With every carrot comes a stick: Luxembourg tightens rules on its popular wealth management vehicle, the SPF
Luxembourg legislation governing its bespoke vehicle for private wealth management, the Société de gestion de patrimoine familial (SPF), has recently been amended. The Bill1 brings several new measures, including the introduction of new fines up to EUR 250,000.
This article explores the popularity of the SPF, key structuring considerations, and what market participants should be aware of considering the recent changes.
Private wealth management is in vogue.
Figures recently published by The Economist reveal that people in advanced economies stand to inherit around USD 6 trillion this year – about 10% of global GDP, up from 5% on average in a selection of rich countries during the middle of the 20th century.2 Luxembourg is positioning itself as a key player in the wealth management space: private banking assets under management (AuM) rose 76% between 2008 and 2018 from EUR225 billion to EUR395 billion, with latest figures published by Luxembourg for Finance climbing to EUR508 billion AuM, representing an additional increase of 29% since 2018.3
Why an SPF?
The SPF has become the investment vehicle of choice for many wealth managers, family offices and affluent taxpayers. Introduced in 2007 through the Law of 11 May 2007 (the SPF Law) and replacing the previous “Holding 1929” regime, the SPF is not per se a legal entity. Rather, the SPF Law sets out an attractive tax regime for certain widely used joint stock companies under the right conditions.
Taking a closer look at the SPF regime, the reasons for its popularity become evident. These vehicles are fully exempt from corporate income tax, municipal business tax and net wealth tax, and are only subject to an annual subscription tax of 0.25%. The Bill has increased the minimum annual subscription tax charge from EUR100 to a still relatively modest EUR1,000, with a cap at EUR125,000.
Regarding distributions to investors, the picture is more nuanced, but benefits remain substantial: preferential tax conditions are extended to the payment of dividends, which are exempt from the usual 15% withholding tax if distributed by an SPF. Interest payments to Luxembourg resident individuals may be subject to a final 20% withholding tax under certain conditions, and director fees (tantièmes) are principally subject to a 20% withholding tax on the gross amount of fees. No withholding tax should apply for interest paid to non-residents.
Rules are rules…
No specific authorization or license is required to benefit from the SPF regime. Taxpayers will however need to comply with a set of requirements, restrictions and compliance obligations. Failure to comply can lead to the Luxembourg Registration Duties, Estates, and VAT Authority (L'Administration de l'enregistrement, des domaines et de la TVA, in short the AED), the competent authority overseeing SPFs, applying the new remedies set out in the Bill, and in the worst-case scenario, result in the permanent withdrawal of the SPF status.
The SPF is designed as a vehicle to manage private wealth assets. In terms of its activities, it is therefore intended for the acquisition, holding and selling of financial assets and participations in other companies whether in Luxembourg or abroad. It cannot engage in commercial activities, and while there are no constraints on the activities of an SPF's subsidiaries, the SPF itself is not allowed to engage in the management of these subsidiaries. Additionally, SPFs are generally restricted from granting interest-bearing loans, even to their subsidiaries. A key prohibition given the asset class's popularity for providing attractive investment opportunities and uncorrelated returns, SPFs are also barred from investing into real estate, directly or through tax transparent vehicles. SPFs can however invest into tax opaque companies holding real estate.
SPFs can be financed through debt or equity, with no specific thin capitalization requirements applying. In practice, however, debt financing of an SPF tends to be limited to a debt portion of up to eight times the amount of the paid-in share capital and share premium of the SPF. That is due to the computation of the subscription tax base, which is broadly levied on the sum of paid in-share capital, share premium, and the debt exceeding this ratio.
Keeping with its purpose as a private wealth management vehicle, the SPF Law restricts eligible investors to (i) natural persons managing their private wealth, (ii) certain patrimonial entities such as family offices and trusts acting exclusively in the interest of the private wealth of one or more individuals, and (iii) certain intermediaries such as fiduciary agents acting on behalf of the first two categories of qualifying investors.
SPFs will also need to comply with certain filing obligations. Subscription tax returns need to be filed and paid quarterly and tax payments must be made in a timely manner. Additionally, SPFs must electronically submit an annual certificate as proof of compliance with applicable rules and restrictions regarding eligible investors and certain matters related to the payment of interest to Luxembourg tax resident individuals. In practice, this involves engaging a qualified domiciliation agent or external auditor to certify compliance.
A look at the recent updates
The recent legislative changes clarify audit procedures for SPFs, require that SPFs include “société de gestion de patrimoine familial” or “SPF” in their name, and as previously mentioned, increase the minimum subscription tax charge to EUR1,000. Most notably, the AED now has a broader range of mechanisms to address non-compliance with the rules, including new fines.
These changes in some sense provide welcome clarifications and leeway for taxpayers. In its comment on the draft version of the Bill, the Conseil d'État praised the legislative changes, noting that existing remedies i.e., the outright withdrawal of the SPF status only, were inappropriate and disproportionate in their effect. Indeed, whereas previous non-compliance could directly lead to the withdrawal of the SPF status after certain delays, the updated SPF Law introduces additional remedies and limits the withdrawal of the SPF status to more serious breaches.
Under the updated SPF Law, the Director of the AED may impose fines of up to (i) EUR10,000 for issues such as non-compliance with naming requirements or failure to submit the requisite compliance certificate or subscription tax return, and (ii) EUR250,000 for more serious breaches, such as where an SPF has non-qualifying investors or engages in unauthorized activities like commercial activities, managing a subsidiary, or directly holding real estate assets in a non-compliant manner.
The amended SPF Law specifies that in cases of serious breaches, the AED may request the SPF to rectify the non-compliance within a 6-month period. This affords taxpayers the opportunity to remedy such breaches and respond to the AED’s findings. If the Director of the AED determines that the SPF has failed to comply after this period, the benefit of the SPF status can be permanently withdrawn, meaning that the company will be fully taxable as from the day of the withdrawal decision notification. Additionally, if an SPF continues to use the “SPF” denomination after status withdrawal, further fines of up to EUR5,000 per month of non-compliance may be imposed.
While these fines can be significant, they may be less severe than the permanent loss of the SPF regime. Taxpayers should remain vigilant or run the risk of incurring potentially substantial penalties.
Closing remarks
The SPF Law offers an attractive tax regime for certain private wealth management activities. To ensure they can benefit from the carrot, and not just suffer the stick, wealth managers, family offices and affluent taxpayers, should seek advice from experienced professionals. This is crucial not only due to the requirements and restrictions discussed in this article but also due to international tax considerations – the SPF regime's advantages mean that these vehicles are generally not eligible for double tax treaty protection and certain European Directives on taxation.4 A recent Circular from the Luxembourg tax administration, which allows SPFs to obtain a tax residence certificate under certain conditions, is a positive development in this respect, but its practical impact remains to be seen. Careful structuring, considering overall investment objectives, asset types, and involved jurisdictions, is essential for operating an efficient structure.
At DLA Piper, we regularly assist our Clients in structuring their private wealth activities. We provide market-tested advice tailored to our Clients' unique interests and challenges throughout the globe, with a presence in over 40 countries through more than 80 offices. If you have any questions, please reach out to us.
This article was originally published in AGEFI Luxembourg and is reproduced with permission from the publisher.
1Bill 8414, published on 24.12.2024 in Mémorial A n°589
2Inheriting is becoming nearly as important as working
3Wealth Management - Luxembourg for Finance
4Council Directive 2011/96/EU of 30 November 2011 (Parent-Subsidiary Directive); Council Directive 2009/133/EC of 19 October 2009 (Merger Directive); Council Directive 2003/49/EC of 3 June 2003 (Interest and Royalties Directive
