Post "Luxleaks" - new substance requirements

Luxembourg has engaged a number of inititiatives to secure it’s tax-friendly business environment on a mid-term and long-term perspective.

The Luxembourg tax ruling practice has been codified since January 1^st 2015 offering a legal framework for tax rulings:

• Applying to both corporations & individuals;
• New legal provisions regarding transfer pricing : introduction of the arm’s length principle in tax law = normal market conditions to be applied ; taxpayers are obliged to provide all necessary documentation supporting the data included in their tax return;
• Tax rulings to be approved by a new authority within the tax administration: “Commission of anticipated (tax) decisions”; 
• Fee to be paid for tax clearings (EUR 3’000-10’000)
• Tax rulings applications should be limited from now on to non-standardised tax planning;
• Rulings have a limited validity period of 5 years.

Beside that, substance become smore and more key: the substance criteria listed in the annex to the Financing Circular from October 26, 2012 (part of the regulatory framework of the Luxembourg advance pricing agreement practice) are appliable without any restriction:

• Do you have actual management in Luxembourg?
• Is your business address of the company in Luxembourg?
• Are your key decisions held in Luxembourg?
• Do you have professional knowledge to perform your functions?
• Do you have qualified employees?
• Are you filing accounting documents and tax returns in Luxembourg?
• Is your principal bank account kept in Luxembourg?
• Do you have sufficient equity that corresponds to the functions performed?

Other criteria

• Are the company’s operating expenses recorded in the local profit and loss statement (P&L)?
• Are local compliance formalities duly satisfied?
• Are meetings physically held locally? …

It's important to fulfil substance requirements for implementing a company structure so that it can successfully pass any tax audit in the UBO’s / parent company’s home country.

Meanwhile, the EU Commission enquiry into tax ruling practise of EU Member states targets:

• Some aggressive tax planning strategies will most probably be banned for illegal state aids(goodwill, foreign branches …);
• Transfer pricing rules and other common tax planning instruments will most probably not be challenged.

AIFMD implemented in Luxembourg on July 10, 2013

The Luxembourg Parliament today adopted the bill of law on alternative investment fund managers, which transposes the Alternative Investment Fund Managers Directive 2011/61/EU (the “AIFMD”) into Luxembourg law. The alternative investment fund managers law (the "AIFM Law") will enter into force on the date of its publication in the Mémorial (Luxembourg official gazette), which is expected to be on or around 16 July 2013.

The adoption of the AIFM Law is an important step for the development of the alternative investment fund industry in Luxembourg. As a result, Luxembourg alternative investment funds will be able to be distributed to professional investors in Europe with the new passport, thus strengthening the position of Luxembourg as an investment fund centre for international distribution.

The AIFM Law will introduce significant changes impacting:

• investment management and the investment fund industry in general
• the modernisation of the Luxembourg limited partnership regimes
• the Luxembourg VAT and income tax laws

These changes not only implement the AIFMD into Luxembourg law, but also enhance the general attractiveness of Luxembourg as an alternative investment fund centre. 

Amendments impacting investment management and the investment fund industry in general

The AIFM Law introduces new rules applicable to alternative investment fund managers (AIFMs). In addition, it modifies existing laws, in particular regarding regulated investment funds and SICARs, and also amends Luxembourg company law. The AIFM Law also foresees certain transitional provisions.

Main features of the AIFM Law and impact on Luxembourg AIFMs

The AIFM Law applies to AIFMs that are either subject to Luxembourg law, or which manage or market alternative investment funds (“AIFs”) in cases where Luxembourg has been defined as the reference Member State of the AIFM (in each case a “Luxembourg AIFM”).

The AIFM Law contains rules regarding the authorisation, operating conditions and organisation of a Luxembourg AIFM, as well as rules on the depositary, valuation of assets, information to be provided to investors, reporting to the Luxembourg supervisory authority for the financial sector (CSSF) and acquisition of control in relation to the AIFs managed by the Luxembourg AIFM. In addition, the AIFM Law contains rules on the marketing of AIFs, including the passport system introduced by the AIFMD, and rules regarding non-EU countries.

Unless a Luxembourg AIFM benefits from an exemption provided under the AIFM Law, in which case a registration regime applies, the Luxembourg AIFM must obtain a licence by the CSSF to carry out its activities. The AIFM licence will enable the Luxembourg AIFM to use the EU passport for the marketing of EU AIFs that it manages to professional investors across the EU, and for the management of AIFs in other EU member states. The management of an AIF comprises at least the investment management and risk management of the AIF.

Until a further delegated act has been issued by the European Commission, which is expected in the second half of 2015 at the earliest, non-EU AIFMs will not be able to benefit from a passport for the marketing of AIFs in the EU. However, at least until 2018, they will be able to continue marketing AIFs to professional investors in Luxembourg under the national Luxembourg placement rules. The AIFM Law does not affect these rules, save for the requirements with respect to the marketing of AIFs without a passport provided for by the AIFMD. Under certain conditions, EU AIFMs and non-EU AIFMs may also market AIFs to retail investors in Luxembourg. 

Luxembourg AIFMs performing the activities of an AIFM before 22 July 2013 will benefit from transitional provisions. Such AIFMs shall submit an application for authorisation to the CSSF by 22 July 2014 at the latest. As from the moment of their authorisation as AIFM by the CSSF or 22 July 2014, all rules of the AIFM Law will apply to Luxembourg AIFMs. The CSSF has published on its website an application form for an AIFM licence, as well as a general FAQ document regarding the AIFM Law. It is expected that the CSSF will publish a second FAQ document with respect to depositary-related aspects of the AIFM Law. 

Guidelines on Executive and Director Remuneration

With regards to the recommendations of the Commission of the European Communities and after consultation with its shareholders and major representatives of the Luxembourg business community, also referring to the revised version of the "Ten Principles of Corporate Governance of the Luxembourg Stock Exchange", the Remuneration Committee of Institut Luxembourgeois des Administrateurs suggests to adopt the following guiding principles when defining compensation for executives and non-executive directors of publicity listed companies. All types of companies, listed or non- listed, may consider these guidelines as helpful.

1. The board of directors (supervisory board) should define and implement a comprehensive remuneration policy, in line with the strategic goals and objectives of the company. This remuneration policy should cover all company employees and directors and not be limited to executive or board level.
2. The company should implement a remuneration policy and supervisory structures that provide for a comprehensive and adequate remuneration of its executives and directors promoting the long term sustainability of the company.
3. The board of directors (supervisory board) should determine a remuneration committee that designs an executive compensation plan and submits that plan to the entire board for approval. The remuneration committee should also elaborate remuneration plans for the board of directors.
4. The compensation of executives (management) has to be treated separately from the remuneration of non-executive directors. It is different in nature, namely with regards to risk-taking, relation to company performance and profit-sharing. 
5. The remuneration committee should be composed exclusively of non- executive members, and it should be chaired by the Chairman of the Board or an independent director. The remuneration committee should consist of at least three people.
6. At least one member of the remuneration committee should have a proven expertise in the field of executive remuneration, ideally acquired in a senior human resources responsibility, as well as access to relevant technical data and market information needed to establish a remuneration policy in the line with market standards.
7. Given the increasing complexity of incentive and remuneration arrangements, the remuneration committee may seek the support of external remuneration consultants. In doing so, it must pay attention to possible conflicts of interest and concerns as to independence, notably where the consultant is part of a group that has other fee-paying relationships with the entity to which remuneration advice is being provided.
8. In order to provide transparency, the company shall describe its policy for executive and non-executive director remuneration and provide explicit and detailed information of the criteria of performance measurement and related remuneration in its financial reporting (annual report).
9. It is recommended that the remuneration policy of the company is reviewed on an annual basis.
10. Form, structure and level of remuneration of executives and directors should primarily fall within the competence of the company and its shareholders.
11. It is strongly recommended to establish an adequate balance between fixed and variable remuneration, covering all elements of remuneration such as share options shares, directors􏰂 fees, retirement and departure conditions and specific benefits.
12. Variable components of remuneration should be linked to predetermined and measurable performance criteria, including non-financial criteria. These criteria should be in line with the medium and long-term objectives of the company and take into account its effective and potential development, the wealth created for the company and its shareholders and the individual and collective performances of the board or the executive management respectively. The criteria should also take into consideration the appropriate level of risk defined by the board.
13. Where a variable component of remuneration is awarded, the company should consider deferring for a minimum period (e.g. vesting over three years) a major part of the variable component related to individual performance.
14. Companies that award variable remuneration based on performance criteria should be entitled to apply clawback clauses that will permit them to reclaim variable components of remuneration directly related to individual performance in circumstances of misstatement or misconduct.
15. Executives and non-executive directors shall not be rewarded for failure. Thus, in particular, severance payments, parachutes clauses and other guaranteed payments not related to performance should be limited to a certain amount or duration beforehand, in general not exceeding two years of global remuneration. This should be taken into account when contractual arrangements are designed and negotiated.
16. The remuneration of non-executive directors should be proportional to their responsibilities and the time devoted to their functions. Non- executive directors should neither receive remuneration linked to their individual performance, nor bonuses, long-term incentive plans, benefits in kind or benefits linked to pension plans.

In addition to the above-mentioned general recommendations, the Remuneration Committee of Institut Luxembourgeois des Administrateurs refers to the specific guidelines outlined in CSSF Circular 10/437 with regards to the remuneration policy of financial undertakings. 

The Ten Principles of Corporate Governance

In 2003 the European Commission launched an Action Plan primarily aimed at enhancing corporate governance within the European Union.

With this in mind, the Board of the Luxembourg Stock Exchange decided to formulate a set of corporate governance rules for Luxembourg. A “ Corporate Governance ” working group was set up to draft the general principles of best practice in corporate governance for all Luxembourg companies listed on the Stock Exchange. The remit of the working group was to draw up a text that would be in line with international practice and the recommendations of the European Commission, whilst taking into account the interests of all the stakeholders, i.e. shareholders, employees and customers.

The Ten Principles and their Recommendations are highly flexible, which allows them to be adapted to the size, activities and culture of each company. They are based on a “ comply or explain ” system, which allows companies to deviate from the recommendations when this is justified by their specific circumstances, provided that adequate explanation is provided.
The monitoring of compliance with the Ten Principles of Corporate Governance relies on the shareholders and the market authorities, possibly supplemented by other mechanisms.
The Luxembourg Stock Exchange believes that the Ten Principles of Corporate Governance should be capable of evolving in response to experience gained and to change in legal practices and business conditions. The Luxembourg Stock Exchange will therefore make every effort to ensure that follow-up is exemplary.

The Role and Tasks of the Corporate Secretary (ILA)

The role of the Corporate or Company Secretary varies depending on the company that the Secretary is employed by. Some Secretaries have an extremely wide remit dealing with everything from Board to Insurance to HR and even maintenance issues. However, the main and most common duties performed by somebody in this role will usually include the following:

1. Administration of Company/ies 
The Secretary is responsible for the statutory and regulatory compliance of each company administered by him/her. All companies administered will have certain requirements to be fulfilled depending on in which jurisdiction they are incorporated/registered, local legal requirements and the company’s corporate constitution. Such compliance will include the completion of certain registers and other record keeping. Also included will be statutory returns to the various authorities. 

2. The Board(s) of Directors of the Company/ies 
The Secretary is responsible for ensuring that the Board of Directors of a company operates within the law, according to the corporate constitution of the company and within the guidelines set down by the principles of corporate governance. 

The Secretary has an advisory role vis a vis the Board and should ensure that all available and relevant information regarding matters with which the Board are concerned are communicated and understood by the Board. 

Regarding Board Meetings, the Secretary is responsible for the preparation of the agenda and the collation and distribution of papers to be submitted to the Board in advance of the meeting. The Secretary should attend Board meetings and be available to advise on matters related to the corporate constitution of the company and company law in general if required. The Secretary should also take the minutes of the meeting and write these up as well as notifying decisions made by the board to relevant parties and keeping a record of actions to be taken by members of the board. 

3. Shareholders 
The Secretary will be responsible for shareholder communication and the organising of shareholder meetings including annual general meetings where appropriate. 

In addition to the above core duties, the Secretary is likely to become involved n projects affecting the companies administered such as restructurings, changes to capital, migrations to different jurisdictions. The Secretary should provide a focal point regarding the completion of such