Is Luxembourg's tax advantage being eroded? Deloitte held a seminar in December 2006 to assess the most recent tax developments and their significance for "fund managers, tax and legal and private banking professionals". Pascal Noel, Partner Tax Services, introduced the seminar by saying that the new developments were, "Perhaps not as positive as (one) might have hoped for keeping Luxembourg attractive and competitive but there are some new tax things."

The big news is Law 5642 on the abolition of the Holding 1929 companies. The Holding 1929 Regime (H29) has been a long-term fiscal incentive specific to attracting investment to Luxembourg. Its abolition (due to incompatibility with EC state aid rules) demonstrates that no niche can be relied on to last forever.

The H29 regime has been abolished as from 1 January 2007. It does not apply to companies incorporated after 20 July 2006. It will remain applicable for a transitional period of a maximum of four years, from 1 January 2007 to 31 December 2010 to companies that benefited from the H29 regime before 20 July 2006 (referred to as grandfathering). With strict specifications, the H29 regime remains applicable in the case of a total or partial sale of the shares of an H29.

Amongst other new developments within Luxembourg, including the reduction of withholding tax on dividends to 15% (which increases Luxembourg's attractiveness as a holding jurisdiction), and the increase on VAT on some services (e.g. those rendered by professionals) from 12% to 15%, Noel pointed out that there are some things that are not new but which are already weakening Luxembourg's competitive tax advantage, such as a company tax rate that is still 29.63%. At the same time there are activities in other countries which are diluting Luxembourg's competitive attractiveness from an external perspective.

To remain attractive in the increasingly competitive financial sector, Luxembourg has to continuously seek niches. Jacques Linon, Director TAX-International/GFSI, Deloitte, spoke about the new Luxembourg investment vehicle for private wealth, the SPF (Société de Gestion de Patrimoine Familial). 19 October 2006 was the date of the abolition of the H29. Only one month later, an alternative bill was drafted, the SPF or fiscal bill 5637. "This was a quick reaction," said Linon and it demonstrates Luxembourg's ability to be flexible.

The new tax regime certainly has advantages. But how does the SPF fare in comparison to H29?

The new regime's sole object must be the acquisition/management and holding/realisation of financial assets excluding any commercial activity or real estate. The SPF cannot be listed on a stock exchange.

There is the condition that the SPF must receive less than 5% of dividend payments per year from companies, which are not subject to taxation comparable to Luxembourg corporate income tax or not covered by the parent subsidiary directive (90/435/EEC). If this is the case, the SPF will be exempt from both corporate income tax and net worth tax. Also, capital gains generated by the sale of the shares of an SPF by a non-resident will not be taxable in Luxembourg and dividend payments made to its shareholders will be exempt from withholding tax. The SPF will be subject to a 0.25% subscription tax which will apply on paid up capital and share premium as at 1 January (or as at incorporation date for the first year) with an annual subscription tax ceiling of 125,000 euros. The SPF must respect a debt to equity ratio of 8:1. Subscription tax will also apply to excess debt compared to such a ratio. The SPF requires three types of certifications: (1) a declaration of eligibility of investors, (2) compliance with non-qualifying dividend reception restriction rule, and (3) compliance with paying agents.

Linon concluded that while the advantages of the SPF are that it has no income tax, it is good for accumulating passive investment income and the overall costs are lower than regulated structures, it has a restricted scope of investment, additional compliance and the distributions may raise tax issues in other countries. "It is just one solution among many solutions," he said.

"Is this the end of tax-exempt advisory companies?" he theorised, if the exempt entities in the fund industry are based on 1929. "What do you do now if you have set up one of these structures?" He suggested that it might be time to, "start to develop exist strategies, consider tax/regulatory constraints, or become a taxable status company. Exist strategies of the exempt regime could be to transfer it into a taxable company (Macro/PSF/non-regulated) or a merger with management/PSF/Bank."