Luxembourg tax opportunities for ICT

KPMG in Luxembourg

Organization of KPMG Luxembourg(Total staff: 900, Tax: 200)

6 Partners & Directors22 Partners & Directors 14 Partners & Directors

BANKINGFUNDS

INSURANCEINDUSTRIAL & COMMERCIALSCORPORATE HEADQUARTERS

PUBLIC SECTOR

KPMG Audit KPMG Advisory KPMG Tax

REAL ESTATE

And the Winner is …

KPMG Luxembourg voted 2010 Leading Tax planning & Tax transactional Firm in Luxembourg

– International Tax Review, 2010

« KPMG in Luxembourg delivers a full tax service to their many local and international clients. Some of their specialists are held in the highest

regard by their peers and other market observers. »

1/Generalities

Reasons for frequent use of Luxembourg in international structuring/ planning

Pragmatic approach of Luxembourg tax authorities in enacting domestic tax laws in favour of cross border investment streams (holding, financing, real estate, IP, trading, etc.) and high value added functions (IP management, distribution, entrepreneurial functions, etc).

Very tax efficient vehicles (e.g. fully taxable SOPARFI, securitization vehicles, SICAR, SIF, SPF, etc.): if properly structured, no or minimum taxation in Luxembourg

Good treaty network (57 treaties in force and currently 17 treaties signed/ in negotiation)

Tax agreement system – available to secure tax treatment (very prompt and flexible tax authorities)

Luxembourg participation exemption

Easy partial / full exit or refinancing strategy - can be structured to be free of withholding tax

Luxembourg: Not a “Tax Haven”

Effective corporate income tax rate (corporate income tax and municipal business tax): 28.80%. Net wealth tax: 0.5% annually on the net assets of the company (creditable under certain conditions) – exemptions available (see further)VAT : 3% to 15% rateNo capital duty (abolished effective 1 January 2009).Tax analysis letter system available to secure tax treatmentWithholding taxes 15% WHT on dividend payments (reduced by double tax treaty 0%, or EU Parent-Subsidiary Directive 0%)No withholding tax on royalties (apart from certain artistic activity)No withholding tax on interest payments (withholding tax or exchange of information in case Savings Directive applies)As from 1 January 2011, specific tax provisions to highly skilled workers relocated in Luxembourg after 31 December 2010 -> exemption of part of highly skilled workers’ remuneration in relation with their assignment in Luxembourg.

Luxembourg Tax Developments

As Luxembourg has concluded a double tax treaty with Israel and provided certain conditions are fulfilled, dividends paid by a Luxembourg company to an Israeli company should not be subject to Luxembourg withholding tax.

IP Tax regime80% deduction of IP related incomeQualifying IP assets are now exempted from the Net Wealth Tax

DTT list of countries

In Force Not yet in force

Middle East and North Africa UAE, Morocco, Tunisia, Turkey, Israel, Bahrain, Kuwait, Qatar

Lebanon, Syria.

Asia Azerbaijan, China, Hong Kong, Georgia, South Korea, Indonesia, India, Japan, Malaysia, Mongolia, Uzbekistan, Singapore, Thailand, Vietnam, Kazakhstan, Georgia

Pakistan, Kyrgyzstan.

East Europe & non EU Member states Russia, San Marino, Norway, Moldova, Switzerland, Iceland, Armenia, Ukraine, Serbia Montenegro, Albania, Macedonia.

EU Member states Austria, Germany, Belgium, Bulgaria, Denmark, Spain, France, Greece, Hungary, Ireland, Italy, Netherlands, Poland, Portugal, Czech Republic, Slovak Republic, Romania, UK, Sweden, Finland, Malta, Slovenia, Estonia, Latvia, Lithuania

Cyprus

Latin America/caribbean Brazil, Trinidad and Tobago, Argentina, Barbados

Africa South Africa, Mauritius

North America Canada, Mexico, USA

The Grand Duchy of Luxembourg At the Heart of Europe

2/ Luxembourg VAT

Luxembourg VAT treatment of television, broadcasting and electronic services

In a B2B transaction : services should be located where the recipient is established.In a B2C transaction: services should be located where the supplier is established.

10

VAT on e-services

Most services provided for a fee through the internet.The physical delivery of goods, where the order and processing is doneeletronically, does not qualify as electronically supplied services.

VAT advantage for B2C: The lowest VAT rate in the EU (15%).

11

VAT on e-services

Conditions to benefit of 15% VAT rate:Services delivered on the internet,Involving minimal human intervention,Internet cannot be used for communication between suppliers & customers,Internet is only used for the supply itself,Internet is used as a support for the commercial activity.

12

VAT on e-services

Examples:

Supply of digitized products generally,Supply of music,Supply of online or offline games,Supply of games of chance and gambling games,Supply of images, text and/or information,Making available of databases,On-line auction services,Supply of distance teaching.

13

The broadcasting of television or radio programs,Many potential viewers or listeners

VAT advantage for B2C: Super-reduced VAT rate (3%)

Adults content still to 15%.

VAT on TV/Radio broadcasting

14

VAT on TV/Radio broadcasting

Conditions to benefit of 3% VAT rate:

Whatever the mode of transmission used,Only to « public » broadcasting,Regardless of whether the provider has the responsibility of the content or not,Applicable to ancillarry operations ,Applicable to all content except if exclusively aimed at adults.

15

VAT on Telecommunications services

Services relating to Transmission, Emission, Reception

OfSignals, Words, Images, Sounds, Information

ByWire , Radio, Optical, Other electromagnetic systems

VAT advantage for B2C: The lowest VAT rate in the EU (15%).Not subject to VAT if enjoyed outside of the EU.

16

VAT on Distance sales

Goods ordered online

« Distance sales » rules allow :A business to charge VAT rate, to a private consumer, at the rate applicable in the country where the business is established, if its sales to other EU countries do not exceed EUR 100,000. Otherwise, it will be required to charge VAT rate, at the rate applicable in the country where the goods are delivered.E.g. Amazon

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Condition to benefit from Luxembourg VAT rates

Substance condition: the entity to be given the possibility to carry out an econimic activity in an autonomous and permanent way.

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9. Luxembourg IP Law: Principles

80% exemption on net positive royalty AND on net capital gain from certain IP 80% deemed income deduction for self-developed patentsEffective corporate tax rate of 5.76% on qualifying net IP incomeRecapture system & anti-abuse provisionsSimple valuation methods for small and medium size businesses

The 6 paragraphs of article 50bis ITC1§. The income received as payment for the use or the granting of the right to use (usage oula concession de l’usage d’un droit) any software copyright, patent, trademark or service mark, domain names, 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.

Luxco Opcoroyalty

licenceCustomerCo

sale

Saleprice

9. Luxembourg IP Law: Principles

§2. Where the taxpayer created a patent himself and it is used as 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.

If patent denied, recapture of previously deducted in the operating year of the notice of the denial.

Luxco IP CustomerCo

sale

Saleprice

9. Luxembourg IP Law: Principles

3§. The capital-gain derived from the transfer (cession) of the right of software copyrights, patent, trade or service mark, or design or model is exempt up to 80%. But recapture rule: The capital gain is taxable up to the algebraic sum of 80% of the net losses (revenus nets négatifs) derived from the IP rights in both current and prior accounting periods to the extent net losses have not been compensated by article 50bis 4§2 (i.e. capitalized on the balance sheet, etc.)No 80% exemption on assets acquired under articles 53 or 54 ITL.

Sale of IP Re investment

in IP Sale

9. New Luxembourg IP Law: Principles

4§. Conditions of the law

4§1. the right must have been created or acquired after 31 December 2007 and,

4§2. the expenses, amortizations, and write-downs related to the right must be recorded on the taxpayer’s balance sheet and shall be included in the profits / 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 intellectual property right.

9. Luxembourg IP Law: Principles

5§. Abuse of law provisionIP cannot be acquired from a direct related company.If either seller / buyer companies are direct owners of each by at least 10%;If both seller / buyer companies are directly owned 10% or more by same common parent company

Seller / Acquirer

Seller / Acquirer

10%NO

Parent

Acquirer

10%NO

Seller

10%

9. Luxembourg IP Law: Which transfers are acceptable or not under the new law?

Acquirer

10%

Transferor

Acquirer

100%

YES100%

InterCo

YESIndividual

Contribution of a branch of activity

Seller / Acquirer

Seller / Acquirer

100%YES?

10%

Seller / Acquirer

Seller / Acquirer

100%YES

10%

InterCo

9. Luxembourg IP Law: Principles

6§. Valuation method in case of disposal of IP

Large companies: generally accepted methods (Market Approach, Income Approach, Cost Approach, etc);

Other companies: possibility to determine the market value at 110% of expenses deducted from the taxable basis of the year of disposal and the preceding years. Grand Ducal Decree of 16 March 2005.

9. Luxembourg IP Law: Example of an IP acquisition

Background

IsraelCo incorporates LuxCo 1LuxCo 1 incorporates LuxCo 2IsraelCo transfers IP to LuxCo 2LuxCo 2 grants a license to EUCoEUCo pays royalties to LuxCo 2LuxCo 2 pays dividends to LuxCo 1LuxCo 1 pays dividends to IsraelCo

Israel Co

LuxCo 2

LuxCo 1

EUCO

RoyaltiesLicense IP

Dividends

Dividends

9. Luxembourg IP Law:Example of an IP acquisition

Luxembourg tax treatment

80% of Net IP income received by LuxCo 2 isexempt from corporate income tax and municipal business taxQualifying IP exempt from net wealth taxOnly 20% of the Net IP income is subject to corporate income tax at the rate of 28,80%, so 5,76% ETRDividends paid by LuxCo 2 to LuxCo 1 should not be subject to withholding taxand said dividends should be tax exempt atthe level LuxCo 1Dividends paid by LuxCo 1 to IsraelCoshould not be subject to withholding tax(under certain conditions)

Foreign considerationsApplicable withholding tax on royalties paid by EUCo to LuxCo2Israeli taxation further to disposal of IP to a Luxembourg entityIsraeli taxation of dividends by IsraelCo

Israel Co

LuxCo 2

LuxCo 1

EUCO

RoyaltiesIP

Dividends

Dividends

License

3/ Luxembourg Special Investment Funds (SIF)

LUXEMBOURG

ABROAD Property Company

Holding Company

FCP - SIF

ISRAEL Investors

FCP-SIF Management

Company

The investors are well informed investors, institutional investors or professional investors.

Taxation is to be analyzed on a case-by-case basis.

The FCP-SIF is in the form of a contractual fund; the management company of the FCP-SIF is in the form of a public/private limited liability company.

The FCP-SIF is not liable to corporate income tax, municipal business tax, net wealth tax and contribution to employment fund; the management company of the FCP-SIF is not liable to corporate income tax, municipal business tax, net wealth tax and contribution to employment fund if it manages only the FCP-SIF.

The FCP-SIF is liable to subscription tax of 1 basis point on the net asset value.

The holding company is typically in the form of a public/private limited liability company.

The holding company is liable to corporate income tax, municipal business tax, net wealth tax and contribution to employment fund.

The property company is typically in the form of the equivalent of a public/private limited liability company.

Luxembourg Special Investment Funds (SIF)

Incentives

R&D incentivesSince Luxembourg wishes to attract companies developing technologies, the Luxembourg government developed a few financial aid processes for various type of scheme. The aim is to help companies to develop their business in Luxembourg. Financial aid can be granted according to certain conditions. In general, Medium-sized Enterprises (SMEs) and Large-sized Enterprises established in Luxembourg can benefit from these advantages.

Equipment loan provided by SNCI (Société Nationale de Crédit et d’Investissement).

Contact

François Petit

Manager, Commerce & Industry

KPMG Tax Luxembourg

T: +352 22 5151 5585

francois.petit@kpmg.lu

www.kpmg.lu