Double Tax Treaty between Germany and Luxembourg enters into force

The new Double Tax Treaty (DTT) for the avoidance of double taxation and the prevention of fiscal evasion with the respect to taxes on income and on capital between Germany and Luxembourg signed on 23 April 2012 entered into force on 30 September 2013 after the exchange of the instruments ratification had taken place.

The new DTT Luxembourg-Germany is applicable as of 1 January 2014 in order to directly follow the Treaty of 1958.

The new DTT corresponds in the main to the OECD Model Tax Convention.

It fixes the withholding tax rate for dividends at 15%. In case of direct shareholdings in a company (with the exception of partnerships and investment companies) of at least 10%, the withholding tax rate is reduced to 5%. In addition, a reduction of withholding tax rate according to EU Parent Subsidiary Directive has to be reviewed on a case to case basis. The withholding tax rates for interest and for licenses remain unchained at 0% and 5% respectively.

Extension of Luxembourg Foundation Law

On 22 July 2013 the Luxembourg Minister of Finance has submitted the draft law No. 6595 to the Parliament aiming at a fundamental reform of Foundation Law in Luxembourg (Law of 21 April 1928).

The foundation according to the current legal situation is basically restricted to philantrophic, religious, social, scientific, artistic or educational purposes, or must have its mission on the areas of sport or tourism. In general the foundation must be a non-profit organization (Article 27 of the Law of 21 April 1928, as amended).

Family foundations, foundations serving private interest or company-affilated foundations known from foundation regimes in other countries such as the Dutch Stichting are not yet permitted under Luxembourg law. The foundation according to current Luxembourg law was therefore not suitable for private wealth management.

With the new foundation law the attractiveness of Luxembourg as a location for family offices and private wealth management vehicles will increase and the influx of wealthy individuals to Luxembourg will further be stimulated.

Overview of the new legal and fiscal framework

Setting up a family foundation requires a notarial deed that is to be published in the Luxembourg Register of Commerce and Companies. Founding members, beneficial owners and the amount contributed do not have to be disclosed.

The family foundation may be represented by one or several managers who can be natural and legal persons.

The foundation may issue registered certificates linked to predetermined assets and liabilities and representing rights defined in the incorporation act.

The family foundation is subject to general obligations to keep accounts in Luxembourg and has to prepare financial statements. However these need not be published in the Luxembourg Register of Commerce and Companies.

The family foundation is subject to general corporate income and business tax. It is, however, exempt from net wealth tax. It also benefits from an exemption for dividends, interest payments and capital gains on securities. Payments to non-resident beneficiaries are not subject to withholding tax and should not be taxable in Luxembourg.

At the death of a Luxembourg foundation member the transfer of net assets (total of all assets minus debts) to the beneficiaries is subject to a registration tax depending on the degree of relationship to deceased´s heir. For spouses of the founder, his/her partner, and his/her direct ascendant or descendant the transfer of net assets is tax exempt.

The present draft law further strengthens Luxembourg´s competitiveness as an attractive location for family offices and high net worth individuals.

German Annual Tax Act 2013 aiming at combatting RETT-Blocker structures

On 5 June 2013 the Conciliation Committe of the German Bundestag and Bundesrat settled the differences about the Annual Tax Act 2013. On 6 June 2013 the law passed the Bundestag and on 7 June 2013 the Bundesrat. The law aimed at combatting undesirable tax planning.

In this context the possibility for real estate companies using RETT-Blocker structures in case of share deals should be restricted.

RETT-Blocker structures aim at avoiding real estate transfer tax in case of an exchange of a legal entity holding German real estate property through an interim holding company in which a third party has a minority interest.

According to the new real estate transfer tax law RETT will be triggered if an acquirer directly and indirectly holds at least 95% share capital in a German real estate property owning entity. By considering also indirect ownership - which was not the case in the past - the new RETT Act receives a more realistic economic view. Technically, all pro rata participations are multiplied when determining the relevant ownership percentage.

The provision particularily affects RETT-Blocker limited partnership structures (KG structures) like illustrated below. These are structures where typically a German KG directly or indirectly holds more than 5% of the shares in a real estate owning company and a third party partner holds more than 5% (in case of the example below with 6% resulting in a minority economic ownership of only 0,36%).

As a result, under the current law, existing RETT-Blocker structures like illustrated below could reach the 95% threshold for RETT purposes.

Financial Holding Company - SOPARFI

The SOPARFI (Société de participation financière) is the standard Luxemburg holding company. It is a fully taxable, Luxemburg-resident company that can be set up by any type of investor without restrictions and usually takes the form of a public limited company (Société Anonyme) or a private limited liability company (Socété à responsabilité limité).

A SOPARFI can benefit from the double tax treaties concluded by Luxemburg and from EU directives such as the Parent-Subsidiary Directive.

The main purpose of using a SOPARFI is to ensure the tax efficiency of the group´s repatriation of profits to investors and its intra-group operations.

Family Wealth Management Company - SPF

The Family Wealth Management Company "SPF" (Société de Gestion de Patrimoine Familiale) is an investment vehicle designed for the management of individuals´private wealth.

For the purpose of an SPF, the term "family wealth" ("patrimoine familiale") is understood to mean "the wealth of individuals" ("patrimoine privé de personnes physiques") as no family relationship is required between the different shareholders.

SPFs have no special legal status. They must be set up in the legal form of a capital company. The annex SPF has to be added to the company name.

SPFs are exonerated from corporate income tax, communal business tax and wealth tax. They are subject to an annual subscription tax at a rate of 0,25% applicable on its share capital.

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