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1 Legislative framework

1.1 Which legislative provisions govern private client matters in your jurisdiction?

Luxembourg private law matters are governed by:

  • Articles 718–892 of the Civil Code in relation to successions; and
  • Articles 893–1100 of the Civil Code in relation to donations and wills.

Luxembourg personal income tax matters are governed by Articles 1–157ter of the Luxembourg income tax law of 4 December 1967, as modified.

1.2 Do any special regimes apply to specific individuals (eg, foreign nationals; temporary residents)?

Luxembourg inpatriate regime: The 2021 Luxembourg budget law has amended and codified the Luxembourg inpatriate regime by transposing Circular 95/2 issued by the Luxembourg tax authorities in 2014 into Luxembourg tax law. This incentive regime aims to attract foreign skilled workers to Luxembourg by providing tax savings. Under the new regime, inpatriate premiums granted to employees as compensation for the costs of living benefit from a 50% tax exemption, while being fully deductible as a business expense at the level of the employer. This premium is limited to 30% of the gross regular annual remuneration of the employee. To qualify for the new regime, the employee’s annual salary (excluding benefits in kind or cash) must amount to at least €100,000.

Luxembourg step-up regime: Under the Luxembourg step-up regime, individuals who hold an important participation (>10%) and migrate to Luxembourg can claim an increased acquisition price for the participation, corresponding to its market value as per the day of migration to Luxembourg. A participation is deemed ‘important’ if the transferor has directly or indirectly held, individually or jointly at any time during the five years preceding the date of disposal, more than 10% of the capital of the entity.

Maintenance of the original domicile for EU officials: EU officials and other EU employees who, solely by reason of the performance of their duties in the service of the European Union, establish their residence in Luxembourg benefit from a special tax regime which allows them to maintain their original domicile for income tax, wealth tax and death duty purposes (Article 13 of the Protocol on the Privileges and Immunities of the European Union).

1.3 Which bilateral, multilateral and supranational instruments in effect in your jurisdiction are of relevance in the private client sphere?

The EU Succession Regulation (650/2012) simplifies the intentional inheritance rules.

Protocol (No 7) on the Privileges and Immunities of the European Union sets out the privileges and immunities that are afforded to the European Union, and to a range of other EU institutions and officials.

Conflicts of law in relation to foreign trusts are resolved by the Hague Convention of 1 July 1985 on the law applicable to trusts and on their recognition.

Treaties for the avoidance of double taxation concluded by Luxembourg are of relevance in the private client sphere from a tax perspective – notably the following provisions of the Organisation for Economic Co-operation and Development (OECD) Model Tax Convention:

  • Article 4 concerning the definition of ‘resident’;
  • Article 10 concerning dividends;
  • Article 11 concerning interests;
  • Article 12 concerning royalties;
  • Article 13 concerning capital gains;
  • Article 15 concerning income from employment; and
  • Article 16 concerning directors’ fees.

Traditionally, double tax treaties concluded by Luxembourg follow the OECD Model Tax Convention. Luxembourg has entered into tax treaties with more than 80 jurisdictions.

2 Taxation

2.1 On what basis are individuals subject to tax in your jurisdiction (eg, residence/domicile/nationality)? How is this determined?

An individual is considered a tax resident of Luxembourg if he or she has:

  • his or her tax domicile in Luxembourg (ie, a permanent place of residence in Luxembourg that he or she actually uses and intends to maintain); or
  • his or her usual abode in Luxembourg (a usual abode is deemed to exist after a continuous presence in Luxembourg of six months that may be spread over two calendar years).

The above conditions (tax domicile or usual place of residence) are not cumulative, but alternative.

2.2 When does the personal tax year start and end in your jurisdiction?

The tax year for Luxembourg tax resident individuals corresponds to the calendar year: from 1 January to 31 December.

2.3 With regard to income: (a) What taxes are levied and what are the applicable rates? (b) How is the taxable base determined? (c) What are the relevant tax return requirements? and (d) What exemptions, deductions and other forms of relief are available?

(a) What taxes are levied and what are the applicable rates?

Personal income tax rates are progressive and currently range from 0% to 45.78% (including a 7% surcharge for the employment fund). The surcharge amounts to 9% for taxpayers in tax Class 1 and 1a whose taxable income exceeds €150,000 (€300,000 for taxpayers in tax class 2)). Resident and non-resident individuals are not subject to any net wealth tax in Luxembourg.

Luxembourg income tax liability is based on, among other things, the individual’s personal situation (eg, family status). For this purpose, each individual is granted a tax class:

  • Class 1 for single persons;
  • Class 2 for married persons as well as civil partners (under certain conditions); and
  • Class 1a for single persons with children as well as single taxpayers aged at least 65 on 1 January of the tax year.

(b) How is the taxable base determined?

A resident taxpayer is subject to Luxembourg income tax based on his or her worldwide income. A non-resident taxpayer, which has neither his or her tax domicile nor his or her usual abode in Luxembourg, is subject to income tax based on his or her Luxembourg-source income only.

Taxable income is determined by adding together the different categories of net income:

  • business income;
  • agricultural and forestry income;
  • self-employment income (eg, directors’ fees);
  • employment income;
  • income from pensions or annuities;
  • income from movable capital (eg, dividend and interest income);
  • rental and royalty income; and
  • miscellaneous income (eg, certain capital gains and payments received upon the liquidation of a company in which the shareholder has a substantial participation).

Any income not falling into one of the above categories is not taxable. Only expenses incurred in relation to taxable income are deductible in calculating the net result of each category. The net income is then reduced by various deductions in order to determine the taxable income.

(c) What are the relevant tax return requirements?

Individuals must file their income tax returns by 31 March of the year following the income tax year (this deadline may be extended upon request). Self-employed individuals must generally make quarterly advance payments, which are determined on the basis of the tax due for the previous year. Once the final tax assessment has been issued by the Luxembourg tax authorities, additional payments or reimbursements may be due.

Residents must file if they meet one of the following criteria:

  • annual taxable income at source in Luxembourg exceeding €100,000;
  • multiple income streams of remuneration or pensions taxable at source in Luxembourg (annual income exceeding €36,000 for taxpayers in Tax Class 1 or 2 and €30,000 for taxpayers in Tax Class 1a);
  • income on which no withholding tax is levied in Luxembourg (eg, rental income, self-employment income);
  • net investment income subject to withholding tax exceeding €1,500;
  • directors’ fees exceeding €1,500; or
  • a non-resident spouse where joint filing is requested.

Non-residents must file a personal income tax return in Luxembourg if they meet one of the following conditions:

  • annual taxable income at source in Luxembourg exceeding €100,000;
  • multiple income streams of remuneration taxable at source in Luxembourg – annual income exceeding:
    • €36,000 for taxpayers in Tax Class 1 or 2; and
    • €30,000 for taxpayers in Tax Class 1a;
  • annual pension income taxable at source in Luxembourg exceeding €100,000;
  • income on which no withholding tax is levied in Luxembourg (eg, rental income, self-employment income);
  • net investment income subject to withholding tax (eg, dividends) paid by a Luxembourg tax resident company;
  • directors’ fees exceeding €100,000; and
  • a non-resident spouse where joint filing is requested.

Where no mandatory filing applies, it is possible to file a voluntary return – for example, to claim a refund of withholding taxes. Furthermore, the Luxembourg tax authorities may request the filing of a tax return for taxpayers that do not fulfil any of the above mandatory filing criteria.

(d) What exemptions, deductions and other forms of relief are available?

Deductions are operated on the net total income and include:

  • special expenses, such as:
    • mandatory state social security contributions (whether Luxembourg of foreign contribution): deduction without limitation;
    • gifts to qualifying charitable institutions: minimum €120 and maximum limited to the higher of €1 million or 20% of the taxpayer’s total net income;
    • voluntary contributions to qualifying supplementary pension plans: maximum €1,200 per year; and
    • alimony payments to a divorced spouse: maximum €24,000 per year (and per former spouse);
  • extraordinary charges (eg, unreimbursed medical costs), where these are unavoidable and considerably reduce the taxpayer’s contribution capacity. In practice, they are deductible provided that they exceed a certain percentage of the taxpayer’s taxable income (which depends on the level of the net income and on the tax class); and
  • a tax credit for employees on a yearly basis ranging from €0 to €600, depending on their level of income.

Exemptions apply depending on the class of income as further described below for each type of income.

2.4 With regard to capital gains: (a) What taxes are levied and what are the applicable rates? (b) How is the taxable base determined? (c) What are the relevant tax return requirements? and (d) What exemptions, deductions and other forms of relief are available?

(a) What taxes are levied and what are the applicable rates?

In the context of private wealth management, capital gains realised by Luxembourg resident taxpayer on movable property (eg, shares) are taxable only if they are realised within six months following acquisition. Such speculative gains are subject to personal income at the normal progressive tax rates. Capital gains held for more than six months are exempt, unless they concern a substantial shareholding (>10%). Capital gains realised after six months on substantial shareholdings benefit from a rate reduction of 50% (ie, maximum rate of 22.89%).

In the context of private wealth management, non-resident shareholders are taxable on the realisation of a capital gain in respect of a substantial shareholding (>10%) only if:

  • they realise that capital gain within six months after acquisition; or
  • they became non-resident taxpayers less than five years before the disposal took place and have been resident taxpayers for more than 15 years.

However, shareholders who are resident in a country with which Luxembourg has concluded a tax treaty that prevents Luxembourg from levying such tax are generally not taxable on such capital gains.

In the context of private wealth management, capital gains realised on the sale of an individual’s principal residence benefit from an exemption. Capital gains realised on real estate within two years of acquisition are taxed as ordinary income (at progressive rates). Once two years have elapsed since the acquisition of the real estate, these are taxed as extraordinary income and benefit from a 50% rate reduction.

(b) How is the taxable base determined?

A taxable capital gain is the difference between the transfer price and the acquisition price (determined on the basis of tax law including adjustment in relation to holding period).

(c) What are the relevant tax return requirements?

Luxembourg tax residents must declare capital gains income in their annual personal income tax return (see question 2.3(c)).

(d) What exemptions, deductions and other forms of relief are available?

The taxable gains realised by a Luxembourg resident taxpayer may be reduced by an allowance of €50,000 (or €100,000 for couples filing jointly) available every 10 years.

Non-resident shareholders may be protected against Luxembourg non-resident capital gains tax based on the basis of the tax treaty entered into between Luxembourg and their state of residence.

2.5 With regard to inheritances: (a) What taxes are levied and what are the applicable rates? (b) How is the taxable base determined? (c) What are the relevant tax return requirements? and (d) What exemptions, deductions and other forms of relief are available?

(a) What taxes are levied and what are the applicable rates?

Inheritance tax is governed by the Law on Inheritance Tax of 27 December 1917, as modified.

Inheritance tax is due on the net fair market value of all property inherited from a Luxembourg inhabitant (ie, from an individual who is resident in Luxembourg at the moment he or she passes away), except for immovable property located abroad which is exempt from Luxembourg inheritance tax.

The tax rates differ depending on the degree of relationship between the heir and the deceased and the fair market value of the transferred estate. The rates vary between 0% and 15% and are increased according to a surcharge to the extent the share received by each heir exceeds a net taxable amount of €10,000. The maximum surcharge is 22/10 and applies for a net taxable amount in excess of €1.75 million. The inheritance tax rate can reach a maximum of 48% for non-related parties.

(b) How is the taxable base determined?

The taxable base is the fair market value of the net assets inherited, except for immovable property located abroad, which is exempt from Luxembourg inheritance tax. Gifts received from the deceased in the year before his or her death are not taken into account in case they were subject to gift tax.

(c) What are the relevant tax return requirements?

The heir of the deceased must file a declaration within six months of the date of the death if the death occurs in Luxembourg. If the deceased is not domiciled in Luxembourg, an individual who inherits real estate located in Luxembourg must file a declaration at the tax office where the real estate property is located.

(d) What exemptions, deductions and other forms of relief are available?

Inheritances passed to direct-line descendants or to spouses are exempt from Luxembourg inheritance tax, except for the part of the estate that exceeds the legal share to which the direct-line descendants or the spouses is otherwise entitled under Luxembourg law forced heirship rules (réserve héréditaire). Furthermore, any inheritance of less than €1,250 is exempt.

2.6 With regard to investment income: (a) What taxes are levied and what are the applicable rates? (b) How is the taxable base determined? (c) What are the relevant tax return requirements? and (d) What exemptions, deductions and other forms of relief are available?

(a) What taxes are levied and what are the applicable rates?

A 15% withholding tax applies to Luxembourg domestic dividends. However, this withholding tax is not final. As for final taxation, dividend income is subject to progressive income tax rates (maximum 45.78%).

Interest paid or attributed to Luxembourg resident individuals by a paying agent located in Luxembourg is subject to a 20% final withholding tax, which represents a final tax and is not reported in the individual’s annual tax return. For interest (covered by the Relibi Law) paid or credited by foreign paying agents located inside the European Union or in the European Economic Area, resident taxpayers receiving such interest in the context of their private wealth can also opt to apply for a 20% final withholding taxation. A specific request should be submitted to the tax authorities before 31 March of the year following that in which the individual received the interest income. Interest payments which do not fall within the scope of the 20% taxation or are not part of private wealth management are subject to final taxation according to progressive income tax rates (max 45.78%).

(b) How is the taxable base determined?

The taxable basis for withholding tax and personal income tax purposes corresponds to the effective amount of the dividend or interest paid to the recipient.

(c) What are the relevant tax return requirements?

Luxembourg tax residents must declare their investment income in their annual personal income tax return (see question 2.3(c)), except where a final interest withholding tax applies.

Furthermore, in case of a dividend payment made by a Luxembourg company, a withholding tax return should be filed, and the withholding tax should be paid by the distributing company within eight days of the date on which the income is made available.

(d) What exemptions, deductions and other forms of relief are available?

A 50% tax exemption from personal income tax can be claimed on the gross dividend income paid by:

  • a Luxembourg fully taxable company;
  • a fully taxable company located in a state that entered into a double tax treaty with Luxembourg; or
  • a fully taxable company resident in the European Union.

A total lump-sum deduction of €1,500 (doubled for taxpayers filing jointly) applies on total dividend and interest income received during the tax year.

2.7 With regard to real estate: (a) What taxes are levied and what are the applicable rates? (b) How is the taxable base determined? (c) What are the relevant tax return requirements? and (d) What exemptions, deductions and other forms of relief are available?

(a) What taxes are levied and what are the applicable rates?

Capital gains realised on real estate within two years of the acquisition are taxed as at progressive tax rate (current maximum rate of 45.78%). In the context of management of private wealth, capital gains on real estate made more than two years after purchase are subject to income tax at 50% of the global rate (with a current maximum rate of 22.89%). The holding of multiple real estate and active transactions on such real estate, such as trade, could easily lead to a requalification of such activity as commercial instead of private wealth management.

(b) How is the taxable base determined?

The taxable basis corresponds to the difference between the acquisition and transfer price of the real estate. If the property has been held for more than two years, the acquisition price of the real estate is adjusted to take account of inflation during the period of ownership.

(c) What are the relevant tax return requirements?

Luxembourg tax residents must declare capital gains on real estate in their annual personal income tax return (see question 2.3(c)).

(d) What exemptions, deductions and other forms of relief are available?

Capital gains realised on the sale of an individual’s principal residence may benefit from an exemption under certain condition.

Capital gains realised by individuals on the disposal of property other than the principal residence, which has been held for more than two years prior the sale, may benefit from an allowance of €50,000 or €100,000 (for taxpayers taxable jointly) every 10 years.

An allowance of €75,000 is granted for capital gains realised on the disposal of real estate inherited in the direct line and which consisted of the parent’s main residence.

2.8 With regard to any other direct taxes levied in your jurisdiction: (a) What taxes are levied and what are the applicable rates? (b) How is the taxable base determined? (c) What are the relevant tax return requirements? and (d) What exemptions, deductions and other forms of relief are available?

We have not identified any additional tax that may be particularly relevant for private clients (eg, no net wealth in Luxembourg for individuals)

2.9 With regard to any indirect taxes levied in your jurisdiction: (a) What taxes are levied and what are the applicable rates? (b) How is the taxable base determined? (c) What are the relevant tax return requirements? and (d) What exemptions, deductions and other forms of relief are available?

(a) What are they and what are the applicable rates?

Value-added tax: Value-added tax (VAT) is essentially a consumer tax that is generally borne by the final consumer of goods and services (who is not a VAT taxable person).

VAT is charged at the following rated:

  • standard rate of 17% (taxable transactions other than those mentioned below);
  • intermediate rate of 14% (eg, some services of depositories, publication services);
  • reduced rate of 8% (eg, electricity, gas); and
  • super-reduced rate of 3% (essential goods and services, such as food, transport, books, residential construction in certain circumstances).

Registration duty: Registration duties are either fixed or proportional (ad valorem duty), depending on the deed to which it relates.

A fixed fee of €75 is due, for example, upon:

  • incorporation of a Luxembourg company;
  • amendment of its bylaws; and
  • transfer of its statutory seat.

Proportional registration duties apply to documents that are registered with the registration authorities. Registration is compulsory in some cases and voluntary in others. For some documents, a rate that is proportional to the value of the contract concerned applies – for example, for loan agreements (non-compulsory ad valorem duty of 0.24%).

Under the referencing theory (théorie de l’usage), contracts referred to in detail in a deed that is registered are deemed to be registered themselves, with the corresponding levy of registration duties. This theory applies only to documents for which registration is compulsory within a certain period.

The acquisition of immovable property located in Luxembourg is subject to a registration duty of 6%, plus a 1% transcription tax. A municipal surcharge of 50% on the value of the registration duties is also due where the commercial property is located within the Luxembourg City municipality (ie, combined maximum rate of 10%).

(b) How is the taxable base determined?

VAT is levied on:

  • supplies of goods and services within the territory of the Grand Duchy of Luxembourg by a taxable person in the course of the person’s business;
  • intra-EU acquisitions of goods and of new means of transport; and
  • imports of goods from non-EU countries.

The transfer of a businesses as a going concern may fall outside the scope of Luxembourg VAT.

The tax base is constituted in the case of:

  • supplies of goods and services, or remuneration for the supply of goods or services;
  • intra-EU acquisitions of goods and of new means of transport, by the purchase price of the goods or of similar goods, or, in the absence of a purchase price, by the cost price, determined at the time when these operations are carried out; and
  • in the case of imports of goods, the value of the goods.

For registration duties, in principle, the tax base corresponds to the value stipulated in the deed of transfer, unless the fair market value of the property concerned exceeds such price stipulated in the deed. In case of doubt as regards the fair market value, the Luxembourg indirect tax authorities can request a valuation demonstrating that the price correspond to the fair market value.

(c) What are the relevant tax return requirements?

Depending on the activities performed, a VAT taxable person must file VAT returns on a monthly, quarterly or annual basis.

A company registered under the simplified VAT regime must file one simplified annual VAT return per year. A VAT taxable person registered under the normal VAT regime, must file VAT returns as follows:

  • one single VAT tax return for an annual turnover of €112,000 or less;
  • quarterly returns and one annual recapitulative VAT return for an annual turnover of more than €112,000; and
  • monthly returns and one annual recapitulative VAT return for an annual turnover of more than €620,000.

(d) What exemptions, deductions and other forms of relief are available?

Exemptions from VAT are available for a number of supplies of goods and services. Examples include the following:

  • Exemptions with credit for input VAT:
    • intra-EU supplies of goods;
    • exports of goods outside the European Union;
    • work and repairs performed for the account of a foreign client on goods to be exported outside the European Union;
    • the sale and hire of ships and aircraft engaged in international trade or professional fishing;
    • repairs, conversions and maintenance performed on ships and aircraft engaged in international trade or professional fishing; and
    • the international transportation of persons or goods.
  • Exemptions without credit for input VAT
    • medical care or services provided by hospitals, doctors, dentists and laboratories;
    • transactions involving human blood, milk or organs;
    • educational services;
    • insurance and reinsurance transactions (except when rendered to clients outside the European Union);
    • management services, including specific and essential investment advice and investment research, to investment funds listed at Article 44.1(d)), of the Luxembourg VAT Law (ie, investment companies in risk capital, specialised investment funds and undertakings for collective investment, if regulated by the Commission de Surveillance du Secteur Financier (CSSF) or a similar EU public body, as well as pension funds if regulated by the CSSF or the Commissariat aux Assurances, or by a similar EU public body, as well as securitisation vehicles subject to the 2004 Securitisation Law performing activities in scope of Article 1.2 of EU Regulation 24/2009, and alternative investment funds, regardless of any regulation);
    • financial and banking services (except when rendered to clients outside the European Union);
    • the supply and leasing of real property (except when it has been opted to subject the lease to VAT);
    • the supply of gold and silver; and
    • transactions involving shares.

VAT entrepreneurs are entitled to an input VAT deduction right – that is, from the VAT charged to its customers (output tax), the VAT entrepreneur deducts the VAT on the goods and services that are used for business purposes (input tax). Only the excess output VAT is paid to the tax administration. In the event of a possible excess of input tax, the taxable person may claim a refund.

For some gifts – such as manual gifts (donation manuelle) and indirect gifts (donation indirecte) – registration is not always mandatory, so it may be possible to make a gift free of registration duty.

For registration tax purposes, a tax credit of up to €20,000 applies on the registration and transcription fees in relation to the acquisition of a personal habitation subject to the condition of effective and personal occupation of the building.

3 Succession

3.1 What laws govern succession in your jurisdiction? Can succession be governed by the laws of another jurisdiction?

Under domestic law, succession is governed by Articles 718 to 892 of the Civil Code.

Succession is also governed by the EU Succession Regulation (650/2012), which entered into application in Luxembourg on 17 August 2015.

Foreign laws – such as the law of the habitual residence of the deceased, the law of its nationality or the law of the location of the inherited real estate – can apply to a succession in Luxembourg.

3.2 How is any conflict of laws resolved?

Under Luxembourg law, the succession of movable property is governed by the law of the last domicile of the deceased. However, the deceased may opt for the law of its nationality to apply. Real estate succession is governed by the law of the location of the real estate assets.

Under the EU Succession Regulation, in principle, the law applicable to the succession of an EU citizen is the law of the state in which the deceased had his or her habitual residence at the time of death. However, a person may also choose the law of the state of his or her nationality to govern his or her succession.

3.3 Do rules of forced heirship apply in your jurisdiction?

Luxembourg forced heirship (réserve héréditaire) rules require that at least:

  • 50% of the estate be reserved to the children if there is one child;
  • 67% if there are two; and
  • 75% in the case of three or more.

The renouncement to a reserved portion should be made by way of a formal declaration to the court registry. No inheritance tax applies to forced heirship entitlement in the direct bloodline and inheritance tax at a rate of 2.5% is levied on the portion exceeding the forced heirship entitlement in the direct bloodline.

3.4 Do the rules of succession rules apply if the deceased is intestate?

In the absence of any testamentary provisions, the rules of forced heirship apply (see question 3.3).

Furthermore, in the absence of any testamentary provisions, the order of succession will be governed by applicable rules of law as follows:

  • descendants (children, grandchildren);
  • surviving spouse;
  • parents, brothers, sisters and descendants of the latter;
  • ascendants other than parents (eg, grandparents);
  • collateral relatives other than brothers, sisters and descendants of the latter; and
  • the state.

3.5 Can the rules of succession be challenged? If so, how?

A will can challenge the general rules of succession, as it allows the deceased to modify the order of succession or the portion given to the inheritors, provided that the rules of forced heirship are respected (see question 3.4).

4 Wills and probate

4.1 What laws govern wills in your jurisdiction? Can a will be governed by the laws of another jurisdiction?

Under domestic law, wills are governed by Articles 967 to 980 of the Civil Code.

Wills are also governed by the EU Succession Regulation and the Hague Convention on the Conflicts of Laws Relating to the Form of Testamentary Dispositions of 5 October 1961. A will may be governed by the law of another jurisdiction provided that it complies with the requirements of the EU Succession Regulation (if applicable) and the Hague Convention.

4.2 How is any conflict of laws resolved?

A conflict of laws regarding wills is resolved under the rules of the Hague Convention and the EU Succession Regulation, signed by Luxembourg.

4.3 Are foreign wills recognised in your jurisdiction? If so, what process is followed in this regard?

According to Article 1 of the Hague Convention, a will is valid provided that its form complies with the law of:

  • the place whether the will was executed;
  • the country of which the testator was a national at the time of his or her death or when he or she made the disposition;
  • the place where the testator was domiciled at the time of his or her death or when he or she made the disposition; or
  • the place where the property is located.

The legalisation of a foreign will is required only where the foreign jurisdiction is not a party to the Hague Convention.

If the foreign jurisdiction is a party to the Hague Convention, a certification – which will be issued at the request of the person who has signed the document or of any bearer – will suffice.

4.4 Beyond issues of succession discussed in question 3, are there any other limitations to testamentary freedom?

In addition to the forced heirship rules, the validity of a will is notably subject to formal requirements, as described in question 4.5.

4.5 What formal requirements must be observed when drafting a will?

Under Luxembourg law, three types of wills are legally accepted:

  • A holographic will is valid where it is handwritten, signed and dated by the testator. The holographic will should be deposited with a notary;
  • An authentic or notarially recorded will must be received by two notaries or by a notary assisted by two witnesses. The will is dictated by the testator and drawn up by the notary. An authentic will is legally secure; and
  • A sealed will (or secret will) is written by the testator or by another person, signed by the testator, sealed and deposited with a notary, who draws up an authentic act of registration. The contents of the will remain secret until it is opened on the death of the testator.

All three types of wills must be registered in the Register of Last Wills.

4.6 What best practices should be observed when drafting a will to ensure its validity?

A will by public deed is preferred over a holographic will, considering the intervention of the receiving notary. In addition to the legal advice that the notary may provide to the testator, the intervention of the notary in the drafting of the will ensures that the testator’s last wishes will not be affected by any formal or substantive defects that invalidate the will. Finally, the notary is legally obliged to request the registration of the authentic will in the Register of Last Wills.

4.7 Can a will be amended after the death of the testator?

After the death of the testator, a will can be amended only by a civil court.

4.8 How are wills challenged in your jurisdiction?

A will can be contested before a civil court on the following grounds:

  • applicable legal requirements as prescribed by law with respect to the form and execution of the will;
  • the validity of the will based on the infringement of rules relating to the forced heirs or capacity of the testator; or
  • the interpretation of the will.

4.9 What intestacy rules apply in your jurisdiction? Can these rules be challenged?

If there is no will, the order of succession will be governed by applicable rules of law as follows:

  • descendants (children, grandchildren);
  • surviving spouse;
  • parents, brothers, sisters and descendants of the latter;
  • ascendants other than parents (eg, grandparents);
  • collateral relatives other than brothers, sisters and descendants of the latter; and
  • the state.

Except for the provision relating to surviving spouses and forced heirship rules (réserve héréditaire), Luxembourg intestacy rules in principle cannot be challenged, except under certain specific circumstances (eg, indignity of the heir).

5 Trusts

5.1 What laws govern trusts or equivalent instruments in your jurisdiction? Can trusts be governed by the laws of another jurisdiction?

Luxembourg has no specific trust legislation. A bill introducing a private foundation (fondation patrimoniale) was drafted in 2013, but has never been voted on by the Parliament. Foreign trusts are generally recognised under Luxembourg law (see question 5.2).

5.2 How is any conflict of laws resolved?

Conflicts of law are resolved on the basis of the Hague Convention of 1 July 1985 on the Law Applicable to Trusts and on Their Recognition, which has been ratified by the domestic Law of 27 July 2003 on Trusts and Fiduciary Contracts, thereby formally recognising foreign trust.

5.3 What different types of structures are available and what are the advantages and disadvantages of each, from the private client perspective?

In the absence of types of structures such as Luxembourg trusts, foreign forms of trusts and private foundations such as the Stichting in the Netherlands and the fondation privée in Belgium can be used in combination with a Luxembourg company for private wealth purposes.

5.4 Are foreign trusts recognised in your jurisdiction? If so, what process is followed in this regard?

The Hague Trust Convention, adopted by Luxembourg, provides a legal framework for the recognition of trusts validly constituted under the laws of a jurisdiction that recognises this institution. The Hague Trust Conversion thus facilitates the recognition of foreign trusts that have been constituted in states which are signatories to the convention.

In accordance with the Hague Trust Convention, trustees will be recognised in Luxembourg as the persons or entities that have legal ownership of designated assets and that hold the assets for the benefit of the beneficiaries.

5.5 How are trusts created and administered in your jurisdiction?

Luxembourg has no specific domestic trust legislation (see question 5.1).

5.6 What are the legal duties of trustees in your jurisdiction?

Luxembourg has no specific domestic trust legislation (see question 5.1).

5.7 What tax regime applies to trusts in your jurisdiction? What implications does this have for settlors, trustees and beneficiaries?

The tax treatment of foreign trusts is generally determined on the basis of a corporate resemblance test, whereby the qualification of a foreign trust is determined by comparison of its legal characteristics with those of existing entities under Luxembourg domestic law. Consequently, the qualification of a foreign trust for Luxembourg tax purposes is determined on a case-by-case basis.

Based on general Luxembourg tax law, taxation follows economic ownership rather than legal ownership. It is the economic beneficiary of the fiduciary that is subject to taxation on income and gains derived from the fiduciary agent. If a fiduciary based in Luxembourg is not the economic owner of the assets, it will qualify as a tax transparent vehicle, so that any proceeds derived therefrom will not be taxable for the fiduciary in Luxembourg. As a consequence, revocable trusts and fixed interest trusts generally are assimilated to a fiduciary agreement (tax transparent entity); whereas irrevocable discretionary trusts should generally be assimilated to a collective organisation, in particular as a patrimoine d’affectation (tax opaque entity).

In case of revocable trusts and fixed interest trusts, which qualify as tax transparent entities, the resident settlor is considered the economic owner and will be thus fully taxable as if he or she holds the trust assets directly. Therefore, any ongoing income and capital gains derived from the trust assets should be allocated to him or her and be taxable in his or her hands. In case of irrevocable trusts and discretionary trusts, which qualify as tax opaque entities for Luxembourg tax purposes, the entity itself can be subject to taxation if the beneficiary cannot be identified.

5.8 What reporting requirements apply to trusts in your jurisdiction?

Luxembourg has no specific domestic trust legislation (see question 5.1).

5.9 What best practices should be observed in relation to the creation and administration of trusts?

Luxembourg has no specific domestic trust legislation (see question 5.1).

6 Trends and predictions

6.1 How would you describe the current private client landscape and prevailing trends in your jurisdiction? Are any new developments anticipated in the next 12 months, including any proposed legislative reforms?

While European private clients have been investing through Luxembourg for several decades, the greatest interest in the jurisdiction is now coming from South America and Asia. There are many reasons for this trend. As the second financial centre in the European Union, Luxembourg offers many advantages for multi-jurisdictional wealth management. As a prime EU wealth management hub, the country notably relies on its economic and regulatory stability, combined with diverse range of financial and legal services, to foster a strong culture of investor protection.

The COVID-19 pandemic has had a significant impact on Luxembourg’s economy and present an unprecedented set of challenges for its financial sector. However, Luxembourg’s strengths – including a robust institutional and regulatory framework and a resistant financial sector – have allowed the country to safeguard financial stability and to preserve a healthy investment environment, including for international private investors.

Earlier this year, the Luxembourg government confirmed that: “Luxembourg is fully in line and compliant with all EU and international regulations and transparency standards, and applies, without exception, the full arsenal of EU and international measures to exchange information in tax matters and combat tax abuse and tax avoidance.” In this spirit of tax transparency, by implementing the necessary Organisation for Economic Co-operation and Development and EU standards, Luxembourg offers private investors a tax-compliant investment environment.

Legislative amendments are usually introduced by the annual Budget Law. The 2022 Budget Law is expected to be voted on by the end of the year 2021. No information in relation to potential legislative reforms is currently available.

7 Tips and traps

7.1 What are your top tips for effective private client wealth management in your jurisdiction and what potential sticking points would you highlight?

Private clients investing in Luxembourg structures generally have various financial and geographical investment objectives. Such objectives should be assessed on a case-by-case basis to achieve an efficient investment structure from a legal, regulatory and tax perspective. Luxembourg offers a wide range of both regulated and unregulated vehicles that can accommodate the investment strategies of each private investor. Private investors should assess the wide range of Luxembourg vehicles, including Luxembourg funds (eg, the special investment fund, the investment company in risk capital and the reserved alternative investment fund) and unregulated corporate vehicles (eg, the private wealth management company) in light of their personal investment objectives and needs.

The substance of these Luxembourg structures becomes increasingly important in the international context. Luxembourg substance is mainly of relevance in a cross-border context, as it is a condition to be able to secure tax benefits under EU tax directives and double tax treaties, and helps to mitigate the risk that other countries will view a Luxembourg entity as resident in their country and tax it accordingly. Therefore, in order to efficiently protect a Luxembourg company against challenges to its Luxembourg tax residency, particular attention must be paid to the residence and substance requirements of the jurisdictions in which a Luxembourg company invests.

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