The contribution by one or more companies of the whole of their net assets or of one or more branches of activity to one or more companies in the process of incorporation or already in existence is exempt from capital duty if the following conditions are fulfilled:

• the contributions must be remunerated by the attribution of shares (with a tolerance of a cash payment of 10% of the accounting value of the shares);
• the companies involved in the transaction, i.e. the receiving company and the contributing company, must have their statutory or effective seat of management within the EU.

The contribution of shares representing at least 65% of the share capital previously issued by another share capital company is exempt from capital duty. In case of contribution of shares by tranche, only the last transaction at which the 65% is reached can benefit from the capital duty exemption. In order to benefit from the exemption the share deal must comply with the following conditions:

• same conditions as for an asset deal;
• the shares contributed must be held for a period of 5 years. The 5-year period starts when the 65% is reached. During the 5-year period, the 65% holding must be kept.

The benefit of the exemption provided for the share deal may however by retained if during the 5 years the shares are transferred according to a share deal or an asset deal which benefits from one of the exemptions.
The advantage of the exemption is also retained if the acquiring company is liquidated.

Our advice: Adverse tax consequences and recapture can be avoided if restructuring and exit are organized carefully in terms of reasonable time frame and sufficient substance at the level of the contributed company (number and type of assets and liabilities to be transferred). Facts Services can assist you in this respect.

According to the Luxembourg administrative practice with respect to thin capitalization, a participation held by a Luxembourg company can be funded by equity and by debt according to a ratio of 15/85. It is generally accepted that non bearing interest debt qualifies for capital duty purposes as equity so that the ratio 0,5% share capital, 14% non interest bearing debt and 85% interest bearing debt is possible.

New financial instruments have been designed in order to meet the complex requirements of intra-group financing in terms of cost and tax efficiency. Amongst others, the following are issued in Luxembourg:

• Preferred Equity Certificate (PEC)
• Convertible Preferred Equity Certificate (CPEC)
• Perpetual bonds
• Redeemable Convertible Bonds (RCB)
• Indirect Profit Sharing Loans (IPSL)

All these instruments are either interest bearing or non interest bearing and qualify as debt for capital duty purposes and for corporate income tax and net wealth tax purposes.
Due to the absence of withholding tax on interest in Luxembourg, the use of convertible or redeemable financial instruments may facilitate the repatriation of funds to the parent company free of withholding tax. Periodical repatriation of funds may also be envisaged through redemption and conversion of financing instruments while dividend distribution gives less flexibility.
The use and management of hybrid instruments is a complex area where the understanding and monitoring of the needs and requirements of the issuing company and of the funding company depending on their own legislation require in-depth experience.

Facts Services has the required skills and experience to analyze your needs and constraints in terms of financing, suggest optimized tax solution, coordinate with foreign third parties for the drafting of the legal documentation and address the accounting and tax compliance issues relating to the chosen financing structure.
NEWS: European proposition to abolish capital contribution tax by 2010.