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The "Fondation Patrimoniale"
Luxembourg’s new estate planning vehicle  - Parliamentary Bill of 9 July 2013
 
I. Introduction
 
For years Luxembourg has been developing its range of investment vehicles so that the country can become firmly established as a European centre of excellence for private wealth management and administration.
 
In this context, Bill No. 6595 of 9 July 2013, brought before Luxembourg’s lower house on 22 July, introduced a new vehicle, the ‘Fondation Patrimoniale’ (Patrimonial Foundation), a private wealth foundation designed to facilitate estate and succession planning.
 
The new vehicle satisfies the growing need of private clients who see the cohesion of family wealth, business continuity and privacy as essential to the future of their estate.
 
The Bill also introduces the ‘step-up principle’ for substantial equity holdings of individuals who switch from being non-resident taxpayers to resident taxpayers in Luxembourg and who subsequently sell their securities.
 
II. Legal framework of the Patrimonial Foundation
 
Under the Bill, the Patrimonial Foundation is an orphan tax structure – i.e. with no shareholders, associates or members – which has a legal personality and which is intended solely for individuals and wealth management entities. It is designed for the administration of private wealth (thus excluding commercial, industrial, agricultural or professional activities) for one or more beneficiaries or for one or more purposes.
 
This initial distinction with corporate entities has implications in terms of inheritance. Effectively, while the shares remain part of the deceased’s estate, the capital paid into a Patrimonial Foundation will be considered as having left the settlor’s estate during his or her lifetime.
 
The Patrimonial Foundation may hold any movable or immovable property, whether tangible or intangible. It may be the arranger or beneficiary of insurance policies, or the settlor or beneficiary of private or public foundations or even trusts. It may also hold equity investments in a company, provided it is not involved in its management.
 
Key features of a Patrimonial Foundation:
  • Duration: limited or unlimited;
  • Capital: minimum €50,000;
  • Registered office: Luxembourg (those without their own premises must be domiciled with a professional domiciliation agent such as Centuria Capital Luxembourg);
  • Governance: one or more directors (natural or legal persons);
  • Supervision: a supervisory board must be appointed (composed of natural persons only) for Patrimonial Foundations with more than five beneficiaries or with assets in excess of €20 million;
  • Audit: the directors must appoint a registered independent auditor for Patrimonial Foundations with more than five beneficiaries or assets in excess of €20 million;
  • Established by notarised deed.
 
Note that in order to guarantee the confidentiality of the Patrimonial Foundation, it is proposed that the publication of the constituent instrument should not include the name of the settlor and beneficiaries, but should comply with the obligations and regulations in force concerning the identity of the beneficial owners, in the interests of the prevention of money laundering and terrorist financing.
 
III. Tax treatment of the Patrimonial Foundation
 
1) Direct taxes:
 
- In principle, the Patrimonial Foundation is fully liable for income tax. However, taxable income does not include:
  • Investment income: debt interest and dividends;
  • Capital gains (particularly from equity investments);
  • Capital and surrender value received under a personal insurance policy covering life, death or disability.
- Contributions of any type and payments or benefits in kind conferred by the foundation are liable for 50% income tax.
 
- The Patrimonial Foundation is exempt from net wealth tax, unlike individuals.
 
2) Indirect taxes:
 
- The constituent instruments of a Patrimonial Foundation, and any subsequent amendments thereto, as well as the initial or subsequent capital contributions, are subject to a flat registration duty (no proportional registration duty applies).
 
- In the event of the transfer of assets during the settlor’s lifetime, gift tax is applied depending on the degree of kinship between the settlor and the beneficiaries.
 
- The dissolution or liquidation of the Patrimonial Foundation during the settlor’s lifetime is also subject to gift tax in the event of transfer to a third party other than the settler, this is calculated according to the degree of kinship between the settlor and the third party.
 
- Upon the settlor’s death, for Luxembourg residents and non-residents, the beneficiaries will be liable for inheritance tax at the rate of 0%, 12% or 40%, depending on the degree of kinship between the settlor and the beneficiaries.
 
IV. Step-up principle
 
The Bill also introduces a general ‘step-up principle’, which is not necessarily specifically linked to the Patrimonial Foundation. This allows any non-resident individual who is domiciled in Luxembourg for tax purposes to adjust the purchase price of his or her investments on the date of transfer of the tax domicile. The investments eligible for this scheme are substantial equity holdings (more than 10%) and convertible bonds if the taxpayer holds a significant stake in the issuer.
 
The step-up principle will thus make it more advantageous to be a Luxembourg tax resident by avoiding double taxation with the initial country of residence.
 
The information and views expressed in this document do not constitute tax advice from Centuria Capital Luxembourg S.A.
 
Therefore, this document is not contractually binding.