The Luxembourg Private Foundation
New innovative tools to attract entrepreneurs and high net wealth individuals in Luxembourg
With the bill of law 6595 submitted to the Parliament on 22 July 2013 (the “Bill”), an important initiative has been taken by the Luxembourg government with the view to contribute to the development of “private banking” activities in Luxembourg. Indeed, once adopted by the Parliament, the Bill should allow entrepreneurs and high net wealth individuals to benefit from new innovative, flexible and modern tools in the management and the transmission of their assets and businesses.
More precisely, the Bill introduces the Luxembourg private foundation regime (“fondation patrimoniale”), a new wealth management vehicle inspired by comparable vehicles existing in other countries such as Germany, Austria, Switzerland, Belgium or the Netherlands. Very interestingly, it differentiates itself from other regimes by providing a step-up in basis for income tax purposes for individuals deciding to relocate their tax residence to Luxembourg.
The private foundation
The introduction of the private foundation aims at broadening the range of investment vehicles at the disposal of entrepreneurs and high net wealth individuals in Luxembourg. The new vehicle is expected to be a suitable solution to secure private or business assets, to separate economic ownership from decision-making authority, or to protect private sphere.
The private foundation has its own legal personality. However, since it has no shareholders nor members it is said to be an “orphan entity”.
A high level of confidentiality is guaranteed since the founder, beneficiaries and amounts contributed to the private foundation do not have to be disclosed to the public (even if the creation of a private foundation must be published in the Official Gazette and registererd with the Trade Register). In the same direction, although the private foundation has to prepare annual accounts, it is not required that those are filed with the Luxembourg Trade Register.
More generally, the number of requirements to be met to set up a private foundation has been opportunely reduced to a minimum.
- The use of a private foundation is limited to individuals and patrimonial entities with the objective of managing private wealth.
- It must have a registered office in Luxembourg.
- Similar to all Luxembourg entities, setting up a private foundation requires a notarial deed (signed by a notary established in Luxembourg), an extract of which has to be filed with the Luxembourg Trade Register.
- An initial capital contribution of EUR 50,000 paid in cash or in kind is required.
In this context, the private foundation offers a considerable degree of flexibility both in terms of management and governance. It actually may own movable and immovable properties, tangible and intangible assets or enter into insurance contracts as a subscriber or a beneficiary. It may also create other public or private foundations or trusts or be the beneficiary of such vehicles. It is authorized to carry out holding activities, but only provided that no managerial decisions are taken in relation to the entities held. On the top of that, the private foundation may issue certificates to its beneficiaries relating to assets owned by the private foundation and entitling them to certain rights as defined in the private foundation agreement or in the issuance document of the certificates.
As far as the management of the private foundation is concerned, the latter has to be governed by one or several directors. The presence of a supervisory board is in principle optional unless the private foundation has more than five beneficiaries or its assets exceed EUR 20m, in which cases it becomes mandatory. Resolutions by the private foundation’s management and supervisory body (if any) are approved by simple majority without any quorum being required (unless otherwise provided).
Finally, the appointment of a registered auditor (“réviseur d’entreprise agrée”) is optional unless the private foundation has more than five beneficiaries or its assets exceed EUR 20m, in which cases it becomes mandatory.
The tax treatment applicable to private foundation appears to be particularly attractive, all the more in the current environment.
At the level of the vehicle itself it shall be noticed that whereas the private foundation is subject to income tax at the standard corporate income tax rate, it benefits from an exemption for investment income including dividends, profit sharing and interest payments derived from securities as well as for capital gains realized on the sale of assets generating exempt income. Capital gains realized on the transfer of assets made in favor of beneficiaries, certificate holders or founders (or their successors) are also exempt from direct taxation. Finally, the private foundation is also exempt from net wealth tax.
Income distributions made by the private foundation to non-resident beneficiaries are not subject to withholding taxes. In the specific case of a payment in kind to a beneficiary or the founder, the transfer is income tax-neutral. Finally, when the founder dies, the transfer of the assets to the beneficiaries is only subject to registration duty if the deceased founder was a Luxembourg resident or, in case of a non-resident founder, if a Luxembourg real estate is transferred. As far as Luxembourg residents are concerned, the private foundation still constitutes an attractive inheritance vehicle, as the exemptions to the specific registration duty are broader than those provided under inheritance law. Irrespective of the residence of the founder for tax purposes, applicable inheritance tax rate varies from 0% to 12% or 40% depending on the family relationship between the founder and the beneficiary.
Step-up in basis for individuals relocating their tax residence to Luxembourg
The Bill also introduces a step-up in basis for individuals who become Luxembourg residents. This important legal innovation is not exclusive to private foundations, but rather applies to any situation where the taxpayer decides to relocate his tax residence to Luxembourg. Such mechanism is already applied in the context of corporations by which unrealized capital gains accrued in foreign jurisdictions are not considered in Luxembourg (provided that certain conditions are met) when computing the taxable basis of an asset at disposal.
Similarly, in the context of the new step-up in basis scheme, the individual’s qualifying assets are valued at their fair market value at the date of the relocation of his tax residence to Luxembourg. This value will be considered as the acquisition price of the assets considered for the calculation of any future capital gain. The acquisition date of such assets remains the same. However, this preferential regime only applies to substantial shareholdings within the meaning of article 100 of the Luxembourg income tax law (i.e. more than 10% of the share capital of the collective entity) and to convertible loans where the taxpayer holds a substantial shareholding in the issuer of the loan.
This new mechanism is therefore expected to be a competitive advantage to attract to Luxembourg entrepreneurs and high net wealth individuals carrying unrealized capital gains even though the tax treatment applicable in the former country of residence shall also be considered.
As a conclusion one can say that whereas the Bill may still be amended before it becomes law, it clearly demonstrates Luxembourg's commitment to increase its attractiveness for individuals considering relocating their tax residence to Luxembourg, and more generally, in proposing efficient and adaptable solutions such as the new private foundation regime. All of these should positively contribute to position Luxembourg as a strong center of excellence when it comes to managing and administrating private wealth.
With these new modern and innovative tools, Luxembourg should be very well placed to acquire a highly strategic position facing the international competition, and being an open gate to wealth creation and wealth management for both entrepreneurs and high net wealth individuals. In particular, it should now be able to compete successfully with other European countries where comparable vehicles such as the Luxembourg private foundation already exist.
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The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.