CIS Legal Update - May 2013: Luxembourg Holding Companies and Other Structures

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With the continuing banking crisis in Cyprus, it is not surprising that other jurisdictions with legislation conducive to holding structures are receiving increased attention. Luxembourg, for example, is known for having a world class financial sector with a leading regulated investment funds platform. As such, a growing number of investment funds are being formed under the supervision of the Luxembourg regulator, the Commission de Surveillance du Secteur Financier (the “CSSF”).

However, it is less well-known that Luxembourg is also a platform for unregulated investment structures, i.e., structures that are not subject to the CSSF’s supervision. These structures normally consist of financial participation companies (sociétés de participation financière or SOPARFI) or of family private asset management companies (sociétés de gestion de patrimoine familial or SPF).

  • A SOPARFI is frequently used in venture capital and private equity transactions for the financing and holding of investments. A SOPARFI is an ordinary and fully taxable commercial company governed by the law of 10 August 1915 on commercial companies (as amended) and it can be incorporated in various corporate forms. There is a lot of flexibility in terms of its corporate objective. Moreover, a SOPARFI can also benefit from double taxation treaties as well as from the EU parent-subsidiary directive exemptions.
  • The SPF was introduced by a law of 11 May 2007 that created the framework for natural persons or limited types of private asset management entities (such as trusts or private foundations) to set up an SPF for the management of private wealth. The corporate objective of an SPF is limited to the acquisition, holding, management and realization of financial assets. It may not engage in commercial activity and may only hold a participation in another company if it is not involved in the management of that company. An SPF may not directly acquire real estate or grant interest-bearing loans. An SPF is, in principle, exempt from Luxembourg corporate income tax, municipal business tax and net worth tax, provided that it has not derived for the financial year 5% or more of its total dividend income from non-resident and unlisted companies that are not subject to a tax comparable to the Luxembourg corporate income tax. An annual subscription tax (taxe d’abonnement) of 0.25% is payable by an SPF with a minimum of EUR 100 and a maximum of EUR 125,000 per year. An SPF does not enjoy the benefits of a double taxation treaty; however, dividend distributions by a SPF are not subject to the Luxembourg withholding tax.

Typically an SOPARFI or SPF is incorporated as a public limited company (société anonyme or SA) or as a private limited liability company (société à responsabilité limitée or SARL).

The Public Limited Company (SA)
  • Share capital: the minimum required share capital for an SA is EUR 31,000 or its equivalent in another currency, of which at least 25% must be paid at the time of incorporation.
  • Director(s): an SA is managed by a board of directors composed of at least three members if it has multiple shareholders and of at least one member if it has been incorporated by a single shareholder. Luxembourg company law does not impose residency or nationality requirements for directors. However, there should not be a majority of directors residing in any country that adopts a “management and control” test for tax residency purposes and a majority. Furthermore, the majority of directors might be required to be Luxembourg residents for tax reasons, depending on the structuring of the company. There is no specific legal requirement for board meetings to be held physically in Luxembourg or as to the frequency of board meetings, although it is recommended, among other reasons from a tax perspective, to hold board meetings in Luxembourg regularly. Board decisions by unanimous written consent are permitted.
  • Shareholder(s): all the shares (actions) of an SA may be held by a sole shareholder. There is no maximum number of shareholders. Shares can be issued in registered form or as bearer shares. Registered shareholdings are registered in a register of shareholders kept at the registered office of the company. In the case of bearer shares, the shares are deemed to be owned by whoever holds the physical stock certificate. Bearer shares are not recorded in a share register. In both cases, the names of the shareholders are not disclosed on the excerpt from the Luxembourg Trade Register. Shares are, in principle, freely transferable between shareholders.
  • Annual accounts and tax returns: an SA must prepare annual accounts, which are filed with the Luxembourg trade register after approval by the shareholders. The SA must also appoint a statutory auditor or an external auditor, and prepare and file annual tax returns.
The Private Limited Liability Company (SARL)
  • Share capital: the minimum required share capital for a SARL is EUR 12,400 or its equivalent in another currency. Shares must be fully paid up-front.
  • Manager(s): the SARL requires a minimum of one manager. Apart from that, the management of the SARL will be similar to the management of the SA as set out above.
  • Shareholder(s): all the shares (parts sociales) of a SARL may be held by a sole shareholder. The number of shareholders is limited to 40. Shares can only be issued in registered form. Shareholdings are registered in a register of the shareholders kept at the registered office of the company and the names of the shareholders are visible on the excerpt from the Luxembourg Trade Register. Shares are, in principle, freely transferable between shareholders. However, transfers to non-shareholders are subject to the approval of existing shareholders representing at least three-quarters of the corporate capital of the SARL.
  • Annual accounts and tax returns: a SARL must prepare annual accounts, which are to be approved by the shareholders and then filed with the Luxembourg trade register. There is no legal requirement for the annual accounts of a SARL to be audited or otherwise reviewed by a statutory or external auditor except if there are more than 25 shareholders. The SARL must also prepare and file annual tax returns.
Double Taxation Treaties

Luxembourg has established a broad network of double taxation treaties. A total of 64 treaties are currently in force, including one with the Russian Federation, and more than 30 additional treaties are currently being negotiated.

Investment and Economic Relations between Luxembourg and the Russian Federation

On 9 February 1989, the governments of the Grand Duchy of Luxembourg, the Kingdom of Belgium and the Union of Soviet Socialist Republics signed an agreement for the encouragement and mutual protection of investments. This agreement has been in effect since 18 August 1991.

The development of bilateral economic relations is also facilitated by regular sessions of the Joint Commission on Economic Cooperation between the Russian Federation and the Belgium-Luxembourg Economic Union (the “JCEC Russia-BLEU”). The latest session was held in Moscow in November 2011 and, during that session, it was decided to establish a Russia-Luxembourg subcommittee within the JCEC Russia-BLEU. At a press conference on 28 January 2013, the Russian Foreign Secretary, S.V. Lavrov, indicated that the ninth session of the JCEC Russia-BLEU will be held in Brussels in Fall 2013.

Special Limited Partnership

On 24 August 2012, draft bill no. 6471 (the “Bill”) implementing directive 2011/61/EU of 8 June 2011 on alternative investment fund managers and amending certain Luxembourg laws was submitted to the Luxembourg parliament. The Bill permits companies to be incorporated under the legal form of a special limited partnership (société en commandite spéciale), which is similar to an English limited partnership in that it is established using a limited partnership agreement, does not have a separate legal personality and should be treated as transparent for tax purposes. It is expected that the Bill will be adopted within the next two months, further increasing the number of available Luxembourg structures.

These are some of the many structures in Luxembourg and the foregoing is by no means exhaustive.