Substance. More than ever, it’s on everyone’s mind, especially in the context of the OECD’s Base Erosion and Profit Shifting (BEPS) action and the Multilateral Instrument (MLI).
From a domestic tax point of view, a company is tax-resident in Luxembourg if it is established under the laws of Luxembourg (i.e. has its statutory seat in Luxembourg) or if it is centrally managed in Luxembourg. Essentially, its place of effective management must be in Luxembourg.
When it comes to substance and tax residency, the country where the company’s stakeholders are is of utmost importance. This could mean the tax authorities of the country where the Luxembourg company invests, or the country of residence of the country’s investors, or that of its lenders. So, in practice, substance is usually a non-Luxembourg matter, and thus must be deeply analysed from different points of view.
Thanks to its broad range of investment vehicles, which go from no to high regulation and can thus satisfy a variety of investors, Luxembourg is very popular as a jurisdiction to set up alternative investment funds. It has become very popular to set up platforms in the Grand Duchy for investing in cross-border real estate, notably in Germany. But what are the key points when it comes to substance and operational requirements for a Luxembourg company owning real property in Germany?
A view from Germany
A company whose legal seat is in Luxembourg could be considered tax-resident in Germany if its place of management is assumed to be in Germany. As a result, it could be subject to corporate income tax and trade tax in Germany. The company’s place of management also decides the applicability of the Germany-Luxembourg Double Tax Treaty. The place of effective management is not only where important decisions are taken but also where daily business operations (i.e. the day-to-day management of the company) are done.
To help you navigate these concepts, a rough guide of dos and don’ts for Luxembourg companies investing in properties located in Germany can be found below:
- The Luxembourg company should preferably only have board members who are tax-resident in Luxembourg. If this cannot happen, then they must, at least, not be tax-resident in Germany—they should also maintain records of trips they take to Luxembourg to attend board meetings (e.g. travel expense reports).
- Board meeting minutes should accurately reflect where each director was located at the time of the meeting, what was discussed, and what was decided and why.
- Extensive and traceable involvement of board members is preferable at all stages of major projects.
- For all correspondence, the Luxembourg company should use its own letterhead, with its Luxembourg address.
- All documents should be approved and executed in Luxembourg.
- It should be ensured that the complete accounting records/ledgers are kept in Luxembourg.
- A properly equipped office should be used by the company in Luxembourg, from where the activity of the company is performed.
- As required by business needs, an employee should be employed (possibly on a part time basis) in Luxembourg by the company (and his/her proof of payment of social security contributions and wage taxes should be obtainable).
- Email accounts and telephone lines, as well as entries in the telephone book and/or trade directories, should be obtained.
- The company should ideally have an online presence.
Some actions could be particularly hazardous and should be avoided:
- Don’t hold any board of managers meetings in Germany.
- Don’t hold board meetings (fully or partially) by telephone, or conduct business through circular resolutions.
- Don’t keep any company records or corporate/accounting documentation in Germany.
- Don’t attend business meetings in Germany with the intention of finalising an agreement with another party. The conclusion of contractual terms should not take place without prior board approval.
- Don’t sign or exchange any documents, or conclude a transaction, in Germany. Everything should be done from Luxembourg.
- Don’t authorise transfers of money, including invoice settlements, from Germany.
- Don’t have the Luxembourg company carry out other activities besides the holding and letting of real estate.
- Don’t employ German-resident individuals or German-resident directors, or own any premises in Germany (other than the leased out properties).
- Don’t delegate strategic decisions to the property manager based in Germany, and make sure that the management of the Luxembourg company and that of the property management company in Germany don’t employ the same individual(s).
Next up on the KPMG Blog: