08/05/2014 /

Summary of Luxembourg companies

Luxembourg has become one of the most important investment domiciles in the world. Its strong commitment to a strong regulatory framework, leading edge legislation and a large pool of highly trained staff make it a jurisdiction of choice for those structuring private equity, venture capital and real estate investments whether through subsidiaries or regulated funds.

Luxembourg has become one of the most important investment domiciles in the world. Its strong commitment to a strong regulatory framework, leading edge legislation and a large pool of highly trained staff make it a jurisdiction of choice for those structuring private equity, venture capital and real estate investments whether through subsidiaries or regulated funds.

Luxembourg Limited Partnership (LP)

  • Inspired by the Anglo-Saxon LP model and primarily targeted at private equity and real estate investors. There is a choice between the CLP, similar to a Scottish LP and the SLP, similar to an English LP.
  • A CLP is defined as a partnership with a legal personality established by contract, for a limited or unlimited duration, between one or more general partners with unlimited and joint and several liability for all obligations of the partnership, and one or more limited partners with limited liability. Limited partners commit to contributing a certain amount, constituting partnership interests, which may be in the form of a security instrument, in accordance with the provisions of the limited partnership agreement.
  • A CLP/SLP is set up under the form of a LPA between one or more GPs and one or more LPs. Therefore, it may be set up with only two partners.
  • The partnership agreement will lay down the rules applicable to the CLP. A notarial deed is not required. Only limited excerpts of the LP agreement need to be published. There is no requirement to publish the names of the limited partners which remains confidential.
  • In an SLP the principle of ring-fencing is applicable. According to this, a personal creditor of a partner cannot have a direct claim right against the assets of the SLP and a creditor of the SLP cannot have a direct claim right against the assets of the limited partners. A key benefit of these creditor provisions is that distributions cannot be clawed back and therefore there is no need to contribute by way of loans as in an English LP.
  • Contributions can be made in kind, in cash or in industry.
  • Despite the absence of legal personality, the SLP has a legal domicile; registration of assets contributed to the SLP is held in the name of the SLP.
  • Both the CLP and SLP offer a high degree of confidentiality, free organisation of Partnership interests and return of capital, rapid set-up and a high level of contractual freedom.
  • Full direct tax transparency and neutrality is available to the CLP and SLP and there is no taxation of capital gains realised upon sale of shares/units in an alternative investment fund both subject to certain conditions. Carried interest is taxed as extraordinary income at a quarter of the global tax rate (around 12%).
  • Both the CLP and SLP must prepare accounts for investors where this is required by specific laws or as stated in the LPA. Luxembourg GAAP, IFRS or “other” GAAP will be the most commonly used accounting frameworks in the preparation of accounts of regulated and unregulated CLP and SLP.
  • Unregulated SLP have considerably fewer obligations as to the preparation, filing, registration and publication of annual accounts.
  • Both Investment Company in Risk Capital (SICAR) and Specialised Investment Funds (SIF) may adopt the form of a CLP or SLP.

SOPARFI

  • Luxembourg adopted the EU Parent-Subsidiary Directive into its law in 1990 which applies to fully taxable resident companies. A new regime was introduced, known as the société de participations financières, or Soparfi for short.
  • A Soparfi is not a special type of company but an ordinary commercial entity governed by the Law on commercial companies. It does not enjoy any special tax regime and is fully taxable.
  • A Soparfi in Luxembourg is formed primarily for the acquisition of financial investments in all types of companies within or outside Luxembourg as well as for the management and realisation of these investments. In addition, a Soparfi may simultaneously carry on industrial and commercial activities as its primary or secondary activity.
  • A Soparfi can significantly reduce its tax burden by limiting its activity to holding investments and structuring these so that it can benefit from the rules in the EU Directive on the tax regime applicable to Parent-Subsidiary companies. This regime notably allows, subject to well-defined conditions, a tax exemption on dividends paid by companies in which the parent company has a holding and on capital gains on the sale of its holdings.
  • In the case where a SOPARFI is liquidated, the distribution of the liquidation proceeds are free from withholding tax, irrespective of the recipient's tax status.
  • By contrast, all commercial activity undertaken by a Soparfi is subject to corporate income tax and VAT. Since the Soparfi is liable to tax like any other commercial company, it benefits from the very large number of double tax treaties agreed by Luxembourg.
  • These characteristics make the Soparfi an interesting vehicle for managing holdings in a group of businesses. It is also the preferred vehicle for financing and holding venture capital, private equity and real estate investments.

Family Wealth Management Company (SPF)

  • Individuals can benefit from organising part of their patrimony in a structure with a distinct legal personality, the SPF. The SPF is defined as a company that is set up under one of a number of legal forms which are exclusively held by eligible investors, whose purpose is limited to the acquisition, holding, management and disposal of financial assets excluding any type of commercial activity and the bylaws of which make a specific reference to the SPF law.
  • It offers a simple, flexible wealth management vehicle that conforms with EU regulatory requirements. Possible uses include succession planning, the organisation of management powers within a family business, speculative operations or borrowing.
  • An SPF must take the form of a capital company. Its share capital will depend on the legal form chosen.
  • The shareholders of an SPF must be individuals managing their own private wealth or else structures acting on behalf of eligible individuals. No family relationship is required between the different shareholders.
  • The SPF is a passive investment vehicle, strictly limited to the acquisition, holding and sale of financial assets. No commercial activity is possible, nor involvement in the management of a company in which the SPF has a shareholding possible.
  • SPFs are exempt from corporate income tax, communal business tax and net wealth tax. SPFs cannot take advantage of double tax treaties.

Securitisation

  • Securitisation facilitates the financing of a company or the management of personal or family wealth. This is achieved by selling securities to investors comprising predictable cash flows arising from an underlying portfolio of inter alia shares, loans, subordinated or non-subordinated bonds, risks linked to commercial and other debt, movable and immovable property, revenues or activities generated by institutions or individuals.
  • Securitisation provides an alternative to bank loans or the issue of new shares, allows non-liquid assets to be converted into cash, can diversify the source of and cut the cost of financing or simply transfer risks to external investors.
  • Under Luxembourg law, a securitisation vehicle can be constituted either as a company or a fund. As a company it can take the form of a public limited company, a joint stock company, a private limited company or a cooperative with limited liability. It can create one or several compartments corresponding to a distinct part of its holding.
  • A securitisation fund has no legal personality and must be managed by a management company, which itself has to be a commercial company. It is formed from one or several joint ownership organisations or one or several an FCP.
  • In case the securitisation is formed of one or several fiduciary estates, the fund is under a co-ownership regime and is governed by trust and fiduciary contract legislation.
  • Securitisation vehicles are tax neutral. Securitisation funds are treated as investment funds and the investors are taxed according to the rules in force in their country of residence. These funds are exempt from tax, but cannot benefit from double tax treaties agreed by Luxembourg.
  • Securitisation companies are fully taxable, but payments carried out on behalf of the investors are fully tax deductible. Additionally, securitisation companies can benefit from EU directives and double tax treaties.
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