A newly laid foundation: a private wealth-planning tool

Sunday, 01 November 2015
Julien Dif discusses the Luxembourg private foundation, a new private wealth-planning tool.

Luxembourg will soon introduce the private foundation, a new structuring and planning instrument that may appeal to individuals or entities dedicated to private wealth management. It is especially designed for individuals or families seeking to preserve the sustainability of their assets after the death of a family member, including when the heirs are not expected to personally take over the family business. The private foundation can also be used for purposes such as providing for a disabled relative or financing a child’s education.

Latest standards incorporated

The Luxembourg government initially issued the draft law on the private foundation in the summer of 2013. However, a series of events delayed the legislative process, such as elections and the enactment of the EU’s Fourth Anti-Money Laundering Directive. The directive incorporates recommendations issued by the Financial Action Task Force and EU member states have until 2017 to implement it in national law.

Succession planning

Private foundations must have their registered address in Luxembourg and the initial endowment cannot be less than EUR50,000. The key difference between private foundations and limited liability companies is the former has an orphan structure with no shareholders, partners or members. 

The foundation is described as ‘private’ to show that it differs from the long-established non-profit associations or foundations.

Further, private foundations cannot exercise any liberal profession or perform any commercial, industrial or agricultural activity. Hence, disclosure of information that applies to commercial companies is not relevant and the privacy of the founder and the beneficiaries prevails.

The SPF (société de gestion de patrimoine familial) was launched in 2007 and is an estate-planning vehicle strictly limited to financial assets, while a private foundation can contain real estate, movable, tangible or intangible property, securities, financial assets, structured products or derivatives, currency, intellectual property rights, debt instruments, artworks, precious metals, and so on.

The private foundation can issue certificates relating to assets it owns to beneficiaries and break down the revenues deriving therefrom. This allows it to perform a function similar to that of a stichting administratiekantoor in Dutch and Belgian law, i.e. separating legal ownership from pecuniary rights. It is especially useful if the certificates are attached to shares, in that holders can exercise voting rights and receive dividends.

Trust-like structure

The private foundation is similar to Anglo-Saxon trusts, to the extent that it has founders, directors and beneficiaries. The main difference is that it is vested with legal personality. As a consequence, a private foundation has its own assets.

A private foundation can be established by one or several founders. Founders can be individuals, Luxembourg SPFs, Anglo-Saxon trusts, Dutch stichtingen administratiekantoor, or any other similar entities dedicated to private wealth management. The private foundation is managed by one or several directors, who, under certain conditions, operate under the oversight of a supervisory board. It is founded for the benefit of one or several beneficiaries appointed by the founder. No family tie is required with the founder.

Favourable taxation

From a Luxembourg tax perspective, private foundations are opaque. As a result, they are subject to corporate income tax and municipal corporate tax. Some tax exemptions are applicable and no wealth or withholding tax is charged by the Luxembourg tax authorities. The Bill introduces the Anglo-Saxon ‘step-up in basis’ for the benefit of new residents – i.e. the value of the assets is determined as of the date on which they became Luxembourg residents.

As regards indirect tax, endowments are subject to a fixed registration duty. Asset transfers to beneficiaries during the lifetime of the founders are treated like any other donation, in accordance with the value of the asset and the relationship between the founder and the beneficiary (close relatives benefit from the 0 per cent rate).

In a nutshell

Luxembourg has designed a private wealth-planning instrument with appealing features. On the one hand, the private foundation complies with the latest EU and international standards. On the other, it protects privacy, benefits from tax incentives and gives the founder great flexibility as to succession planning.

Author block
Julien Dif

Julien Dif TEP is a partner at Bonnard Lawson in Geneva and Luxembourg, current Chair of STEP Suisse Romande and a member of the STEP Council.

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