Art. 44 I d of the Luxembourg Value Added Tax Law (“LMwStG”) exempts, inter alia, the administration of investment funds, alternative investment funds (AIF) and securitisation vehicles listed in the Law of 22 March 2004. There is no precise list in the LMwStG of what is to be regarded as administration within the meaning of this provision. However, the Luxembourg tax authorities confirmed, e.g. in Circular 723ter in 2013, that risk management of investment funds is tax-exempt within the meaning of Art. 44 I d LMwStG.

In addition, according to CJEU case law, the activities listed in Annex II to the UCITS Directive are covered by the exemption:

– investment management;

– Administrative Activities:

(a) accounting services required by law and required by investment fund management;

1. b) customer inquiries;
2. c) valuation and pricing (including tax aspects);
3. d) regulatory compliance monitoring;
4. e) maintenance of the register of unitholders;
5. f) distribution of profits;
6. g) issuance and redemption of fund shares/units;
7. h) contract settlement (including dispatch of certificates);
8. i) maintenance and preservation of records.

Furthermore, the CJEU has stated that activities can only be tax-exempt if they form a broadly independent whole and are specific and essential to the management of the fund.

Please find attached the aforesaid Circular 723ter regarding the VAT treatment of risk management.

Circulaire_Risk_MGMT_7.11.2013

Although it is not mentioned expressly in the VAT Circulaire No 781 of September 30 , 2016, we assume that the director fees in relation with investment funds and other investment vehicles should be covered by Article 44 §1 (d) of the Luxembourg VAT Act and therefore, should be VAT  exempt ion Luxembourg. This should be case if the director fees can be considered as “material and specific and essential” for the business activity of the investment fund. Management companies of investment funds are not covered in Art. 44 §1 (d) Luxembourg VAT.

Article 100 of the amended law of 10 August 1915 on commercial companies states that in the event of a loss of a company which is amounted to the half of the share capital of the company, the board of directors of the company shall  convene an extraordinay meeting of shareholders which decides on a possible dissolution of the company (“going concern”).

The same rules applies in the event that the loss amounts to three quarters of the share capital, but in this case the company will be dissolved with one quarter of the votes in the extraordinay meeting of shareholders .

In the event of a breach of Article 100 of the amended law of 10 August 1915 on commercial companies, the members of the board of directors  might be held liable for the loss of the company in whole or in part.

In the case of a S.A. (Société Anonyme, public limited company in Luxembourg ), pursuant to Article 72-2 of the amended law of 10 August 1915 on commercial companies, interim dividends may be distributed at any time under consideration of the following conditions:

• A special clause must be provided for the possibility of the interim dividend distribution in the articles of the association

• Preparation of interim financial statements declaring that enough financial income are available in the company for the interim distribution

• The decision of the Board of Directors to pay out an interim dividend must be made within two months after the date of preparation of the interim financial statements

• A report of a Commissaire aux comptes (Internal Auditor) or of a Réviseur d’Entreprises (Auditor) to the Board of Directors must be issued that above conditions are met

• If the interim dividend should exceed the amount of the year-end dividend which will be subsequently approved by the Ordinary General Meeting,  the exceeding amount will be treated as an interim payment for the next dividend distribution

• The amount of the interim dividend to be distributed should not exceed the following amount:

Total realized profit (since the end of the last financial year for which the annual financial statements have been approved)

+ Any profit carried forward and amounts withdrawn from the available reserves (for this purpose)

– loss carryforwards / amounts to be included in reserves (in accordance with legal requirements or in accordance with the articles of association)

In the case of a S.à r.l. (Société à responsabilité limitée) according to Article 198bis of the amended law of 10 August 1915 on commercial companies interim dividends are allow distributed at any time as long as the aforesaid conditions are met.

For tax losses arising since the year 1991, the Luxembourg tax law provides in Article 114  Luxembourg Income Tax Law (LITL) the possibility of an unlimited loss carryforward until December 31, 2016.

Tax losses arised as of January 1, 2017, are only valid for a limited time period of 17 years. Tax losses arised until December 31, 2016, however, can still be carried forward for an unlimited time period. The use of tax losses is subject to the so-called “FIFO” principle (First In, First Out).

The deductibility of the (tax) loss carryforward is subject to the following conditions: First, under Article 114 (2) 1 LITL, only tax losses that could not be offset with other income in the tax year in which they were arised can be considered. In addition, under Article 114 (2) 2 LITL, the taxpayer must have duly maintained books during the tax year in which the losses were caused. Furthermore, Article 114 (2) 3 LITL states that only the person who caused the tax  loss may benefit from it. It follows that the company which wishes to carry forward or deduct the losses and the company which has caused the (tax) losses must be an identical person. According to prevailing opinion, the identity of the company had to be judged according to legal and economic aspects. In practice, German tax law has often been used to interpret Article 114 LITL. German jurisprudence is often relevant in interpreting Luxembourg tax rules, since a large part of the Luxembourg tax laws are derived from German tax law and many regulations are still valid until today.

There are two important judgments on the use of loss carryforwards in Luxembourg.

The Luxembourg Administrative Court issued a judgment on the use of loss carryforwards on July 6, 2009 (Jugement de tribunal administratif, 6 Juillet 2009, No. 23982). This judgment provides a clarification with regard to the deductibility of losses in the case of a change of shareholders and in the event of changing economic identity of the company (so-called Mantelkauf). According to the judgment of July 6, 2009, this is to be judged according to aspects of corporate law and not according to economic criteria.

The other judgment was issued by the Luxembourg Administrative Court on 15 July 2010, which upheld the judgment of the Administrative Court of 6 July 2009 (loss carry forward by Mantelkauf) at appeal (Cour Administrative du Grand-Duché de Luxembourg, no. 25957Ca, published on August 6, 2010). In this judgment, the appellate court joined the reasoning of the lower court. The Verwaltungsgerichtshof emphasizes in this context that the possibility of loss carry forward does not favor the taxpayer, but a necessary correction of the sectoral taxation in order to comply with the taxpayer’s performance principle. However, the Administrative Court independently raises the issue of abuse of rights. This could be “if the legal and tax identity of the company were used exclusively to circumvent the personal nature of the right to loss carry-over and the prohibition of transfer for the sole purpose of using the loss carry-forwards and avoiding the taxation of the associated profits”.

In the opinion of the court, evidence of a legal abuse may in principle be a task of the previous activity, whereby the company does not have any relevant business assets, as well as the sale of the company’s shares to new shareholders and the subsequent commencement of a new (profitable) activity.

Special purpose entities are companies that are established to fulfil a specific, narrowly defined objective. Once this objective has been fulfilled, they are usually liquidated.

They are often referred to as special purpose entities (SPEs), but the terms special purpose vehicle (SPV), special purpose company (SPC) and variable interest entity (VIE) are also used as synonyms in the literature.

Special purpose vehicles are mainly used for structured financing in the M&A environment. In Luxembourg, these special purpose vehicles are particularly integrated into structures of (alternative) investment funds for certain tax considerations. The aim is to avoid access by financing creditors to assets of the investor – so-called non- or limited recourse financing – and to shield the object of financing against insolvency risks from the sphere of the investor. In these cases, special purpose vehicles are usually established in the legal form of a S. à .r.l. (comparable to a German GmbH).

In most cases, an SPV is used as an investment vehicle under a parent company in order to acquire a target. For this purpose, the SPV is provided with equity and debt by the parent company in order to purchase the shares. The equity and debt funds also cover the transaction costs for external advisors (auditors, lawyers, experts) and for post-acquisition measures.

The share purchase of a company is characterized by the fact that the legal organizational unit of the target remains unchanged. Only a change of shareholders is carried out, so that the purchaser automatically obtains control over all assets of the target company. An individual transfer is therefore not required.

In addition to the purchase of the complete assets, the contracts are also included. However, it must be noted here that a change of control clause is often formulated so that this allows the contracting parties to terminate the respective contract when the shareholder changes.

In addition to the assets and contracts, the purchaser also acquires all liabilities of the target company.

In most cases, the purchaser acquires 100% of the shares, although in certain constellations he may have successive additional purchase rights. This is usually the case when family-owned companies are purchased, as they first want to examine the “newcomer” in detail.

The employees’ situation under labor law also remains unchanged in the case of a share deal, as the employment relationships continue to exist. However, in the case of contracts of employees with companies in the former group, there may be adjustment regulations.

In the case of a company purchase by way of an asset deal, the purchaser buys a specific business area from the seller company, i.e. he acquires an entity with singular succession. This form of company purchase agreement is significantly more complex than a share deal, as the assets and liabilities to be acquired must be listed in detail in the agreement or its annexes.

In this context, it is not unimportant to mention that often in the case of contracts assigned to the business area, the contractual partners must agree to them.

In general, the contract itself does not require any special form. However, if the assets include S. à.r.l. shares and real estate, special formal requirements are mandatory.

The Letter of Intent is particularly used in a sale outside of an auction process. In such a purchase or sale process, the buyer and seller meet on an equal basis and determine the rules and schedule themselves.

However, as with all more complex deals, there is a lengthy journey until the contract is finally signed, so the parties often try to start this journey by writing a letter of intent.

Both the English term Letter of Intent and the German term for a declaration of intent already suggest that a binding purchase agreement has not yet been concluded, but that the parties have an intention but still need to clarify some details.

The letter of intent basically fulfills two functions:

Documentation of the economic key points of the transaction which the parties assume at the time of conclusion of the LOI. This includes, of course, in particular the purchase price, or the method of determining the purchase price, as well as the transaction structure or particularly important conditions related to the individual case.

Drawing up of a roadmap for the parties until the desired conclusion of the purchase agreement. In particular, a time period for the due diligence is defined.

Typically, the letter of intent does not contain any binding obligations of the parties for the conclusion of a purchase agreement. In general, the LOI is not binding, but individual provisions from this LOI are, e.g. the confidentiality or exclusivity obligation. Since an LOI is usually formulated in a somewhat intransparent manner, it is usually always explicitly advised that the specific desired outcome should be clearly and unambiguously stipulated.

If the object of the subsequent company purchase is a S. à.r.l. – or S.A. – share or a plot of land, a notarial certification is inevitably required!

Until the 2015 fiscal year, Luxembourg corporations were subject to a minimum tax for both corporate income tax purposes and wealth tax purposes (Euro 62.00 for S.A., S.C.A. and S.E. and Euro 25.00 for S.à r.l.).

As part of the new legislation, the corporate minimum tax was removed as of 2016 and a wealth tax minimum tax, which is calculated according to the amount of the balance sheet total, was introduced. The previous minimum wealth tax is no longer applicable. The new minimum wealth tax amounts correspond to those of the previous minimum corporate income tax (including contribution to the labour fund). The distinction between financial and holding companies (financial assets, securities assets and cash > 90% of the balance sheet total) and the other companies has also been adopted, as well as the classification according to the balance sheet total, with a further tax rate level being added.

The wealth tax can still be reduced by the corporate income tax (including contribution to the labour fund and after deduction of investment allowances) of the previous year by setting up a corresponding reserve – but at the maximum up to the amount of the minimum wealth tax.

Only for the 2016 fiscal year is an exemption provided for, in which the minimum wealth tax can still be reduced if necessary. Otherwise, the minimum wealth tax cannot be below the minimum rate and only applies to companies with unlimited wealth tax liability.

In the case of a fiscal unity for income tax purposes, each company within the tax group continues to be subject to wealth tax itself in respect of its own taxable assets (no fiscal unity for wealth tax purposes).

The possibility of deducting the corporate income tax of the controlling company from the previous year against the net worth tax of the companies in the tax group remains unchanged. The deduction is first made for the controlled companies in descending order of assets and lastly for the controlling company/subsidiary.

The upper limit for the minimum wealth tax for the entire tax group though is a maximum of € 32,100. The exceeding amount of the minimum wealth tax is to be deducted first from the controlled companies in descending order of assets and last from the controlling company / controlling subsidiary.

In order for the minimum wealth tax to also apply to securitisation companies, SICARs, ASSEPs and SEPCAVs, the corresponding statutory regulations, which provide for the general exemption of these companies from wealth tax, have been restricted to the extent that the corresponding wealth tax exemptions only apply conditionally to this minimum tax. This tax regulation does not apply to (alternative) investment funds.

Furthermore, a progressive wealth tax rate will apply as of 01.01.2016.

• 0.5% for an assessment base up to Euro 500m.
• For an assessment base above Euro 500 million, the wealth tax is composed of the sum of Euro 2.5 million plus 0.05% of the part of the assessment base above Euro 500 million, with no upper limit.

To qualify as a holding and finance company for minimum tax purposes, these criteria must be met:

The financial assets, securities and cash of the companies must exceed 90% of the balance sheet total.

The companies classified as holding and financing companies are subject to a flat-rate minimum tax in the amount of:

• Until 2016: Euro 3,210 (incl. 7% contribution to the labour fund)
• As of 2017 Euro 4,815 (incl. 7% contribution to the labour fund).

As of 01.01.2015, to ensure that small and medium-sized holding and financing companies are not disadvantaged compared to other companies with a balance sheet total of up to EUR 350,000, the flat-rate minimum tax for holding and financing companies that meet the above criteria and have a balance sheet total of up to EUR 350,000 was also reduced to EUR 535 (incl. 7% contribution to the labour fund).

Luxembourg has the same rules as Germany, medium-sized companies according to Article 47 of the amended law of 10 August 1915 are required to be audited, small companies are not. This is an implementation of an EC Directive (4th EC Directive) in the European Union.

According to Article 35 of the amended law of 10 August 1915, the size criteria for small companies in Luxembourg are if the company does not exceed two of the three applicable limits on the closing date:

• Balance sheet total: ≤ EUR 4.4 million;
• Net revenue: ≤ EUR 8.8 million;
• Number of employees working full-time on an annual average: ≤ 50 persons.

According to Art. 47 of the amended law of 10 August 1915, the size criteria for medium-sized companies in Luxembourg are if a company does not exceed two of the three applicable limits on the closing date:

• Balance sheet total: ≤ EUR 20.00 million;
• Net revenue: ≤ EUR 40.00 million;
• Number of employees working full-time on an annual average: ≤ 250 persons.

Article 309 of the amended law of 10 August 1915 specifies the requirements for consolidated financial statements.

According to Article 313 of the amended law of 10 August 1915, there is an exemption provision from the obligation to prepare consolidated financial statements. If, on the respective balance sheet date (of the parent company), the total of the companies that would otherwise have to be consolidated does not exceed two of the three applicable thresholds mentioned on the basis of their most recent annual financial statements:

• Balance sheet total: ≤ EUR 20.00 million;
• Net revenues: ≤ EUR 40.00 million;
• Number of employees working full-time on an annual average: ≤ 250 persons.

According to Directive 2013/34/EU, net revenues are now defined as the amounts “derived from the sale of products and the supply of services after deduction of sales rebates and value added tax and other taxes directly linked to turnover” (Art. 2 No. 5). Of course, this also applies in Luxembourg.