IP holding, Securitisation

and Fund Structuring via

Luxembourg: can the

Taxman find his way?

Jan Van Daele

TTN Meeting New York

21 May 2012

Overview

1. Facts and Figures: Introduction to Luxembourg Tax Regime

2. Luxembourg IP regime

• Legal framework

• Practical use

• Structuring examples

3. Securitisation

• Structuring example

• Legal framework

• Practical use

4. Luxembourg Holding and Financing regime

5. Luxembourg Funds regime

1. Facts and Figures

• Approximately 2,586 square kilometers (998 Sq mi)

• Approximately 500.000 inhabitants

• Worlds second largest investment fund center

• Modern legal and regulatory framework

• Social and political stability

1. Facts and Figures

Legal and tax advantages

• Statutory tax rate: 28.80%

• Favorable IP tax regime (ETR of 5.72% for royalty income)

• Tax exemption system (deductibility of foreign PE losses)

• Advance tax ruling system

• No capital / stamp duties

• Extensive tax treaty network

• 64 Treaties currently in force

• 22 pending treaties and 12 protocols

• No withholding tax on royalties and interest

• Various ways to eliminate withholding tax on dividends

• Participation Exemption (on dividends and capital gains received)

• No or minor taxation upon exit

• Access to EU Directives

• No CFC legislation

• Extensive network of Bilateral Investment Treaties

2. Luxembourg IP Regime

• Law of 21 December 2007: 80% exemption on net income and capital gains

• Law of 23 December 2008: Exemption from Net Wealth Tax of such IP

• Qualifying IP

• Patents

• Trademarks or service marks

• Design or model

• Internet domain names

• Any copyright or software

• Sportsmen register name and/or image as a trademark

• Acquired or developed after 31 December 2007

• Tax treatment

• Qualifying IP income (royalties, capital gains): 80% deemed income

deduction

• Effective tax rate of 5.76% (20% * 28.80)

2. Luxembourg IP regime - Practical

1. The income received as payment for the use or the granting of the right to use

software copyright, patent, trademark/service mark, design or model, is exempt

up to 80 % of its net positive amount.

The net income is the gross income less expenses having a direct economic

relationship with the income and includes annual amortizations as well as write-downs

if applicable

2. Where the taxpayer created a patent himself and it is used as a part of his

business activity, he is entitled to a deduction amounting to 80 % of the net positive

income that he would have realized if he had authorized the use of such right to a

third-party.

Net revenue = fictive gross revenue less directly related expenses including annual

amortizations and any write-downs

Deduction is allowed as of the date of the filing of the patent application.

Licence

Royalty Sale price

Sale

Sale

Sale price

LuxCo Opco Customer

LuxCo Customer

2. Luxembourg IP regime – Practical continued

3. “Recapture Rule”: capital gains remain taxable up to the extent of 80 % of the net

negative IP income, to the extent they have not already been compensated with IP

income in the current or previous tax years.

4. Conditions of the law:

- The IP rights must have been created or acquired after December 2007

- Expenses, amortizations, and write-downs related to the IP rights must be

recorded on the taxpayer’s balance sheets and shall be included in the profit /

loss allocation as from the first fiscal year for which the benefit of this tax regime

is applied, provided that for a given year, these expenses exceeded the income

in relation with the same IP rights

5. Limitations:

IP cannot be acquired from a direct related company.

- If either seller / buyer companies are direct owners of each other by at least 10 %

- If both seller / buyer companies are directly owned for 10 % or more by the same

common parent company

2. Luxembourg IP Regime - Example

Investor Co

Holding Co

Seller

Lux IP Co

Licensee

Use

of IP

rights

• 0-15% WHT on dividend

distributions;

• IP Income 80% exempt;

• Dividends exempt under

certain conditions;

• Capital gains exempt

under certain conditions;

• No WHT/reduced WHT on

royalty payments;

• No WHT/reduced WHT on

dividend distributions.

Dividends

Royalties

Dividends

IP

Effective Tax Rate = 5,76% as from 2011 (20% *28,80%)

2. Luxembourg IP Regime – IP structure entities

US customers

Non-US customers

US Co

Lux IP Co

Sales and

Marketing subs

Sale

Sale

• Performs R&D function

• Management

• U.S. Distributor

• Owns non-U.S. rights to IP

• Direct sales to non-U.S. customers

• Bears commercial risks (e.g., inventory,

bad debt, fx)

• Entitled to IP profits

• Conducts/contracts manufacturing

• Performs Sales and Marketing

function in local jurisdictions

• May become a distributor

• No valuable intangible assets

• Limited risks

Cost sharing

arrangement

Buy-in

License

3. Luxembourg Securitisation

Originator Investor

Proceeds Proceeds

(2) SPV issues Asset

Backed Securities (1) Transfers right to

receive future receivables

Payments

Principal and

Interest

Initial cash flow Future cash flow

Obligors

(3) Investors look to future cash flows

Originator’s risks eliminated

Trust/

Foundation

The trust/Foundation (such as Stichting)

is used for off-balance sheet purpose

Compartment 1 Compartment 2

Investor under 1

Creditor under 1

LUX

SPV

3. Luxembourg Securitisation

Law on Securitization of 22 March 2004: Provides for flexible, lightly

regulated and tax efficient regime

• Securitization is defined as an operation whereby a securitisation vehicle (“SV”):

- purchases risks linked to certain claims or assets;

- finances the purchase by the issue of securities, the return of which is linked

to these risks

• Broad definition of “securitization” allowing for a wide range of assets to

fall within the scope of the law: trade receivables, mortgage loans, shares

and essentially any “tangible or intangible asset or activity with a reasonable

ascertainable value or predictable future stream of revenue”, the originator

of the securitized assets being not required to be a credit or regulated institution.

• Multi-compartment structure: the possibility of segregating separate and

independent pools of assets to issue several tranches of securities corresponding

to different collateral and providing for different nominal value, yield and

redemption conditions within the compartment.

• Light registration formalities: the assignment of receivables is valid and

enforceable vis-à-vis third parties by the mere agreement between the assignor

and the assignee.

3. Luxembourg Securitisation

• Tax Treatment

- Tax efficiency and neutrality

- Corporation or fund-type (managed by Lux management company)

- No capital duty upon incorporation or increase of share capital (EUR 75

nominal registration fee)

- Corporate type SV

• Subject to Lux CIT and Municipal business tax (eligible for P/S Directive

and tax treaties)

• Exempt from annual net wealth tax

• All commitments related to remuneration of investors/creditors for

issued bonds or shares (future dividends, interest, etc.) qualify as

interest on debt (even if paid as a return on equity) and are therefore

deductible “interest payments” (minimize Lux tax)

• Distributions to investors are not subject to Lux WHT

- Fund type SV

• Transparent for tax purposes (no CIT/no Lux WHT upon distribution

• Management services rendered to SV are VAT exempt

4. Luxembourg Holding and Financing Regime

Making use of an Intermediate Holding Company – Investment platform

jurisdiction

Preliminary Considerations

• Tax Treaty network (reduced withholding taxes and capital gains tax protection)

and Bilateral Investment Treaty network

• Exemption for income from qualifying (foreign) subsidiaries

• Tax efficient repatriation of profits

• Financing (including hybrid debt) and IP arrangements: no withholding tax on

interest/royalty payments

• Advance Tax Rulings (ATR’s) and Advance Pricing Agreements (APA’s) can be

agreed upon with the tax authorities

• Favourable treatment for setting up businesses within the EU (regional

headquarters/distribution/production)

4. Luxembourg Holding and Financing Regime

• Marketability of Luxembourg as holding jurisdiction (High tax rate of 28.80% for

“on shore income”)

• Luxembourg SOPARFIs

• No capital/stamp duties

• Participation exemption for dividends and capital gains

• Ease of exit

• No dividend tax for (partial) liquidation

• CPECS and other hybrids out of WHT scope (Treated as debt for

Luxembourg tax purposes – equity in US and several other jurisdictions:

no WHT/capital duty)

• No WHT on interest and royalties

• No CFC rules

• Tax Treaty Network

• Bilateral Investment Treaties

• Tax Rulings

• Competitive incorporation and compliance cost

• Re - domiciliation (migration) of companies to Luxembourg

4. Luxembourg Holding and Financing Regime

Platform jurisdiction for investments from / into Asia - Middle East

Interest

WHT

Royalty

WHT

Dividend

Tax

CG on share

disposal

BIT

Bahrain 0% 0% 0% 0% - Lux Part. Ex. No

China 10% 10%* 5% 0% if participation

< 25%

Yes

Hong Kong 0% 3% 0% 0% - Lux Part. Ex.

Yes

Qatar 0% 5% 0% 0% - Lux Part. Ex. No

India 10% 10% 16.22%** 21.63% Yes

Kuwait*** 0% 5% 0% 0% - Lux Part. Ex.

Yes

U.A.E. 0% 0% 5% 0% - Lux Part. Ex Yes

* In case of royalty payments for the use of industrial, commercial or scientific equipment,

the tax base will be reduced to 60% of the gross amount

** Not covered by any treaty concluded by India

*** Treaty not yet in force

Applicable rates as reduced by Tax Treaty with Luxembourg

4. Luxembourg Holding and Financing Regime Investors

Hong Kong

Lux

SOPARFI

OpCos

Benefits

- 0% profit tax in Hong Kong – source of income outside

Hong Kong

- UBO disclosure in Hong Kong

- No capital gain taxation in Hong Kong

- Luxembourg participation exemption on dividends and

capital gain income (>10% holding or > EUR 1.2 Mio; 12

months holding period; subsidiary falls within scope of P/S

Directive or is a foreign company subject to comparable

Lux tax)

- Flat tax of EUR 1.575 on Lux HoldCo of which financial

assets (including transferable securities, receivables, bank

deposit etc.) exceed 90% of their total assets = SOPARFI

- To qualify as SOPARFI the Holdco should be engaged in

ownership of shares and management which includes

group financing activities (taxable margin in Lux between 3

Bps and 25 Bps)

- Tax treaties and EU Directives may apply to

distributions/payments from OpCo’s to Lux HoldCo

reducing/eliminating WHT

0 %

dividend

WHT

4. Luxembourg Holding and Financing Regime

USCo

LuxCo

Foreign

Subs

Benefits

- No US tax on accrual of yield on CPECs (Convertible

Preferred Equity Certificates) > Convertible or redeemable

at FMV

- CPEC is a hybrid instrument (debt push down to Foreign

Subs to obtain local country interest expense deduction

without corresponding US taxable interest income)

- CPECs are treated as debt for Lux tax purposes > accrual

yield treated as tax deductible interest expense

- Small taxable margin in Lux (between 3 Bps and 25 Bps)

- Holding activities (CPECs relating to the acquisition of

shares), in combination with financing activities may result

in no effective Lux taxation (offsetting taxable margin on

back-to-back financing activities)

0 %

WHT

Loans

CPECs A CPECs B

5. Luxembourg Fund Regime (SIF)

Sub-Fund

N°1

Art

Sub-Fund

N°4

…

Sub-Fund

N°2

Cash

Liquidity

Sub-Fund

N°3

Wine

Initiators/Managers

Investment advisors/

Investment managers

Luxembourg Service

providers

Custodian

Central Administration

Transfer Agent

Auditor

Investors

General Partner/

Management Co.

Management in Luxembourg

Advisory agreement

All kind of investment policies Risk diversification principle at Sub-fund level

Initiators/Advisors

SPF

Luxembourg

• No VAT registration

• No withholding tax on interest payments

(restrictions apply to individuals)

• No taxation of capital profit arising from the sale of

SPF shares.

• No taxation of liquidation revenues from the SPF.

5. Private Wealth Investment Vehicle SPF

Bank account C + portfolio

Bank account B + portfolio

Bank account A

• Management of own savings (equity and

financial placement)

• No taxation of financial incomes

• No taxation of dividends to non resident

shareholders

• Subscription tax of 0.25% annually on the

deposited capital (+ issuing bonuses), with a

maximum taxation of 125 000.00 €

Individual

Overview of Luxembourg fund regimes

Key criteria

UCITS UCI SIF

Act 2007

SICAR

Act 2004

SPF

Act 2007

Target investors

All

All

Qualified

Qualified

Private individuals –

estate management

vehicles

Supervisory

framework

Retail investor

protection

Retail investor

protection

More flexible

More flexible

No

Ease of

distribution

High

Medium

Unrestricted - Min

net assets

requirement

Unrestricted - Min

net assets

requirement

Unrestricted - Min

net assets

requirement

Investment

restrictions

(eligible assets)

Restricted

Flexible

Unrestricted

Private Equity /

Venture capital

investments

Financial assets only

Risk diversification

High

Medium

Low

No

No

Leverage and Debt

financing

Restricted

Restricted

Flexible

Flexible

Flexible

Time to establish

Short -

Medium

Medium - High

Short

Short

Short

59, Bd. Grande-Duchesse Charlotte L-1331 Luxembourg T. + 352 26 31 36 74 F. + 352 26 31 37 74 E. info@premiertax.lu www.premiertax.lu

YOUR CONTACT

Premier Tax SA

Jan Van Daele, Tax Lawyer jvandaele@grouppremier.com