ABA Tax Section 2011 Midyear Meeting

-Luxembourg Tax

Environment

Christophe JoosenTax PartnerNautaDutilh Avocats Luxembourg

Office: +352 26 12 29 45Mobile: +352 691 12 29 45Email: christophe.joosen@nautadutilh.com

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Luxembourg Taxes In a Nutshell● High nominal tax rate…

• 28.80%

• Minimum tax on holding/financing companies EUR 1,575

• Basis: stand-alone statutory accounts (prepared according to Luxembourg

GAAP or IFRS) unless tax law provides otherwise.

● …but reduced tax base:

• 100% participation exemption for qualifying capital gains and dividends;

• No CFC legislation;

• 80% exemption for qualifying IP income;

• Capital losses and write-downs tax-deductible;

• Exemption method for foreign branch profits from treaty countries;

• Flexible transfer pricing rules;

• Use of hybrid entities and instruments;

• Tax consolidation;

• Functional currency election possible;

• Flexible and investor friendly ruling regime.

Belgium, Luxembourg, the Netherlands and Switzerland

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Luxembourg Participation Exemption100% of dividends and capital gains exempt from income tax provided that the

following conditions are met:

● Holding requirement:

• For dividends: shares representing 10% or more of the capital (or Euro 1.2

million acquisition value) directly for 12 months (retroactively or prospectively).

• For capital gains: shares representing 10% or more of the capital (or Euro 6

million acquisition value) directly for 12 months (retroactively or prospectively).

● Subject to “equivalent” taxation requirement:

• Deemed met for EU resident companies (listed in Parent Subsidiary

Directive).

• For other subsidiaries, subject to “equivalent” taxation requirement.

- ETR of 10.5% computed under Luxembourg principles

- A number of exceptions apply to the 10.5% taxation requirement (e.g.

qualifying tax holidays, exemption provided under certain tax treaties

without taxation condition, e.g. Swiss treaty)

Belgium, Luxembourg, the Netherlands and Switzerland

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Luxembourg Taxes In a Nutshell● In addition:

� Wide treaty network: 61 in force – 14 in negotiation/ratification

� No capital duty

� 0.5% net worth tax:

� Exemptions (participations, IP, foreign assets)

� Credit against corporate income tax

� Lowest VAT rate (15%) in the EU

� Favorable Expat Regime introduced effective 2011

� Unlimited loss carry-forward

� No stamp dutiesBelgium, Luxembourg, the Netherlands and Switzerland

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Non-tax Drivers

Belgium, Luxembourg, the Netherlands and Switzerland

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● Flexible company law

● Wide network of investment protection agreements with most emerging countries

● Political stability

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Repatriation of Profits

Belgium, Luxembourg, the Netherlands and Switzerland

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● No withholding taxes on interest and royalties

● 15% default rate of dividend WHT reduced to 0% if:

- Paid to qualifying EU/EEA resident companies;

- Paid to qualifying entities in treaty jurisdictions which meet a subject-to-tax

test (e.g. US); or,

- Paid to Luxembourg permanent establishments of qualifying entities in treaty

countries.

→ Various widely used repatriation planning techniques available.

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LUXEMBOURG HOLDING AND FINANCING STRUCTURES

Belgium, Luxembourg, the Netherlands and Switzerland

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Repatriation – Dividend Distributions

LuxembourgCompany

Luxembourg Company

ParentEEA/ EU Company

Directive 90/435/CEEas amended

ParentTax Treaty Country(comparable tax)

• ≥EUR 1.2 Mio• ≥10%

• ≥ 12 months

EEA / EU Company

PELuxembourg

Tax Treaty Country

Company

PELuxembourg

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Luxembourg Holding Company Classics

US

LUX LP

TAX HAVEN

IRL Sect 110 SWISS AUSTRIAHong Kong

TAX HAVEN

CH/US/

Malta

PRC

LUXLoan / IP Sub-license

Loan / IP License

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Luxembourg : Lux1 - Lux2

LUX1

� Luxembourg consolidation:

• Under new proposed tax consolidation regime (caveat NWT – 50 bp cost); or

• PEC between Lux1 and Lux2; or

• RPS between Lux1 and Lux2 (with stock dividend)

� No interest withholding tax

� Taxation limited to spread

Loan

US

LUX2

EUEUEUEU

Subs

Loan

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Double Tier Distressed Debt Structure

Steps

• LuxCos are set up with minimum capital

• LuxCo 1 financed with profit participating instrument

• LuxCo 2 equity financed

Luxembourg tax benefits

• No Luxembourg withholding tax on interest paid or repayments of principal of the debts

• The tax base of LuxCo very limited

• Good arguments for beneficial ownership

• LuxCo 2 benefits from double tax treaties and EC Directives

Considerations

• Implemented for several different types of investments and with different jurisdictions

• Net worth tax and FX can be managed

• Ruling letter

LuxCo 1

Profit Participating

Instrument

Investment portfolio

LuxCo 2

Investors

LP

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Luxembourg Private Equity Classics: Use of Preferred Equity Certificates (“PECs”)

Steps

• LuxCo is set up with minimum capital

• Financing of part of the investments to be acquired by/transferred to LuxCo by PECs (can be straight PECs, Convertible PECs or Tracking PECs)

Luxembourg tax benefits

• PECs/CPECs/TPECs:

- debt from a Luxembourg perspective

- equity from an US tax perspective

• Debt-to-equity ratio of 99/1possible

• No Luxembourg withholding tax on yield paid or redemption of the CPECs above nominal value

• LuxCo benefits from double tax treaties and EC Directives

• Implemented for several different types of equity investments and with different jurisdictions

LuxCo

CPECs(hybrid)

TargetCos

US Investors

FundManagement

Carried Interest

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Luxembourg PE and VC Structuring: Use of Alphabet Stock

Alphabet Stock

Steps

• LuxCo is fully capitalized and issues several classes of shares

Luxembourg tax benefits

• Repatriation of proceeds through redemption of class of shares should qualify as a partial liquidation

• (Partial) liquidations are not subject to Luxembourg withholding tax

TargetCos

Investors

LuxCo

Fund

A B C D E

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Steps

• FCo grants an interest-free loan (IFL) to LuxCo

• With the funds received, LuxCo grants an interest-bearing loan to FCo2 (e.g. USCo)

Tax Benefits

• LuxCo has beneficial ownership over interestincome (from legal and accounting perspective)

• LuxCo entitled to an imputed interest deduction on the IFL

• The spread to be realized depends on the amount of the financing activity and the level of risk of LuxCo (e.g. 0.25% or lower)

• Spread is taxable at a rate of 28.59% in Luxembourg

* From a Luxembourg tax perspective, FCo can be Irish, Barbados, Cayman, etc.

Financing with interest-free loan

FCo2LuxCo

Blocker

FCo*

US

IFL IBL

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RH holdco

Luxembourg Financing Structures

Overview:

• Hybrid loan: Lux hold/fin grants hybrid loan(s) to its subsidiaries

• Branch structures: Lux hold/fin allocates its receivable towards group companies to a finance branch

• Belgian Finco with notional i-deduction

Potential benefits:

• Hybrids allow for a deduction of interest expenses at the level of operating entities/subsidiaries, and exemption of the corresponding receipt in Luxembourg (ETR 1.5% or lower)

• Setting up a finance branch allows for deduction of interest expense at the level of operating entities/subsidiaries and limited/no corresponding taxation at the level of the branch nor at the level of its Luxembourg head office (ETR 1.5% or lower)

• Participation exemption on dividends received from Belgian Finco

• Luxembourg tax clearance advisedBelgium, Luxembourg, the Netherlands and Switzerland

US parent

Belgian Finco

BelgiumBrazilFranceIreland

ItalyNetherlands

RussiaSpain

SwedenSwitzerland

…

Luxhold/fin

Subs/operations

US/CHbranch

Hybrid loan

Loan Loan

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Regulated Private Equity Investment Vehicle: SICAR

Legal/Regulatory Framework

• No requirement for risk diversification but investment in “risk capital” only (PE and venture capital)

• Corporate forms (SA, SARL, SCA, SCOPSA) and SCS partnerships

• Lighter supervision of the Luxembourg regulator CSSF

• Open to well-

• informed investors;

• Open ended or closed-ended;

• Compartments (new)

Investors (Fully taxable /

tax exempt )

SICAR

Target

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Tax Framework (opaque entities)

• No capital duty

• Fully taxable but exempt from tax on income from investments in transferable securities

• No withholding tax on income allocated to investors

• Management services to SICAR exempt from VAT

• No taxation upon disposal SICAR

SICAR (Cont’d)

Investors(Fully taxable/

tax exempt)

SICAR

Target

SOPARFI

If required

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Legal/regulatory aspects

• Well informed investors

• Any kind of assets eligible

• Diversification (30% rule)

• Corporate or contractual form

• Open ended or closed-ended

• Supervision of the CSSF

- Initiator of SIF needs to be disclosed to regulator

• Luxembourg based custodian and external auditor

• Central administration in Luxembourg

Regulated Investment Vehicles: SIF

Qualifying Investors

SIF(FCP, SICAV or SICAF)

Transferable securities,debt instruments, money market instruments, real estate,

private equity, commodities and financial derivativeinstruments

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Tax treatment

• No capital duty (2009)

• Not subject to CIT, MBT and NWT

• Annual subscription tax of 0.01% on net asset value of SIF (some exemptions)

• No WHT tax on distributions to investors

• Management services to SIF exempt from VAT

Regulated Investment Vehicles: SIF

Qualifying Investors

SIF(FCP, SICAV or SICAF)

Transferable securities,debt instruments, money market instruments, real estate,

private equity, commodities and financial derivativeinstruments

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Luxco

Loans

Investors

FCP

PropertyCo

Financingloan

No WHT

Luxco

Fund Investors/

SIF

Life SettlementPortfolio

Alternative vehicle: SIF(Real Estate and/or Alternative Asset Classes)

Debt(Notes or other

instruments)

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Legal/Regulatory Aspects

• No license required, unless notes are offered to the public more than 3 times/year

• Performance of notes (e.g. tranches) linked to the performance of the portfolio

• Security package

• Either corporate form or fund

• Issuance of securities (other leverage limited)

Alternative vehicle: Securitisation Vehicle

SV

Noteholders

Portfolio of securitized assets

Notes

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Tax treatment

• No capital duty (2009)

• Funds: no income taxation (transparency)

• Companies: fully taxable but all income minus

- Expenses

- Obligations assumed vis-à-vis investors and creditors (e.g. interest, dividends)

• No WHT on securities issued (e.g. notes)

• Management to SV exempt from VATSV

Noteholders

Portfolio of securitized assets

Notes

Securitisation Vehicle (Cont’d)

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www.nautadutilh.com

NautaDutilh AvocatsLuxembourg

2, rue Jean BertholetL-1233 LuxembourgGrand Duchy of Luxembourg

T. +352 26 12 29- 1F. +352 26 68 43 31E. ndlux@nautadutilh.com

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