LUXEMBOURG
WHY RUSSIAN INVESTORS USE LUXEMBOURG INVESTMENT VEHICLES
Times are changing and the use of offshore jurisdictions is becoming more risky. The tax authorities of many countries look very suspiciously at offshore companies. To invest in businesses, real estate or the stock market in a tax efficient manner it is important to consider the jurisdiction in which the investment vehicle is based. Control and supervision by a financial supervisory authority is the passport to a quiet life.
Why Luxembourg
Luxembourg has a strategic location in Europe with a high standard of living.
Depending on which investment vehicle you choose they are supervised to a greater or lesser extent by the financial supervisory commission (CSSF)
A qualified multilingual workforce is available, speaking Russian, English, French, German and other languages and there is political and social stability.
It has favourable tax treaty agreements with 57 countries including Russia.
It has very competitive company taxation at 28.59% which is made up of a corporate tax of 21.00% plus an unemployment surcharge of 0.84% and a municipal business tax of 6.75% (for Luxembourg City). Companies are also subject to a wealth tax of 0.5% of net assets. However, most investment vehicles are either exempt from such taxes or the tax base is reduced to zero by certain exemptions so that no tax is payable. (But check out the latest news on proposed tax changes)
There are no withholding taxes on dividends, paid to EU or double tax treaty resident companies including Russia, otherwise 15% and there are no withholding taxes on interest and royalties.
It has the lowest VAT rate in Europe at 15% which is especially interesting to web based businesses
It has very competitive personal tax rates up to a maximum of 38.95% and there is no wealth tax on individuals. There is also no inheritance tax between spouses and children. An individual need not declare what assets they have, only the income they earn except interest on Luxembourg bank accounts as there is a tax at source of 10% which is final.
It has very low social security rates of 12% for employees and 13% for employers
The types of Investment Structures available in Luxembourg
There are various uses of Luxembourg companies for investment purposes. In this article we will cover the SOPARFI and in later articles we will explain the use, advantages and taxation rules concerning the other vehicles mentioned below:
SOPARFI (Investment Holding Company)
SPF (Private Portfolio Management Company)
ROYCO (Royalty Company)
FINCO (Financing Company)
PROPCO (Company owning Real Estate)
BRANCH (Branch of Non-Resident Company)
SHIPCO (Shipping Company)
SIF (Specialised Investment Fund)
SICAR (Investment Company in Risk Capital)
SV (Securitisation Vehicle)
You will find detailed structure charts in our brochure which you can download from our HOME page
Taxation of Luxembourg Companies in General
RESIDENT COMPANIES
Resident companies are subject to tax on their worldwide profits with special exemptions for dividends, capital gains and royalty income.
RESIDENCE DEFINITION
For tax purposes, a resident company is defined as:
• a company incorporated and has its registered office in Luxembourg; or
• a company which is managed and controlled in Luxembourg.
TAX YEAR
The normal tax year runs from 1 January to 31 December.
DIVIDEND WITHHOLDING TAX
Dividends distributed by a Luxembourg company are free of withholding tax if the recipient company is:
• another fully taxable resident company; or
• a company resident in the European Union and listed in Art.2 of the Parent Subsidiary Directive, for example Cyprus and Malta; or
a company resident in a country with which Luxembourg has a double tax treaty such as Russia
• a Luxembourg permanent establishment of a company resident in a country with which Luxembourg has a double tax treaty, for example a Russian company having a branch in Luxembourg.
Dividends distributed to offshore companies, trusts and individuals are subject to a withholding tax of 15%.
INTEREST WITHHOLDING TAX
Interest paid by a Luxembourg company is not subject to withholding tax if paid to:
• a foreign company in any country including offshore tax havens; or
• a person not resident in a European Community country.
Interest paid by a Luxembourg bank to a private individual resident in Luxembourg is subject to a tax at source and final taxation of 10% and to a private individual resident in a European Community country is subject to a withholding tax of 20% (35% from 2011).
ROYALTY WITHHOLDING TAX
There is no withholding tax on royalties paid by a Luxembourg company except payments to artists and sportsmen for performances exercised in Luxembourg.
DIVIDEND AND CAPITAL GAIN EXEMPTION
Dividends Received and Capital Gains are tax exempt where a Luxembourg company, partnership, branch or permanent establishment of a company resident in a European Union country, or resident in a country with which Luxembourg has a double tax treaty, owns a qualifying participation in a subsidiary.
A qualifying participation for DIVIDEND EXEMPTION is:
A participation which costs at least €1.2 million, or which represents 10% or more of the share capital in a subsidiary held, or which is intended to be held, for an uninterrupted period of at least 12 months.
A qualifying participation for CAPITAL GAINS EXEMPTION is:
A participation which costs at least €6 million, or which represents 10% or more of the share capital in a subsidiary held, or which is intended to be held, for an uninterrupted period of at least 12 months.
The subsidiary must be a company resident in the European Community, or resident in a country with which Luxembourg has a double tax treaty or be subject to a corporate tax rate of at least half the Luxembourg rate (i.e. 10.5%).
SOPARFI
A SOPARFI is a fully taxable parent company whose primary activity is to hold shares in any other company in the world.
It can also trade, perform a commercial activity, borrow and lend money and hold licences and collect royalty income.
Its minimum share capital is either €31,000 or €12,400 depending on its corporate form.
The shareholders can be companies or individuals resident anywhere.
A debt:equity ratio of 15:85 is normally applicable but a ratio of 1:99 can be achieved
The SOPARFI is subject to company tax at 28.59%, and wealth taxes of 0.5% of net assets and as such is protected by double tax treaties and European Directives. However, qualifying shareholdings and related debt are excluded from wealth tax and dividends and capital gains received by a SOPARFI are tax exempt if received from companies that fall under the participation exemption.
Royalty income and interest income can be subject to special tax treatment.
Dividend, interest and royalty income received are exempt from withholding tax if received from European Union registered companies or subject to withholding taxes at source at reduced rates in accordance with the applicable double tax treaties. The Russia /Luxembourg double tax treaty signed in 1993 foresees that a 10% withholding tax is due in Russia on dividends paid to a SOPARFI if the SOPARFI holds directly at least 30% of the capital of the company paying the dividends and the price of acquisition of the holding is at least €75,000 or its equivalent amount in the national currencies. Otherwise the withholding is 15%.
Dividends paid to a European Union registered company or company registered in a double tax treaty country such as Russia are not subject to withholding tax. Individual shareholders or non-EU registered companies are subject to 15% or the reduced double tax treaty rate of withholding tax.
Interest or royalties paid to a Russian company are not subject to withholding tax.
We can help you create the structure which best suits your situation and we can provide you with the whole administration service to follow - contact us to find out more.