluster is a network between private companies and the public sector in a specific research field in order to develop the relevant sector and the competitiveness of Luxembourg.

The focus is placed on key technologies that have been identified as being important for the future sustainable economic development of Luxembourg.

The following research clusters exist in Luxembourg:

Space Luxembourg Space Cluster

Health Luxembourg BioHealth Cluster

ITC Luxembourg Information & Communication Technologies Cluster

Materials Luxembourg Materials Cluster

Environment Luxembourg EcoInnovation Cluster

Infrastructure Cluster for Logistics Luxembourg

Transportation Cluster Maritime Luxembourgeois

Luxembourg is actively participating in the cross-border and EU development of these clusters.

Furthermore, three Public Research Centres (CRP), which are public organisations, were created in Luxembourg in the eighties to perform and share scientific research, technological development and innovation in major economic fields (environment and agro-biotechnologies, IT, automotive equipment and new materials for CRP Gabriel Lippmann, information and communication technologies, environmental technologies, industrial process and materials technologies, health care technologies and business organisation and management for CRP Henri Tudor, and biomedical research and public health for CRP-Santé).

It is also worth mentioning Luxinnovation, an Economic Interest Grouping composed of private and public partners in charge of supporting the implementation of innovation and research projects in Luxembourg, the Integrated BioBank of Luxembourg (IBBL) which leads technological advances in biobanking research and the National Research Fund.

n Attractive tax and legal environmentCompanies, their shareholders and employees find one of Europe’s most rewarding and stable tax frameworks in Luxembourg, a major contributing factor to the country’s success. Luxembourg’s legal and regulatory framework is flexible and allows for individualised business development.

This attractive tax environment applies to direct taxation but also to indirect taxes.


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Indeed, Luxembourg has always applied the lowest VAT rates within the EU (3%, 6%, 12% and 15%) together with a flexible and less restrictive application of the EU VAT rules despite the economic crisis. The current corporate income tax rate for companies resident in Luxembourg amounts to 22.47% (for taxable profits higher than EUR 15,000, solidarity surcharge included) with a minimum advance corporate income tax (“ACIT”) of EUR 3,000 for companies whose financial assets, transferable securities and cash deposits exceed 90% of their total balance sheet or of an amount barging from EUR 500 to EUR 20,000 depending on the closing balance sheet total of the company (≤ EUR 350,000 to > EUR 20,000,000) for all other companies. The minimum ACIT constitutes an advance and is thus creditable against any future CIT charge but is not refundable. An additional municipal business tax is due on business profits, the rate being currently 6.75% for Luxembourg city.

Although Luxembourg tax law does not formally provide for a “ruling” procedure, tax authorities are generally willing to answer enquiries made by tax payers or their advisers orally or in writing.

Another attractive feature of Luxembourg is its flexible legal system. The Luxembourg lawmaker traditionally favours the contractual aspects of business and thus avoids, as much as possible, overregulation of articles of association and other instruments that may be issued by companies, leaving room for negotiations between parties. For example, the Luxembourg parliament has implemented in investor-friendly terms most of the EU directives into its national legislation. In addition Luxembourg usually implements into its domestic laws EU directives having a favourable economic impact on the Luxembourg market as soon as possible, such as for example the recent UCITS IV Directive 2009/65/EC.

n Top level financial centreThe Luxembourg financial centre is the largest contributor to the national economy. Indeed, with its modern legal and regulatory framework that is continuously updated, Luxembourg naturally attracts banks, insurance companies, investment fund promoters and specialist service providers from all over the world. Without a doubt, their top level competencies are of vital importance for international companies wishing to establish their headquarters in Luxembourg and benefit from this expertise.

Moreover, international issuers choose to apply for the listing and admission to trading of their securities on the Luxembourg Stock Exchange (LuxSE). The latter was founded in 1927 and represents a globally leading market for listing securities with over 3,500 issuers from more than 105 different jurisdictions and a trading volume of EUR 219.15 million (as of 31 December 2010). Since its establishment, the LuxSE has historically taken a liberal, innovative and flexible approach to the securities industry. In 1963, le LuxSE was the first stock exchange to list Eurobond and, since 1969, it has listed and allowed the trading of bonds in their issuing currency.

n A competent, multilingual labour pool renowned for its efficiency

Thanks to the development of international business, more than 150 nationalities are today represented in Luxembourg and more than 65% of residents of Luxembourg city are not Luxembourg citizens. Within Luxembourg’s business community, most people speak English.

With the majority of potential employees originating from Luxembourg, France, Belgium and Germany, not to mention candidates from further abroad, the Luxembourg economy benefits from a particularly competent and multilingual labour pool. English, French, German, Italian, Portuguese and Spanish are all spoken in Luxembourg, where many people are proficient in 3 or 4 languages.


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Source: Eurostat

Luxembourg, ranked first in terms

"of productivity per person employed"

Labour productivity per person employed in European countries and US in 2011

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n High quality of life and safe countryLuxembourg city is the capital with the highest level of personal safety in the world thanks to its high scores in the following areas: relationship with other countries, internal stability, crime fighting and law enforcement. Surrounded by forests, Luxembourg city is well known for its quality of life. Mercer’s 2009 survey placed Luxembourg 19th out of 215 cities, ranking it one of the world’s top cities in terms of quality of living. In Vision of Humanity’s 2009 Global Peace Index, it took 13th place out of a total of 144 countries.

Numerous cultural events are organised in Luxembourg which is a UNESCO World Heritage site and was European Capital of Culture in 2007. In addition to festivals and street events, Luxembourg offers museums (e.g., MUDAM - Museum of Modern Art, MNHA - National museum for history and art), concert halls (Philharmonie, Rockhal), theaters and movie theaters. People can also enjoy the numerous green spaces and sport facilities such as the Olympic-sized pool and the various golf courses.

The cosmopolitan nature of Luxembourg city is evident in daily life (restaurants serving food from around the world, bookstores selling books in different languages, movies shown in original languages, etc.). Many clubs and associations for expatriates have also been established in Luxembourg.

Foreign children benefit from the excellent educational institutions present in Luxembourg. The national public school system and distinguished international schools such as the International School of Luxembourg, the European School, St George’s International School and the Lycée Vauban all offer quality education. The University of Luxembourg provides an international environment with an emphasis on multilingualism. While establishing its special partnerships with other universities and public and private institutions, it has offered Bachelors, Masters Degrees and Doctorates that conform to Bologna criteria since 2003.


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In addition, Luxembourg’s inhabitants benefit from one of the most attractive social security systems in Europe with relatively low rates (both for employees and employers) and broad coverage, high benefits, and generous packages. Finally, Luxembourg offers high quality and modern health facilities.

In short, the position of Luxembourg can be summarised as follows:

n 2st GNP per capita (World Development Indicator Database, World Bank, 2011)

n 1st GDP per capita (World Development Indicator Database, World Bank, 2011)

n 2nd for economic globalisation (KOF Index of Economic Globalization, 2012)

n Second least risky place to do business (Euromoney’s semi-annual survey, 2012)

n Top ranked for personal safety (19th out of 215 cities according to Mercer Consulting, 2012)

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The World Competitiveness Scoreboard presents the 2012 overall rankings for the 59 economies covered by the WCY. The economies are ranked from the most to the least competitive. The scores shown to the right are actually indices (0 to 100) generated for the unique purpose of constructing charts and graphics.

"The worldcompetitiveness scoreboard 2012"

VENEZUELA

GREECE

CROATIA

UKRAINE

ARGENTINA

BULGARIA

ROMANIA

COLOMBIA

SLOVENIA

SOUTH AFRICA

JORDAN

RUSSIA

SLOVAK REPUBLIC

BRAZIL

HUNGARY

PERU

PHILIPPINES

INDONESIA

PORTUGAL

ITALY

SPAIN

TURKEY

MEXICO

LITHUANIA

INDIA

POLAND

CZECH REPUBLIC

KAZAKHSTAN

ESTONIA

THAILAND

FRANCE

CHILE

JAPAN

ICELAND

BELGIUM

NEW ZEALAND

CHINA MAINLAND

KOREA

AUSTRIA

IRELAND

ISRAEL

UNITED KINGDOM

FINLAND

UAE

AUSTRALIA

MALAYSIA

DENMARK

LUXEMBOURG

NETHERLANDS

QATAR

GERMANY

NORWAY

TAIWAN

CANADA

SWEDEN

SINGAPORE

SWITZERLAND

USA

HONG KONG 100.000

97.755

96.679

95.923

91.393

90.289

89.959

89.673

89.257

88.475

87.158

86.052

84.876

84.217

83.185

82.486

82.467

80.142

78.565

78.465

77.673

76.747

75.769

74.881

73.484

71.541

71.354

71.285

70.003

69.001

66.947

66.892

66.187

64.179

63.596

63.422

63.180

62.244

61.118

60.641

60.380

59.499

59.271

58.711

57.340

56.524

55.667

55.159

53.235

53.160

52.957

51.893

48.929

48.450

48.197

46.878

45.301

43.054

31.454

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Some specific legal and tax advantages offeredby Luxembourg

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Luxembourg being a Member of the European Union, companies resident in Luxembourg benefit from the EU directives as implemented into the national laws of the other Member States, offering a harmonised legal framework throughout the European Union. In addition, Luxembourg has concluded more than 80 investment protection treaties and over 60 double taxation treaties, 20 additional double taxation treaties being currently under negotiation.

n Luxembourg SOPARFIsLuxembourg has long been recognised as a prime location for setting up holding companies. The well-known “SOPARFI” which is an acronym for société de participation financière (financial holding company) refers to ordinary, unregulated, fully-taxable Luxembourg resident companies, whose activity includes the holding of shares in subsidiaries benefiting from the participation exemption regime. Since SOPARFIs are Luxembourg tax residents subject to corporate income tax, they benefit from Luxembourg’s double taxation treaty network. Several advantages of the SOPARFI are noteworthy, such as the following:

Participationexemption

Under the participation exemption regime, dividends, liquidation proceeds and capital gains realised on qualified shareholdings in eligible subsidiaries are exempt from corporate income taxes, dividends distributed to eligible parent companies are exempt from dividend withholding tax, and qualified shareholdings are exempt from net worth tax. In comparison with foreign participation exemption regimes, the Luxembourg regime is generally acknowledged to have less stringent conditions.In addition, it provides for a full exemption from corporate income taxes and allows for a tax deduction of losses incurred on the transfer of participations.

Tax consolidation regime

Luxembourg resident companies of a group can opt for a tax consolidation regime under which they can pool their taxable profits and losses for corporate income tax purposes subject to certain conditions.

Expatriate regimefor the recruitmentof highly-skilledworkers (HSW)

In order to facilitate temporary assignments of HSW to Luxembourg or direct recruitments of HSW by a Luxembourg enterprise that is part of an international group, Luxembourg has recently introduced a specific tax regime for HSW.Accordingly, certain repetitive expenses (i.e. housing and annual travel costs as well as tax-equalisation expenses) and non-repetitive expenses (i.e. moving and furnishing costs, as well as travel expenses on special occasions) paid by the employer to the HSW are not taxable in the hands of the HSW, although they remain deductible business expenses in the hands of the employer. The regime is limited to 5 years.

Other taxincentives

Luxembourg companies can notably benefit from an investment tax credit for certain tangible depreciable assets which amounts to 7% or 2% depending on the invested amount as well as an additional investment tax credit of 12%.A tax credit may also be granted under certain conditions to holders of audio-visual investment certificates to develop the production of audio-visual work and to holders of venture capital investment certificates financing innovative products and technologies.In addition, a tax exemption may be applicable to new companies and newly manufactured products to encourage the development and the structural expansion of the economy. Other non-tax incentives are available notably for companies developing research and development as well as innovation activities.

Some specific legal and tax advantages offered by Luxembourg

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n Group financing and cash-pooling activities

Luxembourg has become an international hub for the implementation of group financing and cash-pooling activities. OECD transfer pricing principles are applicable between related entities to assess the arm’s length character of financing transactions, and the Luxembourg tax authorities are willing to enter into advance pricing agreements. In addition, under Luxembourg tax law no withholding tax is levied in Luxembourg on interest payments made to residents or non-resident companies and Luxembourg companies benefit from the double taxation treaties concluded by Luxembourg.

n Securitisation transactionsThe law on securitisation adopted in 2004 provides for one of the most comprehensive and advantageous legal frameworks currently existing in Europe, offering both flexibility and protection to investors in addition to a favourable tax treatment. Although it obviously also covers transactions originating in Luxembourg, the regime is clearly designed for cross-border securitisation, creating a highly attractive framework for foreign transactions in which a Luxembourg vehicle is used.

Securitisation is defined as a transaction by which a securitisation vehicle acquires or assumes, directly or through another vehicle, the risks relating to claims, to other assets, to obligations or the activity of a third party by issuing securities the value or yield of which depends on such risks. The securities which are issued can be either debt instruments, equity instruments or hybrids, or even a combination thereof. Risks relating to all kinds of assets can be securitised - and so can risks relating to obligations or liabilities assumed by third parties or relating to all or part of the activities of a third party. There are thus no restrictions as to the asset classes which can be securitised.

The law does not in any way restrict the means by which such risks can be taken on by the securitisation vehicle, subject only to appropriate disclosures to investors. Risks can thus be taken on through the acquisition of assets in a true sale structure or the securing or guaranteeing of liabilities, or the entering into any kind of obligation in a synthetic structure.

All types of securitisation transactions are thus covered, in the broadest meaning of the term, ranging from term transactions and commercial paper conduits to simple repackagings, regardless of the type of asset classes. The law gives a very broad scope to the concept of securitisation so as to cover both traditional securitisation structures as well as the most innovative ones.

Only securitisation vehicles which issue securities to the public on a continuous basis must apply for a license from the Commission de Surveillance du Secteur Financier (CSSF), the supervisory authority of the Luxembourg financial sector. Securitisation undertakings which do not cumulatively meet these two criteria, in practice the great majority of securitisation undertakings, are not required to apply for any license and are not regulated.

Additionally, a securitisation undertaking can be comprised of different compartments, each corresponding to a segregated part of its assets and liabilities, in respect of which securities, debt, equity or hybrids, can be issued. As between investors and creditors, each compartment is treated as a separate entity, except if otherwise provided for in the articles of incorporation or the management regulations.

Finally, securitisation transactions enjoy a tax neutral treatment regarding corporate income taxes and VAT. Securitisation companies, as Luxembourg tax resident companies, may in addition be entitled to the benefit of the double taxation treaties concluded by Luxembourg.

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n Financing: high level of protection granted by Luxembourg law

To collateraltakers

The most common types of financial collateral arrangements used in Luxembourg with respect to financing transactions are pledges (gage) and transfers of title for security purposes (transfert de propriété à titre de garantie) over claims and financial instruments.The Luxembourg law on financial collateral arrangements (the "Collateral Law"), implementing Directive 2002/47/EC on financial collateral arrangements, governs pledges and transfers of title for security purposes over claims and financial instruments and provides for a special regime for these collateral arrangements, offering very high protection to collateral takers.The Collateral Law applies to all natural and legal persons. A broad range of financial instruments (e.g. shares, bonds, units, warrants, etc., whether in physical form, dematerialised, transferable by book entry or delivery, bearer or registered, endorseable or not, and regardless of their governing law) and all types of claims (e.g. cash) may be given as collateral. Luxembourg collateral arrangements may extend to both present and future assets of the collateral giver without any need to specifically designate such assets, and may secure present and future obligations of the collateral giver. Luxembourg collateral arrangements may be granted to the actual creditor and also in favour of a security trustee. This considerably facilitates the granting of collateral arrangements in the context of secured financing and renders the complex recourse to parallel debt provisions unnecessary. The Collateral Law does not impose any restrictions on the source of the secured obligations. They can originate from loans, derivative contracts, leasing agreements or any other type of agreement or situation that gives rise to a monetary claim of one person against another person.Enforcement procedures of Luxembourg collateral arrangements are simplified, especially with respect to unlisted financial instruments which traditionally had either to be auctioned or subjected to a court allocation procedure. These financial instruments can be privately sold on such conditions as the parties to the collateral arrangement may agree. There is no requirement that the collateral taker gives notice to the collateral givers before initiating the realisation procedure of the collateral.The most interesting feature of the Collateral Law is the exceptional protection it provides to collateral takers in the case of insolvency of the collateral giver. In disapplying all national and foreign insolvency law rules the Collateral Law ring-fences collateral held in Luxembourg from the insolvency estate and rules of the collateral giver. In practice, this means that zero-hour rules, stay-of-action requirements and voidance rules (e.g. hardening period rules) will be without effect on the collateral held in Luxembourg, thus enabling the collateral taker to realise its collateral notwithstanding the insolvency of the collateral giver.

For nettingand close-outnetting

Under the Collateral Law, netting agreements with respect to claims or financial instruments are enforceable notwithstanding the existence of national or foreign insolvency proceedings initiated against the defaulting party, attachments or other measures such as criminal confiscation, and do not constitute an obstacle to the enforcement and to the performance by the parties of their obligations thereunder.

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n Luxembourg: a domicile for propertiesLuxembourg is the leading domicile in Europe for the setting-up and operation of real estate funds, and for the establishment of efficient ownership structures of real estate portfolios.

Owning to Luxembourg’s flexible legal environment and tax-efficient system, each project can benefit from tailor-made solutions addressing promoters’ and investors’ constraints. Real estate portfolios may be held through regulated and unregulated vehicles which can often remain tax neutral. Indeed, numerous assets located in Luxembourg or abroad are held by vehicles set up in the form of Luxembourg fully-taxable resident corporations (SOPARFIs), which should benefit from (i) the Luxembourg participation exemption regime applicable to qualifying participations in both domestic and foreign companies and (ii) Luxembourg’s double taxation treaty network. Real estate investments may also be lodged in an investment company in risk capital (SICAR) introduced by the law dated 15 June 2004 which is a semi-regulated investment company fully subject to corporate income taxes but benefiting from a favourable tax treatment or in regulated investment fund structures of the contractual type (fonds commun de placement - FCP) or the corporate type (investment companies with variable share capital - SICAV), which are governed by either the law of 17 December 2010 on undertakings for collective investment or the law of 13 February 2007 on specialised investment funds. The latter supervised vehicles are subject to an annual subscription tax but not to corporate income taxes.

Institutional investors, insurance companies and multinational companies favour Luxembourg as a domicile mainly because of its wide range of solutions in terms of products, its worldwide reputation and proven track record in the real estate funds area but also because it offers an efficient onshore domicile within the European Union for holding and operating real estate assets.

n VAT related advantagesVAT cash flow optimisation in Luxembourg for logistic platforms

As companies try to reduce the cost of inventory and shorten delivery times, they often introduce distribution hubs in the supply chain, which they want to locate close to their clients.

Countries which are recognised leaders in logistics, such as Belgium and the Netherlands, are well aware of the importance of flexible VAT and customs rules for the development of the sector. What deserves to be known is that the Luxembourg VAT system is particularly advantageous to logistics companies, making Luxembourg a preferred location for a European hub:


A competitiveVAT environment

In principle, importing goods into the EU generates a VAT liability in the country of importation. Most EU countries ask for a direct payment of the VAT on importation or require specific procedures to defer its payment. In Luxembourg, the VAT on importation is dealt with in the VAT return and no cash payment of import VAT is incurred.This can result in a significant pre-financing advantage.

VATrepresentation

The system of tax representation is used for VAT purposes. Under this system, a foreign entrepreneur can appoint a third-party logistics service provider in Luxembourg to carry out the necessary VAT formalities and to pay the VAT due in Luxembourg on its behalf.As a result, a foreign trader who did not register for VAT in Luxembourg is able to import its goods in Luxembourg and distribute them from Luxembourg without having to obtain its own individual VAT identification number.This facilitates the management of VAT obligations and compliance.

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VATfree zoneregime

On 14th July 2011, the law proposal for the implementation of VAT suspension regime has been voted, providing for a temporary VAT exemption for the storage, sale and work on goods placed under this regime, the payment of VAT being delayed until the goods exit the free zone. This eliminates VAT cash flows in relation to transactions taking place within the regime and avoids the burden of VAT registration for foreign entrepreneurs.

Lower VAT costs for the financial sector

Benefiting from Luxembourg’s low VAT rate, the lowest within the EU with a standard rate of 15%, Luxembourg domestic supplies are less taxed than in any other EU country. This is particularly valuable for financial companies (holdings, investment funds, SOPARFIs, banks, etc.) that are not allowed to recover input VAT; reducing their VAT costs is therefore a priority for such companies.

The large scope of VAT exemptions in Luxembourg is also used to limit, or even avoid, any VAT leakage on most financial transactions.

Specific vehicles (such as independent groups of persons) exist in Luxembourg to avoid the generation of VAT costs between financial/banking/insurance operators.

Increase of profit margin for e-business and broadcasting services

Luxembourg’s low VAT rate also benefits supplies made to non-Luxembourg customers, especially in the two following sectors of commercial activity:

Luxembourg asa friendly location for e-business(until 2015)

By establishing themselves in Luxembourg (in the form of a subsidiary or a branch), non-EU suppliers providing electronically supplied services to private individuals in the EU will charge customers with Luxembourg VAT only (rather than a higher foreign VAT). This implies an increase in the profit margin from a competitive pricing due to the application of the lowest standard VAT rate in Europe on sales to all EU private individuals (15% standard rate), whereas operators established in other countries may have to charge VAT up to 25%.

Luxembourg asa prime location for radio and television broadcasting services(until 2015)

As for e-business, Luxembourg applies a very competitive VAT rate of 3% on all radio and television broadcasting services supplied from Luxembourg to private EU residents.

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n Intellectual property (IP) activitiesIntellectual property activities also benefit from an advantageous tax regime in Luxembourg. In addition to the low VAT rates and the absence of withholding tax on royalties, a specific income tax treatment was introduced in 2008 to expand IP management activities in Luxembourg.

According to this regime, income received by a Luxembourg company for the use of, or the right to use, eligible IP rights is exempt from Luxembourg corporate income taxes up to 80% of the net income deriving from the IP rights, leading to an effective corporate income tax rate of 5.84% for Luxembourg city.

IP rights benefiting from these exemptions are copyrights on computer softwares, patents, trademarks, designs, models or domain names developed or acquired as from 1 January 2008. The same exemption is applicable to capital gains realised on the sale of the IP rights (with a recapture rule for expenses). In addition, the qualifying IP rights are fully exempt from net worth tax.

n Captive reinsurance: how groups can efficiently manage their risks

Luxembourg boasts approximately 250 captive reinsurance companies, i.e., reinsurance undertakings which do not belong to an insurance/reinsurance group and which provide reinsurance exclusively to cover the risks of the undertakings of the group to which the captive belongs. These companies are subject to the Luxembourg laws and regulations governing reinsurance companies; such laws and regulations have implemented into Luxembourg law the European directive on reinsurance, including the passporting of reinsurance activities throughout the EU on the basis of a single license in the home Member State of the reinsurance entity.


0

5

10

15

20

25

30

15

Luxe

mb

our

g

Cyp

rus

Mal

ta

Spa

in

Ger

man

y

Net

herla

nds

Fran

ce

Bul

garia

Sw

eden

Irela

nd

Lith

uani

a

Cze

ch R

epub

lic

Est

onia

Latv

ia

Gre

ece

Pol

and

Por

tuga

l

UK

Bel

giumIta

ly

Aus

tria

Slo

veni

a

Slo

vaki

a

Finl

and

Rom

ania

Den

mar

k

"StandardVAT rates 2012"

Hun

gary

Source: EU Commission (situation at 14th January 2013)

21

Luxembourg reinsurance companies including captives are basically fully-taxable to corporate income taxes in accordance with applicable tax rules in Luxembourg, and hence benefit from the manifold double tax treaties which Luxembourg has entered into. However, reinsurance companies are obliged to constitute each year appropriate technical provisions and a specific equalisation reserve against the risk of fluctuation of future claims whose amount depends on the nature and volume of the captive’s business. Such a reserve is fully tax deductible and may entirely offset the taxable profits of the company. In addition, reinsurance transactions are, in principle, VAT exempt.

A large number of major industrial, commercial and financial international groups have put in place a Luxembourg captive reinsurance entity to optimise their internal group risk management via a tax-efficient structure.

The presence of multiple service providers as well as the generally constructive approach of the supervisory authority are additional reasons for the success of Luxembourg as a location for captive (and non-captive) reinsurance companies in Europe.

n Pension funds: a secured and flexible environment for cross-border pension vehicles

Building on the success and regulatory expertise of its well-established investment funds industry, Luxembourg has positioned itself for more than 10 years as an attractive centre for the management and administration of cross-border pension vehicles.

The Luxembourg legislation on pension funds has been inspired by two core principles: security so as to guarantee the rights acquired by affiliates throughout their professional careers, and flexibility in order to enable the setting-up of tailor-made structures designed to meet the specific requirements of sponsors/employers, regardless of whether they are multinational companies or not.

The Luxembourg legislation on pension funds was initially implemented in 1999 and 2000 and now fully complies with the Directive 2003/41/EC on institutions for occupational retirement provisions introducing the possibility to operate on a cross-border basis by providing services to affiliates located in other EU Member States.

The establishment of a pan-European pension fund in Luxembourg entails substantial advantages for multinational companies, including greater consistency in quality of asset management and performance, better control and oversight on a range of pension schemes with respect to management and administration, reduction of transaction costs and asset management fees, outsourcing of administrative and routine tasks.

In addition, Luxembourg offers a wide range of regulated pension vehicles, all complying with the OECD Pension Fund Corporate Governance Principles. Such vehicles may be designed with great flexibility, offering inter alia possibilities to provide for defined benefit/contribution pension schemes, to segregate various pension schemes within a single vehicle, or to arrange for confidentiality among pension schemes.


www.arendt.com © Arendt & Medernach 2013

Jan Neugebauer, Partner Tax LawEmail: [email protected] Tel: (352) 40 78 78 37

Our experts team is supported by our Tax team:

Alain Goebel, Partner Tax LawEmail: [email protected] Tel: (352) 40 78 78 512

Thierry Lesage, Partner Tax LawEmail: [email protected] Tel: (352) 40 78 78 328

Eric Fort, Partner Tax LawEmail: [email protected] Tel: (352) 40 78 78 306

Bruno Gasparotto, Principal Tax LawEmail: [email protected] Tel: (352) 40 78 78 909

Jean-Marc Ueberecken, Partner Corporate Law, Mergers & AcquisitionsEmail: [email protected] Tel: (352) 40 78 78 297

Louis Berns, Partner Employment Law, Pensions & BenefitsEmail: [email protected] Tel: (352) 40 78 78 240

Philippe-Emmanuel Partsch, Partner EU & Competition LawEmail: [email protected] Tel: (352) 40 78 78 350

Laurent Schummer, Partner Corporate Law, Mergers & AcquisitionsEmail: [email protected]: (352) 40 78 78 7710

Sophie Wagner-Chartier, Partner Commercial & Insolvency, IP, Communication & Technology, Corporate Law, Mergers & AcquisitionsEmail: [email protected] Tel: (352) 40 78 78 253

Christian Point, Partner Administrative Law, Property, Construction & EnvironmentEmail: [email protected] Tel: (352) 40 78 78 341

Paul Mousel, Partner Banking & Financial ServicesEmail: [email protected] Tel: (352) 40 78 78 217

Arendt & Medernachmultinational companies team

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