A Q&A guide to doing business in Luxembourg.
This Q&A gives an overview of the legal system; foreign investment, including restrictions, currency regulations and incentives; and business vehicles and their relevant restrictions and liabilities. The article also summarises the laws regulating employment relationships, including redundancies and mass layoffs, and provides short overviews on competition law; data protection; and product liability and safety. In addition, there are comprehensive summaries on taxation and tax residency; and intellectual property rights over patents, trade marks, registered and unregistered designs.
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This article is part of the PLC multi-jurisdictional guide to doing business worldwide. For a full list of contents, please visit www.practicallaw.com/about/doingbusinessin-mjg.
Luxembourg has a civil law system based on the French Napoleonic Codes. Neighbouring countries such as France, Belgium and Germany, and more recently the EU, have influenced further developments in legislation.
There are no restrictions on foreign investment.
There are no exchange control or currency regulations. However, under anti-money laundering rules, customers must fulfil identification requirements when entering into business relations, opening bank accounts or transferring more than EUR15,000 (as at 1 November 2011, US$1 was about EUR0.7).
A wide range of financial aid is available, which includes:
Capital subsidies and interest rate subsidies on tangible and intangible investments.
Loans granted by the National Credit and Investment Corporation.
Tax rebates for investments in companies located in Luxembourg.
An initial eight-year corporate income tax reduction scheme for new undertakings, or existing undertakings introducing new productions in Luxembourg.
A tax scheme to encourage investment in venture capital.
A subsidy scheme for investments whose aim is to prevent or reduce emissions, prevent, reduce or recycle waste, or to implement a rational use of energy or of renewable sources of energy.
Interest rebates on loans granted by licensed credit institutions.
A temporary tax scheme to promote venture capital investments in the audio-visual sector.
A capital grant and tax relief scheme to promote the economic development of certain specific areas of Luxembourg.
The most common form of legal entity to be established by foreign companies is a public company limited by shares (société anonyme) (SA).
To set up an SA, the following conditions must all be satisfied:
The articles of incorporation (articles) must be drawn up in the form of a notarised deed.
The articles must be registered with the Registration and Domains Authority (Administration de l'Enregistrement et des Domaines) within three months by the parties or 15 days by the notary.
The articles must be published.
The registered articles, together with information on the appointed directors, must be filed with the Luxembourg Registry of Trade and Commerce (Registre de Commerce et des Sociétés) (RCSL) within the same month as the documents' preparation. Within the next two months the RCSL discloses the relevant documents in the Luxembourg official gazette (Mémorial C, Recueil des Sociétés et Associations). To carry out commercial activities, a business licence issued by the Ministry of the Middle Classes must be obtained (autorisation d'établissement).
The minimum subscribed share capital for an SA is EUR30,986.69. The share capital must be subscribed for in its entirety and at least one-quarter of each share paid up on incorporation.
There is no maximum share capital. Shares can be issued with or without nominal value and no minimum nominal value per share exists.
Shares can be issued against contributions other than cash, subject to certain conditions. However, the subscribed capital can only be formed of assets capable of economic assessment, for example an undertaking to perform work or supply services cannot form part of these assets. Contributions other than cash must be paid-up within five years after incorporation.
Restrictions on rights attaching to shares. In addition to shares which represent the corporate capital, founder's shares or similar securities can be created. Also, non-voting shares and preferred non-voting shares can be issued subject to certain conditions. The rights attached to shares must be specified by the articles.
Automatic rights attaching to shares. All shareholders have the right to:
Attend and vote at shareholders' meetings.
Receive information about the company.
Pre-emption in relation to subscribing for new shares.
Participate in the profits of the company either through dividends or on liquidation.
In addition, certain percentages of shareholders acting together have rights as follows:
Shareholders representing at least 10% of the share capital have a right of initiative to convene a general shareholders' meeting.
One or more shareholders representing at least 10% of the subscribed share capital are entitled to request that one or more new items be put on the agenda of any shareholders' meeting.
Shareholders representing more than 20% have the right to ask the board of directors to postpone a shareholders' meeting while in session, for up to four weeks.
There are no restrictions on foreign shareholders.
Shareholders can choose between the traditional one-tier structure with only a board of directors and a two-tier structure with a management board and a supervisory board. The two-tier structure allows foreign investors to appoint a Luxembourg resident as director of an SA and control it via a supervisory board consisting of foreign officers.
There are no specific requirements for the managers of an SA registered in Luxembourg to reside in Luxembourg. However it is advisable for at least one manager to reside in Luxembourg for the purposes of ensuring that the SA is considered duly resident in Luxembourg for tax purposes (see Question 14).
Directors of an SA are jointly and severally liable to the company and third parties for damages which result from infringements of Luxembourg's law on commercial companies and/or the company's articles. However, directors are only liable to the company for any management misconduct in relation to the affairs of the company and the execution of the mandate given. Discharge from liability is possible, if:
Directors were not party to a violation.
They reported that violation at the next general meeting.
No misconduct was attributable to them.
In general, as long as a parent company is merely a shareholder, that is, not exercising excessive control of the subsidiary and neutralising its independence, any liability is limited to the total amount of the parent company's shares.
An SA must deposit its annual accounts with the RCSL within a month of their approval and at the latest seven months following the account closing date of the financial year end.
Employment relationships (both individual and collective) are mainly regulated by the provisions of the Luxembourg Labour Code (Labour Code). Labour law is of public order and the legal provisions are therefore mandatory. Parties can only depart from the provisions of this law in a more favourable way for the employee, and any clause that aims to restrict the legal rights of the employee is void.
A written contract is required regardless of whether the employment is for a fixed or indefinite period of time. An individual written contract must be drawn up for each employee no later than the day that they start work. The contract must be drawn up in two originals, one for each party.
If no written contract has been signed, the employee can use any means to prove the existence and the content of his contract. The Labour Code does not, however, allow this right to the employer.
Citizens from EU member states, European Free Trade Agreement (EFTA) member states and Switzerland can stay in Luxembourg for up to three months. For a stay exceeding three months, they must fulfil one of the following requirements, they must:
Perform an activity.
Have sufficient means for their family.
Be registered with a high school or a university as a student.
These citizens can work in Luxembourg without a work permit.
Non-EU workers must obtain a work permit from the Ministry of Foreign Affairs (Immigration Services) and undergo a medical examination. The work permit will only be issued once the employer has forwarded a bank guarantee, from a duly approved financial establishment, for any repatriation expenses of the worker for whom the work authorisation is requested. The sum of the guarantee is calculated by a special commission and cannot be less than approximately EUR1,487.36.
The work permit is issued and renewed upon payment, by employees, of a tax that cannot exceed approximately EUR4,957.87. All or some specific workers can be exempt from paying this tax by virtue of a Grand Ducal regulation, which considers their nationality, profession, recruitment method, type or duration of their work activity.
Once they have obtained a work permit and in the event they take up residence for more than three months, they must apply to the Ministry of Justice for a residence permit. The permit takes between two and three months to obtain.
The Labour Code confers to the staff delegates the right to appoint directors representing the staff in businesses to which the following conditions apply:
They are in the form of an SA.
They employ at least 1,000 employees over a three-year reference period.
The minimum number of directors is nine.
Staff delegations must be set up in every undertaking of the private sector with at least 15 employees. The employer must inform the employee representation each month on the undertaking's operations.
For companies employing at least 150 employees over a three-year reference period, a joint works council must be set up. The employer must inform and consult the joint works council on every economic or financial decision which could have a significant influence on the company's structure or the level of employment.
The management of the employer is further required to present all financial figures to the delegations such as turnover, production and investments and purchase orders.
The termination of individual employment contracts is regulated differently for fixed-term employment contracts and contracts concluded for an indefinite period of time.
A fixed-term contract cannot be terminated before its term, except in case of gross misconduct by one of the parties.
Employment contracts concluded for an indefinite period of time can be terminated:
By notice. Notice of dismissal must be sent by registered letter under penalty of invalidity. Notice by the employer must be given as follows:
for a length of service of less than five years: two months;
for a length of service of between five and ten years: four months;
for a length of service of ten years and over: six months.
Reasons for dismissal must be supported by demonstrable and explicit facts, such as reasons connected with the employee's aptitude or conduct, or reasons arising from the operating needs of the business, establishment or department.
On account of gross misconduct. The dismissal must be notified by registered letter and the employer must immediately state the explicit and detailed reasons for the dismissal.
By the employee. An employee willing to terminate the contract of service must send the employer a registered letter. The notice period required on resignation by the employee is half that required in the case of dismissal by the employer (see above).
An employment contract cannot be terminated if the employer has been duly notified of the employee's incapacity to work within the proper time or if it has received the medical certificate in due form within the proper time.
Dismissals are void against a woman whose pregnancy is medically proved, during the 12 weeks following the birth of a child and towards an employee during parental leave.
Staff representatives and their alternatives are protected from dismissal during their term of office. This protection period is extended to former representatives for six months following the end of their term of office.
Employees can apply to court for damages if one of the above rules has not been complied with.
The statutory procedure regarding collective dismissals must be followed as soon as an employer wishes to dismiss either:
At least seven employees within a period of 30 days.
15 employees within a period of 90 days.
Before proceeding with a collective dismissal the employer must enter into negotiations with employee representatives (if they exist, members of employee committees and joint works committees) and, where a collective agreement is applicable, the signatory unions, for the purpose of reaching agreement on a social plan (redundancy programme) aimed at avoiding or reducing the number of dismissals or mitigating their consequences.
Undertakings employing at least 15 employees must inform (at the latest on the date of the dismissal's notification) the Economic Committee (Comité de Conjoncture) of dismissals based on the operating needs of the business. The Economic Committee may induce the employer and the employees' representatives to enter an agreement (Plan de Maintien dans l'Emploi) reducing the impact of redundancies through social measures, where the employer notified either five dismissals within three months or eight dismissals within six months. Redundancy pay depends on the employee's age, salary and length of service.
Under Luxembourg domestic law, a taxpayer is considered to be a resident of Luxembourg for tax purposes if he has either:
A dwelling at his disposal in Luxembourg in a condition that indicates that he will maintain it and use it.
An habitual place of abode within Luxembourg (that is, his stay on Luxembourg territory exceeds six months in a tax year).
A tax resident employee is liable to tax on his worldwide income, subject to any applicable double tax treaty. The rate depends on the employee's income level and personal status (for example, marital status and the number of dependants).
Income tax is determined on the basis of progressive rates applicable to income bands, ranging from 8% on taxable income exceeding EUR11,450 up to 39% on income exceeding EUR41,793.
An additional 4% of the tax due is added as a contribution to an unemployment fund (consequently, the maximum rate amounts to 40.56%). Social security contributions amount to 24% of an employee's gross salary and are shared equally between employer and employee.
An employer acts as withholding agent for both income tax and social security contributions.
Non-tax resident employees are taxed on income arising from employment in Luxembourg at the same rates as tax resident employees (see above, Tax resident employees), subject to the provisions of any applicable double tax treaty.
Employers must make social security contributions for their employees (see above, Tax resident employees).
A business entity is considered tax resident in Luxembourg if it has either its registered seat or its place of effective management located in Luxembourg.
Companies are liable for the following taxes on their worldwide profits:
Corporate income tax at the rate of 20% for all income up to EUR15,000 and 21% for all income in excess of EUR15,000.
Municipal business tax at the rate of 6.75% (for Luxembourg city resident companies).
Due to the calculation mechanism and an additional 5% mandatory contribution to an employment fund, this leads to total effective tax rates of 28.80% for Luxembourg city resident companies.
Companies are subject to an annual net worth tax of 0.5% on their total net assets.
Luxembourg has implemented a VAT system as prescribed by different EU directives. The standard rate is 15%, subject to applicable exemptions. Most insurance, banking and financial services are exempt from VAT.
Non-tax resident companies are liable to pay corporate income tax on income from Luxembourg sources at the same rate as tax resident companies (see Question 15). In particular, income attributable to a fixed place of business constituting a permanent establishment under Luxembourg law is taxable in Luxembourg.
Dividends paid to foreign corporate shareholders?
Dividends received from foreign companies?
Interest paid to foreign corporate shareholders?
Intellectual property (IP) royalties paid to foreign corporate shareholders?
A withholding tax of 15% applies, but participation exemption can apply. Dividends are exempt from withholding tax if paid to:
A fully taxable Luxembourg limited company (SA, Sarl or SCA).
A company resident in an EU member state and listed under Article 2 of Directive 90/435/EEC on the taxation of parent companies and subsidiaries (Parent-Subsidiary Directive) or a Luxembourg permanent establishment thereof.
A Luxembourg permanent establishment of a company located in a country with a double tax treaty with Luxembourg.
In all cases, shareholders must hold, or undertake to hold, at least 10% of the share capital of the Luxembourg paying company, or the acquisition value of their shares must remain above EUR1.2 million, during a minimum period of 12 months.
Any fully taxable Luxembourg limited company can also benefit from participation exemption in respect of dividends and capital gains received from qualifying equity stakes (Société de Participations Financières (SOPARFI) regime). A shareholding will qualify if:
It amounts to at least 10% of the subsidiary's capital (or EUR1.2 million for dividends, EUR6 million for capital gains).
It is held for a minimum of 12 months.
The subsidiary is a Luxembourg resident limited company, EU resident company covered under the Parent-Subsidiary Directive or a non-resident company subject to income tax comparable to Luxembourg corporate income tax (a rate of at least 10.5%).
All dividends received on these three types of company enjoy automatic 50% exemption if they are not covered by the SOPARFI regime.
There is no withholding tax on interest to the extent that the rate and conditions are at arm's length. Consequently, in some cases, interest on profit participating loans may be re-characterised as a dividend.
IP royalties are not subject to withholding tax. However, under the law of 21 December 2007, the government has introduced a new IP regime that provides for an 80% tax exemption on net income derived from intellectual property.
There is no legislation dealing with thin capitalisation. However the general principle of dealing at arm's length applies.
Thin capitalisation is established when the financing of a company is assured by capital of 15% or less. Where thin capitalisation is established and a loan is granted to a company by a company's shareholder, the tax authorities consider the excessive debts (over 85%) to be the company's capital. The surplus is considered a contribution to capital and interests may be deemed non-deductible and treated as a dividend distribution potentially subject to a withholding tax of 15% (see Question 17).
Transfer pricing rules (see Question 20) and the abuse of law theory (see Question 19) can also apply, and provide the tax authorities with ways to limit excessive debt financing.
While there are no controlled foreign company rules, the tax authorities can use the abuse of law theory to disregard actions performed by a taxpayer where the taxpayer has set up a company scheme with the exclusive aim of obtaining a tax reduction, and where the actual tax reduction is clearly unjustified. Tax is then re-assessed as if a straightforward legal structure had been chosen. However, due to the stringent requirements of this theory, it is rarely applied.
Prices applied in intragroup transactions must be the same as those obtained on an arm's length basis between unrelated parties. The tax authorities may adjust prices accordingly on a relevant transaction between a Luxembourg resident company and a directly or indirectly related non-resident party. The tax authorities generally follow the Organisation for Economic Co-operation and Development Model Convention (OECD) transfer prices guidelines.
Within the EU, imports and exports are not subject to customs duties. Generally, VAT is applied in the destination country. Imports from outside the EU are subject to VAT and may be payable in accordance with applicable EU tariffs.
Exports outside the EU are not subject to EU VAT.
As of October 2011, Luxembourg has about 64 double tax treaties in force, all based on the OECD. Partner countries include all major trading partners inside and outside the EU.
Monopolies and restraints of trade are governed by EU competition laws and by the Law of 17 May 2004 on competition, as amended (2004 Law).
The 2004 Law established the Competition Inspectorate and Competition Council which has the power to investigate whether a competition offence has been committed under the 2004 Law. Depending on its investigations, it can then submit cases to the Competition Council, which applies penalties based on the seriousness of the offence. Failure to comply can lead to prosecution.
Any abuse by one or more undertakings of a dominant position within the market is prohibited (Article 5, 2004 Law). Similarly the law of 30 July 2002 governing certain commercial practices and prohibiting unfair competition, as amended, sets out certain anti-competitive practices, such as sale at a loss, which may be considered an abuse of a dominant position, if exercised by one or several undertakings in a dominant position in the relevant market.
Luxembourg does not have specific merger control legislation. However, Article 3 of the 2004 Law prohibits agreements between undertakings, decisions by associations of undertakings and concerted practices that have as their object or effect the prevention, restriction or distortion of competition. Article 5 of the 2004 Law (see Question 24) could also apply after the fact.
There are some sector specific rules applicable, for example, to credit institutions, where any person acquiring qualifying holdings in or over such institutions must be pre-approved by the competent authority.
Nature of right. A patent is an industrial property right granted by the Ministry of Economy. It is intended to protect new inventions that may be used in an industry. Since the Law of 18 April 2006 (modifying the Law of 20 July 1992, and further modified by the Law of 22 May 2009) it also provides for the protection of biotechnology inventions.
For an invention to be patentable, it must:
Be new.
Involve an inventive step.
Be capable of industrial application.
Not be specifically excluded from protection as a patent.
A patent right grants an exclusive right to patent holders or their beneficiaries to exploit the invention and protects patent holders against any production, distribution or sale of their inventions by a third party without their prior consent.
Protection. A patent must be registered with the Intellectual Property Department of the Luxembourg Ministry of Economy. An application for a European patent (covering Luxembourg and other designated European Patent Convention member countries) may also be made there or through the European Patent Office.
Enforcement. The owner of the patent, or, if the owner does not act, any other person having a licence over the patent can take action for counterfeiting. If there is sufficient proof, the court issues a civil order:
To stop the counterfeiting.
For damages.
Length of protection. Protection lasts for 20 years from the filing of the application, subject to payment of renewal fees.
Nature of right. A trade mark is a distinctive sign that enables customers to distinguish an undertaking's products and services from a competitor's.
Trade mark protection gives trade mark holders the exclusive right to exploit the trade mark in the countries where the trade mark is registered. Third parties cannot use the protected trade mark without the prior consent of the trade mark holder. In addition, where the trade mark is well known in a particular country, the holder may also object to the use of the trade mark for different goods.
Protection. Trade marks are protected in Luxembourg by the Benelux Convention concerning Intellectual Property of 25 February 2005 and implemented in Luxembourg by the Law of 16 May 2006, which protects a trade mark registered in one of the three Benelux countries. Registration can be filed at either the national trade mark office in the relevant Benelux country or the Benelux Trade Mark Office in The Hague. In Luxembourg, the national office is the Intellectual Property Division of the Ministry of the Economy.
Enforcement The trade mark holder and any person allowed to use the trade mark can take action for:
Damages, if they can prove that the use of the trade mark has caused them harm.
The profit realised by the unauthorised use to be attributed to them.
Length of protection. Protection lasts for an initial period of ten years, which can be renewed indefinitely for further ten-year periods.
Nature of right. Any aspect of the appearance of a craft or industrial product given by lines, shapes or materials in particular is considered to be a design. Only a new and individual design can be protected.
The owner of the registered design is granted an exclusive right over it and its use in products in which the design is incorporated. This includes a right over designs which are similar, or which appear to be identical to the registered design.
Protection. Registered designs are protected in the same way as trade marks (Benelux Convention concerning Intellectual Property of 25 February 2005) (see above, Trade marks).
Enforcement. The remedies and liabilities are the same as for trade marks (see above, Trade marks).
Length of protection. Protection is granted for a term of five years and may be renewed every five years. The maximum term of protection is 25 years.
Nature of right. Regulation (EC) 6/2002 on Community designs (Community Designs Regulation) protects unregistered designs which receive automatic copyright protection. However, registration of the design is still recommended.
Protection. Protection arises when the design is made available in the EU.
Enforcement. The remedies and liabilities are the same as for trade marks (see above, Trade marks).
Length of protection. An unregistered design is protected for at least three years. However, it has limited protection against simple copies of the design.
Nature of right. Copyright subsists in original literary and artistic work of any kind, form or expression, including:
Photographs.
Databases.
Computer software.
The copyright holder has an exclusive right over his work and can oppose any amendment or alteration made to it without his consent. He can also oppose all reproduction, divulgence or communication to the public without his prior authorisation.
Protection. Protection subsists automatically without any registration requirements. Protection begins at the time the work is created.
Enforcement. The remedies and liabilities are similar to trade marks (see above, Trade marks). Criminal sanctions for counterfeiting (such as fines or imprisonment) are also applicable.
Length of protection. Protection lasts for the life of the author plus 70 years.
Nature of right. Patterns, samples, technical combinations, competitor formulae and any information or document provided to produce a work, a study or an estimate cannot be used unless authorised.
Protection. Confidential information is protected through an action for unfair competition. Criminal prosecution may also be available if professional secrecy obligations are violated.
Enforcement. Enforcement is usually through a civil or commercial action for damages for unlawful competition by the information holder. Criminal penalties, such as fines or imprisonment can also be imposed.
Length of protection. The length of protection is not defined.
Nature of right. Databases are collections of works or other independent elements set out in a systematic manner and individually accessible by electronic means.
Protection. Registration is not required, but registration in the Economic Ministry's Copyright Register establishes the work's legal creation date (Law of 18 April 2001 on Copyright, Neighbouring Rights and Databases, as amended).
Enforcement. The remedies and liabilities are similar to copyright (see above, Copyright).
Length of protection. Protection expires 15 years after 1 January in the year after the completion of the database, or, if the database is placed before the public before that period, of the year after that in which the database was first placed before the public.
The Law of 3 June 1994 on independent commercial agents regulates agents' contractual relationships with their principal, including, in particular:
Agents' remuneration.
The termination of agency agreements.
The indemnification of an agent's clients.
Non-compete clauses.
There is no specific law relating to distribution agreements. Clauses preventing a distributor from selling below a certain price threshold set by the supplier are prohibited.
There is no specific law governing franchising.
The 2000 Law on electronic commerce (as amended) partially implements:
Directive 99/93/EC on electronic signatures.
Directive 97/7/EC on distance selling.
Directive 2000/31/EC on certain legal aspects of information society services, in particular electronic commerce, in the Internal Market.
Directive 2002/65/EC on distance marketing.
It also regulates the sending of spam e-mails, liability of intermediary service providers and electronic payments.
Luxembourg has implemented Directive 2007/64/EC by the Law of 10 November 2009, as amended by the Law of 20 May 2011, which transposes Directive 2009/110/EC on the taking up, pursuit and supervision of the business of electronic money institutions into national law and modifies the Law of 10 November 2010 on electronic payments.
Luxembourg has implemented Directive 2001/29/EC on copyright and related rights in the information society by the Law of 18 April 2004.
Directive 95/46/EC on data protection has been implemented, through the Law of 2 August 2002 on data protection (as amended). The 2002 Law sets out the rules and principles to be followed by individuals, companies, organisations and administrations (the controllers) who process data on identified or identifiable persons (the data subjects) and submits such processing to different formalities before an independent administrative authority, the National Commission for Data Protection (CNPD).
A claimant must establish damage, the defective character of the product and a causal link between the alleged damage and the defective product (Product Liability Law 1989). A civil action must be taken within three years of the damage occurring. If a product has been on the market for more than ten years, no claim can be made.
Producers must only place safe products on the market and provide consumers with the relevant information to enable them to assess the risks inherent in a product (Law of 31 July 2006).
The Minister of the Economy also has authority to control the general safety of consumer products. Failure to cure the defective characteristics of a product after notification by the Ministry is punishable by fines and/or imprisonment.
T +352 27 855 316
F +352 27 855 855
E aschmitt@bonnschmitt.net
W www.bonnschmitt.net
Qualified. Brussels, 1979; Luxembourg, 1983
Areas of practice. Corporate; banking and finance; investment management; regulatory.
T +352 27 855 316
F +352 27 855 855
E laherne@bonnschmitt.net
W www.bonnschmitt.net
Qualified. Ireland, 2004; New York, 2005
Areas of practice. Corporate; private equity; securities; investment funds.
T +352 27 855 316
F +352 27 855 855
E lnoguera@bonnschmitt.net
W www.bonnschmitt.net
Qualified. Luxembourg, 2003
Areas of practice. Tax.
