Protecting Your Assets With A Luxembourg Foundation

The Grand Duchy of Luxembourg is a small, prosperous country in Central Europe. It is one of the founding states of the European Union. Bordered by Germany, France, and Belgium, it has three official languages: Luxembourgish, German, and French. In addition, this country possesses a skilled multilingual workforce, making it a top financial center in the region and the world. Political, social, and economic stability facilitates business growth and the development of a diversified financial environment. This article will mainly discuss the pros and cons of Private Foundations in Luxembourg.

Protecting your assets with a Luxembourg Foundation can be a strategic and reliable way to ensure the long-term security and prosperity of your wealth. Luxembourg Foundations are well-regarded internationally, making them a preferred choice for asset protection and wealth management. Their legal framework is recognized and respected in many countries, which enhances their effectiveness for individuals and families with global interests.

Main Features

The Luxembourg Foundation can be a for-profit instrument. It is one of the most valuable estate planning and, asset protection and management tools that both locals and foreigners can set up. It is also possible to establish it for charitable purposes (in which case is a non-profit). A Luxembourg Foundation provides a dedicated structure to safeguard your assets from various risks, such as legal disputes, economic downturns, or changing regulations. This separation between your personal assets and the foundation's assets helps protect your wealth for generations to come.

Although this is a Civil Law vehicle, it is similar to a Trust. There are a set of founders, a Board of Directors, and beneficiaries. However, it is crucial to know the differences between these two. For instance, unlike the Trust, a Foundation is a legal entity on its own, separate from the founder and beneficiaries’ legal personalities. The Foundation will manage assets under its name. 

It is an orphan entity, which means it will not possess shareholders or members. As a result, its assets do not belong to the estate of a founder. Like Swiss Foundations, the Founder/s can establish this vehicle to benefit numerous beneficiaries and purposes. Nevertheless, it is usual that it only has one specific aim. A Ducal Decree shall recognize the creation of this vehicle, which must be located in Luxembourg and incorporated by Public Deed (also known as Deed of Incorporation). While non-profit organizations do not require a minimum capital for their establishment, the assets of a Private Foundation must be at least worth €50,000 ($50,100 USD) cash or contribution in kind. It is necessary to appoint a Board of Directors that works toward the object stated in the Public Deed. 

The Public Deed must comprise the following data:

• The Founder.
• The term.
• The seat.
• The object.
• The beneficiaries and how to are appointed.
• The Purpose/s.
• The management roles of the Board of Directors.
• Details about them. 

This information, which The Luxembourg trade and companies registry holds and publishes in the country's official Gazette, is not available to the public. It must be in the Foundation’s headquarters, and legally entitled entities (public authorities or individuals) may access it. Like Trusts, Foundations provide a great deal of privacy and security.

Additionally, the Board of Directors must keep track of all financial and legal matters regarding the Foundation. The Founder must also draft and sign a notarial document. In some cases, testaments, private agreements, and articles of association could be necessary.

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Luxembourg Map, Europe

Even though the Foundation’s registered office must be in Luxembourg, its Founder/s and members of the Board of Directors can be non-residents. The Founder can be part of the Board of Directors and manage the assets. He can appoint himself as a beneficiary and determine how beneficiaries will benefit from the instrument. It is also possible to lay out the conditions for receiving the assets. 

Assets can be real estate, shares, intellectual property, etc. Briefly, a Foundation can control tangible or intangible and movable or unmovable assets. Although its purpose can be for-profit, it cannot develop commercial, agricultural or industrial activities.

If the assets are worth over €20 million ($20 million USD) or it has over five beneficiaries, it is compulsory that a Supervision Board, composed of only natural persons, monitors the Foundation. The figure of an external auditor is a requirement under these circumstances. In contrast, in all the remaining cases, the Founder is free to bring forth a Supervisory Board with concrete powers and dictate how its members are appointed or dismissed. 

The Founder has extensive capacities personal to himself; as a result, no individual will possess these unless the Deed of Foundation mandates it. While the Founder can be an administrator, they cannot be a Supervisory Board member. In addition, the founder can modify statutory documents or articles of incorporation, revoke directors, make the regime stricter, and vary the liability regime. The Founder can amend the features of an Incorporation Deed, such as its beneficiaries, its duration, its beneficiaries, the powers of directors, etc. 

If the Foundation violates the incorporation articles or infringes the provisions of Luxembourg’s Foundation Law, the Courts can dissolve and liquidate it. If the Supervisory Board is guilty of malpractice or professional misconduct, its members may be revoked and reappointed by the Court.

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Euro banknotes, Luxembourg currency

Taxing on a Luxembourg Foundation

Luxembourg offers a favorable tax regime for foundations, with exemptions and reduced rates in place for both income and capital gains. This can result in tax advantages for both the foundation and its beneficiaries. The country provides a wide range of financial services to foundations, including investment management, legal counsel, and administrative support. These services ensure the foundation operates efficiently and effectively.

In terms of taxation, a Foundation is subject to income and municipal corporate tax. However, the following are tax exempted: 

• Income from life insurance contracts.
• Capital gains that come from the sale of assets.
• Dividends and interest from transferable securities (e.g. shares, bonds).
• Income from movable capital assets (e.g. machinery, vehicles, supplies)
• Payments from the Foundation to a beneficiary are free from withholding tax. 

Wealth tax does not apply. A transfer of assets from the Foundation to a beneficiary is subject to a gift tax during the grantor’s lifetime. This tax rate varies from 0 to 40 % according to the family relationship of these two agents.

The Board must keep track of financial records and provide Foundation’s annual accounts and budget to the Ministry of Justice within two months after the end of the financial year (1st of January to 31st of December).

Foundations in Luxembourg are subject to government supervision, ensuring transparency and adherence to regulations. This oversight adds credibility and trust to the foundation structure. Many individuals use Luxembourg Foundations to support educational initiatives and cultural endeavors and it can collaborate with educational institutions, healthcare providers, cultural organizations, and other nonprofits to amplify their impact. By doing so, they leave a lasting legacy by promoting education, the arts, and cultural development.

Vianden Castle Fortifications, Luxembourg

Conclusion

The Luxembourg Foundation offers several valuable benefits like no taxes on dividends, capital gains and wealth. It is an excellent tool for protecting your privacy. Although a gift tax may apply, to maintain the integrity of the Foundation, the governing agents and supervisors do an impeccable job. On top of that, as a grantor, you enjoy vast powers and can be simultaneously a Founder, a beneficiary and a manager.

In conclusion, establishing a Luxembourg Foundation offers numerous advantages for individuals and families seeking to protect their assets while making a positive impact on society. With a robust legal framework, favorable tax regime, and a wide array of services, Luxembourg provides a secure and efficient platform for managing wealth, supporting causes, and preserving family legacies. Whether it's safeguarding your assets or contributing to education, healthcare, culture, or the arts, a Luxembourg Foundation can be a powerful tool to achieve your financial and philanthropic goals.