The Grand Duchy Luxembourg, a founding member of the European Union, is situated at the cross-roads of Europe in the triangle where Belgium, France and Germany meet.  It covers an area of 1,600 square kilometres with a population of approximately 340,000.  The capital is Luxembourg City which is the home of the European Court of Justice, the Secretariat of the European Parliament, the European Investment Bank, the European Court of Auditors and a section of the European Commission and NATO.

Traditionally Luxembourgers have been farmers, the Italians arrived at the end of the 19th Century to work in the steel industry, while the Spanish and Portuguese arrived in the last twenty years.

German and French are the two official languages of Luxembourg with English being widely understood and spoken.

Due to the fortress of Luxembourg City, the Grand Duchy of Luxembourg survived the collapse of the Holy Roman Empire and the unification of the German states by Bismarck during the 19th Century.

Today the country is a constitutional Duchy where the Grand Duke has similar powers to the Queen in England.  Elections are held every five years.

Luxembourg follows the civil law system and therefore Trusts are not yet recognised.

Corporation tax is currently 30%. Luxembourg has enthusiastically followed European Union directives on SICAVS, SOPARFI’s and Reinsurance to build in fiscal advantages for investment activities to supplement the traditional 1929 style holding company.  Currently Luxembourg is a party to 22 double taxation treaties (the traditional 1929 style holding company is expressly prohibited from taking advantage of these double tax treaties.

The Grand Duchy is the home of 212 banks and during the last two decades Luxembourg has become an important financial centre mainly due to its central location, its membership of the EU and the size and efficiency of the banking sector.

It has a long history of enjoying banking secrecy which is very strongly enforced and covers all financial institutions.  Breaking banking secrecy is a criminal (and jailable) offence.  One of Luxembourg’s major objectives is to maintain this secrecy.  There is and no withholding taxes on dividends arising from investments held in other EU States.

All financial institutions, operatives and deposit takers in Luxembourg are controlled by the IML.  The IML has recently introduced onerous regulations for the holders of Luxembourg banking licenses and other deposit takers.  One of the strongest regulations enforced is the ‘know your customer rule’ and therefore opening of bank accounts for people and companies not known to Luxembourg Banks has become a time consuming activity.

There are generally three types of Luxembourg Companies used for international business:

It is a company domiciled in Luxembourg most commonly in the form of a Societe Anonyme or a Societe a Responabilite Limite.  Its legal status is governed by the companies laws of the 10 August 1915 and the 24 April 1983.  Its special fiscal status is defined in the law of 31 July 1929 which also specifies certain limitations of its activities.  It may

·       Acquire, hold and dispose of shares and bonds of Luxembourg or foreign companies.

·       Hold cash and foreign currencies, gold, negotiable securities and place funds on deposit with financial institutions.

·       Finance subsidiaries or companies in which the holding company has a direct shareholding.

·       Hold and licence patents and receive income from the granting of licences.

·       Issue bonds by public or private subscription of up to ten times the amount of its paid up capital and in addition borrow up to three times its issued capital.

·       Buy back up to 10% of its own shares where permitted by its status and agreed by a general meeting of the shareholders.

It May Not:

·       Be an active member of a general partnership or partnerships limited by shares.

·       Carry on any industrial or commercial activity

·       Carry on brokerage or banking activities

·       Grant loans to companies which are not direct subsidiaries, unless it is a Financial Holding Company.

·       Own real estate, except the premises used for its own offices, though it may hold shares in real estate companies.

·       No corporation, income, capital gains, liquidation or stamp duty tax payable

·       No withholding taxes levied on dividends or bond interest paid to non-resident individuals or corporations.

SOPARFI means Societe de participation financiere.  The main advantage of the normal Luxembourg Company with SOPARFI is that while the company is fully subject to corporate tax, exemptions to corporate tax are granted by law for:

·       Dividends received from shareholding, providing shareholdings of at least 10% have been held uninterrupted since the start of the financial year prior to receipt of the dividend from it’s shareholding in the subsidiary.

·       Liquidation gains on liquidation of companies in which shares are held.

·       Capital gains on sale of shareholding providing shareholdings of at least 25% have been held uninterrupted since the start of the financial year prior to receipt of the dividend from it’s shareholding in the subsidiary.

·       There are also no withholding taxes levied on dividends paid by a normal Luxembourg Company with SOPARFI provisions to its EU parent and either 25% or the reduced tax treaty tax is levied if payment is made to a non-EU parent.  Therefore the company can benefit from full double tax treaty protection.  No special tax authority ruling is required and these companies can combine shareholding with commercial, industrial or other financial activities.

·       The Company must have a minimum capital of Euro 12,500, fully paid-up.  A local bank or well established foreign bank (recognised by the notaire) will be asked to certify to the notaire drawing up the deed of incorporation that funds are held for the company in a blocked account for the formation of the company.

·       There are a minimum of two shareholders required who may be individuals or companies and of any nationality or residence.  Full details of the their names, occupation and residence are required.

·       There are a minimum of three directors required who may be individuals or companies and need not be resident in Luxembourg.

·       An auditor is required who is either a ‘commissaire aux comptes’ or a ‘reviseur d’entreprise’, depending on the size of the company.

·       Accounting records for all Luxembourg companies must be kept.  They are normally kept in Luxembourg, but can be kept outside the country.  Extracts of the Balance Sheet and Profit and Loss Account are required for registration each year after being audited by the ‘Commissaire’ and approved by the Annual General Meeting.

·       5% of the Company’s net profits must be paid into a legal reserve until the reserve reaches 10% of the issued capital.

·       An Annual General Meeting of shareholders must be held in Luxembourg to approve the Company’s accounts and give discharge to the directors and auditor.  The time, day and place of the meeting are specified in the statutes of the Company.  If all the shares are registered, the meeting can be convened by registered letter containing the agenda of the meeting, otherwise, notice must be published in the Memorial and a Luxembourg Journal at eight day intervals, the second notice appearing not less than eight days before the meeting.

·       A Holding Company must produce quarterly tax d’abonneent returns.

·       A normal Company with SOPARFI provisions must produce annual (calendar year end) corporation tax returns.

 

A minimum of three directors are required who may be corporate or individual. Details of the directors appear on the public file so anonymity may only be retained by appointing third party professionals to the Board.

 

A minimum of two shareholders are required. Details of the shareholders appear on the public file but bearer shares are allowed. However, if bearer shares are to be issued then the full amount of the authorised capital must be paid up on incorporation so if anonymity is required it is often preferable to use nominee shareholders.