Trusts and Fiduciary arrangements in Luxembourg

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 trusts 4

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 • Luxembourglaw does not recognize this difference: • principle of unique and full ownership • no possibility to launch a Luxembourg trust but foreign trusts arerecognized

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 agreements 11

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 alternative 17

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 • 12.500 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 alternative 23

24. Specialized Investment Fund as an alternative • Introduced by a law of 13 February2007 • 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 • Email : carine.feipel@arendt.com