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.

The Luxembourg government has recently introduced a draft law on 6 November 2007 that would provide for an 80% tax exemption of income derived from intellectual property (“IP”) as well as capital gains realized on the disposal of such intellectual property. The aim of this new incentive is to encourage companies to invest more in research and development and will increase the attractiveness of Luxembourg for the holding of intellectual property. It is intended that the regime is applicable as from January 2008.

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

Regime applicable to royalties (income derived from intellectual property)

The royalties received by a Luxembourg legal person or natural person as a consideration for the use of any copyright on software, any software, trade mark, design or model will benefit from an 80% exemption on their net income. Net income is defined as the gross royalty income received by the legal person or individual reduced by the amount of expenses in direct connection with this income.

Regime applicable to capital gains

Capital gains realized on the disposal of intellectual property (use of any copyright on software, any software, trademark, design or model) will in principle benefit from an 80% exemption, subject to certain rules as set out in the draft law.

Conditions that need to be fulfilled

• The IP must have been created or acquired after 31 December 2007;
• The expenses in connection with the IP must be recorded as an asset in the balance sheet for the first book year for which the application of the regime is demanded;
• The IP may not have been acquired from a person who is qualified as an “affiliated company”. The concept of affiliated company has been clarified by the draft law. Company X is considered as an affiliated company to company Y if :
  • Company X directly holds a participation of 10% in the share capital of Y
  • Company Y directly holds a participation of 10% in the capital of X;
  • 10% or more of the share capital of X and Y are directly held by the same company.

Summary of the key advantages of the proposed new regime

• The scope of IP acquired from a third party is broad; it may include any patents, any copyrights on software, trademarks, designs or models (other countries such as Belgium have also introduced such regime, however the scope of IP is more limited and excludes copyright, trademarks, models and designs (see Belgian law of 27 April 2007);
• Only 20% from the net income out of IP will be taxed at 29,63% which provides an effective tax burden of roughly 5.9%;
• The IP can be developed either by the company itself or acquired from a third party;
• Income derived from IP developed by the company itself can also be deducted (for an amount of 80% of the net income it would have received from a third party for the use of the patent);
• Luxembourg companies (soparfi, etc.) can in general benefit from the extensive network of Luxembourg double tax treaties as well as from the EU directive on royalty payments (as opposed to offshore jurisdictions).

Conclusion

This new draft law offers an attractive regime for the holding of intellectual property through a Luxembourg company certainly taking into account that Luxembourg has an extensive tax treaty network and that Luxembourg companies can benefit from the EU directive on royalty payments.