The Private Wealth & Private Client Review: Luxembourg
For decades, Luxembourg has been a major participant in the international wealth management industry with its large private banking industry.
Luxembourg has also become a home for many individuals and families with significant wealth. In the past, the Luxembourg authorities have been committed to 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 attractiveness as a country of residence, 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.
Luxembourg's public debt is among the lowest in the world (23.23 per cent as of May 2021) and it is one of the few countries in Europe to meet the 3 per cent budget deficit criteria.
The country's political stability and healthy public finances (Luxembourg AAA-rating) contribute to a great extent to the social stability and overall security of Luxembourg. Despite the covid-19 sanitary crisis, Luxembourg has succeeded in maintaining healthy public finances and its triple A rating, which was recently reconfirmed by the relevant agencies in 2021.
This political, social and tax stability, together with the fact that Luxembourg is part of the EU and geographically lies at 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, 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 relating to income tax with 86 countries (as of May 2020). Most provide for double taxation relief through exemption. Investment income is generally subject to tax credit rules. Most of the double taxation treaties provide for exchange of information on request following Article 26 of the Organisation for Economic Co-operation and Development (OECD) Model Tax Convention. Luxembourg has not entered into any double taxation treaties relating to inheritance tax and gift tax.
By two laws of 26 March 2014 and 29 March 2013, 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 double taxation treaties.
The law of 18 December 2015 has introduced the Automatic Exchange of Information Law (AEOI Law) as set forth in Directive 2014/107/EU, dated 9 December 2014 (which amends the previous Directive 2011/16/EU). The AEOI Law entered into force on 1 January 2016. As of 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.
In application of the law of 18 December 2015, the Grand Ducal Decree of 15 March 2016 (as amended from time to time) determines the list of participating jurisdictions and exempt products in relation to the CRS.
In addition, Luxembourg has implemented a series of tax legislation, mainly affecting corporate taxpayers, ensuring as such its compliance with the European and OECD standards, including:
- the law of 21 December 2018 implementing the Anti-Tax Avoidance Directive (ATAD 1);2
- the law of 7 March 2019 approving the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (MLI);
- the law of 20 December 2019 implementing Directive (EU) 2017/952 amending ATAD 1 (ATAD 2); and
- the law of 25 March 2020 implementing Directive (EU) 2018/822 (DAC 6), which introduces disclosure obligations for intermediaries and taxpayers of certain reportable cross-border arrangements.
Unless there is a relevant double taxation treaty applicable, tax residency is determined in domestic law by two criteria: domicile or 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 or 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 constituting 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. These provide generally that, where an individual is a resident of both contracting states, his or her status is determined as follows:
- 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);
- 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;
- 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
- 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 for individuals acting in the course of the management of their private wealth. 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 the following two conditions are met: the taxpayer was resident in Luxembourg, for tax purposes, for over 15 years; and the taxpayer became non-resident less than five years before the disposal.
If a person resides in Luxembourg for less than six months, he or she may 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 requested to do so by the Luxembourg tax authorities). 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.
Luxembourg law provides for a step-up principle for new Luxembourg tax residents: any non-resident individual who becomes a Luxembourg tax resident may revalue the purchase price of certain assets at their market value on the day that such person becomes a Luxembourg tax resident. This regime only applies to substantial shareholdings and to convertible loans in which the taxpayer holds a substantial shareholding.
Since January 2018, resident and non-resident married couples can opt for individual or joint taxation. Declared partners can be jointly taxed under certain conditions and upon request.
Luxembourg is not a tax haven and income tax rates vary from zero to 45.78 per cent (including the contribution to the unemployment fund) with the maximum marginal rate of 45.78 per cent applicable to income above €200,004 for a single person and €400,008 for a couple taxed jointly.
Income tax rates are progressive. Since 1 January 2017, the marginal tax rate is 42 per cent for taxable income exceeding €200,004 (class 1 and 1a) or €400,008 (class 2). The contribution to the unemployment fund is 7 per cent, increasing to 9 per cent for taxable income exceeding €150,000 (class 1 and 1a) or €300,000 (class 2). Therefore, the maximum marginal tax rates applicable in 2017 can amount to up to 45.78 per cent. This does not include the social security and dependency contributions.
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:
- wealth tax for private individuals has been abolished since 1 January 2006; and
- a final withholding tax of 20 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 20 per cent levy if they are the beneficial owners of interest payments from paying agents established outside Luxembourg, either in a Member State of the EU or the European Economic Area; or in a jurisdiction that has concluded an agreement with Luxembourg in connection with the Savings Directive.
In these circumstances, the 20 per cent levy is calculated in the same way as if the paying agent was resident. The option for the 20 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.
This interest income and the assets producing the income will not need to be reported in the individual's annual income tax return.
Dividend income is subject to income tax, but a 50 per cent exemption is granted for dividends received from the following types of companies (Article 115(15)a of the Luxembourg Income Tax Law):
- a fully taxable resident company;
- an EU-resident company under Article 2 of the Parent–Subsidiary Directive3; and
- a fully taxable limited company that 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.
A yearly tax allowance of €1,500 is available for a single taxpayer. The latter allowance is increased to €3,000 for married couples or jointly taxed partners.
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 can be reduced by the application of double tax treaties or refundable under certain circumstances. When the beneficiary is an individual, the tax withheld at source is in principle fully creditable on his or her personal income tax.
Capital gains on movable assets are taxable if:
- 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);
- 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 at any moment within the five years preceding the disposal. A resident can also dispose of a substantial shareholding if he or she acquired the shareholding 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 22.89 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-month holding period). These allowances can be used once per decade only;
- no capital gains tax is due if both the gain is realised more than six months after the acquisition; and the movable assets do not constitute all or part of a substantial shareholding;
- for non-residents, capital gains on substantial shareholdings in a Luxembourg corporation are taxable if the shares are disposed of within six months of the acquisition or before the acquisition, which occurs, for example, when shares in a listed company are sold before their acquisition (in a regulated market that authorises such activity); or 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 movable assets to the shareholder's country of residence); and
- 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 immovable assets, real estate and land are taxable if:
- made within the first two years after purchase (or before purchase); and
- 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 22.89 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 movable assets apply.
The following additional allowances apply:
- €75,000 for capital gains realised on the disposal of real estate inherited from a direct ascendant (i.e., 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
- 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 immovable 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. A €20,000 transfer tax credit is available once to each Luxembourg-resident taxpayer in the context of the acquisition of a home, under the condition of an effective and personal occupation of the acquired dwelling, within two years and for a period of two years.
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 are they taxable by assessment.
For residents, royalties are subject to Luxembourg income tax for individuals.
Real estate investment fund tax
As of 1 January 2021, a 20 per cent real estate tax is due from certain Luxembourg-based investment vehicles (UCIs, SIFs and RAIFs) established under a corporate form that receive income directly or indirectly from real estate located in Luxembourg.
As of 1 January 2021, employers are entitled to grant a profit-sharing bonus to some of their employees of up to 5 per cent of the employer's profits generated in the previous financial year. This discretionary bonus is considered as a corporate tax-deductible operating expense at the level of the employer, qualifies as employment income at the employee level, and benefits from a 50 per cent individual income tax exemption in the employee's hands. The bonus cannot exceed 25 per cent of the employee's gross ordinary annual remuneration (i.e., excluding any cash, in-kind benefits, bonuses, premiums, etc.) for any given tax year.
Luxembourg estate laws have mostly been implemented by the Napoleonic Code and are still today very similar to French estate law. For the determination of the law applicable, Luxembourg applies the last-domicile criteria for movable 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 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 (Succession Regulation).
The Succession Regulation, which does not need to be implemented into the national domestic law of the Member States, entered into force on 16 August 2012 and has a direct effect on death situations occurring on and after 17 August 2015.
Under the Succession Regulation, citizens are 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 is the law of the habitual residence of the deceased.
The Succession Regulation ensures 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:
- to taxes and customs;
- to the status of natural persons, and the legal capacity of natural persons; or
- to questions relating to matrimonial law.
Luxembourg is a civil law country and as such has strong forced heirship rules. Under Luxembourg law only 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 within 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 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 a 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 real estate located abroad; and movable 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 and 48 per cent (including surcharge) depending on the amount transferred and the relationship between the parties.
Exemptions to IHT apply in the following cases:
- on the portion those in the direct bloodline are entitled to under the intestacy rules;
- succession between spouses and partners bound by a partnership agreement registered for more than three years;
- estates not exceeding a value of €1,250; and
- real estate situated outside Luxembourg.
The last domicile of the deceased is the decisive factor in establishing whether 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 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 immovable 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:
- gifts made by the deceased in the year preceding the death, unless gift tax has been paid;
- other assets received by a third party without tax pursuant to a contractual arrangement (e.g., life insurance); and
- movable 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 IHT rates are as follows:
- zero per cent on the forced heirship entitlement of those in the direct bloodline;
- zero per cent on property transferred between spouses and partners bound by a partnership agreement registered for more than three years;
- 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);
- 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));
- 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);
- 10 per cent on property transferred between great-uncles and great-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
- 15 per cent on property transferred between unrelated persons.
In addition, a progressive surcharge (from 10 to 220 per cent) is levied depending on the value of inheritance. For example, the amount of tax is increased by 10 per cent for estates with a value between €10,000 and €20,000; and 220 per cent for estates whose value exceeds €1.75 million.
This brings 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 to 14.4 per cent.
Rates of gift tax, including the surcharge, are as follows:
- between 1.8 and 2.4 per cent on gifts to those in the direct bloodline, depending on whether the gift is recoverable or not;
- 4.8 per cent on gifts between spouses and partners bound by a partnership agreement registered for more than three years;
- 6 per cent on gifts between siblings;
- 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);
- 8.4 per cent on gifts between uncles and aunts, and nephews and nieces;
- 9.6 per cent on gifts between great-uncles and great-aunts, and great-nephews and great-nieces; and
- 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:
- tangible assets transferred by hand (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;
- gifts executed by notarial deed in a foreign country (except if the gift concerns real estate located in Luxembourg). The law of the country where the gift is received (locus actum regit) governs the tax treatment of the gift; and
- 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:
- the descendant (legitimate, natural, adopted);
- the surviving spouse;
- privileged ascendants and collaterals (father, mother, brother, sister and their descendants);
- ascendants other than mother and father;
- other collaterals; and
- 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 as 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:
- one child: 50 per cent, leaving 50 per cent freely disposable;
- two children: one-third each, leaving one-third freely disposable; and
- 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:
- the assets that the deceased owned at death; and
- 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:
- 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
- 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 provisions 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 or her nationality (see Section III.i).
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;
- a 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
- a 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 or her 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:
- accept the estate;
- 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
- refuse the estate.
As the heirs benefit from the rights of joint 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:
- 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 that are inherited or received as gifts); and
- 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, the inheritance tax rate is zero per cent.
If the two partners are bound by a partnership of less than three years, 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.
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 ratified the HCCH Convention on the Law Applicable to Trusts and on their Recognition 1985 (Hague Trusts Convention) (Law of 27 July 2003). 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, a beneficiary or an heir.
In June 2013, the government adopted a draft law on the creation of a private wealth foundation, registered and pending before the Luxembourg Parliament. The authorities have since decided to freeze this draft law, and no developments are expected until further notice.
ii Structuring for tax planning reasons
Luxembourg has no controlled foreign corporation legislation applicable to individuals. With appropriate structuring, the tax impact can be anticipated on investment income by structuring the assets of the client in a private asset management company, by structuring substantial shareholdings in financial holding companies or by holding a portfolio of bankable assets through capitalising investment funds.
Outlook and conclusions
The government has committed to continue with its strategy to make Luxembourg a major international centre in the field of wealth management.
A main international topic in 2021 remains the fight against tax fraud and the pressure on those financial centres that are viewed as being only partially compliant or not transparent enough. This is clearly not the case for Luxembourg. The implementation into Luxembourg law of the required European and international standards (CRS, ATAD 1 and 2, MLI, DAC 6) has assured 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. As far as transparency rules are concerned, Luxembourg introduced a public register of beneficial owners with the Law dated 13 January 2019 ( RBO Law of 13 January 2019) and more recently a register of trusts and fiduciary agreements (RFT Law of 10 July 2020). For compliant private clients, this will enhance the attractiveness of Luxembourg as an internationally recognised, secure and truly compliant and transparent financial centre.
Finally, even if it is too early to measure what the global economic impact of the pandemic crisis the world has to face will be, the healthy finances of Luxembourg, the high liquidity and solvency ratios of its banks and the resilience of its financial sector give more room to Luxembourg than most other European countries to tackle the crisis with adequate economic policies.