Estate planning in Luxembourg
The abbreviation SPF stands for ‘Société de Gestion de Patrimoine Familial’, and this vehicle came into being in Luxembourg in 2007 as the successor to the legendary ‘Holding 1929’. The ‘Holding 1929’ was banned by the European Commission, but the Luxembourgers weren’t prepared to throw in the towel and, instead, devised the SPF. The SPF is a very interesting private wealth management vehicle.
The SPF is established as a legal entity and may adopt one of the following forms: a public company limited by shares (Société Anonyme), a private limited liability company (Société à Responsabilité Limitée), a corporate partnership limited by shares (Société en Commandite par Actions) or a cooperative in the form of a public limited company (Société Coopérative organisée sous forme d’une Société Anonyme). The minimum share capital and the minimum paid-up capital of an SPF depend on the choice of the legal form and whether or not bearer shares are issued (if bearer shares are issued, the total amount of the share capital has to be paid at the moment of incorporation).
Indeed, it’s possible to issue bearer shares instead of nominative shares (except when you opt for the private limited liability company form). In other words, it’s possible to make the owner of the SPF invisible to greedy tax authorities and this in a legal way! When bearer shares are issued, the owners of the shares are the persons holding the certificates, and the transfer of such bearer shares takes place without any formality by just handing over the shares to someone else. The articles of association must include a statement that the company is subject to the provisions of the ‘SPF legislation’ and the name of the company must always be supplemented with the abbreviation ‘SPF’, after the indication of the legal form of the company.
Different types of shareholders are allowed: (1) individuals (natural persons) managing their private wealth, (2) trusts and private foundations and (3) intermediaries acting on behalf of the first two categories. All these shareholders don’t have to be residents of Luxembourg. Commercial companies aren’t allowed as shareholder.
What are the permitted activities?
The activity of an SPF is legally restricted to the acquisition, holding, management, and disposal of financial assets in a broad context, including derivatives. More precisely, the SPF can invest in the following assets: shares, companies, funds, futures, bonds, put/call options, precious metals, currencies, bank accounts, and so on. There are no investment limits, no restrictions and no minimum interest quotas. The SPF may lend securities and loans to companies in which it holds a participation, as long as it’s done free of charge (non-interest bearing). Advanced dividend payments are permitted and the SPF can borrow from third parties.
What are the prohibited activities?
The SPF cannot engage in commercial activities. Any form of commercial or business activity is excluded, as well as the direct ownership of real estate, the holding of patents or rights and the conduct of administrative activities or financial services on behalf of third parties.
Nevertheless, the SPF may acquire real estate indirectly through its participations in subsidiaries. An SPF may also hold participations in other companies (commercial companies, for example) but only in the case where it doesn’t involve itself in the management of these subsidiaries. An SPF isn’t allowed to grant interest-bearing loans to companies in which it holds a participation (however, interest-free loans are allowed, as mentioned before).
The SPF is exempt from Corporate Income Tax, Municipal Business Tax and Net Wealth Tax. The SPF is only subject to an annual subscription tax of 0.25%, with a minimum yearly amount of EUR 100 and a maximum yearly amount of EUR 125,000. The subscription tax is levied on the amount of the paid-up capital increased by (1) the amount of share premium and (2) the amount of debts exceeding eight times the paid-up capital and share premium. Profit reserves are not part of the taxable basis. In other words, the subscription tax of 0.25% isn’t payable on borrowed money until the borrowed money exceeds 8 times the paid-up capital and the share premium. This offers many interesting possibilities.
Capital duty was abolished in Luxembourg in 2009 and there’s only a fixed registration fee of EUR 75 to be paid when incorporating the SPF. The SPF is exempt from taxation at source (withholding tax) on distributions to non-residents. For example, Luxembourg doesn’t levy withholding tax on dividends paid by an SPF to its Spanish shareholders.
However, there’s one exception: interests on debt paid to EU individuals (both Luxembourg residents and non-Luxembourg residents but EU individuals) are subject to withholding tax following the current EU Savings Tax Directive (this withholding tax can be circumvented of course). Interests paid to non-EU residents aren’t subject to withholding tax. In addition, there’s no capital gains tax on the sale of SPF shares (for shareholders who aren’t resident of Luxembourg) and no tax on the income from the liquidation of the SPF (for shareholders who aren’t resident of Luxembourg). This offers a multitude of beautiful possibilities.
One disadvantage (but this is more information for professionals) is that the SPF cannot make use of Double Taxation Avoidance Agreements; moreover, the SPF cannot register for Value Added Tax and it doesn’t fall under the so-called European Parent-Subsidiary Directive.
The SPF is not subject to any form of supervision by the financial markets. The so-called Administration de l’Enregistrement et des Domaines (AED) is authorised to supervise the SPF’s and NOT the tax authorities of Luxembourg. This means that shareholders of the SPF can remain completely anonymous, even to the tax authorities of Luxembourg (Administration des Contributions). Also a masterstroke of the Luxembourgers of course. And as mentioned before, an SPF can be incorporated as a company with bearer shares (an SA, Société Anonyme).
An SPF is a capital company focusing exclusively on private investors allowing them to manage their assets and to benefit from an attractive tax regime. By the way, that’s also the only rationale of its existence – its activity is legally restricted to the acquisition, holding, management and disposal of financial assets, excluding any commercial activity. As a discreet investment vehicle with a solid framework of legislation, it’s certainly a very interesting tool, especially when you realise that one of the noteworthy features of Luxembourg’s legal framework is stability. Consequently, there’s no nervous fuss: people who engage in tax planning hate uncertainty and ambiguity.
The rather small Grand Duchy of Luxembourg is also devoted to its banking secrecy. Luxembourg is very small and certainly doesn’t want to be pigeon-holed as a tax haven. The Luxembourgers love privacy and professional secrecy, which can be found in the Constitution. And they’re still very devoted – and rightly so – to their banking secrecy, which is laid down in both the Banking Act and the Criminal Code.
As of the first of January 2015, Luxembourg will implement the automatic exchange of information method. In other words, only legal entities and legal arrangements will be able to enjoy the banking secrecy in Luxembourg as of then (individuals have to look for another safe place). But the banking secrecy will stay intact for Luxembourg residents, so moving to Luxembourg could be an option.