Country - Luxembourg
Corporate Vehicles
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A. UNDERTAKINGS FOR COLLECTIVE INVESTMENTS ("UCIs"): FCP, SICAV AND SICAF
UCIs are traditional structures for real estate investment in Luxembourg. They may either be of a contractual nature, such as investment funds (fonds commun de placement) or the "FCP", which are managed by a management company domiciled in Luxembourg, or of a corporate nature, such as investment companies established either with variable capital (société d'investissement à capital variable or "SICAV") or with fixed capital (société d'investissement à capital fixe or "SICAF").
All types of UCI may be either closed-ended or open-ended to redemptions.
Open to all types of investors (and therefore submitted to the mandatory supervision of the Luxembourg regulator, the Commission de Surveillance du Secteur Financier (CSSF)), fund structures governed by the Luxembourg Law of 20 December 2002 on UCIs involve the collection of funds from the public and the collective investment of those funds in accordance with the principles of risk-spreading.
Fund structures dedicated to institutional investors are governed by the Luxembourg Law of 19 July 1991 and involve the collective investment of funds collected from institutional investors in accordance with the principles of risk-spreading. The CSSF supervises these structures less strictly.
Multiple compartment structures are available for both retail and institutional investor UCIs.
Tax aspects:
UCIs are not subject to tax except for an annual net asset tax of 0.05%, which is reduced to 0.01% in certain cases. No ad valorem capital duty is payable for the establishment of the fund. Non-resident shareholders of a fund which is contractual in nature are not subject to capital gains, income or withholding tax in Luxembourg. In the case of funds of a corporate nature, non-resident shareholders are not subject to taxation in Luxembourg if they hold not more than 10% of the fund's shares. Please see section E for further information on Luxembourg tax in relation to UCIs.
B. INVESTMENT COMPANIES IN RISK CAPITAL ("SICAR")
The Luxembourg Law of 15 June 2004 created a new type of structure dedicated to high risk investments made by institutional, professional or other sophisticated investors.
The SICAR is a specific corporate vehicle created for investment in venture capital by direct or indirect investment in entities to be launched, developed or listed, with the aim of offsetting the high level of risk taken by investors, against higher than average potential returns. The SICAR is subject to limited supervision by the CSSF which is not required to approve either its promoter or investment manager as is the case with a UCI. The SICAR is permitted to invest indirectly in real estate, by means of participations in other companies or funds, including wholly owned subsidiaries. In order to constitute risk capital the CSSF typically requires that the real estate investment must either qualify as opportunistic or core-plus investment.
Tax aspects:
SICARs are subject to corporation tax at the rate of 29.63% provided that the income resulting from the securities held by the SICAR, as well as the income resulting from the transfer, contribution or liquidation of these assets, does not constitute taxable income. There is no withholding tax on dividend payments made by the SICAR. SICARs benefit in principle from tax treaties and from the EU Parent-Subsidiary Directive. There is no ad valorem capital duty. Please see section E for further information on Luxembourg tax in relation to SICARs.
1. SOPARFI
A SOPARFI is an unregulated commercial corporate vehicle governed by the Luxembourg Law of 10 August 1915 "on Commercial Companies", as amended, and open to investments in financial participations made by qualifying investors. SOPARFIs may invest in real estate or in companies holding real estate. SOPARFIs are not subject to supervision by the CSSF.
The securities issued by SOPARFIs may be acquired by retail or professional investors.
Tax aspects:
SOPARFIs are taxable entities benefiting from the participation exemption regime (exemption on dividends and capital gains). Dividends distributions are subject to a withholding tax at a rate of 15% (the rate can be reduced or the tax avoided by application of the domestic participation exemption regime or double tax treaties). SOPARFIs are subject to a 1% duty on capital contributions. Please see section E for further information on Luxembourg tax in relation to SOPARFIs.
C. DIRECT INVESTMENT
There are two ways for a non-resident taxpayer to invest directly in real estate in Luxembourg: either through or without a permanent establishment (établissement stable).
1. Investment without a permanent establishment
Minimum capital
Not applicable.
Set-up costs
Not applicable.
Time required to become operative
Not applicable.
Costs per annum for corporate and accounting compliance
Not applicable.
Corporate governance
Not applicable.
Regulatory control
Not applicable.
Taxation of current income in Luxembourg
For individuals income is subject to income tax at the progressive ordinary rates (with a current top marginal rate of 38.95%, including the contribution for the employment fund).
For corporations income is subject to corporate income tax equal to 22% (22.88%, inclusive of the 4% surcharge for the employment fund) of any global amount above EUR 15,000.
Lower rates apply if the taxable profits do not exceed EUR 15,000: 20% on income up to EUR 10,000, and 26% on income between EUR 10,000 and EUR 15,000.
Taxation of distribution of current income to investors
No further taxation or withholding tax applies in Luxembourg.
Taxation of capital gains
Taxation of capital gains on the sale of real estate assets is as follows:
For individuals:
- capital gains made on the sale of real estate assets by individuals who have owned the property for less than two years are fully taxable (top marginal rate of 38.95%);
- capital gains made on the sale of real estate assets by individuals who have owned the property for more than two years are taxable at a half of the global rate (average rate applicable on the income).
For corporations:
- no specific capital gains tax exists in Luxembourg; capital gains are taxed in the same way as other business profits and are subject to corporate income tax.
2. Investment through a permanent establishment
Minimum capital
None.
Set-up costs
Approximately EUR 3,000 (excluding VAT).
Time required to become operative
Registration of the branch with the Trade and Companies Register must be done within one week of the branch commencing its activities.
Costs per annum for corporate and accounting compliance
Approximately EUR 5,000 per annum (excluding VAT).
Corporate governance
Not applicable.
Regulatory control
Not applicable.
Taxation of current income in Luxembourg
Profits attributable to the permanent establishment are subject to corporate income tax and municipal business tax.
Municipal business tax is levied at a variable rate according to the municipality in which the real estate is located (for instance, in Luxembourg City it is 6.75%).
The maximum aggregate corporate income tax and municipal business tax rate amounts to 29.63% (the 2007 figure for Luxembourg City).
Taxation of distribution of current income to investors
No further taxation or withholding tax in Luxembourg.
Taxation of capital gains
The sale of real estate assets is not subject to specific capital gains tax in Luxembourg. Capital gains are taxed in the same way as other business profits and are subject to corporate income tax and municipal business tax.
D. INDIRECT INVESTMENT IN REAL ESTATE IN LUXEMBOURG THROUGH UCIs: FCP, SICAV AND SICAF
The collective investment vehicles available for investment in real estate in Luxembourg are FCPs (fonds commun de placement immobiliers) and SICAV/SICAF (société d'investissement à capital variable/fixe).
1. Investment through an FCP
Management company
A management company is required and may be incorporated under the form of a public limited company (société anonyme), a private limited company (société à responsabilité limitée), a cooperative company (société coopérative) or a limited partnership with shares (société en commandite par actions). The management company does not need to fulfil regulatory substance requirements.
Minimum capital
EUR 125,000.
Set-up costs
Costs vary according to the specific project.
Time required to become operative
Approximately six to eight weeks, but may vary according to the specific project.
Costs per annum for corporate and accounting compliance
Costs vary according to the specific project.
Corporate governance
An FCP is not a legal entity and is managed according to its own management regulations by the management company. Specific committees may also be set up and can be granted co-decision rights or remain consultative bodies.
The appointment of a statutory auditor is required.
Taxation of current income in Luxembourg
An annual subscription tax is payable at a rate of 0.05% of the aggregate net assets of the FCP, as valued on the last day of each quarter. A reduced rate of 0.01% per annum is applicable for (i) Luxembourg investment funds, the exclusive object of which is the collective investment in money market instruments and the placing of deposits with credit institutions (ii) Luxembourg investments funds, the exclusive object of which is the collective investment in deposits with credit institutions (iii) Luxembourg investment funds which are subject to the law of 13 February 2007 relating to specialised investment funds and (iv) individual compartments of UCIs with multiple compartments referred to in the 2002 Law as well as for individual classes of securities issued within a UCI or within a compartment of a UCI with multiple compartments, provided that the securities of such compartments or classes are reserved to one or more institutional investors.
Taxation of distribution of current income to investors
No withholding tax applies on payments of interest or dividends.
Taxation of capital gains
There is no tax at the level of the FCP in relation to the sale of real estate assets or real estate companies.
For non-tax-resident unit-holders there is no tax on capital gains from the sale of units of an FCP.
2. Indirect investment in real estate in Luxembourg through an SICAV or an SICAF
Management company
Not required.
Minimum capital
EUR 1,250,000.
Set-up costs
Costs vary according to the specific project.
Time required to become operative
This varies according to the specific project.
Costs per annum for corporate and accounting compliance
Costs vary according to the specific project.
Corporate governance
SICAVs and SICAFs are public limited liability companies (société anonyme) and, as such, are governed by boards of directors composed of at least three directors.
An external approved management company may also be appointed as manager of the SICAV/SICAF.
The appointment of a statutory auditor is required by law.
Regulatory control
An SICAV or SICAF must be approved by the Commission de Surveillance du Secteur Financier.
Taxation of current income in Luxembourg
An annual subscription tax is payable at the rate of 0.05% of the aggregate net assets of the FCP, as valued on the last day of each quarter. A reduced rate of 0.01% per annum is applicable for the following investment funds: (i) Luxembourg investment funds, the exclusive object of which is the collective investment in money market instruments and the placing of deposits with credit institutions (ii) Luxembourg investments funds, the exclusive object of which is the collective investment in deposits with credit institutions (iii) Luxembourg investment funds which are subject to the law of 13 February 2007 relating to specialised investment funds and (iv) individual compartments of UCIs with multiple compartments referred to in the 2002 Law as well as for individual classes of securities issued within a UCI or within a compartment of a UCI with multiple compartments, provided that the securities of such compartments or classes are reserved to one or more institutional investors.
Taxation of distribution of current income to investors
There is no withholding tax on payments of interest or dividends.
Taxation of capital gains
There is no taxation at the level of the SICAV/SICAF in relation to the sale of real estate assets or real estate companies.
In the case of the sale of shares in the SICAV/SICAF for non-tax-resident shareholders the following points apply:
For individuals:
- if there is a double tax treaty based on the OECD model, capital gains are not taxable in Luxembourg. Otherwise, capital gains are only taxable at the ordinary rates if the shareholding is sold within six months following its acquisition, or before its acquisition, and if the shareholding qualifies as a substantial participation (more than 10% of the company’s capital).
For corporations:
- if there is a double tax treaty based on the OECD model, capital gains are generally not taxable in Luxembourg. Otherwise, capital gains are subject to corporate income tax at ordinary rates only if the shareholding is sold within six months of its acquisition and qualifies as a substantial participation.
E. INDIRECT INVESTMENT THROUGH AN INVESTMENT COMPANY IN RISK CAPITAL (société d’investissement en capital à risque - SICAR)
Minimum capital
EUR 1,000,000.
Set-up costs
Costs vary according to the specific project.
Time required to become operative
Setting up a SICAR can take between four and six weeks from the date of filing a complete set of documents with the CSSF (including a prospectus, the articles of incorporation, the curriculum vitae of the proposed managers, the depositary agreement and other service providers' agreements).
Costs per annum for corporate and accounting compliance
These are negotiated with the administrator chosen by the SICAR.
Purpose
A SICAR is an eligible vehicle for investment in private equity real estate properties (see section A).
Corporate governance
The SICAR may be incorporated in the form of a public limited company (société anonyme), a private limited liability company (société à responsabilité limitée), a cooperative company organised under the form of a public limited company (société cooperative organisée sous la forme d’une société anoyme) or a limited partnership with shares (société en commandite par actions).
The appointment of a statutory auditor is required by law.
Regulatory control
The SICAR must be approved by the Commission de Surveillance du Secteur Financier.
Taxation of current income in Luxembourg
Profits realised by a SICAR are subject to corporate income tax and municipal business tax. However, income derived from portfolio items consisting of securities in "risk capital", capital gains derived from the sale of such securities and income from temporary investment in liquid assets held for a maximum period of 12 months before investment in "risk capital" are excluded from the tax base.
The maximum aggregate corporate income tax and municipal business tax rate amounts to 29.63% (the 2007 figures for Luxembourg City).
Taxation of distribution of current income to investors
No withholding tax is payable on the distribution of dividend to investors.
Taxation of capital gains
Capital gains on the sale of real estate assets are not subject to a specific tax.
In the case of the sale of a participation in a SICAR neither non-resident individuals nor non-resident corporations are subject to capital gains tax in Luxembourg.
F. INDIRECT INVESTMENT IN REAL ESTATE IN LUXEMBOURG THROUGH ORDINARY FULLY-TAXABLE CORPORATE VEHICLES
There are three types of ordinary fully-taxable corporate vehicle which are commonly used for real estate investment: private limited liability companies (societé à responsabilité limitée), the public limited liability companies (société anonyme) and limited partnerships with shares (société en commandite par actions).
1. Société à responsabilité limitée (SARL)
Minimum capital
EUR 12,500.
Set-up costs
For standard articles of association, approximately EUR 5,000 (excluding VAT, capital duties, notary fees, etc.).
Time required to become operative
Any form of company can be incorporated in two days subject to the receipt of the relevant documents, such as the signed proxy to hold the meeting with a Luxembourg notary and the blocking certificate issued by a bank, certifying that the amount corresponding to the share capital of the company is blocked in the name of the company until the execution of the notarial deed of incorporation.
Ancillary steps, such as the opening of a bank account in relation to the blocking certificate, and anti-money laundering procedure documents may mean incorporation takes longer.
Costs per annum for corporate and accounting compliance
Approximately EUR 5,000 to EUR 10,000 per annum (excluding VAT) depending on service providers.
Corporate governance
An SARL is managed by one or more manager(s) who can be individuals or corporate entities.
Regulatory control
None.
2. Société anonyme (SA)
Minimum capital
EUR 31,000.
Set-up costs
For standard articles of association, approximately EUR 5,000 (excluding VAT, capital duties, notary fees, etc.).
Time required to become operative
As for an SARL.
Costs per annum for corporate and accounting compliance
Approximately EUR 5,000 to EUR 10,000 per annum (excluding VAT), depending on service providers.
Corporate governance
An SA is managed by a board of directors composed of at least three directors. There is no upper limit on the number of directors.
The board of directors can delegate day-to-day management to an individual who is not a director of the SA.
The appointment of a statutory auditor is required by law.
Regulatory control
None.
3. Société en commandite par actions (SCA)
Minimum capital
EUR 31,000.
Set-up costs
For standard articles of association, approximately EUR 5,000 (excluding VAT, capital duties, notary fees, etc.).
Time required to become operative
As for an SARL.
Costs per annum for corporate and accounting compliance
Approximately EUR 5,000 to EUR 10,000 per annum (excluding VAT) depending on service providers.
Corporate governance
An SCA is managed by one or more general partners chosen from its unlimited liability shareholders (associé commandité). The general partner cannot be removed by the general meeting of shareholders (associés commanditaires) whose liability is limited to the amount of their contribution to the SCA.
The appointment of a statutory auditor is required by law.
Regulatory control
None.
4. Tax treatment of the corporate vehicles outlined above
Taxation of income in Luxembourg profits realised by an SARL, an SCA or an SA are subject to corporate income tax and municipal business tax. The maximum aggregate corporate income tax and municipal business tax rate is 29.63% (the 2007 figure for Luxembourg City).
Taxation of distribution of current income to investors
Individual shareholders
A withholding tax of 15% is normally payable (17.65% if borne by the debtor (i.e. the company paying the dividend)), subject to any agreements made in a relevant double tax treaty.
Corporate shareholders
- If the EU Parent-Subsidiary Directive applies, distributions made to a qualifying EU parent company are exempt, provided that it has directly held, or has committed itself to hold, a participation of at least 10%, or share capital of at least EUR 1,200,000, in the Luxembourg company, for an uninterrupted period of at least 12 months.
- If the EU Parent-Subsidiary Directive does not apply, but a double tax treaty does, then the withholding tax rate may be reduced to 0%, or 5% for shareholders owning more than 10% or 25% of the shares/voting rights, and to 15% for other shareholders.
- If neither the EU Parent-Subsidiary Directive nor a double tax treaty applies, a 15% withholding tax is payable.
Taxation of capital gains
Capital gains realised by an SARL, an SCA or an SA on the sale of real estate assets are taxed as business profits and therefore subject to corporate income tax and municipal business tax.
In the case of capital gains on the sale of a participation in an SARL, an SCA or an SA the following applies:
For individuals:
- if a double tax treaty based on the OECD model applies, capital gains are not taxable in Luxembourg. Otherwise, capital gains are only taxable at the ordinary rates if the shareholding is sold within six months of its acquisition, or before its acquisition, and qualifies as a substantial participation.
For corporations:
- Resident fully taxable corporations: Capital gains are exempt if, at the time the gains are realised, the seller has directly held, or has committed to hold, a participation of at least 10%, or share capital of at least EUR 6,000,000, for an uninterrupted period of at least 12 months.
- Non-resident corporations: If a double tax treaty based on the OECD model applies, capital gains are generally not taxable in Luxembourg. Otherwise, capital gains are subject to corporate income tax at the normal rates if the shareholding is sold within six months of its acquisition and qualifies as a substantial participation.
G. RULES ON LEVERAGE
1. Thin capitalisation rules
According to the general practice adopted by the tax authorities, the debt/equity ratio applicable to a fully taxable Luxembourg capital company is 15 for equity to 85 for debts. In case of non-compliance with said ratio, interest in relation to the excess of liabilities can be considered as dividends for tax purposes. The consequence is that such excess interest is not deductible and is potentially subject to a withholding tax under the same conditions as distributed dividends.
For these purposes, debt includes loans granted or guaranteed by shareholders but not external debts.
No thin capitalisation rules apply to intra-group financing activities.
2. Withholding tax on interest
Under Luxembourg tax law (subject to the application of the laws dated 21 June 2005 ("‘Laws") implementing Council Directive 2003/48/EC on the taxation of savings income ("Directive")) there is no withholding tax on interest payments made by a company or its paying agent to a non-resident corporate lender.
With effect from 1 July 2005, a Luxembourg-based paying agent (as defined in the Directive) is required to deduct tax on interest and other similar income paid to an individual resident in another EU member state, or to a residual entity established in another EU member state, unless the beneficiary of the interest payments elects an exchange of information. Interest, as defined by the law, includes income realised on the sale, refund, redemption of shares or units held in a UCITS, if the UCITS invests, either directly or indirectly, over 40% of its assets in debt claims, as well as any other income derived from UCITS, where the investment in debt claims exceeds 15% of the UCITS's assets. The same regime applies to payments to individuals or residual entities resident in the following territories: the Netherlands Antilles, Aruba, Guernsey, Jersey, the Isle of Man, Montserrat and the British Virgin Islands. The withholding tax rate is initially 15% until 30 June 2008, 20% until 30 June 2011 and 35% from 1 July 2011. The withholding tax system only applies during a transitional period, which will end following the conclusion of certain agreements, relating to information exchange and providing for measures equivalent to those laid down in the Directive, with certain third countries (i.e. the Principality of Monaco, the Swiss Confederation, the United States of America).
Payments made under certain profit-participating bonds are regarded as dividends and subject to a withholding tax of 15%. This may be reduced if a double tax treaty applies.
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