CAPITAL MARKETS
CSSF CIRCULAR 13/565 DATED APRIL 17TH 2013 (THE "CIRCULAR") AMENDING CSSF CIRCULAR 12/548 ("CIRCULAR 12/548") TRANSPOSING THE GUIDELINES OF THE EUROPEAN SECURITIES AND MARKETS AUTHORITY ("ESMA") ON THE EXEMPTION FOR MARKET MAKING ACTIVITIES AND PRIMARY MARKET OPERATIONS (THE "GUIDELINES")
Further to the publication of the Guidelines on April 2nd 2013 by ESMA, the Commission de Surveillance du Secteur Financier (CSSF) has by way of the Circular amended Circular 12/548 concerning the practical aspects of implementing Regulation (EU) No 236/2012 of March 14th 2012 on short selling and certain aspects of credit default swaps (the "Regulation").
The purpose of the Guidelines is to assist market participants and national supervisory authorities with the assessment and operation of notifications to the competent authorities in respect of the exemptions for market making activities and primary market operations under Article 17 of the Regulation and thereby develop a common and consistent approach in dealing with exemptions throughout the European Union.
In particular, the Guidelines provide advice on the following:
- definition and scope of the exemption for market makers and authorised primary dealers;
- determination of the competent authority to which the notification for exemption should be addressed;
- general principles and qualifying criteria of eligibility for the exemptions;
- exemption process (including templates for notifications).
The Guidelines are incorporated into Circular 12/548 (by being annexed as Annex VI) with immediate effect and the amended Circular 12/548 is available on the website of the Commission de Surveillance du Secteur Financier (CSSF) at:
NEW LUXEMBOURG LAW CONCERNING DEMATERIALISED SECURITIES
A big step in the modernisation of Luxembourg securities law has been taken with the adoption of the law concerning dematerialised securities and amending a number of existing Luxembourg laws, which was published in the Luxembourg Official Gazette (Mémorial A N°71) on April 15th 2013 (the "New Law").
Luxembourg companies (societé anonyme, société en commandite par actions) and investment funds now have the option to issue dematerialised equity securities and foreign and Luxembourg issuers have the option to issue dematerialised debt securities governed by Luxembourg law. There remains the option to issue debt and equity securities in bearer and registered form.
The New Law sets out certain requirements for the issuance/conversion of equity securities in/into dematerialised form, including but not limited to, the amendment of the articles of the issuer. The New Law also provides for forced conversion and sets down the consequences of non-presentation of securities in case of forced conversion.
Listed securities must be issued through clearing houses (les organismes de liquidation), which at present in Luxembourg would be one of Clearstream Banking S.A., LuxCSD S.A. and VP Lux S.à r.l. Non-listed securities are settled by either one of the above mentioned clearing houses or by central securities depositaries (les teneurs de compte central). The New Law also amended the law of April 5th 1993 on the financial sector, as amended, to provide for a central securities depositary (le teneur de compte central) as a new professional of the financial sector, which requires approval of the Luxembourg financial regulatory authority (Commission de Surveillance du Secteur) Financier (CSSF) to exercise its activities.
INVESTMENT FUNDS
PRINCIPLES FOR THE VALUATION OF COLLECTIVE INVESTMENT SCHEMES
On May 3rd 2013, the International Organisation of Securities Commissions ("IOSCO") issued a final report on "Principles for the Valuation of Collective Investment Schemes ("CIS")" (the "Final Report"). The Final Report amends and updates the Principles for CIS Valuation, originally developed in 1999 by the IOSCO, in order to take into account subsequent regulatory, industry and market developments.
Considering that during the last decade the fund industry developed a wide range of new assets whose valuation cannot be determined by using quoted prices, it has become inevitable for a CIS to rely on internal techniques which means management's judgment. As such internal techniques are more subjective, new international guidelines are required.
The Final Report therefore aims to promote internationally recognised standards for the valuation of assets of a CIS. In the opinion of the IOSCO, the proper valuation of assets is crucial for the protection of investor's interests.
The Final Report sets forth eleven principles as described below:
- Documented and comprehensive policies and procedures should be drafted by the entity responsible for the valuation of CIS' assets;
- The methodologies for the valuation of assets should be identified by such policies and procedures;
- The valuation policies and procedures should establish procedures handling with potential conflicts of interest;
- Valuation policies and procedures should be applied consistently to all assets of the same nature;
- Procedures solving problems relating to pricing errors should be established in order to fully compensate investors for material harm;
- The valuation policies and procedures should be periodically reviewed to ensure their appropriateness and effective implementation; they should also be reviewed by a neutral third party at least annually;
- Initial and periodic due diligence should be performed on third parties before entrusting them with the performance of valuation services;
- The valuation methodologies should be disclosed to investors in the CIS' offering documents (or otherwise);
- Redemptions and subscriptions of investors' units and shares shall be performed on the basis of forward pricing and not on the basis of historic net asset value;
- Asset valuation should be performed on any day open for subscriptions and redemptions; and
- The net asset value should be available to investors at no fee.
The above mentioned principles have been drafted in consideration of the comments received by the IOSCO during the consultation process. Such principles reflect a certain common approach and are a practical guide for regulators and industry practitioners.
EU FINANCIAL TRANSACTION TAX
During negotiations in relation to the European financial transaction tax ("FTT"), it became clear that it would be difficult to reach consensus across the 27 Member States. At the request of 11 Member States, namely France, Germany, Belgium, Portugal, Slovenia, Austria, Greece, Italy, Spain, Slovakia and Estonia, the European Commission has adopted a proposal to implement the FTT under the "enhanced cooperation" procedure.
The FTT shall be implemented by January 2014 only by those Member States opting into the "enhanced cooperation" procedure.
Nonetheless, the FTT will have an impact on investors all over the world. Indeed, in its current form, the FTT would be levied on all transactions on financial instruments between financial institutions when at least one party to the transaction is located in a participating country (i.e. when at least one party is located in a country participating in the enhanced cooperation).
The United Kingdom has officially launched a challenge against the European Commission in the European Court of Justice in respect of the proposed implementation of the FTT under the "enhanced cooperation" procedure. Following this, Luxembourg announced on May 8th 2013, through the publication of a Q&A on the matter, that it would not opt for such enhanced cooperation.
In this Q&A, Luc Frieden, the Luxembourg Finance Minister has indicated that "Luxembourg is not opposed philosophically to the FTT" but, due to the growing interdependence of the financial world, it must be looked on a global level and not just at a regional level by 11 countries. He warns that implementation of the FTT through the "enhanced cooperation" procedure could lead to fragmentation of the single market and capital flight from the non-participating Member States.
UPDATE ON REGULATIONS OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL ON EUROPEAN VENTURE CAPITAL FUNDS ("EuVECA") AND ON EUROPEAN SOCIAL ENTREPRENEURSHIP FUNDS ("EuSEF")
Following the endorsement of both proposed regulations by Coreper on December 13th 2012 (see our newsletter of January 2013), the European Parliament adopted on March 12th 2013 at first reading, the amended proposals on EuVECA and EuSEF. They were subsequently adopted by the Council on March 21st 2013.
Both regulations were signed on April 17th 2013 and published in the European Official Journal on April 25th 2013. They will apply from July 22nd 2013, coinciding with the effective date of the Alternative Investment Fund Managers Directive ("AIFMD"). These regulations aim to make it easier for venture and social entrepreneurs that are exempt from the requirement to seek authorisation under AIFMD, to raise funds across the European Union without the requirement to comply with the full AIFMD regime. The key elements of the regulations provide for an EU brand for "EuVECA" and "EuSEF" and the introduction of a European marketing passport. The regulations are complementary although the range of eligible financing investments under the EuSEF regulation is wider than those available for venture capital funds under the EuVECA regulation.
We hereafter discuss only the amendments with respect to the EuSEF. Those with respect to the EuVECA will be developed in a separate publication.
The adopted amendments are the result of a compromise reached between the European Parliament and the Council. One significant amendment relates to the definition of a qualifying portfolio undertaking. It is extended to mean an undertaking that is established within the territory of a Member State, or in a third country provided that the third country is not listed as a non-cooperative country and territory by the Financial Action Task Force ("FATF") and has signed an agreement with the home Member State of the EuSEF manager and with each other Member State in which the units or shares of the EuSEF are intended to be marketed, to ensure that the third country fully complies with the standards laid down in the OECD Model Tax Convention on income and on capital, and ensures an effective exchange of information in tax matters.
The amended text states that the EuSEF manager shall not use leverage at the level of the EuSEF. However, the EuSEF manager may borrow, issue debt obligations or provide guarantees, at the level of the EuSEF, where such borrowings, debt obligations or guarantees are covered by uncalled commitments.
With regard to the delegation of functions to third parties, the EuSEF manager shall not delegate functions to the extent that, in essence, it can no longer be considered to be the manager of the EuSEF and to the extent that it becomes a letter-box entity.
The full text of EuSEF regulation is available at: www.eur-lex.europa.eu
The text of EuVECA regulation is available at: http://www.eur-lex.europa.eu/LexUriServ/LexUriServ
UPDATE ON PROPOSAL FOR A REGULATION OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL ON KEY INFORMATION DOCUMENTS FOR INVESTMENT PRODUCTS
On July 3rd 2012, the European Commission published a proposal for a regulation of the European Parliament and of the Council on key information documents for investment products (see our newsletter of September 2012).
On November 14th 2012, the European Economic and Social Committee ("EESC") gave its opinion following consultation requests from both the European Parliament and the Council of the European Union. The EESC welcomed the proposal as this legislation will, for the first time, regulate all types of complex financial products and will ensure they are comparable, regardless of the type of manufacturer (bank, insurer or investment company). In its opinion, the EESC hopes that the recommendations will be taken on board in order to make the regulation clearer, more immediately enforceable and applicable. One of the comments relates to the simultaneous existence of the key information document ("KID") as proposed and the key investor information document ("KIID") required pursuant to Directive 2009/65/EC ("UCITS"). The EESC suggested that within two years of the entry into force of the regulation for investment products, the European Commission should be empowered to propose the merger of the two distinct models, bringing the UCITS requirements into line with those for the KID.
Further to a request from the Council of the European Union and from the European Parliament, the European Central Bank ("ECB") delivered its opinion on the proposal on December 11th 2012. The ECB welcomed the proposed regulation but made a number of comments, including that the KID should include the following elements: (i) counterparty, operational and liquidity risks affecting the investment product; (ii) sensitivity of the products' performance to effective stress scenarios; and (iii) the leveraged component of the product insofar as this component may multiply the applicable risks. In addition, the ECB recommends that the proposal should be amended so as to ensure harmonisation with other proposed European Union legislation introducing administrative sanctions, in particular by including provisions on administrative pecuniary sanctions.
Following these two opinions, the Committee of Economic and Monetary Affairs of the European Parliament ("ECON Committee") made a number of significant amendments to the draft regulation between December 2012 and February 2013 (please refer to the following links to see all the amendments to the draft regulation :
According to the summary of the meeting of the ECON Committee held in Brussels on May 27th and 28th 2013, half of the compromises had already been agreed. The voting of the ECON Committee on the proposed amendments to the draft regulation which was expected to occur on June 17th 2013 has been postponed to July 9th 2013, according to the information received from the ECON Committee. The vote in plenary of the Parliament is scheduled for September 2013.
THE EUROPEAN MARKET INFRASTRUCTURES REGULATION 648/2012 (EMIR) - RECENT DEVELOPMENTS
On June 4th 2013, the European Securities and Markets Authority ("ESMA") issued a "Questions and Answers" document ("QAD") on the implementation of EMIR. The purpose of the QAD is to promote common supervisory approaches and practices in the application of EMIR. It aims to answer questions asked by the general public, market participants and competent authorities in respect to the practical impact of EMIR. The QAD develops several questions that arose within the frame of EMIR, such as:
- EMIR classification of clients;
- Clarification on deadlines for confirmation of transactions;
- Hedging exemptions; and
- Client segregation.
The QAD is a practical convergence tool used to promote common supervisory approaches and practices, so that the national financial supervisory authorities work on a harmonised basis.
The QAD may also be used by ESMA in order to identify outstanding issues in the context of EMIR and that could then be fixed by new ESMA guidelines.
On the same date, ESMA also issued a report (the "Report") on the guidelines and recommendations ("Guidelines") regarding written agreements between members of central counterparties ("CCP") colleges. The Guidelines have been drafted in order to clarify the content of written agreements between CCP colleges; such agreements must be drafted by national competent authorities ("NCA") when they receive an application for authorisation from a CCP.
The Report discusses the rationale for issuing the Guidelines and includes recommendations regarding a standard written agreement for the establishment and functioning of CCP colleges. The Report also includes recommendations for the swift adoption of such written agreements.
In addition, the Guidelines and recommendations for establishing consistent, efficient and effective assessments of interoperability arrangements ("Interoperability Guidelines") have been released by ESMA on June 10th 2013. The Interoperability Guidelines only apply to NCAs. Their purpose is to define what NCAs should analyse when assessing an interoperability arrangement within the meaning of EMIR. The objective of the Interoperability Guidelines is to improve the rigor and uniformity of standards applied in the assessments of interoperability arrangements. The Interoperability Guidelines focus on the five following topics in respect to interoperability arrangements:
- Legal risk;
- Open and fair access;
- Identification, monitoring and management of risks;
- Deposit of collateral;
- Cooperation between NCAs.
FOREIGN ACCOUNT TAX COMPLIANT ACT ("FATCA"): LUXEMBOURG CHOOSES MODEL I
In the context of the FATCA negotiations with the United States of America ("US"), Luc Frieden, the Luxembourg Finance Minister, announced, on May 21st 2013 that Luxembourg will follow the approach adopted by other Member States of the European Union (being, at this time: United Kingdom, Denmark, Ireland, Spain, Italy and Germany), opting for the automatic exchange of information between Luxembourg and the US tax authorities through the signing of the Model I Intergovernmental Agreement (the "IGA").
This decision follows the announcement made by Mr. Frieden on April 10th last, whereby, within the scope of the Directive 2003/48/EC on taxation of savings income in the form of interest payments ("the Savings Directive"), Luxembourg would accept with effect from January 1st 2015, the automatic exchange of information within the European Union.
The automatic exchange arrangement set in place by the IGA will allow for automatic exchange of information on bank accounts held in Luxembourg by those falling under the definition of citizens and residents of the US.
For the time being, the Luxembourg IGA is still under negotiation but it is expected to be signed by the end of the third quarter of 2013, at the latest. Negotiations are currently focused on agreeing a list of the Luxembourg entities and (financial) products that will be exempt from FATCA reporting, which are to be listed in the so-called Annex II.
Luxembourg has also expressed its wish that such automatic exchange of information be accepted as the international standard such that it would apply to all the competing financial centres. In that respect, Luxembourg has granted a mandate to the European Commission for the latter to negotiate the application of such automatic exchange with Switzerland, Liechtenstein, Andorra, Monaco and San Marino.
INVESTMENT FUNDS - AIFMD NEW DEVELOPMENTS IN LUXEMBOURG
IMPLEMENTATION OF THE AIFMD IS EXPECTED SOON
Luxembourg authorities are preparing for the implementation of Directive 2011/61/EU of June 8th 2011 on alternative investment fund managers ("AIFMD").
The Council of State of Luxembourg (le Conseil d'Etat), issued its last opinion N° 49.914 on the Luxembourg implementation of the AIFMD (the "AIFM Law") on June 18th 2013. The opinion acknowledges most of the last amendments to the AIFM Law. It also adds some minor changes to the draft bill and clarifies the characteristics of the new form of limited partnership, société en commandite spéciale, to be introduced by the AIFM Law. The law is expected to be voted shortly.
NEW CSSF PUBLICATIONS IN RESPECT OF THE AIFMD
The Luxembourg supervisory authority, the Commission de Surveillance du Secteur Financier ("CSSF"), issued a template application questionnaire for Luxembourg alternative investment fund managers ("AIFMs") who may already wish to obtain approval by the CSSF as an AIFM. In this respect, please note that all Luxembourg AIFMs shall be approved by the CSSF before July 22nd 2014.
The CSSF also issued on June 18th 2013 a "Frequently Asked Questions" document (the "FAQ") on the AIFM Law. The FAQ highlights some of the key aspects of the AIFMD from a Luxembourg perspective. It covers the scope of the AIFM Law, the particularities of the authorisation regime as an AIFM in Luxembourg and the requirements applicable to AIFMs in respect to the delegation of tasks to external fund services providers.
In addition, the FAQ provides for much-needed clarifications on the transitional provisions laid down in the AIFM Law.
AIFMD - RELEASE OF REGULATION 447/2013 AND OF REGULATION 448/2013
On the basis of Directive 2011/61/EU of the European Parliament and of the Council of June 8th 2011 on alternative investment fund managers ("AIFMD"), the European Commission issued on May 15th 2013 the two following regulations clarifying certain procedures under the AIFMD:
- Commission Implementing Regulation (EU) No 447/2013 of May 15th 2013 establishing the procedure for AIFMs who choose to opt in under Directive 2011/61/EU of the European Parliament and of the Council (the "Opt In Regulation"); and
- Commission Implementing Regulation (EU) No 448/2013 of May 15th 2013 establishing a procedure for determining the Member State of reference of a non-EU AIFM pursuant to Directive 2011/61/EU of the European Parliament and of the Council (the "Reference Regulation").
The Opt In Regulation sets forth the required procedure for alternative investment fund managers ("AIFMs") who are below the thresholds of article 3 of the AIFMD and thus subject to less requirements under the AIFMD, to opt for full compliance of all rules under the Directive. By opting in, the EU AIFM shall benefit from a marketing passport for the units / shares of the fund under management, which would otherwise not be available to such EU AIFM.
For its part, the Reference Regulation lays down the procedure for determining the Member State of reference when a non-EU AIFM intends to manage EU alternative investment funds ("AIFs") pursuant to the second subparagraph of article 37(4) of the AIFMD.
More specifically, the Reference Regulation lists (i) the information to be provided by non-EU AIFMs and (ii) the procedure to be followed by EU national supervisory authorities and the European Securities and Markets Authority when they receive such information by non-EU AIFMs.
Both Regulations are immediately applicable from July 22nd 2013, which is the date by which all Member States of the European Union shall implement the AIFMD.
MEMORANDA OF UNDERSTANDING SIGNED WITH 34 NON-EUROPEAN UNION REGULATORS IN THE FRAMEWORK OF DIRECTIVE 2011/61/EU OF JUNE 8TH 2011 ON ALTERNATIVE INVESTMENT FUND MANAGERS ("AIFMD")
On May 22nd 2013, the European Securities and Markets Authority ("ESMA") approved several Memoranda of Understanding (MoU) entered into by the financial regulators of the European Union (EU) / European Economic Area (EEA) with 34 third-country regulators (including the United States of America, Canada, Brazil, India, Switzerland, Australia, Hong Kong and Singapore).
Such MoU enable EU securities regulators and non-EU authorities to supervise cross-border fund managers within the EU and outside. For this purpose, the MoUs provide for the exchange of information between regulators, on-site visits on a cross-border basis and assistance in the enforcement of applicable law.
The existence of MoUs between the EU securities regulator and non-EU authorities is a precondition of the AIFMD for allowing managers based outside the EU to access EU markets or perform fund management services.
Please note that ESMA has negotiated the MoUs centrally pursuant to a mandate given by Croatia, Iceland, Liechtenstein, Norway and the Member States of the EU. Due to the fact that the MoUs are bilateral agreements that must be signed between each EU securities regulator and the non-EU authorities, such negotiated MoUs will become applicable upon their signature on a case by case basis. The actual supervision of alternative investment fund managers lies with the national securities regulators, therefore each authority decides with which non-EU authorities it will sign an MoU.
A complete list of all the signing 34 regulators can be found on:
The content of the MoUs will be available soon on ESMA's website.
RELEASE OF THE FINAL REPORT ON DRAFT REGULATORY TECHNICAL STANDARDS ON TYPES OF ALTERNATIVE INVESTMENT FUND MANAGERS ("AIFMS")
The Draft
Within the framework of Directive 2011/61/EU of the European Parliament and of the Council of June 8th 2011 on alternative investment fund managers ("AIFMD"), the European Securities and Markets Authority ("ESMA") issued the Draft regulatory technical standards (the "RTS") on types of AIFMs on April 2nd 2013.
The RTS aims to clarify the concepts of "AIFM of open-ended AIF(s)" and of "AIFM of closed-ended AIF(s)", ("AIF" being an alternative investment fund within the meaning of the AIFMD).
The distinction between these two concepts has a huge impact on the application on the AIFMs of the liquidity management rules, the valuation procedures and the transitional provisions laid down in the AIFMD.
An AIFM of open-ended AIF(s) is an AIFM which manages at least one AIF, some or all of whose unitholders or shareholders have the right to redeem their units / shares (i) at least once a year, and (ii) in accordance with the fund documents, at a price which is close to the net asset value of the unit / share to be redeemed. For the purposes of the latter, it is considered that action taken by AIFMs in order to ensure that the price of units / shares on stock exchanges does not significantly differ from their net asset value is regarded as equivalent to the right to redeem shares. To the contrary, the existence of lockup periods and of restrictions on redemptions due to the illiquid nature of assets (e.g. side pocket investments) does not prevent the AIFM from qualifying as AIFM of open-ended AIF.
An AIFM of closed-ended AIF(s) is an AIFM managing an AIF which is not complying with the foregoing. Furthermore, when there is a change in the redemption policy that transforms an open-ended AIF into a closed-ended AIF, or vice-versa, the new rules become applicable upon such transformation.
The Final Report
Within the framework of Directive 2011/61/EU of the European Parliament and of the Council of June 8th 2011 on alternative investment fund managers ("AIFMD"), the European Securities and Markets Authority ("ESMA") issued on May 24th 2013 its final report on guidelines on key concepts of the AIFMD (the "Guidelines").
ESMA requires the national supervisory authorities to incorporate such Guidelines into their supervisory practices in order to ensure mainly the common, uniform and consistent application of the concepts that comprise the definition of alternative investment fund ("AIF") in Article 4(1)(a) of the AIFMD.
Pursuant to the AIFMD, all AIF shall have a single AIFM to which the requirements of the AIFMD apply. It is therefore imperative for an investment vehicle, which is not an undertaking for collective investment in transferable securities within the meaning of directive 2009/65/EC, to assess whether it qualifies as an AIF or not. ESMA has been assigned the task to draft the Guidelines in order to clarify the elements of definition of an AIF and to ensure that the scope of the AIFMD is uniform across the European Union.
The AIFMD defines an AIF as a collective investment undertaking which raises capital from a number of investors, with a view to investing it in accordance with a defined investment policy for the benefit of those investors and does not qualify as an undertaking for collective investment in transferable securities within the meaning of directive 2009/65/EC. Such concepts are now clarified in the Guidelines.
In a nutshell, the Guidelines describe the following concepts:
- "collective investment undertaking" is an undertaking:
- which does not have a general commercial or industrial purpose;
- which pools together capital raised from its investors for the purpose of investment;
- which invests capital with a view to generating a pooled return for those investors; and
- whose unitholders or shareholders of the undertaking – as a collective group – have no day-today discretion or control;
- "raising capital" consists in the commercial activity of taking direct or indirect steps to procure the transfer or commitment of capital by one or more investors to the undertaking for the purpose of investing it in accordance with a defined investment policy;
- "number of investors" consists in the potential of the undertaking to have more than one investor, even if the undertaking has actually only one investor ; and
- "defined investment policy" is about having a policy on how the pooled capital in the undertaking is to be managed to generate a pooled return.
Finally, the Guidelines further state that if a single compartment on an investment vehicle qualifies as AIF, then the whole investment vehicle is to be considered as an AIF.
LAW OF MARCH 29TH 2013 - ADMINISTRATIVE COOPERATION IN THE FIELD OF TAXATION
On March 29th 2013 the Luxembourg Parliament adopted a law (the "Law") implementing the European Directive 2011/16/EU of February 15th 2011 on administrative cooperation in the field of taxation (the "Directive"). The Law aims at ensuring that tax information is exchanged with the national tax authorities of other Member States in accordance with international standards of transparency on exchange of information.
The Law entered into force with retroactive effect as from January 1st 2013 and applies to all taxes excluding however value added tax, custom and duties and compulsory social security contributions. Under the Law, tax information can be exchanged upon request by the national tax authorities of other Member States or spontaneously by the Luxembourg tax authorities.
Exchange of information on request
Upon reasoned request, the Luxembourg tax authorities will communicate foreseeably relevant information (including information held by a financial institution) in its possession or that it can obtain further to administrative enquires if such enquiry is deemed necessary by the Luxembourg tax authorities. Exchange of information that is unlikely to be relevant for the taxpayer's affairs is not allowed (no fishing expedition).
Spontaneous exchange of information
The Luxembourg tax authorities shall spontaneously provide information to the tax authorities of other Member States in the following cases:
- the Luxembourg tax authorities has grounds for supposing that there may be a loss of tax revenue in the other Member State;
- where a person secures a reduction of tax in Luxembourg which would give rise to an increase in tax (or liability to tax) in another Member State;
- transactions between persons liable to tax in Luxembourg and other Member State conducted through one or more countries causing tax savings in Luxembourg and/or in the other Member State;
- where it is believed by the Luxembourg tax authorities that tax savings result from an artificial intra-group transfer of profits;
- information communicated by other Member State has enabled the Luxembourg tax authorities to obtain further relevant information for that other Member State.
The Law also introduces other forms of administrative cooperation between the Luxembourg and foreign tax authorities:
- Simultaneous controls in Luxembourg or in the other Member State territory concerning person(s) of common interest to the tax authorities;
- Sharing of know-how and best practices through mutual presence in administrative offices and participation in administrative enquires or with administrative notification.
The Law did not implement the Directive's provisions on automatic exchange of information regarding income from employment, director's fees, pensions, life insurance and real estate income. These will have to be implemented with effect as from January 1st 2015. As of this date, Luxembourg will also apply the automatic exchange of information on interest payments made by Luxembourg financial institutions to individuals resident in another Member State (within the scope of the European Directive 2003/48/EC of 3rd June 2003 on taxation of savings income in the form of interest payment) thus repealing the existing 35% withholding tax applied by Luxembourg on such interest payments. Luxembourg residents receiving interest income paid by Luxembourg financial institutions will not be affected by this measure. Information on interest payments concerning residents outside the EU will continue to be exchanged upon request on the basis of the applicable double tax treaty.
HIGHER ADMINISTRATIVE COURT: DECISION 31343C: TRANSFER OF USUFRUCT ON QUALIFYING PARTICIPATION
On March 7th 2013, the Higher Administrative Court of Luxembourg (Cour administrative) (the "Court") ruled on the availability of the Luxembourg participation exemption regime (Article 166 Luxembourg Income Tax Law) upon the transfer of the usufruct of a qualifying participation to a third party against remuneration.
In the case at hand, a Luxembourg company (the "Company") holds 99.70% of the shares of an Italian subsidiary and transferred the usufruct for an uninterrupted period of five years to a third party against payment of a fixed remuneration. The question was if the compensatory remuneration of the owner is falling under the Luxembourg participation exemption regime, since it is originated from the ownership of the (important) participation.
First, the Court confirmed that article 108bis of the Luxembourg Income Tax Law ("LITL") which provides that in case of transfer of the usufruct, for Luxembourg income tax purposes, the income will be deemed to be received by the bare owner who will transfer it to the usufructuary, is not applicable to the case at hand because the Company is a limited liability company which is always deemed to realise a business income.
Regarding the availability of the important participation exemption, the Court referred to the parliamentary documents and concluded that article 166 LITL is only available with respect to shares, of which full ownership is held by the recipient of the dividend income. The Court furthermore is of the opinion that the capital gains exemption is only available where the full ownership is transferred. In the case at hand, absent any detailed provision in the sale and purchase agreement, the view of the Court is that the legal owner transferred not only the entitlement to receive dividends, but all the rights attached to the usufruct pursuant to the Luxembourg Civil Code (Code Civil). On the basis of this position, the Court is of the view that the remuneration received in exchange of the transfer of the usufruct shall not be qualified as "income of a shareholding" in the sense of Article 166 (1) LITL, but rather as income resulting from the partial transfer of property rights (cession partielle du droit de propriété) of the shareholding, which for tax purposes represents a capital gain / capital loss in the sense of Article 166 (9) 1. LITL. As the Court is the view that the capital gain exemption of article 166 (9) 1. LIR is only available where the full ownership is transferred, the Court ruled that in the case at hand, the Company cannot avail itself of the capital gain exemption.
HIGHER ADMINISTRATIVE COURT: DECISION 32184C: EXCHANGE OF INFORMATION ON BANK ACCOUNTS – COMMUNICATION EX-OFFICIO OF THE REQUEST OF INFORMATION TO THE PLAINTIFF
On May 2nd 2013, the Higher Administrative Court of Luxembourg (Cour administrative) judged that the request for information made in application of the double tax treaty between Luxembourg and France does not benefit from the rule of confidentiality.
The French tax authorities requested an exchange of information from the Luxembourg tax administration on the basis of article 22 of the double tax treaty between France and Luxembourg (the "Treaty"). The Luxembourg tax authorities refused to communicate the request of the French tax authorities to the taxpayer on the basis of the rule of confidentiality as referred in the commentaries to article 26 of the OECD model tax convention of July 17th 2012.
The judge considered that the rule of confidentiality based on the 2012 commentaries to article 26 of the OECD Model Tax Convention is not applicable in the case at hand since this rule is not included in the Treaty and references to the 2012 commentaries to article 26 of the OECD Model Tax Convention shall be limited to the clarification of the rules included in a double tax treaty. The judge therefore ruled that the communication of the request of the French tax authorities to the taxpayer cannot be refused on the basis of the Treaty.
Furthermore, the judge considered that the request of information is an essential element that must be communicated ex officio to the plaintiff.
For more information, please refer to our article at www.bsp.lu/articles/Echange_donnees.html.
HIGHER ADMINISTRATIVE COURT: DECISION 31799C CLARIFICATION OF THE PROOF OF RECEIPT OF A TAX ASSESSMENT BY REGULAR POST
On May 14th 2013, the Higher Administrative Court (Cour administrative) clarified the rules regarding the proof of receipt of a tax assessment when it is sent by regular post in a sealed envelope.
Paragraph 211 (3) of the Abgabeordnung completed by the Grand-Ducal decree of October 24th 1978 allows the tax authorities to send the tax assessments by regular post. In such case, it is assumed that the tax assessment has been notified to the taxpayer the third working day following the lodgement of the tax assessment with the post office.
On January 12th 2011, the tax authorities sent a tax assessment for the year 2006 to the company XYZ. The company brought an action against the tax assessment to the director of the tax authorities (the "Director") which was rejected because the claim was made after the end of the time limit for bringing an action, i.e. more than 3 months after the issuance of the tax assessment. The taxpayer filed an appeal against the decision of the Director arguing that the tax assessment was received in the course of March 2011.
According to the judge, if the taxpayer brings an action against a tax assessment, it means that the taxpayer has effectively received such tax assessment. The taxpayer has therefore to prove the date of lodgement of the tax assessment with the post office, which is stated on the envelope. If the taxpayer does not attach such envelope to his claim, it shall be assumed that the tax assessment has been lodged with the post office on the date mentioned on the tax assessment and that it has been notified to the taxpayer 3 working days after its lodgement with the post office.
For more information, please refer to our article in French at
www.bsp.lu/articles/Bulletin_imposition.html
CIRCULAR N° 765 – DETERMINATION OF DEDUCTIBLE INPUT VAT ON "MIXED GOODS OR SERVICES"
On May 15th 2013, the Luxembourg VAT Authorities (l'Administration de l'enregistrement et des domaines) issued a new circular ("Circular n° 765") in relation with the determination of the amount of deductible input VAT of "mixed taxable persons", which perform both VAT taxable and exempt activities.
In accordance with Luxembourg VAT law, a mixed taxable person is only allowed to recover the input VAT that is in relation with its VAT taxable activities.
In order to do so, mixed taxable persons have often used a general prorata which was determined either as (i) the ratio between the VAT taxable turnover and the total turnover or as (ii) the ratio between the assets generating taxable turnover and the total assets. In Circular n° 765, the VAT authorities take the view that the general prorata is, in most cases, not appropriate in order to determine the correct amount of recoverable input VAT for mixed companies and therefore the application of the direct allocation and special prorata method should precede the application of the general prorata. The scope of the general prorata shall be limited to overhead costs which cannot be allocated under the two other methods.
Circular n° 765 provides examples of special allocation keys, based for example on cost units employed for a certain business activity, the square meters dedicated to each activity or sectorial special prorata. The aim of these provisions is to establish a more precise and more consistent determination of the amount of input VAT deductible.
Circular n° 765 emphasises that an appropriate analytical accounting should be the best way to justify the allocation keys chosen in other to apply the direct allocation method. In that respect, a taxpayer should be well prepared in order to be able to justify the methods and keys used for the allocation of the costs and input VAT between taxable and non-taxable activities.
The provisions of the Circular are applicable as from fiscal year 2013.
CIRCULAR L.I.R. N° 95/2 OF MAY 21ST 2013 CONCERNING THE TAX REGIME APPLICABLE TO IMPATRIATE WORKERS (THE "CIRCULAR")
The Circular, issued by the Luxembourg tax authorities on May 21st 2013, provides specific tax provisions exempting, at the level of the employers, part of the expenses borne by employers in relation with the impatriation of high skilled workers to Luxembourg i.e.:
- Employees working abroad for an international group and assigned to a Luxembourg company of the same group ("Assignment");
- Employees hired abroad by a Luxembourg company ("Recruitment").
The Circular applies retroactively as from January 1st 2013 and eases the conditions posed by circular L.I.R n°95/2 of December 30th 2010 ("2010 Circular") in an effort to promote the relocation of foreign workers to Luxembourg. The Circular replaces the 2010 Circular.
General conditions
As provided by the 2010 Circular, the Circular also requires that the employee becomes a Luxembourg tax resident and has not been subject to income tax in Luxembourg in the 5 years preceding the starting date of employment in Luxembourg. The Circular requires in addition that the employee was not living less than 150km from the Luxembourg border.
The employee's annual remuneration should at least amount to EUR 50,000 (EUR 112,000 under the 2010 Circular).
The employer must employ in the medium term 20 full-time employees and the number of impatriates cannot exceed 30% of the total full-time working force (10% under the 2010 Circular).
Conditions in case of Assignment
The assigned employee must have 5 years' experience in a similar activity or have been employed within the same group for 5 years.
A contractual arrangement must exist between the employee and the home company as well as a secondment contract.
The employee must be granted a right of return to the home company.
Conditions in case of Recruitment
The employee must be highly specialized in a sector for which there are recruitment difficulties in Luxembourg.
Eligible expenses and tax treatment
The Circular applies to the amount of expenses that exceed those that the impatriate would have borne had he stayed in his home country. These expenses incurred by the employer on behalf of the employee are tax deductible at the level of the employer and exempt at the level of the employee.
The following expenses are eligible to the tax relief:
- Moving expenses (to and from Luxembourg) and furnishing costs;
- Travel costs under specific circumstances (birth, marriage or death of a family member);
- School fees for the employee's children;
- Lump sum allowance to compensate for the living differential between home country and Luxembourg (subject to cap).
The following expenses are eligible to the tax relief subject to an overall cap of EUR 50k per year (EUR 80k if the employee lives with spouse/partner) and 30% of the employee's annual pay:
- Rent / utilities expenses provided the employee has kept his house in the home country;
- Travel costs for one annual trip to the home country;
- Cost related with the difference in income tax charge between Luxembourg and the home country.
This tax regime applies during the 5 years following the starting date of employment in Luxembourg. Under the Circular, each employer is merely required to provide the tax authorities with a list of impatriate workers employed for the application of this tax regime whereas, under the 2010 Circular, this tax benefit was only be granted upon submission of a written request.
ECJ: DECISION C-424/11: VAT TREATMENT OF MANAGEMENT SERVICES PROVIDED TO A DEFINED BENEFIT OCCUPATIONAL PENSION SCHEME
On March 7th 2013, the European Court of Justice ("ECJ") ruled that a defined benefit occupational pension scheme established for the benefit of employees is not considered as a "special investment fund" pursuant to article 135 (1) (g) of Directive 2006112/EC (the "VAT Directive"). Therefore, management services provided to such pension funds are subject to VAT at ordinary rates.
In the case at hand, Wheels Common Investment Fund Trustees Ltd. (the "Fund") is a fund pooling the assets of a number of Ford group pension schemes. The Fund receives its financing by way of contributions by the employer and the employees, a trustee managing the Fund in the context of a retiring pension scheme. Under that scheme, the employees are entitled to pension payments based on the length of the service with the employer and of the amount of salary, as is typical in defined benefits pension schemes.
The ECJ stated that there are structural differences between the Fund and special investment funds within the meaning of the VAT Directive. For one, the Fund is not open to the public, but is limited to group employees. Second, the employees' pension will not be based on the value of the assets held by the Fund and the returns generated by their contributions, but will be defined in advance on employment law based criteria (length of service, level of remuneration). The Fund may not be seen as a special investment fund for the employer either, since the employer makes the payments into the Fund solely in order to meet its legal obligations towards its employees. For these cumulative reasons, the ECJ ruled for the Fund not to be a special investment fund as per the VAT Directive and therefore cannot benefit from a VAT exemption for management services rendered to such a pension fund.
This decision might trigger a change of Luxembourg VAT legislation, which exempts from VAT the management of any "fund supervised by the CSSF". This interpretation of the VAT Directive might prove too large and a reduction of the scope of VAT exemptions is conceivable. However, we believe that based on the characteristics of a pension fund, some should still be seen as qualifying special investment funds (for further information please see our article of April 18th 2013 at www.bsp.lu/articles/Wheels_CJEU_ruling.html
CSSF REGULATION 12-02 OF DECEMBER 14TH 2012 REGARDING THE FIGHT AGAINST MONEY LAUNDERING AND TERRORIST FINANCING (THE "REGULATION")
As discussed in our newsletter of January 2013, the Regulation was published in the Luxembourg Official Gazette (Mémorial A n°5) and entered into effect on January 12th 2012.
The full text of the Regulation is now available in English on the website of the Commission de Surveillance du Secteur Financier (CSSF) at www.cssf.lu/fileadmin/files/Lois_reglements/Legislation/Reglements/RCSSF_No12-02eng.pdf.
NEW CSSF CIRCULAR ON COOPERATION WITH JUDICIAL AUTHORITIES
On June 7th 2013 the Commission de Surveillance du Secteur Financier (CSSF) released CSSF Circular 13/566 which introduces through the e-file.lu communication platform an additional way of exchanging the required information with an investigating judge in the context of a criminal investigation.
Please see our article on the Circular available at www.bsp.lu/articles/EFile_Platform.html
Furthermore, the full text of the Circular (only in French) is available here:
www.cssf.lu/fileadmin/files/Lois_reglements/Circulaires/Hors_blanchiment_terrorisme
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
