All questions
Asset deals versus share deals
i Legal frameworkReal estate transactions can be structured either as a direct purchase of the real property asset or as a purchase of the shares of the asset-owning company. In the latter case, there is no direct transfer of the ownership of the property from the seller to the purchaser.
Asset deals are governed by contractual provisions subject to specific rules applicable to sales established, inter alia, by the Civil Code. In respect of share deals, in addition to contractual provisions, provisions of the Company Law apply.
Transactions usually start with negotiations under a confidentiality agreement, taking the form of either a letter of intent or a head of terms to be countersigned by the seller. A due diligence process generally follows the signature of the letter of intent, allowing the purchaser to identify any legal, administrative, tax, financial, technical and environmental risk associated with the acquisition. The outcome of the due diligence phase will be decisive as to whether the acquisition process will continue.
Share dealAfter the closing of the due diligence process, or even during the due diligence process, a share purchase agreement is negotiated to set out the terms and conditions relating to the sale and purchase of shares in the asset-owning company.
Asset dealFrom a legal perspective, the acquisition of a real estate asset is most often performed in two separate stages: a private agreement between parties and a notarial deed.
The private agreement may be established by a number of legal mechanisms, such as an offer letter, an undertaking to sell or, most often, by a preliminary sale and purchase agreement, but no standard forms are imposed. The effect of preliminary sale and purchase agreements is to bind the parties, and the transfer of ownership documented in such agreements is perfectly valid. However, those agreements are not enforceable against third parties.
Commonly, preliminary sale and purchase agreements contain conditions precedent relating to the buyer obtaining the necessary funding or administrative authorisations and an obligation requiring the parties to go before a civil law notary within a certain period, and they are frequently coupled with a penalty clause.
To become enforceable against third parties, a notarial deed is required. To have the transfer of ownership registered and to confer rights against third parties, the transfer of title must be recorded in the mortgage register. The fees of the notary are computed according to a tariff and are generally borne by the purchaser. The purchase price, duties and taxes are paid to the notary, who ensures that the necessary duties are paid and releases the amount to the vendor.
ii Corporate forms and corporate tax frameworkLuxembourg real estate investment vehicles can be either regulated (i.e., authorised and supervised by the CSSF) or unregulated, and may be established under different laws and take different legal forms.
Unregulated vehicles are generally set up as companies or partnerships subject to the Company Law.
Standard companyUnregulated vehicles governed by the Company Law include the standard Luxembourg resident company (the standard company), which is subject to general taxation rules in Luxembourg. However, a standard company may also qualify as an AIF when relevant conditions are met.
It is most typically organised in the form of a private limited company, a public limited company or a partnership limited by shares.4
The key features of a standard company are the absence of investment restrictions or limitations, risk-spreading requirements, investor requirements (unless subject to the AIFMD), and authorisation or prudential supervision by the CSSF. It can only have a fixed share capital and is subject to standard minimum accounting and publication requirements depending on the corporate form chosen (an audit is required if certain quantitative thresholds are exceeded).
As regards taxation in Luxembourg, a standard company is fully subject to corporate income tax (CIT); to municipal business tax (MBT), the rate of which varies depending on the municipality in which the company is located; and to net worth tax (NWT).
The maximum aggregate CIT and MBT rate amounts to 24.94 per cent in 2023 for companies located in Luxembourg City and is levied on the standard company's net worldwide profits, subject to double tax treaties and domestic exemptions. As a general rule, taxable profits are determined on the basis of the accounting profits as established in accordance with the Luxembourg generally accepted accounting principles, except where the valuation rules for tax purposes require otherwise.
The NWT is levied at the rate of 0.5 per cent on the standard company's net assets not exceeding €500 million and at the rate of 0.05 per cent on the portion of the net assets exceeding €500 million5 as determined at 1 January of the fiscal year. A minimum NWT (MNWT) is applicable as well, set at €4,815 if the company's fixed financial assets, receivables against related companies, transferable securities and cash exceed 90 per cent of its total gross assets and €350,000. In all other cases, the MNWT ranges from €535 to €32,100, depending on the company's total gross assets.
Dividends distributed by a standard company to its shareholders are, as a rule, subject to withholding tax at the rate of 15 per cent, subject to double tax treaties and domestic exemptions. Liquidation proceeds, deriving from a complete or partial liquidation, are not subject to withholding tax in Luxembourg.
Tax losses incurred since the 2017 tax year may be carried forward for a maximum of 17 years under certain conditions, whereas losses incurred between 1 January 1991 and 31 December 2016 may be carried forward without time limitation.
As a key tax feature, standard companies benefit from a participation exemption regime and are generally entitled to claim the application of double tax treaties. Under the participation exemption regime, the following exemptions are available:
- dividends, liquidation proceeds, and capital gains received and realised on qualified shareholdings in eligible subsidiaries are exempt from CIT and MBT;
- qualified shareholdings in eligible subsidiaries are exempt from NWT; and
- dividends distributed to eligible parent companies are exempt from the 15 per cent dividend withholding tax.
Among the unregulated vehicles governed by the Company Law, common limited partnerships (CLPs) and special limited partnerships (SLPs) may often be a suitable alternative if a tax-transparent vehicle is desired. The essential difference between the two limited partnerships is that the SLP does not have legal personality distinct from that of its limited partners. It may further be noted that these limited partnerships may also qualify as an AIF when relevant conditions are met.
Contractual flexibility is the key feature of the Luxembourg partnership legislation. Statutory default rules apply only when the limited partnership agreement (which may be entered into under private seal or as a notarial deed and published as an excerpt including limited generic provisions, thus guaranteeing confidentiality with regard to the partnership arrangements and terms) remains silent in respect of certain key points that are of importance in protecting investors. Most of the economic and non-economic terms, including corporate governance, voting rights of the limited partners (or removal thereof), deployment of capital, and profit and loss allocation, may be tailored to the specific needs of a project. The other key features are the absence of investment restrictions or limitations, risk-spreading requirements, investor requirements (unless subject to the AIFMD), and authorisation or prudential supervision by the CSSF. CLPs and SLPs are also subject to simplified accounting obligations.
Both CLPs and SLPs are, in principle, transparent for CIT and NWT purposes and, hence, not subject to CIT (except in the case of application of the rules on reverse hybrids from tax year 2022) and NWT in Luxembourg.
The partnership may, however, be subject to Luxembourg MBT in limited circumstances if it pursues a business activity or it is deemed to pursue a business activity by virtue of the 'business-taint' theory, namely if its general partner is a limited company that owns at least 5 per cent of its capital or economic interests (which in practice is generally not the case). In respect of the business activity, the Luxembourg tax authorities confirmed6 that CLPs and SLPs qualifying as AIFs within the meaning of the AIFM Law are deemed not to be conducting a business activity.
Luxembourg resident partners of the partnership are personally subject to income and NWT in respect of their share in the profits and assets of these entities, regardless of whether the profits and assets are effectively distributed or not.
Non-Luxembourg resident partners may be subject to taxation in Luxembourg only in respect of their partnership interests in a limited number of situations (see Section II.iii and Section II.iv).
Any distributions by the partnership are, as a rule, made free of withholding tax in Luxembourg. Given its tax transparency, the partnership may not benefit for its part from double tax treaties, but its partners may generally claim treaty benefits from the source state.
iii Direct investment in real estateRegistration dutiesIn the case of an asset deal, the direct transfer of a real estate asset located in Luxembourg is subject to Luxembourg transfer taxes assessed on the basis of the highest of the purchase price, as indicated in the notarial deed, and the fair market value of the property. Transfer taxes are usually paid by the purchaser.
Where the asset deal takes the form of a sale or of a contribution for valuable consideration, Luxembourg transfer taxes amount to 7 per cent or 10 per cent and are composed of a registration duty of 6 per cent, plus a municipal surcharge of 50 per cent (i.e., 9 per cent in aggregate) where the asset comprises an office or a commercial property located in the city of Luxembourg, and a transcription tax of 1 per cent.
Where the asset deal takes the form of a contribution remunerated by shares, reduced Luxembourg transfer taxes of 3.4 or 4.6 per cent apply and are composed of a registration duty of 2.4 per cent, plus a municipal surcharge of 50 per cent (i.e., 3.6 per cent in aggregate) where the asset comprises an office or a commercial property located in Luxembourg City, and a transcription tax of 1 per cent.
Considering the significant cost of transfer taxes, intragroup transfers are rarely made through a direct sale but, instead, are made through a contribution remunerated by shares or a share deal (as detailed hereafter, the acquisition of shares in a Luxembourg tax-opaque company should not be subject to Luxembourg transfer taxes, even when the main or sole asset of the company is a real estate asset located in Luxembourg).
Direct taxation on acquisitionThe corporate buyer should typically break down the total price paid for the asset between the price related to the plot and the one related to the construction as only the latter is depreciable for tax purposes.
Direct taxation on holding and upon exitAs a general rule, income and gains deriving from real estate assets are taxed in the jurisdiction of the location of the assets.
Rental income derived from the direct holding by a standard company of a real estate asset located in Luxembourg and capital gains realised upon the disposal of that asset are subject to CIT and MBT at ordinary rates in Luxembourg, after deduction of permitted tax-deductible costs and fiscal losses carried forward, if any. Constructions can be depreciated over their useful economic life. As from 2019, apart from exceptions, annual exceeding borrowing costs can be deducted up to the higher of €3 million or 30 per cent of earnings before interest, taxes, depreciation and amortisation.
The standard company is also subject to NWT on the unitary value assigned to the property, after deduction of tax-deductible liabilities.
The Luxembourg Income Tax Law (ITL)7 provides for a rollover regime, whereby the capital gain realised upon disposal of a real estate asset (that has been part of the net assets of a standard company for at least five years before disposal) may be transferred, under certain conditions, to fixed assets acquired or built up by the company (by the end of the second fiscal year following the year of disposal at the latest) in reinvestment of the real estate's sale price. The capital gain transferred on the reinvested fixed asset reduces the acquisition price of that asset accordingly, to ensure that the transferred capital gain is taxed through reduced depreciation and ultimately at the time the reinvested fixed asset is sold. In that scenario, when the reinvested fixed asset is a participation, the transferred capital gain remains subject to taxation notwithstanding the application of the Luxembourg participation exemption regime.
Where the Luxembourg property is held through an unregulated Luxembourg limited partnership (CLP or SLP), tax neutrality may be achieved in the hands of the limited partnership to the extent that it does not pursue or is not deemed to pursue a business activity. In the presence of a business activity, rental income and capital gains relating to the real estate asset located in Luxembourg are subject to MBT, after deduction of permitted tax-deductible costs and fiscal losses carried forward, if any.
Luxembourg resident partners of a CLP or SLP are personally subject to income and NWT in respect of their share in the profits and assets of the entity, regardless of whether those profits and assets are effectively distributed, and under the tax provisions applicable in their particular circumstances.
As a matter of principle, Luxembourg non-resident partners of a CLP or SLP should not be subject to Luxembourg tax on income and gains arising from their interest in the entity, except where the partner holds its interest in the entity through a permanent establishment (PE) or permanent representative in Luxembourg, or the income and gains attributable by tax transparency of the CLP or SLP to that partner are Luxembourg source income that is taxable in Luxembourg (e.g., income and gains from a Luxembourg real estate asset when that asset is directly held by the entity). With regard to NWT, a Luxembourg non-resident partner of a CLP or SLP is generally not subject to it except where the partner (other than an individual) holds its interest in the entity through a PE or permanent representative.
Value added taxAs a general rule, real estate transactions, including purchase and rental activities, involving real estate located in Luxembourg are exempt from value added tax (VAT) in Luxembourg.8 Accordingly, input tax incurred on related expenses by the seller or the lessor is unrecoverable.
However, it is possible to waive the VAT exemption. Article 45 of the VAT Law provides a right to opt for VAT in both cases (i.e., the purchase or rental of the real estate), if the transaction occurs between taxable persons for VAT purposes and involves a building dedicated to the pursuit of activities that allow for 100 per cent input VAT in the case of businesses for which the whole turnover is subject to VAT, or at least 50 per cent input VAT for mixed-use buildings and partially taxable persons. The VAT option must be submitted for the approval of the VAT authorities. Accordingly, input VAT incurred on related costs becomes recoverable.
iv Acquisition of shares in a real estate companyRegistration dutiesLuxembourg real estate assets are generally individually owned by a dedicated property company,9 thereby offering a prospective purchaser the choice to acquire either the asset directly or the property company (i.e., a share deal). In the latter case, no Luxembourg transfer taxes should apply, in principle, considering that there is no direct transfer of the ownership of the property from the seller to the purchaser (apart from exceptional circumstances of simulation).
There is, however, one exception to this principle. Transfer taxes apply to the transfer of shares in a Luxembourg tax-transparent entity (such as limited partnerships) in the same way as if the real estate asset was transferred directly, except for the transcription tax, which does not apply.
The transfer of shares in a property company (or, as the case may be, in an intermediary holding company) may be subject to real estate transfer taxes in the country where the real estate asset is located.
Direct taxation on acquisitionThe purchase price of the shares in a Luxembourg property company (including related costs) constitutes the acquisition cost for Luxembourg tax purposes.
Direct taxation on holding and exitAs a general rule, and subject to the provisions of a relevant double tax treaty, income and gains deriving from the shares in a property company are taxed in the jurisdiction of residence of the beneficiary of the revenues. However, where the land-rich entity provision clause in a double tax treaty grants taxation rights to the country where the real estate asset of the property company is located in accordance with that country's domestic tax rules, capital gains upon disposal of the shares in the property company are taxable in the jurisdiction where the real estate asset is located. Luxembourg's domestic tax law does not contain such a rule.
Where the shares in the Luxembourg property company are held by Luxembourg resident individual shareholders, any dividends and other payments are subject to Luxembourg income tax at the progressive ordinary rates (50 per cent of the dividends distributed are, however, exempt from income tax). Capital gains realised upon the disposal of the shares in the property company by Luxembourg resident individual shareholders acting in the course of the management of their private wealth are not subject to Luxembourg income tax, provided that this disposal takes place more than six months after the shares were acquired and provided that the shares do not represent a substantial shareholding.10 Capital gains realised on a substantial shareholding more than six months after the acquisition thereof are instead subject to Luxembourg income tax according to the half-global rate method. Capital gains realised upon the disposal of the shares in the property company by a Luxembourg resident individual shareholder acting in the course of the management of their professional or business activity are subject to Luxembourg income tax at the ordinary rates.
Where the shares in the Luxembourg property company are held by Luxembourg resident corporate shareholders, they shall include any profits derived, as well as any gains realised on the disposal of the shares in the property company, in their taxable profits for Luxembourg income tax assessment purposes, unless the conditions of the Luxembourg participation exemption regime are satisfied. The same tax treatment generally applies when a standard company is used to hold shares in a non-Luxembourg property company.
Where the shares in the Luxembourg property company are held by an unregulated Luxembourg limited partnership (CLP or SLP), tax neutrality may be achieved in the hands of the limited partnership to the extent that it does not pursue or is not deemed to pursue a business activity. If a business activity is deemed pursued, distributions and capital gains relating to the property company are subject to MBT, after deduction of permitted tax-deductible costs and tax losses carried forward, if any.
In this respect, distributions to a CLP or SLP (other than advances on liquidation proceeds) are generally subject to the 15 per cent Luxembourg withholding tax, unless the conditions of the Luxembourg participation exemption regime are fulfilled at the level of the partners. Luxembourg resident partners of a CLP or SLP are personally subject to income and NWT in respect of their share in the profits and assets of the entity, irrespective of whether the profits and assets are effectively distributed, and under the tax provisions applicable in their particular circumstances.
As a matter of principle, a Luxembourg non-resident partner of a CLP or SLP should not be subject to Luxembourg tax on income and gains arising from its interest in the entity, except where that partner holds its interest in the entity through a PE or permanent representative in Luxembourg, or the income and gains attributable by the tax transparency of the CLP or SLP to that partner are Luxembourg source income that is taxable in Luxembourg – for example, where, subject to the provisions of an applicable double tax treaty:
- dividends from the Luxembourg property company are subject to Luxembourg withholding tax; or
- the partner holds indirectly through the CLP or SLP a substantial shareholding in the Luxembourg property company and the shares in the latter are disposed of:
- within six months; or
- after six months, where the partner has been a Luxembourg resident taxpayer for more than 15 years and has become a Luxembourg non-resident taxpayer less than five years before the disposal takes place.
Tax on capital gains in Luxembourg would also apply if the Luxembourg non-resident partner holds a substantial shareholding in the Luxembourg property company indirectly through the CLP or SLP and if, subject to the provisions of an applicable double tax treaty, that partner disposes of its investment in the CLP or SLP within six months. A Luxembourg non-resident partner of a CLP or SLP is generally not subject to NWT except where that partner (other than an individual) holds its interest in the entity through a PE or permanent representative.
Where the shares in the Luxembourg property company are held directly by Luxembourg non-resident shareholders, the latter are generally not subject to any tax on income and capital gains in Luxembourg. However, non-resident shareholders may become liable for tax on the income and gains in Luxembourg – for example, where:
- those shareholders hold the shares in the property company through a PE or permanent representative in Luxembourg;11 or
- subject to the provisions of a relevant double tax treaty, the shareholders hold a substantial shareholding in the Luxembourg property company and either:
- they dispose of their participation in the property company within six months; or
- the disposal takes place after six months and the shareholders have been Luxembourg resident taxpayers for more than 15 years and have become Luxembourg non-resident taxpayers less than five years before the disposal takes place.
The acquisition of shares in a Luxembourg property company is considered to be a VAT-exempt transaction or outside the scope of VAT in Luxembourg.
