In the first in a series of CSC webinars discussing considerations for establishing and operating a global business and the critical factors for success, we look at what makes Luxembourg a preferred jurisdiction.
Luxembourg’s attractions and structural advantages
Establishing and operating a global business is a complex endeavor. Legal professionals involved in global expansion will need to address compliance, mitigate risks, and facilitate a smooth international business operation while managing variations in regulatory, compliance, and tax frameworks across jurisdictions.
Beneath its picturesque exterior, Luxembourg is seen as a business gateway to Europe. It’s a thriving financial center and a strategic hub for European business expansion, offering a stable international business environment with an innovative legal and regulatory structure.
Several factors contribute to Luxembourg’s allure for international businesses. First and foremost is its central location, offering easy access to major European markets. Its location has also meant it has developed a highly skilled and multilingual workforce, ensuring access to the talent necessary to navigate the complexities of the European market.
Beyond these fundamental strengths, Luxembourg offers a business-friendly environment, backed by a robust and stable economy. The government actively fosters economic development and a streamlined bureaucratic process. For example, the participation exemption allows companies to receive dividends and capital gains from subsidiaries tax free under specific conditions, promoting cross-border investment within the European Union.
François-Xavier Goossens, co-head of CLS Luxembourg CSC, highlights how its business-friendly reputation allows Luxembourg to punch above its weight as a global fund center. “Luxembourg’s domiciled investment funds are distributed in 80 countries, and 76% of the top 60 asset management firms have chosen Luxembourg as their European hub. For such a small country, it’s quite an achievement to have a total of €5.5 trillion of assets under management.”
Choosing the right corporate structure: SARL vs. SA
The legal framework in Luxembourg provides two primary options for establishing a business presence—the Société à responsabilité limitée (SARL) and the Société anonyme (SA). Understanding the distinctions between these structures is crucial for making an informed decision.
Similar to a U.S. limited liability company (LLC), a SARL is a simpler and more cost-effective option for smaller businesses. It requires a minimum share capital of €12,000, with ownership limited from one to 100 shareholders. Management is typically vested in one or more managers.
SAs, on the other hand, are more complex structures suited for larger corporations. They require a minimum share capital of €30,000, with only 25% needing to be paid up front. SAs offer greater flexibility, with a board of directors overseeing management, and the potential for more shareholders.
Substance requirements: Demonstrating a bona fide operation
To expand into Luxembourg’s market, companies must demonstrate adequate substance. This refers to a company’s operational and economic activity within the country.
“The substance regulations require entities with tax residence and income in Luxembourg to evidence adequate local resources, facilities, and control over income and income-generating activities,” says Simon Maire, head of Commercial and Growth Development at CSC Luxembourg. “The activities are required to have adequate employees, expenditure, physical presence, as well as be managed and directed in the local jurisdiction to benefit from operating in Luxembourg.”
Key indicators of substance include:
- A registered office with a dedicated workspace and necessary equipment.
- A board of directors with a majority residing in Luxembourg or at least 50% local representation.
- Regular board meetings held in Luxembourg with documented decisions.
- A bank account in Luxembourg for managing daily operations and making payments.
Navigating the Anti-Money Laundering framework
According to Ed Breedveld, co-head of CSC Luxembourg’s Corporate and Legal Solutions business, another benefit of Luxembourg for international businesses is that the market adheres to a robust Anti-Money Laundering (AML) framework designed to prevent money laundering and terrorist financing. “Businesses establishing a presence in Luxembourg must be prepared to comply with these regulations,” Ed says. “Service providers such as banks and consultants play a crucial role in this process, conducting thorough due diligence procedures.”
Examples of these AML procedures include:
- Business risk appetite: Assessing the service provider’s tolerance for types of clients and industries.
- Risk assessment: Evaluating new clients based on ownership structure, target investments, and countries involved.
- Know Your Customer: Verifying client identities and beneficial owners, including source of funds and wealth.
- Ongoing due diligence: Continuously monitoring client activity and transactions throughout the relationship.
Insights from the experts
Luxembourg presents a compelling opportunity for businesses seeking to expand their European footprint. However, navigating the legal, tax, and regulatory landscape can be challenging, and careful consideration of corporate structures, substance requirements, and AML regulations is vital.
In CSC’s recent webinar, Global Roadmap: Navigating the Complexities of Global Business Expansion, I was joined by CSC experts Francois-Xavier Goossens, Simon Maire, and Ed Breedveld, as we looked in detail at these topics and more. It’s an invaluable resource for any business making informed decisions for its European expansion journey.
Watch the on-demand webinar now.
