I OVERVIEW OF M&A ACTIVITY
Luxembourg’s legislative and regulatory framework and stability, as well as its distinctive domestic market and in particular its financial sector, have generally allowed the country’s M&A sector to continue to be quite active during the year, within a context of globally flourishing M&A.
Luxembourg continues to be a key platform for M&A, including private equity activity. A major trend for the latter resulting from the economic downturn of past years has been the growth of regulation in the private equity industry. Concerns about the protection of investors have led to the increased regulation of the markets, including (even if not primarily targeted at) private equity funds. In turn, the existence of such regulations (e.g., AIFMD) has led fund managers to seek well-regulated jurisdictions such as Luxembourg to domicile their funds, and Luxembourg remains a venue of choice for structuring international acquisitions.
As regards the dynamic financial sector, Luxembourg is the largest fund centre in Europe2 and second in the world behind the US.3 Luxembourg had about €3,370 billion in net assets under management as of January 2016,4 with its funds distributed in over 70 countries worldwide.5
Over the years, and aside from undertakings for collective investment in transferable securities (UCITS), the Luxembourg fund industry has developed recognised expertise in the area of alternative investment funds (AIFs). Regarding this, the law of 12 July 2013 implementing Directive 2011/61/EU on AIF managers (AIFMD Law) was a response to a political desire for more stringent regulation and closer oversight of systemic risks. In addition, the AIFMD Law aimed to provide harmonised rules for the management and marketing of AIFs in Europe.
The AIFMD Law presented an opportunity for the Luxembourg legislator to provide for specific provisions important to develop the market (such as the introduction of a new regime for carried interest), to modernise the common limited partnership (SCS) and to introduce a new special limited partnership regime (SCSp, which is not vested with a legal personality, unlike the SCS) modelled on the common law concept of the limited partnership, aiming to grant flexibility in the creation of such structures and being inspired by the UK and US regimes. This modernisation of the structuring toolbox aims to eliminate the onshore/offshore arbitrage by offering onshore equivalent structuring solutions that will fit into a post-AIFMD environment. Investors have demonstrated significant interest in these partnerships, as reflected by their number of incorporations.
M&A linked to international real estate is also quite active in Luxembourg, which is a hub for the real estate sector, with Luxembourg being the leading European domicile for vehicles investing directly or indirectly in international real estate.6
Moreover generally the information and communications technology sector is one of the areas earmarked for development in Luxembourg (this sector represents around 7 per cent of Luxembourg’s gross domestic product and is one of the driving forces of the Luxembourg economy7).
In this context, and with the importance of the Luxembourg financial sector, it is interesting to note that a lot of actions are being undertaken to make Luxembourg a European hub in the new area of FinTech.
II GENERAL INTRODUCTION TO THE LEGAL FRAMEWORK FOR M&A
As the sale and purchase of a business or company is not regulated by one dedicated series of rules, it is best to consider each M&A transaction on a case-by-case basis to determine the applicable rules.
The rules that generally apply to M&A in Luxembourg depend on the following main factors.
i Structure of the deal
Depending on their structure, the following rules apply to deals such as national or cross-border mergers, sales of shares, asset deals and partial demergers: the Civil Code, notably governing contracts; the Law on Commercial Companies of 10 August 1915 as amended (LCC); and the Law of 5 August 2005 as amended on collateral agreements (implementing Directive 2002/47/EC on financial collateral arrangements), which is commonly used in M&A transactions to secure financing. It provides, in particular, for a special protection of collateral takers against insolvency proceedings for these collateral arrangements (e.g., pledges, transfers of titles for security purposes and netting clauses). In a worldwide context, where questions about the structure and enforcement of collateral and guarantees in the framework of cross-border financing through syndicated loans have taken on more importance, Luxembourg continues to offer a legal environment more favourable to lenders than some other European countries.
ii Nature of the target
If a company is listed, all Luxembourg laws deriving from the implementation of the relevant European directives (such as the prospectus, market abuse, takeover bids or transparency European directives, as well as the directive regarding the exercise of certain rights of shareholders regarding general meetings in listed companies) shall apply. It is also important to note the law of 21 July 2012 on mandatory squeeze-out and buyout of securities that are or were admitted to trading on a regulated market or that were the subject of a public offer (which applies outside any tender process by way of a takeover bid). Moreover, there may be specific legislation to be considered depending on the sector involved in the transaction (e.g., banking, insurance, telecommunications). Prior regulatory approvals or notifications may also be necessary (e.g., in the case of a change of shareholding).
More generally, the carrying out of a commercial activity in Luxembourg is subject to the granting of a business licence, which is a prior administrative authorisation.
iii Transfer of persons
The following apply to the transfer of persons: the Labour Code for transfer of employees; the Law of 2 August 2002 on the Protection of Persons with regard to the Processing of Personal Data as amended; and the Law of 30 May 2005 laying down specific provisions for the protection of persons with regard to the processing of personal data in the electronic communications sector as amended.
iv Types of vehicle involved
Luxembourg offers a wide range of vehicles (regulated and unregulated), including SCS and SCSp forms referred to above.
Some of these vehicles benefit from a favourable tax framework, and all of them benefit from a legal framework that has been designed and tailored to fit their purpose. The vehicles most commonly used in Luxembourg are as follows:
- a the most important of the unregulated vehicles is the Luxembourg holding and finance company (SOPARFI). SOPARFI is a generic term that refers to non-regulated, fully taxable Luxembourg companies carrying out holding and financing of participations in portfolio companies as their corporate purpose. SOPARFIs are entitled to the benefit of the Parent–Subsidiary Directive (see Section VIII.i, infra) and the Luxembourg double tax treaties (DTTs) network. There are currently almost 80 DTTs in force. The most commonly used legal forms for SOPARFI are:
• SARL, private limited company commonly used for structuring since it offers significant flexibility;
• SA, public limited company, more regulated than the SARL and can be listed; and
• SCA, partnership limited by shares, having two types of shareholders: some have unlimited liability and can manage the SCA, and others have limited liability. The rules applicable to the SA are generally also applicable to the SCA; and
- b the most commonly regulated vehicles (supervised by the CSSF) used in private equity by institutional, professional and other well-informed investors are respectively specialised investment funds (SIF) and undertakings for collective venture capital investments (SICAR). More specifically:
• SIFs are open to an extensive number of assets eligible for investment, whereas investment through a SICAR has to be qualified as ‘risk capital’ and shall include in this respect a risk component, a development component and an exit strategy;
• SIFs have to comply with some specific risk-spreading rules, whereas this is not the case for the SICAR; and
• both vehicles benefit from their own attractive tax regime, and both may be incorporated under any legal forms available.
Note, moreover, that if the SOPARFI, SIF or SICAR meets the conditions stated by the AIFMD Law, they will have to appoint a manager in compliance with this law.
III DEVELOPMENTS IN CORPORATE AND TAKEOVER LAW AND THEIR IMPACT
The Luxembourg authorities show a continuing will to ensure Luxembourg law reflects the European legal framework for mergers, for instance through the implementation of, inter alia, the following European directives: Directive 2005/56/EC on cross-border mergers of limited liability companies; Directive 2007/63/EC requiring an independent expert report for a merger or demerger; and Directive 2009/109/EC on reporting and documentation requirements in the case of mergers and divisions.
This legislation, as enacted in Luxembourg, facilitates cross-border mergers involving Luxembourg companies with European but also non-European companies. The provisions applicable to national mergers are also applicable to cross-border mergers, and are completed by specific rules linked to the cross-border aspect.
It should also be noted that Luxembourg legislation permits a broader variety of company structures to engage in mergers (in particular SARLs) in comparison with Directive 2005/56/EC and the other neighbouring European Member States’ legislation.
ii Other main corporate developments
Bill 5730, aiming to reform the LCC, was finally adopted on 13 July 2016; the new law intends to modernise the LCC with the aim of bringing additional legal security together with flexibility in particular regarding voting rights, share transfers, financial instruments, governance, transfers of registered offices and dissolution.
The following parliamentary bills have been also recently adopted:
- a Bill 6777 regarding the creation of a simplified limited liability company (i.e., simplified SARL) established by natural persons;
- b Bill 6868 relating in particular to the publication of non-financial information by some large undertakings and groups, and amending some accounting provisions (Directive 2014/95/EU); and
- c Bill 6929 regarding the creation of a reserved AIF, which will not be supervised by the CSSF (but supervised through its AIFM).
Other notable developments include the following parliamentary bills (not yet adopted):
- a Bill 6539 regarding the preservation of enterprises, and aiming to modernise the bankruptcy and assimilated procedures’ legal framework;
- b Bill 6864 regarding the reform of the lease for commercial activities;
- c Bill 6831 regarding the creation of a company of societal impact aiming to propose an adapted framework for undertakings whose main aim is to have a societal or social impact; and
- d beyond the specific corporate and M&A area, Bill 6595, currently on standby, regarding ‘private wealth foundations’, aims to provide individuals with an instrument to manage patrimony.
IV FOREIGN INVOLVEMENT IN M&A TRANSACTIONS
A large part of M&A activity in Luxembourg is made up of the acquisition of foreign targets or assets through Luxembourg vehicles. Luxembourg is a location that foreign investors and international groups consider particularly for the establishment of investment funds or for structuring cross-border acquisitions and intragroup structuring, mainly due to the stability of the country, its pragmatism and its openness to new businesses.
In line with the re-domiciliation onshore to Luxembourg of an increasing number of funds, the migration of companies to Luxembourg has always been recognised, and the broad variety of available vehicles is also very attractive.
In existing structures, there continue to be many restructurings, some conflicts among shareholders and renegotiation of funding, along with the implementation of various stock option plans and similar incentives (for instance, carried interest).
V SIGNIFICANT TRANSACTIONS, KEY TRENDS AND HOT INDUSTRIES
The Luxembourg banking sector has seen some M&A, including the acquisition of Banco Popolare Luxembourg by Banque Havilland; the merger of Banque Degroof Luxembourg and Petercam Luxembourg, creating Degroof Petercam Luxembourg Bank, following the merger of the parent companies in the autumn of 2015; and the announced acquisition by Julius Baer of Commerzbank International, still subject in particular to regulatory approvals.
The TMT sector, another dynamic area in Luxembourg, has seen the acquisition by Temenos, one of the leaders of banking software, of Multifonds a company specialised in fund software and headquartered in Luxembourg.
Moreover, the following ‘sample’ deals illustrate the variety of M&A transactions in Luxembourg:
- a the acquisition by the group Kinepolis, one of Europe’s leading cinema operators, of the activities of the Utopia’s group in Luxembourg;
- b Bilia group, a Scandinavian leader in the car and transport vehicle sector, is entering the Luxembourg market through the acquisition of the largest BMW and MINI dealership in Luxembourg from the Luxembourg Arnold Kontz group; and
- c Delfin Sàrl, a Luxembourg holding, has entered the capital of Luxair, the Luxembourg airline company, through its acquisition of a 13 per cent shareholding.
As far as the content of deals is concerned, the trends that have emerged during the past few years continue to be observed. Even in deals that would have formerly appeared quite simple, the investors systematically carry out in-depth due diligence. Furthermore, contractual clauses that would previously have been considered a remote risk by contracting parties are now receiving increased scrutiny (e.g., regarding insolvency aspects).
More generally, it is worth noting that over the past few years, Luxembourg has become the leading place in Europe for international renminbi business (the official Chinese currency). Moreover, several Chinese banks have been set up in Luxembourg.
VI FINANCING OF M&A: MAIN SOURCES AND DEVELOPMENTS
Regarding the types of instrument that may be used for structuring financing, the Luxembourg market provides a broad range of instruments, for example, securities or financial instruments that carry specific financial or voting rights (e.g., preferred dividend rights, subordination, convertible loans). More complex and hybrid instruments are also available to suit investors’ requirements (e.g., tracking shares, convertible preferred equity certificates, bonds, profit-participating loans), enabling profit repatriation and flows in a tax-efficient manner.
It is nevertheless worth noting that within the international and European framework, hybrid structures and instruments are currently under discussion. The OECD provides for guidelines and recommendations to neutralise the effects of hybrid mismatch arrangements. Moreover, Directive EU 2015/121 and Directive 2014/86/EU have been amending the EU Parent–Subsidiary Directive (2011/96/EU) on the common system of taxation applicable in the case of parent companies and subsidiaries of different Member States.
Luxembourg transposed these amending Directives into national law by a law of 18 December 2015. Pursuant to this, the Luxembourg tax exemption for income derived from an otherwise qualifying EU subsidiary will not be applicable to the extent that this income is deductible by the EU subsidiary. This new anti-hybrid rule applies only within the EU (i.e., it is not applicable to hybrid arrangements between a Luxembourg company and a non-EU company).
In principle, arm’s-length and non-profit participating interest is not subject to Luxembourg withholding tax, and is considered as a tax-deductible expense. Excessive interest is generally regarded as a hidden transfer of profit or distribution (constructive dividend) subject to withholding tax, unless reduced by an EU directive or DTT if applicable, and as such will not be tax-deductible. In addition, Luxembourg tax practice provides for thin capitalisation rules that apply to holding activities financed through related parties’ debts or third-party debts secured by related parties (see Section VIII, infra).
Third-party financing usually takes the form of senior or mezzanine loans (whether syndicated or not).
VII EMPLOYMENT LAW
If a merger involves a transfer of an undertaking within the meaning of Directive 2001/23/EC, the transferee and the transferor must observe a specific procedure set out for the safeguarding of the terms and conditions of employment of the individuals affected by the project.
To this extent, the law provides for the compulsory transfer of the employees assigned to the transferred activities. The transfer of activities cannot constitute a valid ground for dismissal, but dismissals are allowed if they are based on real and serious grounds (such as economic reasons not connected to the transfer), apart from companies subject to a collective agreement of the banking and insurance sector, for which redundancies are forbidden for two years after the transfer unless the employees’ representatives give their prior consent.
Moreover, the transferee and the transferor must discuss, with their respective employees’ representatives, the conditions under which employees will be transferred. This aims at integrating the employees into the new entity having regard, particularly, to the rights they acquired from the former employer and the collective bargaining agreement applicable in both companies.
It should be noted that mergers and restructurings can be driven by economic considerations, and may lead to the dismissals of employees before or after the process.
Elsewhere, it must be pointed out that the number of litigation cases has continued to increase due to social restructuring plans in the past few years.
Finally, a transfer of undertaking may also have an impact on complementary pension schemes if such schemes exist in the transferor. The law on complementary pension schemes regulates the transfer of the rights of employees in the event of a transfer of undertaking. Thus, when the transferor ceases to exist, vested rights or rights in the process of formation of active members and vested rights of former members are transferred to the transferee. It should, however, be noted that if the transferor continues to exist, only vested rights or rights in the process of formation of active members that the transferee takes into employment are transferred. Vested rights of former members still fall within the responsibility of the transferor unless otherwise agreed.
In line with Directive 2002/14/EC, in 2008 Luxembourg law reinforced the employer’s obligation to inform and consult with the employees’ representatives (joint works council and staff delegation) on the economic aspects of the company’s activities and, in particular, requires the employer to provide information concerning recent and possible future developments of the company (such as a merger).
In addition, if the merger is likely to have a significant impact on the work organisation or employment contracts, the employer must inform and consult the employees’ representatives in due time prior to the implementation of the project to allow them to give their opinion.
If the merger involves a transfer of undertaking, the transferee and the transferor must provide the employees’ representatives with specific information, such as the reasons for the transfer, the measures and the legal consequences applicable to the employees, with a view to facilitating the aforementioned negotiations.
It must be noted that a law reforming social dialogue was enacted on 23 July 2015. One of the major changes will be the removal of the joint works council and the transfer of its functions to the staff delegation. As a result, after the entry into force of the law, the staff delegation shall be the sole body representing the employees’ interests. The legal threshold for the staff delegation to be entrusted with a participation role (as currently performed by the joint works council) remains set at 150 employees. The law entered into force on 1 January 2016, with the exception of certain provisions that will take effect at the time of the next election of the staff delegation in 2018 (except in the case of an obligation to proceed to anticipated elections). In addition, the current provisions on joint works councils will continue to apply to joint works councils already established at the time of entry into force of the law, until the next social elections.
In the event of cross-border mergers, Directive 2005/56/EC applies, and notably Article 16 regarding employee participation. Further to observations made by the European Commission as regards the proper implementation of this Directive under Luxembourg law, a bill was filed in April 2015 aiming in particular to provide a guarantee that the rights as regards employee participation acquired by employees based in another Member State and resulting from a system of representation more favourable than the Luxembourg system remain applicable to these employees, in compliance with Directive 2005/56/EC. The legislative process is still pending.
VIII TAX LAW
i General taxation rules
In general, Luxembourg companies among which SOPARFIs are fully subject to Luxembourg corporate income tax (CIT) and municipal business tax (MBT) at an aggregate rate of 29.22 per cent for 2016.
According to announcements by the Prime Minister regarding the impending 2017 tax reform, the current CIT rate will progressively decrease in the next few years. As a result, Luxembourg companies subject to the standard tax regime should be taxed in the future at an aggregate rate of 27.22 per cent in 2017 and 26.22 per cent in 2018.
In addition, Luxembourg companies are subject to annual net worth tax (NWT), levied at a rate of 0.5 per cent on the company’s worldwide net worth as at 1 January of each year. Since 1 January 2016, companies are no longer subject to minimum CIT, but are subject to minimum NWT of €3,210, which will reach €4,815 in 2018, for financial holding companies (i.e., companies whose financial assets represent more than 90 per cent of their balance sheet and more than €350,000 (i.e., SOPARFIs)). For all other companies, the minimum NWT is progressive, and varies between €535 and €32,100 per year. NWT continues to be levied at a rate of 0.5 per cent on the company’s worldwide net worth up to and including €500 million. When the unitary value exceeds the aforementioned threshold, NWT is levied at a rate of 0.05 per cent (on the taxable amount exceeding €500 million).
SOPARFIs or general Luxembourg companies have access to the Luxembourg DTT network as well as to the EU directives. As a result, dividends and liquidation proceeds received, and capital gains realised by, a fully taxable Luxembourg-resident company are exempt from CIT and MBT subject to the following:
- a the distributing company is:
• a fully taxable Luxembourg-resident company; or
• a company resident in another EU Member State and covered by Article 2 of Directive 2011/96/EU dated 18 January 2012 as amended from time to time on the taxation of parent companies and subsidiaries (Parent–Subsidiary Directive); or
• a non-resident company that is fully liable to a foreign tax that can be considered comparable to the Luxembourg CIT;
- b at the date of realisation of income, the Luxembourg company has been holding (or undertakes to hold) a 10 per cent participation (or an acquisition price of at least €1.2 million for dividends or €6 million for capital gains) for at least 12 uninterrupted months in its subsidiary or distributing company;
- c the structure is based on substance and economic reality and not exclusively set up for tax purposes (transposition of the new Parent–Subsidiary Directive 2014/86/EU by the Luxembourg law of 18 December 2015).
Distributions of dividends made by Luxembourg tax-resident companies to their parent companies also benefit from a withholding tax exemption under very similar conditions. These rules, combined with the extensive DTT network, generally allow tax-efficient repatriation of profits to parent companies or funds.
Particularly relevant for M&A activity is the implementation of Directive 2009/133/EU, the Merger Directive. Indeed, the Luxembourg CIT system recognises and applies the tax-neutrality regime in the case of exchange of shares, group restructuring, migrations, transformation of companies, mergers and spin-offs. The transposition of the Merger Directive in Luxembourg is slightly wider than the Directive itself, as it covers other transactions, such as the issuance of shares upon conversion of a convertible loan under certain circumstances. Generally speaking, the same regime is applied to Luxembourg and foreign EU companies. Where the accounting treatment of the transaction would not mirror the tax-neutral treatment as foreseen by Luxembourg law, a tax balance sheet may be drawn by the Luxembourg companies. This may particularly be relevant in cases where the foreign rules applicable to group reorganisations may require a certain accounting treatment at the level of any Luxembourg companies involved in the transaction.
The aforementioned elements combined in particular with the abolition of capital duty (effective since 1 January 2009), which was replaced by a fixed registration duty of €75 applicable to transactions involving Luxembourg entities,8 provide an attractive base for M&A.
ii SCS and SCSp
Resident partnerships, such as SCS, although vested with a legal personality (with the exception of the SCSp), are treated as transparent entities for Luxembourg tax purposes, and are hence per se liable to neither CIT nor NWT. Nonetheless, a partnership (SCS or SCSp) may be subject to MBT regardless of its tax transparency if it is considered a commercial partnership. In this respect, a partnership is commercial or deemed to be commercial if it carries out commercial activities (e.g., management of a portfolio consisting in receivables), or is commercially tainted (i.e., at least one of its general partner or partners is a capital company, or the majority of its parts are held by one or more resident capital companies) based on a German concept known as the ‘impregnation theory’.
The AIFMD Law introduced a less stringent application of the impregnation theory such that an SCS will not be subject to MBT to the extent that the general partner is a joint-stock company holding less than 5 per cent interest in the SCS. For the avoidance of doubt, when the partnership itself performs a commercial activity, it will be in any case subject to MBT. On 9 January 2015, the Luxembourg tax authorities issued Circular LIR No. 14/4 (Circular) providing in particular new guidance on the distinction to be made between commercial activities and private wealth management, and clarifying the application of the impregnation theory to AIFs set up as an SCS or SCSp. The Circular has been welcomed by investors and fund managers of AIFs since it confirms the already existing practice (i.e., the full tax neutrality of limited partnerships set up as AIFs to the extent the general partner is not a company holding 5 per cent or more in the partnership).
iii Thin capitalisation rules
Although there is no written rule in this respect, the Luxembourg tax authorities consider an 85:15 debt-to-equity ratio as acceptable as far as holding activities are concerned. Excessive interest is regarded as profit transfer or distribution, subject to withholding tax, unless reduced by an EU directive or DTT if applicable, and as such will not be tax deductible. Unrelated debt or debt borrowed from unrelated lenders is generally not taken into consideration when calculating such ratio.
As a result, debt pushdown strategies on acquisitions might be efficiently contemplated. It is an efficient alternative to tax grouping solutions when the conditions of tax unity are not fulfilled.
Luxembourg has renegotiated many of its DTTs to be in line with the current version of Article 26 of the OECD Model Tax Convention.9 According to an Administrative Circular dated 31 December 2013, the Luxembourg tax authorities agreed to apply the provisions of Article 26 of the OECD Model Tax Convention and its related commentaries as amended in 2012. Of the 77 DTTs currently in force, 54 contain the new version of Article 26 of the OECD Model Tax Convention.
v Exit tax
The Luxembourg exit tax regime was amended on 13 May 2014 to comply with EU regulations.
The new regime currently in force provides for a more flexible deferred taxation system available to Luxembourg corporate taxpayers without guaranty or interest on any outstanding tax liability provided the exit is realised within the European Economic Area (EEA). Further, pursuant to this new regime, the taxpayer can use any capital losses realised on assets unrealised at the time of the migration to the extent that such losses are not used in the EEA country to which it was transferred.
vi No ‘control foreign corporations’ rules
Luxembourg does not have prior control foreign corporations rules. The use of a Luxembourg company to acquire foreign targets is as a general rule not an issue (if not abusive). For the application of certain benefits (Parent–Subsidiary Directive), the Luxembourg company must, inter alia, prove that the non-EU resident target is subject to a comparable tax.
A new directive proposal dated 28 January 2016 may implement a general control foreign corporation regime. According to the directive proposal, taxpayers with controlled subsidiaries in low-tax jurisdictions may shift large amounts of profits out of the highly taxed Member States in which taxpayers are present. The proposal would entitle the Member State where the taxpayer is established to tax flows from it to its subsidiary if the global rate of income tax of the low-tax jurisdiction represents less than 40 per cent of the Member State’s rate. Such directive, however, will need to be approved by all Member States before it can be approved and implemented.
vii Transfer pricing
With Luxembourg being a jurisdiction of choice for acquisitions (such as leveraged acquisitions), it is interesting to note that a circular of 28 January 2011 of the Luxembourg tax administration provides for a framework of transfer pricing rules applicable to intragroup financing activities solely.
The budget law for 2015 dated 19 December 2014 (Budget Law) clarified the arm’s-length principle definition in the sense of Article 9 of the OECD Transfer Pricing Guidelines, and included new documentation requirements for taxpayers to assess the compliance of their intragroup activities with the above-mentioned principle.
This framework, in line with the OECD’s principles, confirms that the Luxembourg tax framework is well advanced when it comes to compliance with international regulations, such as those of other OECD members.
viii Intellectual property (IP) box
A law that came into force on 1 January 2008 provides for, inter alia, an exemption of 80 per cent of the net income derived from certain qualifying IP rights.
The main aspects, under certain conditions, are, an exemption equal to 80 per cent of the net positive income or capital gain respectively deriving from the use or the licence of the author’s rights over software, patents, trademarks, design or domain names, or the disposal of such IP rights; and patents registered and used by a taxpayer in the framework of its own activity entitle the latter to benefit from an exemption of 80 per cent on the net positive income that would have been generated by the licence of such IP rights to a third party.
A new law is awaiting adaptation to the new requirements identified by the G20 and the OECD, and is represented by the ‘modified nexus approach’ as set up under the framework of the BEPS action plan designed by members of the OECD. Under the ‘modified nexus approach’, the existence of a substantial economic activity and research and development (R&D) activities are key points when delocalising IP assets. To that end, income derived from eligible IP rights may benefit from an efficient tax treatment in proportion of the R&D expenses effectively incurred by the taxpayer in relation to such IP rights in the relevant country (in the case at hand, Luxembourg).
The Budget Law repealed the Luxembourg IP box regime and established a transitory regime. The IP box regime is terminated from 1 July 2016, and for NWT as from 1 January 2017.
Until 30 June 2016, entering into the current IP box regime was still possible. The regime is grandfathered for the existing IP box from 1 July 2016 until 30 June 2021 (and until 1 January 2021 for NWT). Nevertheless, the transitional period is shorted to 31 December 2016 (1 January 2017 for NWT) for IP rights acquired from related parties after 31 December 2015.
ix New advance tax clearance (ATC) practice
The Budget Law has introduced a new provision into Luxembourg tax laws dedicated to ATC practice. This new provision was designed to formalise the existing administrative practice and to increase the transparency of the Luxembourg tax framework. Indeed, ATC decisions will be published in a summarised and anonymous form in the annual report of the activities of the Luxembourg tax authorities.
A grand-ducal regulation of 23 December 2014 and the Law have created a tax ruling commission that assists the taxation office with the execution of the uniform and equal application of the tax law. Each tax-ruling request is submitted to the commission for an opinion. In addition, tax-ruling requests are subject to a specific fee that varies between €3,000 and €10,000 depending on the complexity of the request.
This new procedural framework aims to ensure a consistent application of the tax rules by Luxembourg taxation offices. Moreover, the publication in a summarised and anonymous form, as well as the exchange of tax rulings with foreign tax authorities, will increase tax transparency and strengthen Luxembourg as a reliable and competitive jurisdiction.
Due to the administrative fees and the exchange of information regulations to which all rulings are subject, as well as the timing needed by the commission to revert with a ruling, rulings are seldom requested unless the complexity of a specific case requires a clearance.
x Automatic exchange of information
In line with its commitment to increased transparency, Luxembourg has applied since 1 January 2015 the automatic exchange of information tool for interest payments paid to individuals resident in the EU and other dependent territories that have accepted the reciprocal exchange of information.
From the same date, and further to the implementation of the Directive 2011/16 on administrative cooperation in the field of taxation by the act dated 26 March 2014, Luxembourg also applies the automatic exchange of information for three categories of income (salaries, directors’ fees and pensions accrued as from 2014) to the extent such information is available to the Luxembourg tax authorities.
With the law of 18 December 2015, Luxembourg transposed the Common Reporting Standards Directive, and financial institutions are subject to automatic exchange of information regarding the personal accounts and financial information of their customers.
Finally, with the Law of 29 July 2015, financial institutions must disclose financial information of their US customers according to Foreign Account Tax Compliance Act.
IX COMPETITION LAW
No specific control of M&A is provided for under Luxembourg law.
The main law in this area is the law on competition of 23 October 2011 (Competition Law), which reflects Articles 101 and 102 of the Treaty on the Functioning of the European Union by prohibiting concerted practices and abuse of a dominant position.
These general prohibitions may only affect mergers or acquisitions after the transaction has taken place if they lead to an abuse of dominant position or result in concerted practices.
Indeed, currently no prior notification to the Luxembourg authorities is either required or possible under the framework of concentrations between undertakings. It should be noted that while there are no pre-merger filing requirements in Luxembourg, should the merger involve a European dimension, then control is implemented at the level of the European Commission. The European Commission can request assistance in investigating any particular merger involving a Luxembourg entity.
Pursuant to the Competition Law, the Competition Council, Luxembourg’s sole competition authority, holds investigating functions and decision-making powers, meaning that the person in charge of the investigation of a case does not participate in the decision-making process of that case.
In conjunction with the Competition Law, other pieces of legislation have some competition law aspects, for instance:
- a Law of 30 July 2002 regulating certain commercial practices and prohibiting anticompetitive practices such as below-cost selling;
- b Law of 27 February 2011 on electronic communications networks and services, which gives power to the ILR (Luxembourg’s national regulation authority) to impose obligations on undertakings identified as having significant power on a specific market: for example, obligations of transparency, non-discrimination, accounting separation, to meet reasonable requests for access to and use of specific network elements and associated facilities, and price control and cost-accounting obligations;
- c the Consumer Code; and
- d the Civil Code relating to contractual and tort liability.
Many signs continue to point to a recovery in global M&A, particularly due to the local M&A market and foreign investment, although it must be noted that, due to the international positioning of Luxembourg, the ‘wait-and-see approach’ linked to the Brexit question has not been neutral on the markets for the beginning 2016. That being said, there are still good reasons to remain optimistic about M&A activity involving Luxembourg in the near future.
1 Marie-Béatrice Noble is a founding partner of MNKS, Raquel Guevara is the leading partner of the tax department and Stéphanie Antoine is a senior manager. The authors would like to thank Edouard Bubenicek and Mélissa Volia for their assistance in preparing this chapter.
2 ALFI, press release: ‘Luxembourg retains position as the leading investment fund domicile in Europe’, February 2016.
3 ALFI, ‘Luxembourg: the Global Fund Centre’ – January 2015
4 ALFI, press release: ‘Luxembourg retains position as the leading investment fund domicile in Europe’, February 2016. The Commission for the Supervision of the Financial Sector (CSSF)/ALFI, ‘Net asset under management in Luxembourg funds’, January 2016.
5 ALFI, ‘Luxembourg: the Global Fund Centre’ – January 2015.
6 ALFI, Luxembourg Real Estate Investment Vehicles – November 2014.
7 Fedil (Business Federation Luxembourg) – 2015 Annual Report.
8 Namely, incorporation, amendments to the by-laws and transfers of the central administration of commercial and civil companies to Luxembourg, but also applicable to contributions made within the framework of a corporate restructuring provided that the contribution is mainly in consideration for shares issued by the company receiving the contribution.
9 For example, the DTTs with Austria, Bahrain, Barbados, Canada, Denmark, France, Germany, Guernsey, Hong Kong, India, Ireland, Italy, Jersey, Liechtenstein, Malta, Monaco, the Netherlands, Norway, Poland, Russia, Saudi Arabia, Seychelles, Spain, Sri Lanka, Sweden, Switzerland, Panama, Qatar, Taiwan and the United Kingdom.