1. Trusts and Fiduciary arrangements in Luxembourg
Carine Feipel
December 2nd ,2009

2. Luxembourg in a nutshell
Located in the heart of Europe
Founding member of the EU, as such submitted to EU legislation
One of the most important international financial centers in the EU
One of the smallest countries in the EU but one of the highest incomes per capita in the world
Multicultural and multilingual population
Great political stability, high level of security
Well connected to the outside world with over 50 double tax treaties
Money laundering: GAFI rules
Cooperation between foreign authorities even in tax matters
OCDE compliant - Luxembourg on no black/grey OCDE list

3. Agenda Recognition of foreign trusts Luxembourg fiduciary agreements
Family wealth management company as an alternative
Specialized Investment Fund as an alternative

4. Recognition of foreign trusts4

5. Recognition of foreign trusts
Judgment of the Luxembourg Court of Appeal of 22 May 1996
Facts:
A settlor grants a guarantee to a bank on assets (cash) allocated to a Jersey trust without any intervention of the 2 trustees
The bank exercises its guarantee on the assets of the trust
Issue
The trustees ask the Luxembourg court to force the reimbursement of the guarantee by the settlor  the settlor is not entitled to grant a guarantee on the assets of the trust
The settlor challenges the authority of the trustees to act as representatives of the trust before the Luxembourg court

6. Recognition of foreign trusts
Court
The trust is not a legal concept existing under Luxembourg law
Impossibility of establishing a trust in Luxembourg
But
The capacity of the trustees to act as representatives of the trust exists in the law of the trust
The law of the trust is not contrary to Luxembourg law and Luxembourg public policy
The action before the Luxembourg court introduced by the trustees is admissible

7. Recognition of foreign trusts
The Hague Convention on the law applicable to trusts and on their recognition
“…the legal relationships created - inter vivos or on death - by a person, the settlor, when assets have been placed under the control of a trustee for the benefit of a beneficiary or for a specified purpose.” Article 2
Luxembourg law dated 27 July 2003 applicable to trusts and fiduciary agreements (with effect in Luxembourg since 1st January 2004)  recognition of foreign trusts

8. Recognition of foreign trusts
In « common law » jurisdictions : difference between legal and economic property:
the settlor transfers legal property of assets to the trustee
the beneficiaries have the economic property of the assets transferred to the trustee
Luxembourg law does not recognize this difference:
principle of unique and full ownership
no possibility to launch a Luxembourg trust but foreign trusts are recognized

9. Recognition of foreign trusts
Judgment of the Luxembourg District Court of 12 December 2008
Facts
A US resident, Mrs. B, holds a real estate in Luxembourg
At the time of her death, the real estate is allocated to a US trust
The trustee is in charge of managing the assets of the trust during a certain period of time
The beneficiary of the trust is the sister of Mrs. B and the French foreign Ministry and a French association

10. Recognition of foreign trusts
Issue
The Luxembourg tax authorities consider that the real estate has been allocated to the trust and that inheritance tax is due at a rate applicable to non-relatives
Court
Principle of tax neutrality of the transfer of assets to a trust
Trusts do not have legal personality
Recognition by the Luxembourg tax authorities of the US trust: no inheritance tax was due

11. Luxembourg fiduciary agreements11

12. Luxembourg fiduciary agreements
Introduced in the Grand-Ducal regulation of 19 July 1983 modified by the law of 27 July 2003
Innovation: introduction of the principle of segregation of assets
Fiduciary agreements may be used for various purposes:
Management purposes (fiducie-gestion);
Guarantee purposes (fiducie – sûreté);
Credit purposes (fiducie – crédit);
Carrying purposes (fiducie – portage)
Gift or inheritance purposes (fiducie – donation)

13. Luxembourg fiduciary agreements
Definition (Art 5, Law 2003)
“A fiduciary agreement is an agreement by which a person, the principal, agrees with another person, the fiduciary, that, subject to the obligations determined by the parties, the fiduciary becomes the owner of assets which shall form a fiduciary estate”.
full transfer of ownership in favor of the fiduciary
separate patrimony held by the fiduciary on behalf of the settlor (patrimoine d'affectation)
No registration requirements in Luxembourg, except when relating to real estate located in Luxembourg, or aircrafts or vessels registered in Luxembourg

14. Luxembourg fiduciary agreements
Eligible persons as fiduciary  credit institutions and certain professionals of the financial sector:
investment firms, investment funds (SICAV, SICAF), management companies of collective investment funds (FCP), pension funds, insurance or reinsurance companies, securitization vehicles.
Non-eligible persons:
Lawyers, notaries, domiciliation agents

15. Luxembourg fiduciary agreements
Functioning
Freedom of contract
In absence of defined rules set by the parties  rules governing mandates except for representation and dismissal principle
The fiduciary arrangement may be irrevocable and discretionary

16. Luxembourg fiduciary agreements
The fiduciary assets do not belong to the personal estate of the fiduciary agent
This segregation survives even in the case of bankruptcy or insolvency of the fiduciary agent
 the fiduciary assets cannot be seized by creditors of the fiduciary agent
 the fiduciary assets will not form part of the insolvency estate of the fiduciary agent

17. Family wealth management company as an alternative17

18. Family wealth management company as an alternative
The law on family wealth management companies (“société de gestion de patrimoine familial” - “SPF”) was adopted on 11 May 2007
The SPF is designed as an investment company intended solely for individuals managing their private wealth. The level of wealth or sophistication of the individual is irrelevant.
The SPF is a legal entity separate from its shareholders

19. Family wealth management company as an alternative
Shareholders of the company :
any individuals acting within the framework of the management of their private wealth;
any wealth management entities acting exclusively in the interest of the private wealth of individuals i.e. family offices, trusts, private foundations or similar entities;
intermediaries holding shares in the SPF on a fiduciary basis or in a similar capacity, on behalf of eligible investors
« Family » notion :
 no need to be relatives

20. Family wealth management company as an alternative
Corporate form : any form of a capital company such as the private limited liability company, the public limited liability company, the partnership limited by shares, or the cooperative company in the form of a public limited company
minimum registered capital
31,000 EUR for a public limited liability company
EUR for a private limited liability company

21. Family wealth management company as an alternative
purpose of the company
acquisition, holding, management and sale of financial assets, to the exclusion of any commercial activity
The SPF cannot:
hold real estate directly, but it can invest in any kind of property company
grant loans
subscribe to an insurance policy

22. Family wealth management company as an alternative
Subjective tax exemption
No Withholding tax
No benefit from Double Tax Treaty
0.25% subscription tax (with a cap)

23. Specialized Investment Fund as an alternative23

24. Specialized Investment Fund as an alternative
Introduced by a law of 13 February 2007
Subject to a light supervision by the CSSF:
Ex post approval procedure
Requirement of a prospectus (issuing document) which needs to be updated only if new shares or units are issued to new investors
No promoter requirement but reputable and experienced directors
Principle based investment restrictions
Subject to an annual subscription tax (taxe d’abonnement) at the rate of 0.01%

25. Specialized Investment Fund as an alternative
Eligible investors: well-informed investors
Institutional investor, or
Professional investor, or
Other well-informed investor, i.e.
having confirmed in writing that he/she adheres to the status of well-informed investor, and
investing a minimum of 125,000 Euros in a SIF

26. Specialized Investment Fund as an alternative
All legal forms permitted:
FCP (common fund)
SICAV (investment company with variable capital) / SICAF (investment company with fixed capital) under the form of an S.A., S.C.A., S.à R.L. or S.C.S.A.
Umbrella structure possible

27. Specialized Investment Fund as an alternative
Risk diversification
No quantitative investment restrictions except CSSF Circular 07/309 of 3 August 2007 (possible derogation):
no more than 30% of the SIF assets in securities of the same kind issued by a single issuer;
Master-Feeder structure possible

28. Thank You 28

29. Contact us Carine Feipel Partner Tel :+1 212 554 3541