Since a ruling by the European Commission in 2006, 1929 holding companies have been in a transitional period. This meant that no new 1929 holding companies could be incorporated, while existing ones created up to July 20, 2006 could benefit from the transitional regime only under certain conditions; those that did not meet those conditions lost their privileged tax status.

Up to December 31, 2010, 1929 companies currently under the transitional regime can elect to transform themselves into another kind of company, otherwise they will be automatically converted when the year-end deadline is reached.

What happens if companies do nothing?

As of January 1, existing 1929 holding companies will become Soparfis (sociétés de participations financières). The advantages of a Soparfi include access to Luxembourg’s network of double taxation treaties and to European Union directives including the Parent-Subsidiary and Interest and Royalties directives, the application of tax deductions and the possibility to carry forward losses.

However, unlike 1929 holding companies, Soparfis are fully taxable. Companies that are automatically converted will become subject to municipal business tax, corporate income tax and net wealth tax levied on the net assets of the company, although tax planning measures may be used to mitigate the impact of these taxes.

What are the other options for the conversion of 1929 holding companies?

A range of other structures is available in Luxembourg for the conversion of 1929 holding companies.

Société de Gestion de Patrimoine Familiale (SPF)

The SPF was created by the law of May 11, 2007 as an alternative option to replace the 1929 holding company. Its advantages include exemption from municipal business tax, corporate income tax and net wealth tax (although there are exceptions), the absence of Luxembourg withholding tax on dividends and interest, application of the EU Taxation of Savings Directives, and a tax-neutral regime for investors.

However, the SPF has a number of disadvantages, notably restrictions on the kind of investors that can use the structure. These are limited to individuals acting to manage their private property, wealth management companies acting exclusively to manage the private property of individuals, and intermediaries acting in the name of such private investors.

In addition, the purpose of an SPF is strictly limited to the acquisition, holding, management and realisation of financial assets. The structure does not benefit from Luxembourg’s double taxation treaties, nor from the Parent-Subsidiary Directive.

The conversion of 1929 holding companies into SPFs is tax-neutral.

Specialised Investment Fund (SIF)

Brought into being by the law of February 13, 2007, the SIF may be a suitable option for 1929 holding companies that contain a managed portfolio. SIFs offer a range of advantages including a subscription tax of only 0.01 per cent, exemption from corporate income tax and net wealth tax, and exemption from Luxembourg withholding tax on dividends.

The purpose of a SIF is the management of financial assets and real estate. It can be either fiscally transparent (as a common contractual fund, or FCP) or non-transparent (open-ended investment company, or Sicav); Sicavs benefit from certain Luxembourg double taxation treaties. A SIF offers a tax-neutral regime for investors and in addition allows for the creation of legally segregated compartments or sub-funds.

The disadvantages of a SIF are that it is an entity regulated and supervised by the Financial Services Supervisory Authority and is subject to risk diversification rules. The regime is restricted in terms of eligibility to institutional, professional and well-informed investors, and SIFs must reach the minimum capital level of €1,250,000 within one year.

Alternatives

In theory 1929 holding companies can also be converted into securitisation vehicles or risk capital investment companies (Sicars), but these structures are less likely to be appropriate to the purposes of 1929 holding companies.

Other solutions

As an alternative to these conversion options, a 1929 holding company can also be merged with another company, it can be liquidated, or its registered office can be transferred abroad.

Despite the abolition of the 1929 Holding Company regime, a broad range of alternative solutions is available in Luxembourg to suit your particular needs.

The main innovations of the Audit Law are:

-       The introduction of a distinction between “approved” independent auditors and “unapproved” independent auditors. The latter are not allowed to proceed to activities reserved by law to the approved independent auditors and therefore statutory audits.

-       The registration of “approved” independent auditors with the Luxembourg Supervisory Commission on the Financial Sector (Commission de Surveillance du Secteur Financier).

-       The set-up of an audit committee for public interest entities subject to derogation.

In accordance with the OECD standard, the protocol provides for an exchange of information in specific cases between the respective tax authorities.

Such protocol is very important for the development of the international activities of Luxembourg’s financial center, and notably its investment fund sector:  Luxembourg will no longer be considered as a tax haven according to the royal Spanish decree which define tax havens.

We set out hereunder the main features of this treaty. The maximum withholding taxes that will be applicable are as follows:

• 0% on dividends if the beneficial owner is a company that directly holds at least 10% in the capital of the distributing company or the participation has an acquisition cost of at least 1,200,000 Euro;
• 10% on dividends in all other cases;
• 0% on interests; and
• 3% on royalties paid from Hong Kong to Luxembourg. According to Luxembourg internal law, royalties other than royalties for the use of, or the right to use, any copyright of literacy or artistic work are not subject to withholding tax.

Capital gains realised on the sale of assets are taxed in the place where the seller is resident, except if the sold asset qualifies as:

- immovable property situated in the other contracting party;

- movable property allocated to a permanent establishment in the other contracting party;

- shares of a company more than 50% of the value of which is derived directly or indirectly from immovable property situated in the other contracting party;

In other words, a sale of shares held by a Luxembourg parent company in a Hong Kong subsidiary will be only taxable in Luxembourg. In accordance with Luxembourg internal law, such capital gains will be exempted from capital gains tax if the Luxembourg company owns more than 10% of the capital in the Hong Kong subsidiary and the disposal takes place within 6 months of the acquisition of the shareholding.

Given that Luxembourg has a very favourable holding regime and an extensive tax treaty network, as well as being a member state of the European Union, Chinese and Hong Kong investors may be able to use this tax treaty as a platform for their European investments.

The main measures introduced by these laws are as follows:

1. Abolition of capital duty as of 2009

The law has abolished the current contribution duty of 0,5% on capital contributions to Luxembourg companies.

The new favourable regime will provide:

- For  a fixed registration duty of 75 Euro on (i) the incorporation of Luxembourg companies, (ii) the amendment of the articles of incorporation of Luxembourg companies and (iii) the transfer of seats to Luxembourg;

- For contributions of real estate assets to Luxembourg companies in exchange of shares: these contributions will be subject to a fixed registration duty of 0,5% and a transcription tax of 0,5%. All other contributions of real estate assets to Luxembourg companies (such as debt takeover, etc.) will be subject to a registration duty of 6% and a transcription duty of 1%.

It is important to note that the new laws also provide for the abolition of the fixed capital duty of 1,250 Euro charged to specialized investment funds (SIFs), private equity capital companies (SICARs), undertakings of collective investments (UCIs) and securitization vehicles.

2. Exemption (under certain conditions) of withholding tax on dividends paid to treaty countries (in case of corporate shareholders)

This expansion of the participation exemption regime would seriously enhance the attractiveness of Luxembourg as a jurisdiction for the repatriation of profits. Currently, most treaties signed by Luxembourg provide for a reduced rate of withholding tax (generally 5% instead of the domestic withholding tax of 15%). Practically, this would reduce the withholding tax on dividends paid by a Luxembourg company to its parent company located in a country with which Luxembourg has signed a double tax treaty to 0%. The exemption is granted if the parent companies is subject to an effective tax rate of at least 10,5% and either hold at least 10% of the shares in the Luxembourg company or if the acquisition cost for the shares is at least 1,200,000 Euro. Given that Luxembourg has a very favourable holding regime and an extensive tax treaty network, as well as being a member state of the European Union, Non EU investors and Asian investors may see Luxembourg  as a platform for their European investments.

3. Decrease of the combined corporate income tax rate from 29,63% to 28,59% as of 1 January 2009

4. Broadening the scope of the IP regime introduced by the law of December 2007 (in relation to the 80% exemption on income derived from IP)

Currently, 80% of income and capital gains derived from intellectual property rights is exempt from corporate income tax. These laws would broaden the scope of the law as follows: (i) Qualifiying IP assets held by Luxembourg companies will be exempt from the net wealth tax of 0.5% and (ii) domain names are, as from tax year 2008, eligible to the 80% tax exemption on income derived from intellectual property.

• 0% on dividends if the beneficial owner is a company that directly holds at least 10% in the capital of the distributing company or the participation has an acquisition cost of at least 1,200,000 Euro;
• 10% on dividends in all other cases;
• 0% on interests; and
• 3% on royalties paid from Hong Kong to Luxembourg. According to Luxembourg internal law, royalties other than royalties for the use of, or the right to use, any copyright of literacy or artistic work are not subject to withholding tax.

Capital gains realised on the sale of assets are taxed in the place where the seller is resident, except if the sold asset qualifies as:

- immovable property situated in the other contracting party;

- movable property allocated to a permanent establishment in the other contracting party;

- shares of a company more than 50% of the value of which is derived directly or indirectly from immovable property situated in the other contracting party;

In other words, a sale of shares held by a Luxembourg parent company in a Hong Kong subsidiary will be only taxable in Luxembourg. In accordance with Luxembourg internal law, such capital gains will be exempted from capital gains tax if the Luxembourg company owns more than 10% of the capital in the Hong Kong subsidiary and the disposal takes place within 6 months of the acquisition of the shareholding.

The treaty would enter into force after the exchange between Luxembourg and Hong Kong of the ratification instruments.

Given that Luxembourg has a very favourable holding regime and an extensive tax treaty network, as well as being a member state of the European Union, Chinese and Hong Kong investors may be able to use this tax treaty as a platform for their European investments.

• The exemption of withholding tax on dividends paid to corporate shareholders located in countries with which Luxembourg has signed a double tax treaty. This expansion of the participation exemption regime would seriously enhance the attractiveness of Luxembourg as a jurisdiction for the repatriation of profits. Currently, most treaties signed by Luxembourg provide for a reduced rate of withholding tax (generally 5% instead of the domestic withholding tax of 15%). Practically, if the bill is voted, this would reduce the withholding tax on dividends paid by a Luxembourg company to its parent company located in a country with which Luxembourg has signed a double tax treaty to 0%;
• As already mentioned by the Prime Minister in a speech addressed to the Luxembourg Parliament on 22 May 2008, the Luxembourg overall income tax would be reduced gradually over a period of a couple of years from 29,63% to 25,5%. If the draft bill is voted, the overall corporate income tax rate would already be reduced to 28,59%;
• Introduction of new favourable measures in relation to the law of December 2007 on income and capital gains derived from intellectual property: Currently, 80% of income and capital gains derived from intellectual property rights is exempt from corporate income tax. The draft bill would introduce the following measures: (1) qualifiying IP assets held by Luxembourg companies will be exempt from the net wealth tax of 0.5% and (ii) domain names are, as from tax year 2008, are eligible to the 80% tax exemption on income derived from intellectual property.

Although this bill is not yet voted, it is expected to be approved so that the measures would be applicable as of the year 2009.

• Relating to corporate taxation
  • Progressive decrease of the corporate tax rate from 29.63% to 25.5% with a possible broadening of the corporate tax base
  • Abolishment of capital duty as from January 1st , 2009
• Relating to personal taxation
  • Income tax brackets for personal income tax will be increased by 6% in 2009
  • Increase of tax deduction ceilings (insurance premiums)
  • Tax allowance of € 600 for salaried and pensioned taxpayers will be replaced by a tax credit of € 300
  • Single parent allowance of € 1,920 will be replaced by a tax credit
  • Salary indexation will be restored as from 2010 (unless the economic situation worsens)
  • Introduction of specific measures for people with low income
• Relating to Philanthropy  and Environment
  • The maximum tax deductible amounts for donations to certain charitable organization are doubled from € 500,000 to € 1,000,000, respectively from 10% to 20% of the net income
  • No increase of the duty on road fuel (petrol and diesel) and of excise duties
  • Company cars will benefit from the € 750 incentive granted for the purchase of low-emission cars (< 120g CO2/km)

While promoting environmental and philanthropic measures, those proposed reforms mainly aim at enhancing Luxembourg attractiveness for investors, in the context of a general slowdown of the global economic activity, which justify the introduction of social measures.
On the whole, it is a balanced evolution allowing for a preservation of Luxembourg competitiveness in a new economic context.

A Draft bill of law relating to the modernisation of the amended law of 10 August 1915 on commercial companies was submitted to the Luxembourg Parliament on 8^th of June 2007.

Its principal purpose is to further modernise Luxembourg corporate law.

Brief overview of the main changes proposed in the draft law:

Relating to the regime of the public companies limited by shares (sociétés anonymes)

• New possibilities of differentiation between shareholders
  • Possibility to issue below par value more shares of an already existing class.
  • Possibility to grant multiple voting rights for certain shares.

• Management of the company
  • Establishment of management committees (comités de direction);
  • Amendments to the regime of conflict of interests at the level of the management bodies of the company;
  • Confirmation of the possibility for the board to resolve by way of circular resolutions.

Relating to the private limited companies (sociétés à responsibilité limitée)

Proposals for reforms

• A new form of commercial company, the sociétés par action simplifiée, inspired by the regimeof the French sociétés par action simplifiée could be introduced in the Luxembourg corporate law. This would allow a greater flexibility in drafting by-laws.
• Possibility of a future codification of the Luxembourg corporate law

Conclusion

The modernization of Luxembourg corporate law proposed by the draft law should improve its attractiveness for investors by introducing changes that were tested in other national legislations .On the whole it is a balanced evolution allowing for more differentiation between shareholders while improving their rights and a more flexible management.

• Reduction of capital duty (payable upon incorporation and on capital increases) from 1% to 0,5%. The intention of the Luxembourg government is to abolish this capital duty by 2010;
• Increase of investment tax credit from 10% to 12%. This credit applies to investment in tangible goods other than buildings, personal cars, etc;
• 80% exemption on income derived from IP (royalties) (article 50bis of the Luxembourg Income Tax Code) (see our legal alert of 23 December 2007);
• Reduction of taxation of Luxembourg residents: the income tax brackets are increased by 6%;

Please do not hesitate to contact us should you have any further questions.