A. The Luxembourg national Trust : Under the form of a fiduciary agreement
Elements of the Trust in Luxembourg (institutional fiduciary contract or private family office contract)
Foreign and local wealthy individuals can set up Trusts or private family offices with the purpose of protecting their estate. The Trust is one of the most useful estate planning and even wealth management tools in Luxembourg. The Luxembourg Trust must identify the three actors, i.e. the settlor, the Trustee and the beneficiary or beneficiaries.
The deed of Trust in Luxembourg (fiduciary agreement)
In order to create a Trust in Luxembourg, the settlor and the Trustee must draw up a private agreement, also known as a deed of Trust through which the two parties agree on the assets which will be administered on a “fiduciary basis”. The deed of Trust should be signed before a public notary in Luxembourg in order to avoid any litigation on the date of execution of the agreement.
B. The Luxembourg international Trust
Foreign citizens and / or residents are likely to act in a capacity as settlor, beneficiary, Trustee and even fiduciary agent for international Trusts in Luxembourg. Also, the assets deemed to be protected through the settlement of a Trust in Luxembourg must not mandatory be transferred to Luxembourg, as they can be located anywhere else in the world.
Luxembourg domestic law recognizes any Trust incorporated abroad as far as validly constituted under foreign laws and gives full legal effect to the Trust. In addition, the Trust can only produce its effects in Luxembourg if it complies with the law of origin under which it is constituted.
Trusts must be compliant with public policy and may not in particular infringe upon the forced heirship rules.
The concept of segregation of ownership applies which means that the Trust patrimony remains separated from the personal patrimony of the Trustee.
A foreign Trust may own Luxembourg property (and abroad), and generally real estate and shares of a company world-wide.
There are no specific provisions under Luxembourg law setting forth the circumstances under which a Trust may be set aside or it’s effects disregarded.
Taxation principles of the international Trust in Luxembourg
Article 12 (4) of the law dated 27.7.2003 provides that in case of transfer of the Trust patrimony without consideration to a third beneficiary during the lifetime of the settlor or at the time of the settlor’s death, gift or inheritance taxes will be levied depending on the level of kinship between the beneficiary and the settlor.
Trustee is subject to Luxembourg income taxes only on Luxembourg source income
Registration taxes on donations range between 1,8 % and a maximum of 14,4 % save for tangible assets transferred by hand (don manuel) which are in principle not subject to registration tax as they are not registered – unless the donor dies during hr year of making the gift in latter case the gift must be included in the succession.
Donations of immovable properties located in Luxembourg
They are recorded in a notarial deed and trigger a proportional registration tax regardless whether the donator or / and the donee are non-residents and are also subject to a 1% transcription duty.
Donations of immovable properties located outside of Luxembourg
A fixed registration tax as of 12 € merely applies.
A non-Luxembourg resident will be subject to a transfer duty upon death on immovable properties only located in Luxembourg, not abroad. The inheritance tax rates vary depending on the kinship between the parties and range between 0 and 15 %. However inheritance of immovable property located abroad is expressly exempt from Luxembourg tax, even in the case where this property is not subject to tax in the jurisdiction where it is located. Same for movable assets and funds.
Taxation principles – distinction between revocable Trust and irrevocable Trust
No specific tax rules target the Trust itself. The Luxembourg tax authorities generally consider that a revocable Trust and a fixed interest Trust are to be assimilated to a fiduciary agreement.
Thus the settlor or the beneficiary at the time of the settlor’s death should be considered to be the economic owner of the assets held by the Trustee and any income and capital gains derived from the Trust assets themselves should be taxable in their hands (settlor or beneficiary) depending on their tax residence.
An irrevocable and discretionary Trust may be defined and assimilated to an independent estate, segregated from the other assets and liabilities of the founder’s estate, affected to a specific purpose and which may not be taxed in the hands of another taxpayer. The Trust itself will be considered as tax recipient of the income for Luxembourg tax purposes and in such case as a rule the income received by the Trust will not be taxed in Luxembourg unless the management (central administration is legally & formally declared being settled in Luxembourg) of the assets of the Trust is carried out in Luxembourg leading the tax administration to consider the Trust itself (vehicle) as a Luxembourg tax resident.
As a rule of principle the provisions laid down in the double tax treaties apply to the Trust, save exception. The creation of a Trust should be considered generally as a non-event for Luxembourg direct tax purposes.
So far no specific “anti-avoidance” tax provisions apply to Trusts (others than those applied to regular companies) and the tax and registration authorities have very rarely challenged transactions by using the fictitious or sham acts provision.
Tax treatment of the creation of a Trust
The creation of a Trust implies a transfer of legal ownership of the assets from the settlor to the Trustee. Any transfer of assets to a foreign Trust must be registered in Luxembourg, e.g. immovable property, aircrafts or vessels) or others on a voluntary basis through the payment of a 12 € registration tax if the Trust will hold the rights or assets for a period of 30 years.
In case where the foreign Trust is entitled to hold the rights or assets for a period over 30 years, the transfer of assets to the Trust should be considered as subject to the common registration rules. Anyway as long as the beneficiary has not accepted the benefit of the Trust, the transfer of assets to the Trust should not be considered as a donation.
From a Luxembourg tax perspective any transfer without valuable consideration is not considered a taxable event and hence no capital gain taxes are levied.
Distribution of Trust income to resident and non-resident beneficiaries
No registration duties are levied upon the distribution of Trust income except where the Trust deed purports that any distribution must be registered with an authority from a formal point of view.
No direct tax consequence for the beneficiary unless the income is from a Luxembourg source (real estate located in Luxembourg) and / or the beneficiary is a Luxembourg tax resident.
In order for the distribution of income by a Trust to qualify as “investment income”, there must be an economic link between the beneficiary and the Trust and the beneficiary must put a portion of his wealth at the disposal of the Trust itself.
According to the RBO law of 13.1.2019 a foreign Trust which owns a Luxembourg company through the Trustee may be considered as to be the effective beneficial owner of that company and in such case the settlor, the Trustee, the beneficiary and the protector may need to be disclosed with the register of beneficial owners as publicly available.