In order to make itself even more attractive as a financial center and to compete with legislation from Germany, Switzerland, Austria, Belgium and Holland, Luxembourg has added a highly anticipated inheritance planning instrument to its legislative arsenal, a tool which could be qualified as a “Luxembourg trust”. In March 2013, the Luxembourg authorities introduced legislation for this new tool, known as the Luxembourg “private foundation,” which offers a competitive and attractive alternative to others such as Anglo Saxon trusts.
The “private foundation” (LPF) is a unique alternative. Although it has a tripartite organization as a trust would have, in contrast the LPF is vested with legal personality with its own patrimony.
Setting up a Luxembourg private foundation
This new vehicle is designed to ensure the cohesion and conservation of family wealth, the continuity in its management and protection of privacy.
The private foundation is vested with legal personality, ensuring its safety and protection while permitting the management of its activities. The objective of the foundation is limited to the management and administration of private inheritance and excludes all business activities. However, there is no restriction on the types of assets that can be held by an LPF (shares, patents, real estate, etc.) compared to the Luxembourg private wealth management company (so called SPF, a form of holding company).
The foundation is an orphan vehicle in that it has no shareholders or members, but rather three types of particpants: settlors, beneficiaries and managers.
The settlors define the constitution and allocate assets to the foundation. They are the 'deus ex machina' of the structure. In the constitution, the settlors designate which people or organizations will benefit from the products or capital in the foundation's assets.
The assets are administered by managers (or an accounting firm) which are tasked with growing the foundation's equity while respecting the wishes of the founders.
Luxembourg private foundations are created in the same way as other companies- through notarial deed. It indicates the identity of the settlor or settlors, the name of the foundation, its duration, location (necessarily in Luxembourg), its objective, the intial amount allocated (minimum of 50,000€ in cash or in kind), the identity of the administrators and/or the members of the supervisory board and who appoints the beneficiaries either directly or indirectly.
In order to protect the anonymity of the participants, while keeping in mind that the constitution of these vehicles is published in the Memorial section C, the administrators must send in an extract to the trade register mentioning only the name of the foundation followed by the designation of 'patrimonial foundation', the duration, location, objective of the foundation and the identity of the administrators and/or the members of its supervisory board.
Although bookkeeping and financial statements are required, the accounts are not filed or published in the Luxembourg Trade Register.
Although registration in the trade register is mandatory, it does not mean that the foundation is commercial in nature.
Operation of a Luxembourg private foundation
A Luxembourg private foundation is managed either by one or more administrators (natural persons or moral personalities), or by adminstrators overseen by a supervisory board.
If the assets are worth more than 20 million EUR and the foundation has more than 5 beneficiaries, it is mandatory for the settlor to name a supervisory board.
A settlor can also be the administrator of the foundation, but an administrator cannot be a member of the supervisory board.
The administrator or administrators will perform all the tasks needed to realize the foundation's objective. The role of the supervisory board is to monitor the management by the administrators.
Taxation on patrimonial foundations
- Taxation on foundations and distribution of assets
The foundation is an opaque vehicle from the perspective of taxation in Luxembourg but will be subject to corporate income tax and the municipal corporate tax. It is not subject to a wealth tax.
Nevertheless, the law exempts certain income such as (i) income from movable capital assets, (ii) capital gains issued from the sale of assets generating revenue (including investments held for more than 6 months) and (iii) income from life insurance contracts.
Amounts that may be paid out by these foundations would not be qualified as dividends by the tax law and as a result would not be subject to withholding tax.
- Inheritance and gift tax
The transfer of assets from foundation to a beneficiary during the settlor's lifetime are subject to a gift tax. The rate charged depends on the family relationship between the settlor and beneficiary.
The day the settlor dies, regardless of whether he is a resident of Luxembourg or not, the inheritance tax is due at specific rates which are more favorable than common law. That could be an incentive for Luxembourg residents to create a private foundation.
If the settlor is not a resident of Luxembourg, only real estate assets located in Luxembourg are subject to inheritance tax there.
- New residents of Luxembourg
The law modifies article 102 of the L.I.R. to allow new residents of Luxembourg to transfer their foreign investments to a patrimonial foundation for their value on the day that these persons become a resident of Luxembourg.
In conclusion, The Luxembourg government has introduced this new vehicle as an attractive alternative in response to similar Anglo Saxon tools being introduced in other countries. This modern product offers a solution to better manage problems confronted by family inheritances and private fortunes. A new vehicle to protect privacy and familiy patrimony.