A draft bill to amend the law of 11 May 2007 on the Luxembourg « SPF» has been introduced on 15 July in order to comply with the principles of both the Treaty on the Functioning of the European Union and the Agreement on the European Economic Area (EEA).
As a replacement for the traditional Holding 1929 companies, a law establishing a new private asset management vehicle – the Société de gestion de Patrimoine Familial («SPF») - was passed by the Luxembourg Parliament.
The current SPF regime
Drafted to answer the needs of private investors, the law on the creation of the SPF was passed by the Parliament on 11 May 2007 (“The SPF Law”) and aimed at establishing a legal framework for the management of private assets.
According to article 1 of this law, the legal form of a SPF precludes any form of partnership. As a result, a SPF can only be set up under the form of an S.àr.l. (Société à responsabilité limitée – limited liability company), an S.A. (Société anonyme – limited liability company by shares), a COOPSA (Société cooperative organisée sous forme de SA – cooperative company organised as a limited liability company by shares) or an SCA (Société à commandite par actions – limited liability partnership company). Its shareholders and investors are either individuals managing their personal assets or entities acting on behalf of such individuals.
A SPF may acquire, hold, manage or dispose of financial assets but is not allowed to conduct any type of commercial activity. Thus, a SPF benefits from the limited liability of the legal person.
The private nature of the company allows the investors to choose how they want the assets to be managed and thereby gain more freedom from the principle of risk diversification imposed on Undertakings for Collective Investment ("UCI").
SPFs are allowed to invest in any kind of equities and other transferable securities, bonds and other debt instruments, forward contracts, swaps, options and structured products.
With respect to the minimum social capital of a SPF, the Law of 2007 is silent. Accordingly the statutory Law of 1915 on commercial companies as amended applies, that is to say, EUR 31,000 for the SA and EUR 12,500 EUR for the S.à r.l..The statutory law also applies as regards the paids-up capital.
From a Luxembourg tax perspective, the SPF is exempted from corporate income tax, municipal business tax and net wealth tax according to the article 4(1). However a SPF that receives more than 5% of its total dividend income during a year out of participations in non-resident and non-listed companies which do not have to pay an income tax similar to Luxembourg corporate income tax, cannot benefit from the tax scheme provided by article 4(1) of the SPF Law. A resident company of an EU Member State that appears on a list drawn up on the basis of the modified Directive 90/435/CEE, automatically meets the requirements of comparable taxation. Thus, it is a general practice that a tax, which is levied abroad and comparable to a tax levied in Luxembourg, should be collected for an effective tax rate at least equal to half of the Luxembourg rate, i.e. 10.5 %.
Why amending the SPF Law?
Pursuant to a decision of the European Commission, some of the provisions contained in the SPF Law are incompatible with certain provisions of the Treaty on the Functioning of the European Union (« TFEU ») and certain provisions of the Agreement on the European Economic Area (« EEA »). Given the precedence of European law over national legislation, amendments to the law are needed.
Indeed, according to the European Commission, the current law applies different tax regimes to similar statuses, which would deter a Luxembourg SPF from investing in a non-resident company rather than in a Luxembourg-based company.
What is this draft bill about?
Technically, the bill will repeal both paragraphs 2 and 3 of the SPF Law and amend articles related to those two paragraphs.
In concrete terms, the bill repeals the exclusion criteria regarding the tax exemption for any SPF receiving more than 5% of its dividends coming from non-resident and non-listed companies which do not have to pay an income tax similar to Luxembourg corporate income tax.
If this bill is passed, it will allow SPF holding major shareholding in any non-resident companies (even in low tax jurisdictions) to take advantage of the favourable tax treatment as provided for by article 4(1) of the SPF Law. It could therefore increase the foreign investments made by the SPFs and bring new business perspectives with a wider market potential.