For decades Luxembourg has been a major participant in the international wealth management industry with its large private banking industry, today ranked first in the eurozone, fourth in Europe and seventh in the world.
Luxembourg has also become a home for many individuals and families with significant wealth. Since the country’s taxation reform in 2006, private individuals have taken advantage of its favourable tax regime on investment income and the absence, under certain conditions, of taxation on succession.
The Luxembourg authorities are constantly improving the legal and regulatory framework, implementing instruments and vehicles designed and available for wealth management, as well as cultivating a culture of investor protection, both of which help explain Luxembourg’s success and importance.
There are many reasons that explain Luxembourg’s position in the wealth management industry and Luxembourg’s appeal as a country of residence for high net worth individuals (HNWIs), but it is primarily the political and tax stability that is key to the emergence of the industry and that at the same time continues to safeguard the necessary conditions for its permanent successful development. Over the past 50 years, almost all Luxembourg governments have been coalition governments gathering representatives from at least two different political parties. The bipolar political landscape that exists in other countries does not exist in Luxembourg, and this explains the very sustainable tax stability of Luxembourg and why tax laws are rarely changed, but only slightly amended to implement new developments or to take advantage of new market opportunities.
Luxembourg’s public debt is among the lowest in the world (23.9 per cent in 2015; it is expected to increase in 2016, but should remain under 25 per cent) and it is one of the few countries in Europe to meet the 3 per cent budget deficit criteria.
The political stability and healthy public finances (Luxembourg is AAA rated) contribute to a great extent to the social stability and the overall security in Luxembourg.
This political, social and tax stability together with the fact that Luxembourg is part of the EU and geographically lies in the heart of Europe is of increasing importance for wealthy families, as is the safeguard afforded by the policy of investor protection promoted by the Luxembourg authorities.
The purpose of this chapter is not to give a complete view on taxation principles for private individuals in Luxembourg but merely to address the main characteristics and issues that are important in the context of wealth management.
Luxembourg tax-resident individuals are generally taxed on their worldwide income. This means that all income deriving from Luxembourg or from abroad has to be included in the annual tax return of a Luxembourg resident. Non-residents are normally taxed on income generated in Luxembourg and on their property located in Luxembourg. There are exceptions to this rule under double taxation treaties and other provisions. Based on the double tax treaties signed by Luxembourg, Luxembourg residents will be considered as tax exempt in Luxembourg for income related to real estate located and taxable abroad, but the income that is taxable abroad will be considered for the determination of the tax rate applicable to the income to be taxed in Luxembourg.
Luxembourg has in force double taxation treaties (DTTs) relating to income tax with 75 countries (as of February 2016, as well as two new conventions in force from 1 January 2017 with Andorra and Croatia). Most provide for double taxation relief through exemption. Investment income is generally subject to tax credit rules. Since 2010 Luxembourg approved the entry into, or updated, 54 double taxation treaties that provide for exchange of information on request following Article 26 of the OECD Model Tax Convention. Luxembourg has not entered into any double taxation treaties relating to IHT and gift tax.
On 26 March 2014 the Luxembourg parliament adopted Council Directive 2011/16/EU of 15 February 2011 on administrative cooperation in the field of taxation, introducing the concept of automatic exchange of information for certain information and providing for an exchange of information procedure applicable under the double taxation treaties.
On 18 December 2015, the Luxembourg government adopted Bill
No. 6858 introducing the Automatic Exchange of Information Law (the AEOI Law) by implementing Directive 2014/107/EU, dated 9 December 2014 (which amends the previous Directive 2011/16/EU). This Directive extends the existing scope of the mandatory exchange of information as introduced by the Savings Directive 2003/48/EC and amended by Directive 2014/48/EU. As a consequence, the Savings Directive 2003/48/EC was repealed with effect from 1 January 2016, and the Directive 2014/48/EU was no longer implemented into Luxembourg law. However, the exchange of information under the Savings Directive relating to the year 2015 has remained in force during 2015, reportable in 2016.
The AEOI Law entered into force on 1 January 2016. As from this date, Luxembourg Reporting Financial Institutions are required to provide to the fiscal authorities of other EU Member States and jurisdictions participating in the OECD Common Reporting Standard (CRS) details of financial account information of holders who are residents of, or established in, an EU Member State and certain dependent and associated territories of EU Member States or in a jurisdiction that has introduced the CRS in its domestic law. The automatic exchange of information is effective as of 1 January 2016. By 30 June 2017, Luxembourg Reporting Financial Institutions will be required to report to the Luxembourg Tax Authorities the 2016 information on accounts. Afterwards, the Luxembourg Tax Authorities will have until 30 September 2017 to report such information to the competent foreign authorities.
In application of the law of 18 December 2015, the Grand Ducal Decree of 15 March 2016 determines the list of the participating jurisdictions and the exempt products in relation to the CRS.
Unless there is a relevant double taxation treaty applicable, tax residency is determined in domestic law by two criteria: (1) domicile or (2) usual place of residence.
Domicile is defined as the location of the individual’s abode, in circumstances where he or she maintains and uses it (as owner, tenant, holder of a life interest, or free of charge) with a permanence that shows that he or she does not intend to stay there on a temporary basis only.
Usual place of residence is defined as the place where the individual resides, if it can be shown that he or she does not intend to stay there on a temporary basis only. The law does not fix a minimum term and, depending on the circumstances, even a stay for less than six months can qualify as a usual place of residence. A stay for more than six months automatically qualifies as a usual place of residence and the individual is considered tax-resident (the tax liability being extended to the first six months). The concept of usual place of residence is a factual one.
Double taxation treaties concluded by Luxembourg mostly follow the OECD Model Tax Convention 1977 as revised in 2014. These provide that, where an individual is a resident of both contracting states, his or her status is determined as follows:
- a he or she is deemed resident only in the state where he or she has a permanent home available. If he or she has a permanent home in both states, he or she is deemed resident in the state that is the centre of his or her personal and economic relations (centre of vital interests);
- b if the centre of his or her personal and economic relations cannot be determined, or if he or she has no permanent home available in either state, he or she is deemed resident in the state in which he or she has a habitual abode;
- c if he or she has a habitual abode in both states, or in neither of them, he or she is deemed resident in the state of which he or she is a national; or
- d if he or she is a national of both states, or neither of them, the competent authorities in the contracting state will settle the question by mutual agreement.
There is no formal exit tax. Leaving Luxembourg does not trigger taxation on unrealised gains. However, capital gains realised on the disposal of substantial shareholdings held in Luxembourg entities after departing from Luxembourg are taxable, if two conditions are met:
- a the taxpayer was resident in Luxembourg, for tax purposes, for over 15 years; and
- b the taxpayer became non-resident less than five years before the disposal.
If a person resides in Luxembourg for less than six months it is possible to qualify as a non-resident (see above).
A specific regime applies to EU officials and other EU employees. If they reside in Luxembourg to perform their duties in the service of the EU, they maintain their original domicile for income tax, wealth tax and death duty purposes (Article 13, Protocol on the Privileges and Immunities of the European Union).
The official tax year runs from 1 January to 31 December. Taxpayers must file their tax returns by 31 March in the year following the relevant tax year and make quarterly advance payments. If a non-resident generates income in Luxembourg, he or she must in certain cases file an annual tax return. Final payments (or reimbursements) are made once the final tax assessment has been received from the tax administration.
Any individual is entitled to request a reimbursement of potentially excessive taxes withheld on salaries and pensions derived from Luxembourg if he or she only resides in Luxembourg for part of the year (décompte annuel).
On 18 December 2015, the Luxembourg parliament adopted the 2016 Budget Law, through which the step-up principle has been introduced. Any non-resident individual who becomes a Luxembourg tax resident may revalue the purchase price of securities to their market value on the day that he becomes a Luxembourg tax resident. This new regime only applies to substantial shareholdings and to convertible loans in which the taxpayer holds a substantial shareholding.
Married couples have to jointly file a tax return including their children under the age of 18.
Declared partners can be jointly taxed under certain conditions and upon request.
Additionally, as from 1 January 2017, resident and non-resident married couples can opt for individual taxation based on Bill No. 7020 introduced by the Luxembourg government on 26 July 2016 (registered with the Luxembourg parliament but not yet adopted).
As of 2016, Luxembourg-resident taxpayers who have omitted to declare some of their income to evade income taxes, inheritance taxes or registration duties will be able to regularise their situation further to some conditions, such as filing a tax return with the Luxembourg tax authorities on a spontaneous basis, covering their undeclared assets and income.
As a counterpart, a 10 per cent surcharge on taxes due is applied for amended tax returns submitted in 2016 and there is a 20 per cent surcharge for returns submitted in 2017.
Luxembourg is not a tax haven and income tax rates vary from zero to 43.6 per cent with the maximum marginal rate of 43.6 per cent applicable to income above €150,000 for a single person and €300.000 for a couple taxed jointly.
Income tax rates are progressive. Since 1 January 2013 the new marginal tax rate is 40 per cent for taxable income exceeding €100,000 (class 1 and 1a) or €200,000 (class 2). The contribution to the unemployment fund is 7 per cent, for taxable income exceeding €150,000 (class 1 and 1a) or €300,000 (class 2), this rate is increased to 9 per cent. Therefore, the maximum marginal tax rates applicable in 2015 are 42.8 per cent and 43.6 per cent respectively.
In addition, a dependency contribution of 1.4 per cent is applicable and a temporary budget balancing tax of 0.5 per cent, bringing the overall maximum rates to 44.7 per cent and 45.5 per cent.
On 26 July 2016, the Luxembourg government introduced Bill No. 7020 in relation with tax measures (registered with the Luxembourg parliament but not yet adopted) that could be applicable as of 1 January 2017. One of the measures is the abolishment of the temporary tax of 0.5 per cent for balancing the state budget.
Another reform would relate to the maximum tax rate, which would be increased to 41 per cent for individuals (tax classes 1 and 1a) with annual revenues above €150,000 (€300,000 for married couples and partners who opt for this tax regime) and 42 per cent for individuals (tax classes 1 and 1a) with annual revenues exceeding €200,004 (€400,008 for married couples and partners who opt for this tax regime). With the dependency contribution of 1.4 per cent, the overall maximum rates should amount to 46.09 per cent and 47.18 per cent.
ii Taxation of investment income
Wealth tax and interest income
For investment income purposes, Luxembourg is a very attractive country to be a resident of for the following reasons:
- a wealth tax for private individuals has been abolished since 1 January 2006; and
- b a final withholding tax of 10 per cent applies to interest payments made by Luxembourg paying agents to (or for the immediate benefit of) residents. This withholding tax fully discharges income tax if the beneficial owner is an individual acting in the course of the management of his or her private wealth (Law of 23 December 2005, as modified).
Residents can also opt for a final 10 per cent levy if they are the beneficial owners of interest payments from paying agents established outside Luxembourg (Law of 17 July 2008, modifying the Law of 23 December 2005) either:
- a in a Member State of the EU or the European Economic Area (EEA); or
- b in a jurisdiction that has concluded an agreement with Luxembourg in connection with the Savings Directive.
In these circumstances, the 10 per cent levy is calculated in the same way as if the paying agent was resident. The option for the 10 per cent levy must cover all interest payments made during the calendar year. Finally, residents who opt for this option must file a specific return before 31 March of the year following the year in which the interest was received.
On 26 July 2016, the Luxembourg government introduced Bill No. 7020 (registered with the Luxembourg parliament but not yet adopted) proposing that the withholding tax on interest paid to Luxembourg-resident individuals should be increased to 20 per cent instead of its current 10 per cent rate.
This interest income and the assets producing the income will not need to be reported in the individual’s annual income tax return.
Under EU Council Directive 2003/48/EC on taxation of savings income in the form of interest payments (the Savings Directive) and amended by Directive 2014/48/EU (not implemented into Luxembourg domestic law), Luxembourg paying agents had to withhold tax on interest or similar income paid to foreign beneficial owners who are either:
- a individuals; or
- b residual entities. A residual entity is an entity:
• without legal personality (including a Finnish general partnership, limited partnership, and a Swedish general partnership or limited partnership, although these are legal persons (Article 4(2), Savings Directive);
• whose profits are not taxed under the general arrangements for the taxation of businesses; and
• which has not opted to be considered as a UCITS under EU Council Directive 85/611/EEC on undertakings for collective investment in transferable securities (UCITS) (the UCITS Directive), residing or established in another EU Member State.
The withholding tax applied under the Savings Directive was 35 per cent and was replaced by the automatic exchange of information as of 1 January 2015.
On 18 December 2015, the Luxembourg government adopted Bill
No. 6858, introducing the Automatic Exchange of Information (AEOI) Law by implementing the Directive 2014/107/EU dated 9 December 2014 (which amends the previous Directive 2011/16/EU). This Directive extends the existing scope of the mandatory exchange of information as introduced by the Savings Directive 2003/48/EC and amended by the Directive 2014/48/EU. As a consequence, the Savings Directive 2003/48/EC has been repealed with effect from 1 January 2016 and the Directive 2014/48/EU is no longer implemented into Luxembourg law. However, the exchange of information under the Savings Directive relating to the year 2015 has remained in force during the year 2015, reportable in 2016.
The AEOI Law entered into force on 1 January 2016. As from this date, Luxembourg Reporting Financial Institutions communicate information concerning individuals and certain entities resident in EU Member States or certain third countries. By 30 June 2017, Luxembourg Reporting Financial Institutions will be required to report to the Luxembourg Tax Authorities the 2016 information on accounts. Afterwards, the Luxembourg Tax Authorities will have until 30 September 2017 to report such information to the competent foreign authorities.
In application of law of 18 December 2015, the Grand Ducal Decree of 15 March 2016 determines the list of participating jurisdictions and the exempt products in relation to the CRS.
Dividend income is subject to income tax but a 50 per cent exemption is granted for dividends received from the following types of company (Article 115 (15)a of the Luxembourg Income Tax Law):
- a a fully taxable resident company;
- b an EU-resident company under Article 2 of the amended EU Council Directive 90/435/EEC on the taxation of parent companies and subsidiaries (Amended Parent–Subsidiary Directive); and
- c a fully taxable limited company, which is:
• resident in a country that has entered into a double tax treaty with Luxembourg; and
• liable to a tax equivalent to corporate income tax in Luxembourg.
Expenses linked to such dividends are only deductible up to 50 per cent.
Currently, a withholding tax of 15 per cent (17.65 per cent if borne by the distributing company) is levied on dividends distributed by fully taxable resident companies. This tax will be credited on Luxembourg income tax or can be reduced by the application of double tax treaties or refundable under certain circumstances.
Capital gains on moveable assets are taxable if:
- a they are qualified as speculative capital gains (this applies when the period between acquisition and disposal is less than six months or when the transfer precedes the acquisition);
- b they are realised on the disposal of a substantial shareholding in a resident or non-resident corporation. A resident individual owns a substantial shareholding in a company if he or she (either alone or together with his or her spouse or minor children) holds or has held (directly or indirectly) more than 10 per cent of the company’s share capital within five years preceding the disposal. A resident can also dispose of a substantial shareholding if he or she acquired free of charge, within five years preceding the disposal, a shareholding that constituted a substantial shareholding in the hands of the individual he or she acquired it from (or individuals if there were successive free transfers within the same five-year period). In these cases the capital gain will be fully taxed but at a rate amounting to 50 per cent of the average tax rate (the maximum tax rate is 21.8 per cent) and will apply a tax relief of €50,000 (€100,000 for spouses or partners jointly taxed if the capital gain is realised after a six months holding period). These allowances can be used once per decade only;
- c no capital gains tax is due if both:
• the gain is realised more than six months after the acquisition; and
• the moveable assets do not constitute all or part of a substantial shareholding;
- d for non-residents capital gains on substantial shareholdings are taxable if: (1) the shares are disposed of within six months following the acquisition or before the acquisition. This can occur, for example, when shares in a listed company are sold before their acquisition (in a regulated market that authorises such activity) or (2) the taxpayer was resident in Luxembourg for tax purposes for more than 15 years and became non-resident less than five years before the disposal. The provisions of double tax treaties can override the rules for non-residents (double tax treaties entered into by Luxembourg generally allocate the right to tax capital gains on moveable assets to the shareholder’s country of residence); and
- e a taxable capital gain is the difference between the transfer price and the acquisition price (the acquisition price includes the acquisition costs). On the transfer of a substantial shareholding, or a speculative investment, the applicable rate must be calculated. The average rate applicable to the total income is calculated according to progressive income tax rates and 50 per cent of the average rate is applied to the capital gain.
Capital gains on immoveable assets, real estate and land are taxable if:
- a made within the first two years after purchase (or before purchase); and
- b made more than two years after purchase. The capital gain is subject to income tax at 50 per cent of the global rate (with a current maximum rate of 21.8 per cent) after:
• adjustment of the acquisition price to take account of inflation during the period of ownership; and
• application of any applicable allowance.
The same allowances that are available for moveable assets apply.
Capital gains realised on the principal residence of the taxpayer would be exempt.
The following additional allowances apply:
- a €75,000 for capital gains realised on the disposal of real estate inherited from a direct ascendant (that is, someone from whom a person is descended, for example, a parent or grandparent), if it was the principal residence of the taxpayer’s parents (or spouse’s parents); and
- b capital gains derived from the sale of an individual’s principal residence are exempt from income tax.
Non-residents are taxed in the same manner as residents in relation to immoveable assets located in Luxembourg.
Non-residents are subject to the same taxes as residents when buying assets and other property located in Luxembourg. Both residents and non-residents pay a 6 per cent transfer tax on real estate located in Luxembourg. There is a 3 per cent surcharge on real estate located in the City of Luxembourg, and a 1 per cent transcription tax.
For non-residents, royalties that are not linked to a permanent establishment in Luxembourg owned by a non-resident taxpayer and paid to a non-resident are not subject to withholding tax in Luxembourg, nor have they been taxable by assessment since 2004.
For residents, royalties are subject to Luxembourg income tax for individuals.
Luxembourg estate laws have mostly been implemented by the French Code Napoléon and are still today very similar to French estate law. For the determination of the law applicable, Luxembourg applies the last-domicile criteria for moveable assets and the law of situs for real estate.
Luxembourg has not signed any international treaty on estate law and estate taxation, except for the Hague Convention of 5 October 1961 modified in 1978 on the Conflicts of Laws Relating to the Form of Testamentary Dispositions (Hague Testamentary Dispositions Convention), and the Basel Convention on the Establishment of a Scheme of Registration of Wills concluded on 6 May 1972 modified in 1978.
For EU residents the situation has substantially improved since the adoption on 4 July 2012 by the European Council of Regulation (EU) No. 650/2012 on jurisdiction, applicable law, recognition and enforcement of decisions and acceptance and enforcement of authentic instruments in matters of succession and on the creation of a European Certificate of Succession (the Succession Regulation).
The Succession Regulation, which does not need to be implemented into national domestic law of the Member States, entered into force on 16 August 2012 and will have a direct effect on death situations occurring on and after 17 August 2015.
Under the Succession Regulation, citizens will be able to choose whether the law applicable to their succession should be that of their habitual residence or that of their nationality. In the absence of a designation of the law of nationality, the law applicable to a given succession will be the law of the habitual residence of the deceased.
The Succession Regulation will ensure that a given succession will be treated coherently under a single law and by one single authority and that a mutual recognition of decisions relating to that succession will be implemented throughout the EU. The applicable legal system will rule the entirety of the inheritance (‘principle of the unity of succession’).
Regulation (EU) No. 650/2012 is not applicable:
- a to taxes and customs;
- b to the status of natural persons, and the legal capacity of natural persons; or
- c to questions relating to matrimonial law.
Luxembourg is a civil law country and as such has strong forced heirship rules. Under Luxembourg law only the children benefit from the protection of forced heirship rules. The spouse would not be a compulsory protected heir and can be excluded by virtue of a will.
Third parties or family members may only benefit from gifts or legacies if the assets fall into the scope of the free portion of the deceased. From a legal point of view, all gifts, even those executed abroad, and all contractual arrangements executed to the benefit of a third party (like insurance policies) will be reintegrated fictively in the mass of assets as of the day of death for the purpose of the calculation of the free reserve. The same would apply to assets structured in companies, foundations and trust structures. In cases of violation of a statutory reserve, the forced heirs may claim for reduction of the gifts.
ii Taxation of successions and gifts
Inheritance tax (IHT) is levied on the total net estate left by a Luxembourg resident person valued on the day of the death except for:
- a real estate located abroad; and
- b moveable assets located abroad and taxed abroad by virtue of the citizenship of the deceased person.
When determining whether IHT is due on the deceased’s estate, Luxembourg considers whether the deceased was domiciled in Luxembourg at the date of his or her death. This can lead to conflict with the tests of other countries, which may use the residence or citizenship of the deceased, when determining whether the estate is liable to IHT.
IHT rates vary between zero per cent and 48 per cent (including surcharge), depending on the amount transferred and the relationship between the parties.
Exemptions of IHT apply in the following cases:
- a on the portion those in the direct bloodline are entitled to under the intestacy rules;
- b succession between spouses and partners bound by a partnership agreement registered for more than three years, with common children;
- c succession between spouses married under the universal community regime, where it is expressly stipulated that the surviving spouse will receive all the community assets at the death of the other spouse (Articles 1094 and 1527, Civil Code);
- d succession between spouses or partners bound by a partnership agreement registered for more than three years, where, on the death of the deceased:
• the surviving spouse or partner receives a life interest (usufruct) in an asset, periodic payment or pension; and
• the deceased’s children of a first marriage or partnership (or their descendants) receive the ownership of the asset or must pay the periodic payment of the pension;
- e estates not exceeding a value of €1,250; and
- f real estate situated outside Luxembourg.
The last domicile of the deceased is the decisive factor in establishing whether or not Luxembourg IHT applies.
Luxembourg levies a death transfer tax on the value of real estate located in Luxembourg held by non-residents at the date of their death. The death transfer tax rates vary between zero per cent and 48 per cent, depending on the amount transferred and the family relationship between the deceased and the heirs. Resident and non-resident heirs can be liable for death transfer tax on immoveable property located in Luxembourg, if the deceased was non-resident.
Since the Law of 18 December 2009, the tax regime of estates where the deceased was a non-resident of Luxembourg has been aligned with the tax regime applicable to estates where the deceased was a resident of Luxembourg. As a result, the above exemptions and allowances apply identically in both cases.
For the determination of the taxable base the following assets are deemed to be aggregated:
- a gifts made by the deceased in the year preceding the death, unless gift tax has been paid;
- b other assets received by a third party without tax pursuant to a contractual arrangement (e.g., life insurance); and
- c moveable goods received on real estate sold by the deceased to the heirs within three months preceding the death if the deceased has reserved a right of usufruct.
The rates of IHT are as follows:
- a zero per cent on the forced heirship entitlement of those in the direct bloodline;
- b 2.5 per cent on the portion exceeding the forced heirship entitlement of those in the direct bloodline (5 per cent on the portion exceeding the freely disposable portion);
- c 5 per cent on property transferred between spouses and partners bound by a partnership agreement registered for more than three years, without children in common. In addition, a lump-sum deduction of €38,000 is granted to the surviving spouse or partner in this case;
- d 6 per cent on property transferred between siblings, on the portion they are entitled to under the intestacy rules (15 per cent on the surplus (i.e., the portion exceeding their entitlement under the intestacy rules));
- e 9 per cent on property transferred between uncles and aunts, and nephews and nieces (and between the adopting and the adopted, in a simple adoption), on the portion they are entitled to under the intestacy rules (15 per cent on the surplus);
- f 10 per cent on property transferred between grand-uncles and grand-aunts, and great-nephews and great-nieces (and between adopted and adopting descendants, in a simple adoption), on the portion they are entitled to under the intestacy rules (15 per cent on the surplus); and
- g 15 per cent on property transferred between unrelated persons.
In addition, a progressive surcharge (from 10 per cent to 220 per cent) is levied, depending on the value of inheritance. For example, the amount of tax is increased by:
- a 10 per cent for estates with a value between €10,000 and €20,000; and
- b 220 per cent for estates whose value exceeds €1.75 million, bringing IHT rates to a maximum of 48 per cent.
Gift taxes are levied on the fair market value of the gift transferred. Gift tax rates vary according to the relationship between the parties. Gifts have to be passed by notarial deed according to the Civil Code and as such are subject to a gift tax. Rates vary from 1.8 per cent to 14.4 per cent.
Rates of gift tax, including the surcharge, are as follows:
- a between 1.8 per cent and 2.4 per cent on gifts to those in the direct bloodline, depending on whether or not the gift is recoverable;
- b 4.8 per cent on gifts between spouses and partners bound by a partnership agreement registered for more than three years;
- c 6 per cent on gifts between siblings;
- d 4.8 per cent on gifts made to certain public institutions, foundations and not-for-profit associations (the same rate applies in the case of inheritance);
- e 8.4 per cent on gifts between uncles and aunts, and nephews and nieces;
- f 9.6 per cent on gifts between great-uncles and great-aunts, and great-nephews and great-nieces; and
- g 14.4 per cent on gifts between unrelated persons.
The rate is reduced by 50 per cent on gifts made under a marriage contract or with a view to marriage.
No gift tax applies on:
- a tangible assets transferred by hand are not subject to gift tax (unless the donor dies during the year of making the gift, in which case the gift must be included in the estate), as they are not registered;
- b gifts executed by notarial deed in a foreign country. The law of the country where the gift is received (locus regit actum) governs the tax treatment of the gift; and
- c gifts made to scholarship foundations designed for universities and academic public institutions (the same rate applies for inheritance) as well as, under certain conditions, some other public foundations.
iii Legal regime
There are two types of succession: intestate and by will. In the absence of any testamentary provision, the intestacy rules apply.
The designation of the beneficiaries under the devolution rules depends upon the legal order in which these beneficiaries rank among themselves and in relation to the surviving spouse. This order is determined by: the degree of relationship; and the lineage of inheritance.
The legal devolution system provides for a hierarchy of heirs and provides for several rules (proximity, order and representation).
The hierarchy of heirs will be the following:
- a the descendant (legitimate, natural, adopted);
- b the surviving spouse;
- c the privileged ascendants and collaterals (father, mother, brother, sister and their descendants);
- d the ascendants other than mother and father;
- e the other collaterals; and
- f the state.
The descendants are forced heirs. They exclude all the others, except the surviving spouse. If a child has predeceased his or her parents then the descendant of that child comes in representation of that child into the estate of the parent.
Where the surviving spouse has no children, the surviving spouse inherits all the estate and excludes all other heirs (except if divorced or excluded by application of a testamentary provision).
Where there are children present, the surviving spouse is entitled to a child portion (without being lower than a quarter of the estate) or the usufruct on the main residence.
Children receive a portion of the deceased’s estate under a forced heirship regime (Article 913, Civil Code). The amount of the forced heirship depends on the number of children:
- a one child: 50 per cent, leaving 50 per cent freely disposable;
- b two children: one third each, leaving one third freely disposable; and
- c three or more children: 75 per cent divided equally, leaving 25 per cent freely disposable.
If there are forced heirs, legacies and gifts can only be made on the freely disposable portion. When calculating the forced heirship, the following are taken into account:
- a the assets that the deceased owned at death; and
- b gifts made during the deceased’s lifetime. These are valued as at the date of the deceased’s death but taking into account their condition on the date of donation.
If the gifts granted by the deceased exceed the freely disposable portion, a forced heir who has been deprived of his or her rights can initiate an action for a reduction of these gifts. Under Luxembourg law, such a reduction must be granted. There are two types of reduction:
- a if the gift has been made to a third party who is not an heir to the estate, the reduction will be in kind, meaning that the forced heir is, in principle, entitled to claim back the gift; and
- b if the gift has been made to an heir of the estate, the reduction will be en moins prenant, meaning that the heirship will be reduced in proportion to the value of the gift received. If the value of the gift exceeds his or her entitlement as an heir, he or she will have to compensate the forced heir in cash.
The forced heirship regime cannot be avoided by holding assets through an offshore company, a trust or foundation, or in joint names. Only the deceased’s children (and not the spouse) are forced heirs. Only forced heirs can claim for a reduction of the gift, not their creditors.
Estate planning tools, testamentary provisions, gifts, corporate structures, insurance policies, proxies, joint bank accounts, fiduciary agreements, foundations and trusts are acceptable to the extent that they do not infringe forced heirship rules.
Except for the rules applicable on forced heirship and provision applicable to the surviving spouse, the heirs cannot normally challenge the intestacy rules. However, a challenge to these rules may be possible under certain conditions.
It is not essential for the owner of assets in Luxembourg to make a will, if he or she agrees to his or her estate passing under the intestacy rules. However, an individual must make a will to take advantage of the free portion of the estate or to protect the surviving spouse’s interests.
Normally, a will set up by a Luxembourg resident would be subject to Luxembourg law. Under the EU Succession Regulation (also known as Brussels IV), discussed above, a foreign national can make a will governed by the law of his nationality (see Section III.i, supra).
A will that has been validly executed abroad under a foreign law can be recognised in Luxembourg under the Hague Testamentary Dispositions Convention.
There are three forms of testamentary provisions:
- a handwritten (holographic) will (Article 970, Civil Code). This must be entirely handwritten, signed and dated by the testator;
- b notary deed (Articles 971 to 975, Civil Code). This must be executed before two notaries or one notary assisted by two witnesses. Normally, a notary public takes a record of the testamentary provisions as dictated by the testator. The notary then reads the testamentary provisions to the testator and the will is signed by:
• the testator and the notaries, if the will was executed before two notaries; or
• the notary and the witnesses, if the will was executed before a notary and two witnesses; and
- c mystic will (Articles 976 to 980, Civil Code). This must be handed to a notary public in a sealed envelope and the testator must declare that the envelope contains his last will. The will must include the testamentary provisions, written either by the testator or by someone else.
Testamentary contracts (except in marriage contracts) and inheritance agreements (pacte sur succession future), by which a person waives or grants a right in relation to assets of a future estate, are, in principle, invalid (with the following exceptions: certain provisions included in donation deeds are valid, and insurance contracts are valid).
The deceased’s estate vests in the heirs on his or her death (Civil Code). The legal heirs automatically become co-owners on the death of the deceased. However, the heirs can:
- a accept the estate;
- b accept or refuse the estate after reviewing the estate inventory, showing its assets and liabilities (with three months to review the inventory and 40 days to accept or refuse); or
- c refuse the estate.
As the heirs benefit from the rights of joints owners, they can sell their share in an asset to another heir or to a third party (Article 815, Civil Code). A person cannot be forced to stay in a joint-possession situation.
Before determining the assets and liabilities of an estate, any assets that were common to the spouses under a matrimonial regime must be liquidated.
There are two types of marital regime:
- a the legal regime. This is the regime applicable if there is no marital contract. The assets and debts are owned in common (apart from those assets and debts acquired before the marriage or which are inherited or received as gifts); and
- b the conventional regime entered into by notary deed. This can provide for adaptations to:
• the legal regime (e.g., by providing that assets and debts acquired before the marriage are common to both spouses or by providing for a universal community regime, meaning that all assets are owned in common between the spouses); and
• the separate ownership regime (each spouse retains sole ownership of the assets they acquired before and after entering into the marriage).
The Law of 9 July 2004 grants legal rights to cohabitants (including those of the same sex) if they declare the partnership with their local authority. This has the benefit of, for example, protection in relation to common property and tax advantages. If a declaration has been made, a partnership grants to the partners similar legal rights to those of married couples.
The surviving partners only inherit from the dead partner if a will has been made.
If the two partners are bound by a partnership of more than three years and if the dead partners had descendants or common children with the surviving partner, the inheritance tax rate is zero per cent.
If the two partners are bound by a partnership of more than three years and if the dead partner did not have descendants or common children with the surviving partner, the inheritance tax rate is 5 per cent (for inheritance tax purposes, a lump-sum deduction of €38,000 is applicable for the surviving partner).
The deadline for filing the IHT tax return depends on where the deceased died.
IV WEALTH STRUCTURING AND REGULATION
Luxembourg legal tools used in wealth structuring are numerous and can address almost every need. They range from corporate structures and partnerships to contractual instruments such as insurance policies and fiduciary agreements, and to civil law instruments such as donations, wills and matrimonial agreements. Luxembourg has signed a large number of HCCH conventions relating to international private law issues.
i Structuring for estate planning reasons:
As a majority of estates are exempt from IHT no advance estate planning is necessary in most cases. For the remaining cases where IHT would be applicable, donation by hand of cash amounts, securities or shares in Luxembourg or foreign companies, as well as insurance policy structures, would be used. Given the fact that Luxembourg law generally invalidates inheritance agreements by which a person waives or grants a right in relation to assets of a future estate, structuring for succession purposes has to be used with caution.
Luxembourg has enacted a law on fiduciary agreements that are contracts under which a fiduciant (principal) agrees with a fiduciary (trustee) that, subject to the obligations determined by the parties, the fiduciary becomes the owner of assets (Article 5, Law of 27 July 2003). The assets under a fiduciary contract are separated from the fiduciary’s personal assets and can only be claimed by creditors who have rights over them. The fiduciary assets are not included in the fiduciary’s personal estate on bankruptcy or liquidation, and the fiduciary must account for the fiduciary assets separately from his or her personal assets.
Luxembourg has ratified the HCCH Convention on the Law Applicable to Trusts and on their Recognition 1985 (Hague Trusts Convention) (Law of 27 July 2003).
At present, Luxembourg does not have its own trust legislation but trusts validly set up under foreign legislation can be administered in Luxembourg and are recognised under the conditions provided for by the Hague Trusts Convention. In that respect claims can be filed against a trustee or trust assets in Luxembourg by a spouse, a civil partner of a settlor or a beneficiary or a heir.
In June 2013, the Luxembourg government has adopted a draft law on the creation of a private wealth foundation. This draft law, if adopted, will allow Luxembourg to offer a new legal vehicle benefiting from having legal personality, as distinct from the personality of its founder or its beneficiaries, a legal entity that is the subject of rights and liabilities and duly represented by its board of directors. The draft law contains strict rules on governance, provides for a balance between the protection of the settlor’s interest and the beneficiaries’ interest. The draft law contains state-of-the-art provisions on Financial Action Task Force compliancy rules and is at the same time very protective for the private client in respect of information available to third parties.
The private wealth foundation will be a legal vehicle exclusively dedicated to private clients and private wealth. The private wealth foundation will have an ordinary tax regime and should normally benefit from the various tax treaties concluded by Luxembourg. The draft law also clarifies issues on indirect taxation such as gift taxes and estate taxes.
ii Structuring for tax planning reasons
Luxembourg has no ‘controlled foreign corporation’ legislation applicable to individuals. With appropriate structuring the effective income tax rate can be lowered on investment income by structuring the assets of the client (1) in a private asset management company or (2) by structuring substantial shareholdings in financial holding companies or (3) by holding a portfolio of bankable assets through capitalising investment funds.
V CONCLUSIONs & OUTLOOK
The Luxembourg government has committed to continue with its strategy to make Luxembourg a major international centre in the field of wealth management. The recent law on family office activities, as well as the draft law on the private wealth foundation, clearly demonstrates this aim.
A main international topic in 2016 remains the fight against tax fraud and the pressure on those financial centres that are viewed as being only partially compliant or are considered to be offshore financial centres. The recent Panama Papers issue clearly highlights the importance for financial centres to be globally compliant. The implementation of the automatic exchange of information applicable since 1 January 2016 will assure Luxembourg of its place in the future landscape of the wealth management industry, as this industry, worldwide, moves towards greater transparency and private clients move to overall tax compliancy. For the compliant private client it will enhance the attractiveness of Luxembourg as an internationally recognised, secure and truly compliant financial centre.
Another international topic in 2016 will be the sustainability of banking secrecy laws. Along with the move to greater transparency the role for these laws will also change, becoming of even greater importance to the private client as the gatekeeper to the private sphere and to overall security for wealthy families. Jurisdictions with strong banking secrecy laws, such as Luxembourg, will continue to be under pressure in a cross-border environment although the pressure will change now along with the developments on the issue of automatic exchange of information. The recent implementation by the government of a tax amnesty law to be applied in the tax years 2016 and 2017 again puts the issue of the sustainability of banking secrecy law in the spotlight.
From a purely legal perspective, the existence of the banking secrecy laws and the fact that they remain strong and provide secure protection to families is important for the compliant private client.
The fact that banking secrecy laws are very strong in a domestic context adds to the favourable tax environment detailed above; this along with the Luxembourg government’s policy of ensuring tax stability will continue to make Luxembourg a very attractive place of residence for wealthy families.
On 26 July 2016, the Luxembourg government introduced Bill No. 7020 (registered with the Luxembourg parliament but not yet adopted) proposing some measures that could be applicable from 2017. One of them is the immunisation of the capital gain deriving from potential immoveable property belonging to a business aiming at facilitating the transfer of family businesses.
Other measures include tax advantages, such as tax credits for single-parent households increased up to €1,500, tax credits for employees and pensions adapted depending on revenues, an increase of deductibility of ceiling mortgage interest on principal residences, and a new tax reduction for cars with zero emissions and e-bikes.
Finally, capital gains arising from the sale of real property, other than a main residence, sold between 1 July 2016 and 31 December 2017 will be taxed at 25 per cent of the normal rate (so at a maximum of about 12.5 per cent). The deductibility of the interest on a mortgage would be increased.
1 Simone Retter is a partner at Retter Attorneys.