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The creativity of the Luxembourg financial economy: "Luxembourg Private foundation"

By Serge Ejzenberg
Posted Oct. 28, 2013


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Luxembourg is well-known and has first class companies to sustain its worldwide reputation in developing and providing first class services to "Its 4 pillars of the financial economy": Asset Management – Investment Funds – Wealth Management – Insurance and reassurances practices.

Private banking and wealth management markets show an increase of 8% in 2013. A new trend the multi-level asset management from the entrepreneurs will continue to growth and tackle Switzerland. This will be part of a global structuration of the offerings and expertise in the Luxembourgish bank.

In this idea the government and the chamber have crafted a new tool for the private asset: “La foundation patrimonial”. The project is under negotiation since July 22nd .

This project will be a second opportunity for the private banking. Other products and solutions will attract client willing to manage their assets in a safer way. On the worldwide basis a new demand from high net worth individuals and families to protect their wealth and more specifically ensure that their heritage will not disappear due to heritage dispute. The objective of this new law will aim to target riche entrepreneurs searching to unify their assets and ensure the continuity of the enterprise after the decease of the founder.

This new tool will create new employments in banks, lawyer offices and fiduciaries.

Key characteristics of a Luxembourg private foundation:

 

It will be a legal entity separate from its founders and beneficiaries. The main difference with joint stock companies is that the private foundation is an orphan structure, deprived of shareholders or members. This is a key differentiation with important consideration. While the share or interest in Luxembourg companies remain in the estate of the deceased person, the capital contributions of the private foundation are going out of the estate of the founder during his live

 

How to incorporate?

Only individuals and private wealth entities are the only person authorized to create a private foundation. A notary has to set first the foundation. The minimum capital is 50 000€ and can be paid up in cash or in kind.

Foundations despite the absence of business activity have to be registered in Luxembourg and are also required to draw up financial statements but are except from any filing and publication requirements.

Due to the absence of shareholders, no general meeting can be organized. The functioning of the Luxembourg private foundation will be that the rules governing the amendment of the bylaws, the approval of the accounts, etc… differs from the one governing Luxembourg companies.

Private foundations as opposite to ordinary foundations are not supervised by the Ministry of Justice. Private foundations are and remain tools for the private wealth management and estate. Charitable or non-profit making sector should remain ancillary.

Also private foundations with no dedicated premises should be domiciled with a domiciliary company.

 

Certificates


The private foundation can issue certificates to designated beneficiaries (private wealth entities or designated individuals). The certificates represent a division of ownership rights of these assets. Key important: the foundation remains the legal owner, but the owner of the certificate is entitled to receive income. In the case of certificates are granted in relation to shares, the holder of certificates has the right to exercise voting rights and to receive dividends.

The foundation is not entitled to dispose of assets in relation to which it issued certificates.

 

Tax aspects

The current draft of the law adds the private foundation to the list of vehicles liable to corporate income tax. The private foundation is a fully taxable Luxembourg Company, but with specific treatment of incomes subjects to tax treatment.

The draft law offers to the private foundation wide Corporate Income Tax. Here are the following:

  • Income from movable assets
  • Capital gains realized upon the sale of assets generating from movable assets
  • Long term capital gains on movable assets
  • Capital and surrender value in case of life, death, invalidity insurance.

As a counterpart the related losses are not tax deductible

In case of transfer of assets from the foundation to the beneficiary, the beneficiary is deemed to acquire them at the cost booked by the foundation

The foundation will be exempt from Municipal Business Tax and the Net Wealth Tax

 

Distribution

Any amount paid by the private foundation to its beneficiaries qualifies as miscellaneous income; these payments will not trigger any withholding tax.

Furthermore, non-residents are not taxable in Luxembourg by reason if income derived from a Luxembourg private foundation.

Fixed registration duty upon incorporation; the 75€ fixed registration duty also applies to real estate allocated to the foundation.

In case of transfer of assets while the founder is still alive, is regarded as a direct gift from the founder and subject to general Luxembourg.

A similar principle applies in case of dissolution of the foundation, with the exception; in this case, the duty is due by the beneficiary.

In case of founder’s death; if the founder was resident in Luxembourg, the total assets held by the foundation will be subject to an inheritance duty. Such duty applies on the fair market of the value of the assets decreased by the liabilities to the assets at a rate of:

  • 0% if the assets received by beneficiaries who would be:
    • The founder’s spouse
    • The founder’s registered partners provided they have been married or partner for more than 3 years
    • A direct ascendant or descendant of the founder
  • 12% of the share assets received be beneficiaries who would be the founder’s brothers, sisters, uncles, aunts, nephew, adopted or adoptants and their descendants,… or the founder’s mother in law, father-in-law, son, or daughter-in-law if the founder and its spouse do not have common descendants
  • 40% in any other case.

If the founder was not a resident in Luxembourg, the same rates will apply under the same conditions to the fair market value of real estate assets located in Luxemburg held by the foundation, decreased by the liabilities related to these assets.

 

“Step-up” concept for individuals

Individuals selling shares are as a matter of principle taxable on the capital gains computed on the basis of the difference between the sale price and the acquisition. The draft law introduces a beneficial provision for individuals that become Luxembourg resident. This provision is a general rule that applies to capital gains on shares regardless of the use of a private foundation.

These are able to compute capital gain on their substantial shareholdings on the difference between the sale price and the value of the share at the time of the transfer of residency. This provision aims at avoiding double taxation of individuals that would have been subject to an exit tax in their home country when transferring their residence to Luxembourg.

 

The end of Société de Gestion de Patrimoine Familial (SPF) ?

The new Foundation Patrimoniale, will provide a new vehicle with broader purpose and diffracts mechanisms, from both a legal or tax perspective.

The mechanism of transfer of assets to the foundation and subsequently to the beneficiaries are tailor made mechanism for estate planning.


The law is project to be accepted by this year end by the Luxembourg Parliament.

 


Article by Serge EJZENBERG, President, – Cercle Alexis de Tocqueville.

 
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The creativity of the Luxembourg financial economy: "Luxembourg Private foundation"



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