Articles

The Luxembourg private foundation – a new tool for private wealth planning

The Luxembourg private foundation – a new tool for private wealth planning

The Luxembourg private foundation – a new tool for private wealth planning

10.10.2013 LU law

Over the last few years, the Luxembourg legislator has made considerable efforts to endow its financial place with a range of legal tools that would fulfill the legitimate needs of both private clients and professional asset managers. In order to strengthen Luxembourg’s position as a European center for wealth management, the bill No. 6595 now proposes to introduce a new structure, the private foundation (“fondation patrimoniale”), meant to facilitate patrimonial structuring and succession planning.

There are many reasons for which natural persons and wealthy families could use the private foundation:

  • to ensure the sustainability of the family estate by avoiding the scattering of assets in the event of death of a family member and therefore preserving and valuing the estate of the family on the long term;
  • to dissociate the economic ownership of the family estate from the management of the family business. This may be of use when the founder of the private foundation has no inheritors or inheritors which are unable or not willing to manage the family business / wealth;
  • to limit the visibility of the family estate and preserve the privacy and safety of the family members; and/or
  • to affect the family estate to a specific purpose related to the family such as ensuring the satisfaction of the financial needs of a child.

In addition to the new private foundation itself, the bill No. 6595 introduces in Luxembourg tax law an asset step-up in value mechanism for individuals transferring their residence to Luxembourg1 . This principle should facilitate the relocation of individuals to Luxembourg mitigating any risk of double taxation in the new Luxembourg residence State.

1. The legal regime

The new legal regime has been largely based on the provisions of the law of August 10, 1915 on commercial companies, as amended, especially those governing Luxembourg public limited companies, the main difference being however that the private foundation, being by definition an orphan structure, has no shareholder(s). Consequently, the legislator had to achieve equilibrium between the contractual freedom of the founder(s) and the necessity to guarantee the protection of the beneficiaries.

1.1 Incorporation and registration

The private foundation is intended to be a legal structure open only to individuals or patrimonial entities having as object the management and administration of private patrimony to the benefit of one or several beneficiaries (e.g. a trust or a Dutch “stichting administratiekantoor”).

Such vehicle will be incorporated by the means of a special notarial deed necessarily containing information relating to (i) the identity of the founder(s), (ii) the denomination of the foundation, (iii) its duration, (iv) its registered office (must be set in the Grand Duchy of Luxembourg), (v) its object, (vi) the amount of the initial allocation (statutory minimum of EUR 50,000), (vii) the details and powers of the directors, (viii) the details and powers of the members of the supervisory board and (ix) either the details of the beneficiaries of the foundation or criteria allowing to determine such beneficiaries or the details of the corporate bodies or individuals having the right to determine such beneficiaries and the relevant procedure.

The incorporation deed will need to be published in the Luxembourg Official Gazette and subsequent amendments to such deed will have to be filed with the Luxembourg Register of Commerce and Companies. In this respect, it is important to note that although some information on a private foundation will in any case be publicly available, the mechanism of indirect designation of the beneficiaries will allow the identity of the beneficiaries to remain strictly confidential.

Contrary to a trust, the patrimony foundation will acquire a separate legal personality as from the date of the passing of the notarial deed and the contributions in cash or in kind made by the founder(s) shall become the foundation’s own property.

Although the patrimony foundation will be subsequently registered with the Luxembourg Register of Commerce and Companies, it shall keep its civil nature. Such nature will entail a prohibition to engage into any financial asset trading activities.

1.2 Assets and certificates

The patrimony foundation may hold any movable or immovable, tangible or intangible assets (e.g. patents, financial assets, bonds, works of art, cash and precious metals), but also (i) subscribe to or be the beneficiary of insurance contracts, (ii) be the founder or beneficiary of private or public private foundations or trusts and (iii) hold an interest in a company (provided however that it does not interfere in the management of such company).

In a way similar to a Dutch “administratiekantoor”, the private foundation may issue certificates in registered form linked to assets it holds and representing the rights as defined in the incorporation deed or in separate regulations or in the documents relating to the issuance of such certificates to any individual or patrimonial entity acting in the framework of the management of the patrimony of one or several individuals. Such mechanism allows the foundation to keep legal control over an asset in its patrimony while at the same time granting certain economic rights over such asset to the holder of the certificates.

The private foundation will keep a certificates register similar to that of a public limited liability company and it will be possible, according to the terms and conditions of the deed of issuance, to exchange such certificates against part of or all of the underlying assets.

Certificates may only be transferred between the person having received such certificates at the time of the issuance, the founder(s), the beneficiaries and their respective patrimonial entities.

1.3 Management and supervision

The management of the foundation will be entrusted to one or several directors who will be appointed by the founder(s). Directors can be individuals or corporate bodies and a founder or a beneficiary may be appointed as director.

If at a certain point in time, one or several directors need to be replaced, the new member(s) of the board of directors shall, unless the incorporation deed specifies otherwise, be appointed by the founder(s) or chosen amongst a list prepared and executed by the founder(s). In the latter case, their appointment will be effective as from the day of their written acceptance of the mandate. Such a list will enable a founder to influence the appointment of future directors even after his death.

In the absence of any such appointment by the founder(s), new directors will be appointed by the supervisory board (if any). Should the foundation not have a supervisory board, then the new directors will be coopted. Finally, if a cooptation appears to be impossible, then the new directors will be appointed by the competent District Court.

Directors may only be dismissed in accordance with the conditions of the incorporation deed.

Such directors may be placed under the control of a supervisory board (compulsory for private foundations having more than five beneficiaries or a patrimony of more than EUR 20,000,000), composed entirely of natural persons. The founder(s) or the beneficiaries may be appointed as members of the supervisory board as long as they have not already been appointed as directors.

The supervisory board must be composed of at least three members (unless the foundation does not reach any of the two above thresholds) appointed by the founder(s).

Unless the incorporation deed specifies otherwise, resolutions of the directors or of the supervisory board shall be taken at the simple majority of the votes without any quorum requirement.

1.4 Annual accounts and external auditor

The annual accounts of the private foundation will be established according to the simplified rules applicable to Luxembourg financial holding companies (“sociétés de participations financières”). Such annual accounts will not need to be filed with the Luxembourg Register of Commerce and Companies and will not be published.

If the private foundation has more than five beneficiaries or a patrimony of more than EUR 20,000,000, the directors will have to appoint an external auditor (“réviseur d’entreprises agréé”) who will be in charge of the audit of the annual accounts.

1.5 Subsequent amendments of the incorporation deed

Given that by essence, a private foundation is a constantly evolving structure that may last for several decades, it is essential to allow the incorporation deed to be amended.

Such subsequent modifications are governed by the provisions of the incorporation deed and the founder may foresee that he shall have the right to amend essential aspects of the foundation, such as its duration, its object, its beneficiaries, the powers of the directors or the powers of the supervisory board (if any).

In the absence of any specific rights of the founder, the default rule is that the incorporation deed may be amended by the board of directors upon motion by the supervisory board (if any). Such resolution shall be taken at the simple majority of the votes. However, in order to protect the foundation’s patrimony and its beneficiaries, as well as to comply with the founder(s)’ will, certain essential aspects of the foundation (e.g. its object or its duration) may only be amended for serious grounds and if the incorporation deed specifically authorizes the board of directors to do so.

Unless the incorporation deed provides otherwise, the decision to change the nationality of the foundation may only be taken unanimously by the directors upon motion by all the members of the supervisory board.

1.6 Registered office and corporate books

If the foundation does not have its own premises, it will have to establish its registered office at the premises of a domiciliary agent.

The board of directors will have to make sure that the corporate books are at all times available at the registered office. Such information will be available to the founder(s), the director(s) and the member(s) of the supervisory board.

Unless specified otherwise in the incorporation deed, each beneficiary shall also have access to the information directly linked to his rights.

1.7 Identification of the ultimate beneficial owner(s)

In order to comply with the latest requirements of the Financial Action Task Force (FATF) and of the Global Forum on transparency and exchange of information for tax purposes, the Luxembourg legislator requires the director(s) of a private foundation to keep sufficient and up-to-date information on the ultimate beneficial owners of the foundation either at the registered office or at any other place in Luxembourg.

Natural persons benefitting from the foundation will qualify as ultimate beneficial owners but also any natural person whose patrimony is managed by the foundation or whose goods have been contributed to the foundation.

Such information shall be kept during five years from the day of the liquidation of the foundation and will have to provide by the director(s) to the competent Luxembourg authorities upon request.

1.8 Dissolution and liquidation

The decision to dissolve the private foundation and to open the liquidation process will be taken by the board of directors, unless the incorporation deed provides otherwise. The liquidator shall allocate the foundation’s assets in accordance with the provisions of the incorporation deed and the extra-statutory regulations. In the absence of any such provision, the liquidator will look for an allocation as close as possible to the foundation’s object.

2 The Tax Regime

2.1 Direct taxes

The private foundation is subject to Luxembourg income tax at the standard corporate income tax rate.

A tax exemption applies to income derived on investment income such as dividends, profit participating yields and interest from securities. The tax exemption applies to any capital gains realized on the sale of those assets that generate tax exempt income.

Other capital gains realized upon the disposal of movable assets after a minimum holding period of 6 months are tax exempt.

The capital and surplus surrendered on life insurance policies where the private foundation is beneficiary are also tax exempt.

The transfer of the private foundation’s assets in favor of beneficiaries, certificate holders or founders and their heirs is tax neutral as it does not trigger the realization of latent capital gains.

Income and gains not falling in the scope of the tax exemptions, such as income from immovable property, are subject to corporate income tax2.

Distributions, in cash or in kind, by the private foundation to Luxembourg residents are not subject to withholding tax but income tax will be levied on 50% of the said distributions. Distributions, in cash or in kind, to non-Luxembourg residents are not subject to income tax in Luxembourg.  

The Luxembourg private foundation may be structured to accommodate the ordinary asset transfer to beneficiaries (horizontal structuring) or the special securitization with certificates being issued (vertical structuring).  

Alike Luxembourg resident individuals, the private foundations are exempt from Luxembourg net wealth tax.

2.2 Indirect taxes

The asset contributions to the private foundation are not subject to proportional registration duties. The incorporation and subsequent amendments to the incorporation documents are subject to a flat registration duty.

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.

The registration duty rates range from 0% to 40% depending on the family relationship between the founder and the beneficiaries.

The transfers of assets from the private foundation to the beneficiaries during the life-time of the founder are assimilated to donations and are subject to a gift tax according to Luxembourg gift tax rates varying with the family relationship between the founder and the beneficiaries. The same applies upon the private foundation’s liquidation, respectively dissolution. 

 

Private founding

 

3 The Set-up Principle

In addition to the new private foundation itself, the bill introduces in Luxembourg tax law an asset step-up in value mechanism for individuals transferring their residence to Luxembourg3.

This mechanism should facilitate the relocation of individuals to Luxembourg mitigating any risk of double taxation in the new Luxembourg residence State.    

The individual’s assets are valued at their fair market value at the date of the transfer residence to Luxembourg.

This value is deemed the acquisition price of the assets for the calculation of future capital gains.

This preferential regime only applies to substantial shareholdings (i.e. more than 10% of the share capital of the collective entity) and to convertible loans where the individual 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 high net wealth individuals carrying latent capital gains. 

Private foundation

4 Conclusion

In the light of the above analysis, it becomes clear that the Luxembourg legislator intends to promote contractual freedom throughout the new regime while protecting the private interests of the beneficiaries through a few imperative provisions.

Following the enactment of the bill No. 6595, it is likely that such new private foundation will allow Luxembourg to keep ranking amongst the most successful European jurisdictions in terms of private wealth and asset management.

 

Footnotes

  1. The introduction of the asset step-up value principle for individuals transferring their residence to Luxembourg will be consistent with the Luxembourg tax treatment of companies migrating to Luxembourg where the asset step-up approach already applies in the Luxembourg opening tax balance sheet. 
  2. It is anticipated that, subject to case by case analysis, it will be possible to mitigate such income tax exposure with an appropriate structuring
  3. The introduction of the asset step-up value principle for individuals transferring their residence to Luxembourg will be consistent with the Luxembourg tax treatment of companies migrating to Luxembourg where the asset step-up approach already applies in the Luxembourg opening tax balance sheet. 

 

All rights reserved. Care has been taken to ensure that the content of this e-bulletin is as accurate as possible. However the accuracy and completeness of the information in this e-bulletin, largely based upon third party sources, cannot be guaranteed. The materials contained in this e-bulletin have been prepared and provided by Stibbe for information purposes only. They do not constitute legal or other professional advice and readers should not act upon the information contained in this e-bulletin without consulting legal counsel. Consultation of this e-bulletin will not create an attorney-client relationship between Stibbe and the reader. The e-bulletin may be used only for personal use and all other uses are prohibited.

Team

Related news

25.04.2018 EU law
25 April 2018: Stibbe sponsors LPEA Insights conference in Luxembourg on 'Building the Real Economy'

Conference - LPEA, Luxembourg Private Equity and Venture Capital Association, organises a conference in Luxembourg, which brings on stage General Partners (GPs) and Limited Partners (LPs) to discuss and showcase the private equity sector from the perspective of local practitioners, together with additional contributions from guest speakers specially invited to the event. Stibbe Luxembourg is a proud sponsor of this event, which some of our lawyers will attend.  

Read more

05.03.2018 EU law
8 & 9 March 2018: Jan Bogaert speaks on shareholder activism

Conference - The International Bar Association organizes the 3rd IBA Asia-based International Financial Law Conference. The conference attracts  industry leaders, regulators, in-house counsels (including Alibaba, Ant Financial, Tencent, CICC etc) and leading practitioners from across Asia, Europe and the US.

Read more

28.03.2018 BE law
Belgian VAT: Government reactivates option to tax immovable property leasing to professionals

Articles - We reported before [1] on the consensus of the Belgian Federal Government to introduce an option to make the leasing of immovable property between professionals subject to VAT. This initiative was aborted due to budgetary constraints, but the Government has now agreed to reactivate it: this option to tax will be introduced as of 1 October 2018.

Read more

27.02.2018 NL law
Further guidance on Dutch ATAD implementation and measures against letterbox companies

Short Reads - Further to the policy plans published by the Dutch government in October 2017, the Dutch State Secretary of Finance published on February 23, 2018 a Letter (the "Letter") containing further details on certain aspects of the Dutch government's two way approach of enhancing the investment climate in the Netherlands.

Read more

Our website uses cookies: third party analytics cookies to best adapt our website to your needs & cookies to enable social media functionalities. For more information on the use of cookies, please check our Privacy and Cookie Policy. Please note that you can change your cookie opt-ins at any time via your browser settings.

Privacy – en cookieverklaring