Luxembourg has historically been a very open economy fostering cross-border investments. The Luxembourg legal system contains elements inspired by the legislations of its immediate neighbours (France, Germany and Belgium) as well as those adopted in the framework of the EU legal system.

Sources of Law

The main sources of law are the constitution dated 17 October 1868, the laws voted by the parliament and the grand ducal regulations (règlements grand-ducaux). 

Commercial companies are governed by the Law of 10 August 1915 on commercial companies as amended and, as the case may be, by the Law dated 2 September 2011 regulating access to certain professions, as amended.

Court System

The Luxembourg judicial court system is composed of a judicial branch dealing with civil and criminal matters and an administrative branch in charge of disputes with the authorities. The judicial system is divided into three instances:

• first instance courts;
• courts of appeal; and
• the Court of Cassation.

Regulatory Framework

The prudential and regulatory oversight of financial markets, the financial sector and investment funds is entrusted to the Commission for the Supervision of the Financial Sector (Commission de Surveillance du Secteur Financier or CSSF), while oversight of the (re)insurance sector is entrusted to the Insurance Commissioner (Commissariat aux Assurances or CAA).

No prior review or approval is currently required when foreign investors intend to invest in the Grand Duchy of Luxembourg. However, the Luxembourg legislator has considered the implementation of a regulatory framework for foreign direct investment (FDI) through the introduction on 15 September 2021 of Bill of Law No 7885 (the “Bill”) aimed at controlling investments which could affect national security or public order.

According to the Bill, any FDI to be made in a Luxembourg entity engaged in critical activities (including, without limitation, energy, health, data and defence), which would enable a foreign investor to participate effectively in the control of this entity, will have to be notified to the Luxembourg minister of economy. The investor will need to obtain the approval of such authority prior to proceeding with the contemplated investment. For further details, see 2.1 Outlook and FDI Developments and 7. Foreign Investment/National Security.

Outlook

The Grand Duchy of Luxembourg relies on a robust, resilient, yet stable economy that has consistently kept its AAA rating as evidenced by the ratings issued by established rating agencies. The prudent management of the economy has led to a healthy budget, solid growth, a dynamic market and low unemployment.

The Luxembourg government was able to withstand the shock of the COVID-19 pandemic and maintain the economy at its pre-pandemic level. Due to the increasing diversification of Luxembourg՚s economy, and despite the country՚s small size, the authorities have pragmatically and successfully striven to maintain its position as a strong financial market participant and as a tested gateway for the structuring of cross-border investments in Europe with minimum restrictions on FDI. 

Regulatory Framework for FDI 

Luxembourg does not currently have a specific FDI screening regime.

However, the emergence of new types of investments has raised concerns as to the potential risks that such investments could eventually cause to national security when they are carried out in certain sensitive industries. 

The COVID-19 pandemic has further accentuated the need to establish a legal framework to ensure the protection of Luxembourg’s industries, technologies and strategic interests.

On 19 March 2019, the European Parliament and the Council adopted Regulation (EU) 2019/452 establishing a framework for the screening of FDI coming into the European Union (the “Regulation‟) and providing the possibility for its member states to set up a screening mechanism. 

As mentioned in 1.2 Regulatory Framework for FDI, on 15 September 2021, the Luxembourg legislator announced the Bill (No 7885) “establishing a national screening mechanism for FDI likely to affect security or public order”, aimed at implementing the Regulation.

As the process for establishing the Bill is still at an early stage, the final provisions of the law might differ from the provisions of the Bill detailed in 7. Foreign Investment/National Security. 

Share Deals v Asset Deals

Transactions may be structured as asset deals or as share deals. Share deals are preferred in the case of larger transactions, as they enable a global approach to the transfer of assets and liabilities with minimum formalities, without the need to transfer ownership over each asset separately (and consequently perform often cumbersome and lengthy registration formalities) and/or without the need to obtain approval from the creditor for the transfer of liabilities. 

Asset deals allow for the direct transfer of specifically determined assets and/or contracts and are often the deal of choice in the case of distressed companies. 

Furthermore, the choice between a share deal and an asset deal is likely to be driven by tax considerations. 

Universal Transfers

A specific procedure is regulated with respect to the transfer of the universality of assets and liabilities or the transfer of a company’s branch of activity. In such cases, all assets and liabilities that are part of the universality or part of the said branch of activity are automatically transferred by effect of law, subject to compliance with certain requirements. 

Mergers may also be considered as a tool to acquire control over other companies, at both national and cross-border level.  

Public Companies

Shares of a public company can be obtained through the acquisition of shares from shareholders by means of a voluntary or mandatory tender offer. For the acquisition of over 33.3% of the voting rights in a public company, a takeover bid will need to be made to all shareholders. Furthermore, any shareholder obtaining over 90% of the share capital and voting rights in a publicly traded company is entitled to launch a mandatory squeeze-out process for the acquisition of the remaining shares from minority shareholders, within three months of the end of the time allowed for acceptance of the voluntary bid. 

Minority Investments

Minority investments are generally made directly in the relevant company (usually by way of another Luxembourg law-governed entity). Should the minority shareholder intend to act in concert with other shareholders, the investment could be made at the level of a holding company, where the minority investor would come in together with the majority shareholder(s).

Competition

In addition to an FDI regime, other special requirements that may need to be considered by a foreign investor planning to invest in Luxembourg include control by the Luxembourg Competition Council, which, although not required by law to be notified pre-merger, may exercise post-merger control if the transaction affects the Luxembourg market (see 6. Antitrust/Competition). There is also a specific framework applicable to transactions concerning public companies, where specific regulatory requirements are to be observed (see 3.1 Transaction Structures).

Investment in Specific Sector of Activities

In addition, there are certain sectors where specific authorities, set up at national level, survey M&A activity (see 8.1 Other Regimes), such as:

• Commissariat aux Assurances or CAA, which is in charge of supervising the insurance industry;
• Commission de Surveillance du Secteur Financier or CSSF, which is in charge of supervising the financial services industry; and
• Autorité Luxembourgeoise Indépendante de l'Audiovisuel or ALIA, which is in charge of supervising media and broadcasting communications.  

As such, the acquisition or divestment of a stake in companies from these specific sectors may be subject to prior authorisation from certain authorities or to a notification addressed thereto.

Corporate governance rules in Luxembourg mainly depend on the type of corporate entity and whether the company is listed or not. 

Public Companies

In Luxembourg, the only companies which can be listed are public limited liability companies, European companies (sociétés européennes or SE) and partnerships limited by shares (sociétés en commandite par actions or SCA). 

Public limited liability companies can opt for either a one-tier or two-tier board structure. In the latter case, the management board is in charge of the management of the company, while the supervisory board’s purpose is to monitor the management board’s work. In Luxembourg, most companies opt for the traditional one-tier management system with a board of directors managing the company. 

Private Companies

Private companies include companies which are not listed or not eligible for listing. 

Examples of private companies include:

• private limited liability companies (sociétés à responsabilité limitée or Sàrl); 
• common limited partnerships (sociétés en commandite simple or SCS); and
• special limited partnerships (sociétés en commandite spéciale or SCSp), having no legal personality.

A public limited liability company, although eligible for listing, will qualify as a private company if its shares are not listed.

The most widely used form of private company in Luxembourg is the private limited liability company, as its flexibility is attractive for both operational and holding activities. 

Private limited liability companies are managed by one or several managers, whether natural or legal persons, shareholders or not. 

Governance Framework

For all entities in Luxembourg, corporate governance rules are provided in the Luxembourg Law on commercial companies, dated 10 August 1915, as amended, as well as the relevant articles of association/partnership agreement of each entity or a shareholders’ agreement, as the case may be. 

In addition to these rules, listed companies are required to comply with the provisions of the Law of 24 May 2011 regarding the exercise of certain shareholder rights at general meetings of listed companies, as amended, as well as the principles set out in the Luxembourg Stock Exchange’s (LSE՚s) ten principles of corporate governance.

The contemplated future FDI regime is neutral with respect to the type of legal form used to invest in Luxembourg. The Bill refers to an investment made in any Luxembourg entity with activities in a critical sector, regardless of its corporate form.

In Luxembourg, minority shareholders are generally bound by decisions made by majority shareholders. Safe harbour rules, however, exist to govern the majority-minority shareholder relationship. 

Luxembourg Laws

Firstly, all shareholders, including minority shareholders, enjoy certain rights (eg, the right to information and to equal treatment of shareholders; voting rights except in limited cases). 

Secondly, specific rules under the Luxembourg Law on commercial companies dated 10 August 1915, as amended (the “1915 Law”), provide minority shareholders with various rights depending on the type of company and the importance of the stake they hold in the entity. 

In particular, the 1915 Law provides several protective rules to the benefit of minority shareholders in public limited liability companies, including the following:

• shareholder(s) representing at least 10% of the share capital of the entity can request the holding of a general meeting of the shareholders;
• shareholder(s) holding at least 10% of the subscribed capital can request that one or more additional items be put on the agenda of any meeting (this percentage is reduced to 5% if the public limited liability company is listed, according to the law dated 24 May 2011); and
• shareholders representing at least 10% of the votes can, subject to certain conditions and on behalf of the company, bring a liability claim against the directors for damage caused to the company as a result of mismanagement or breach of the 1915 Law or the articles of association.

Certain rights are also granted to the minority shareholders in the context of mergers. 

Articles of Association

The articles of association and/or a shareholders’ agreement can, in practice, provide for even more protective rules. 

Case Law

Case law provides for protective rights pursuant to the theory of the abuse of majority (abus de majorité), whereby minority shareholders can assert their rights before a Luxembourg judge if a resolution negatively affects their rights. The following evidence must be provided before the judge: 

• the resolution approved by the shareholders is not in the corporate interest of the company; and 
• the resolution was passed solely to favour the majority shareholders to the detriment of the minority shareholders. 

If abuse of majority is established, judicial sanctions include damages owed by the majority shareholders, the cancellation of the resolution or the appointment of an interim administrator as relevant.

As mentioned in 2.1 Outlook and FDI Developments, Luxembourg does not have a specific FDI regime yet, but the Bill provides that foreign investors will be required to give prior notification to the minister of economy of any FDI they contemplate in an entity conducting activities in a critical sector in Luxembourg and which would enable them to participate effectively in the control of this entity.

In addition, certain laws imposing a disclosure obligation can impact the foreign investors and/or the Luxembourg entity in which an FDI is made.

• According to the Law of 13 January 2019 on the register of beneficial owners, as amended, all Luxembourg companies registered with the Luxembourg Trade and Company Register are required to file information relating to their ultimate beneficial owner(s) with the Register of Beneficial Owners (Registre des bénéficiaires effectifs or RBE).
• Direct shareholders of certain types of Luxembourg companies (eg, private limited liability companies) need to be registered with the Luxembourg Trade and Companies Register.
• According to the Law of 11 January 2008 on transparency requirements for issuers of securities, as amended, any holder (natural or legal person) of securities, of certificates representing securities, or of financial instruments giving entitlement to vote in a Luxembourg company listed in Luxembourg or in any other EU member state, must notify the company issuing the securities and the CSSF of any acquisition, transfer or similar operation concerning such shares or rights that causes its holding to reach, exceed or fall below the 5%, 10%, 15%, 20%, 25%, 33⅓%, 50% and 66⅔% thresholds.

See 8.1 Other Regimes for further details.

In addition to debt financing via financial institutions, the issuance of securities in capital markets and investment funds are the major ways to raise funds in Luxembourg. 

Capital Markets

Having access to capital markets opens the door to fundraising from a large range of investors. Issuers can offer securities to the public and list them in a regulated market such as the LSE or the non-regulated euro multilateral trading facility (MTF). If not exempted, issuers will be required to draw up a prospectus in respect of their offers of securities in compliance with the Prospectus Regulation (EU) 2017/1129 (the "EU Prospectus Regulation"). The said prospectus, approved by the Luxembourg competent authority for the financial sector (CSSF), benefits from a passport enabling the issuer to raise funds from a larger range of investors, throughout the EU.

SMEs

Capital markets are also accessible to SMEs or for smaller offers. Small offers or offers targeted to qualified investors may be exempt from the obligation to draw up a prospectus compliant with the EU Prospectus Regulation, which allows for the quickest and easiest access to funds. 

SMEs wishing to make an offer to the public or list their securities on the LSE may fall under the provisions of the EU Prospectus Regulation, providing the possibility to draw up a limited prospectus, the so-called Growth Prospectus, limiting expenses regarding access to fundraising on the capital markets.

Digital Assets

Capital markets in Luxembourg are now witnessing the developing trend of digital assets. Offers of different types of digital assets (securities tokens, native tokens, NFTs, utility tokens, etc) have recently been emerging on the Luxembourg capital market, facilitating even greater access to funds from a range of investors. The Luxembourg regulatory framework is evolving in line with the market trend, as the issuance of native tokens is rendered possible by a recent legislative evolution, ie, the Law of 22 January 2021 or the so-called Blockchain II Law.

Blockchain and digital assets are introducing a revolution in the traditional capital markets.

Securities Regulation

The creation and transfer of securities of Luxembourg companies are generally governed by the Law on commercial companies of 10 August 1915, as amended. Under this Law, and depending on the corporate form of the company, the creation or transfer of shares may be subject to the approval of the other shareholders in the company.

The Luxembourg Law of 1 August 2001 on circulation of securities, as amended, lays down specific rules on the circulation of securities booked on a securities account and, to some extent, of securities deposited or held by an account keeper. 

In addition to the above, securities issued, invested and traded on the capital markets are subject mostly to regulations enacted by the EU and implemented in Luxembourg, directly or via an implementing national law. 

As such, the offer of securities to the public falls under the provisions of the EU Prospectus Regulation, requiring the issuer of such securities to draw up a prospectus with the relevant specific information on the terms of the offer and the securities. Offers exempted under the EU Prospectus Regulation may fall under additional obligations provided by the Luxembourg Law of 16 July 2019 on prospectuses, such as notification to the Luxembourg competent authority for the financial sector (CSSF).

When the issuer of securities is a Luxembourg securitisation vehicle, it is subject to the provisions of the Law of 22 March 2004 on securitisation, including to the potential requirement of being authorised by the CSSF to exercise its activities.

Regulated Market

For securities listed or admitted to trading on a regulated market, additional regulations apply in relation to such securities.

Securities of companies governed by Luxembourg law, where all or part of the securities are admitted to trading on a regulated market in one or more member states of the EU, are subject to the rules laid down in the Luxembourg Law of 19 May 2006 on takeover bids, implementing EU Directive 2004/25/EC of 21 April 2004. 

The issuer of listed securities or securities admitted to trading on a regulated market may be subject to the disclosure requirements provided by the Luxembourg Transparency Law of 11 January 2008, implementing EU Directive 2004/109/EC of 15 December 2004, such as disclosure of a major shareholding or a change in the rights of securities.

AML Regulation

A foreign investor investing or holding securities governed by Luxembourg law would be subject to the relevant applicable law as described above. In addition to rules of public order related for instance to potential embargo, access to the securities governed by Luxembourg law may be subject to anti-money laundering or terrorist financing rules. However, restrictions regarding access to the securities by foreign investors are usually dealt with on a case-by-case basis in the offering document.

The fact that foreign investors choose to be structured as investment funds would not, in and of itself, subject the fund to any regulatory review. In other words, FDI in Luxembourg would not per se subject a fund to any regulatory review.

It is only if the fund vehicle in question takes the form of a regulated vehicle (eg, SIF, SICAR) that such vehicle will be subject to the oversight and supervision of the Luxembourg regulator.

Lack of Prior Merger Control – Ex Post Control 

Luxembourg is the only EU member state without prior merger control. 

The absence of prior merger control does not, however, prevent the Luxembourg Competition Council from exercising a certain degree of merger control over the Luxembourg market. Indeed, on the basis of European jurisprudence in the Continental Can case, the Luxembourg Competition Council is competent to prohibit a merger ex post in the case of abuse of a dominant position on the Luxembourg market on the basis of Article 5 of the Law of 23 October 2011 on competition. 

In its Decision 2016-FO-04 of 17 June 2016 regarding Utopia, the Luxembourg Competition Council verified its competence to deal, ex post, with mergers that strengthen a pre-existing dominant position. The Council concluded that such ex-post control based on the abuse of dominance provisions is permissible, irrespective of the existence or otherwise of special national rules providing for ex ante control. The Council, nevertheless, closed the case without further action due to the absence of anti-competitive effects on the market as a result of the merger. 

In the Fédération des Artisans case, a complaint over abuse of a dominant position had been filed concerning a concentration between two dominant companies active on different markets (vertical merger). In its Decision 2019-R-01 of 15 March 2019, the Luxembourg Competition Council rejected the complaint on the grounds that the situation in question was different from the one described in the Continental Can judgment that related to horizontal mergers (between competitors). The Administrative Court confirmed this position in its judgment on appeal of 25 January 2021.

Referral Mechanism to the European Commission

Article 22 of Council Regulation No 139/2004 of 20 January 2004 on the control of concentrations between undertakings allows one or more member states to request the European Commission to examine a concentration which does not have a European dimension, but which affects trade between member states and threatens to significantly affect competition in the territory of the member state(s) making the request.

In its Guidance of 31 March 2021 on the application of the referral mechanism provided for in Article 22, the European Commission confirms that referral is possible where the requesting member state, such as Luxembourg, has not put in place a specific national merger control regime. 

Following the Guidance, the Competition Council stated that it will use Article 22 to refer a merger to the European Commission when there is an effect on trade between member states and a significant threat to competition in its territory. On 20 January 2022, the Ministry of the Economy initiated a public consultation on the potential introduction of a merger control regime in Luxembourg. On 13 July 2022, the Ministry of the Economy presented an intermediary report on the public consultation. The report provides the outlines of a future national legal framework, with a view to submitting a bill of law to the parliament in spring 2023.

This is not applicable in Luxembourg.

This is not applicable in Luxembourg.

There is currently no FDI regime in force in Luxembourg but the Draft Law No 7885 of 15 September 2021, submitted to parliament, provides for the setting-up of a national screening mechanism for FDI that is likely to affect Luxembourg's security interests and strategic sectors. 

See 7.1 Applicable Regulator and Process Overview for further details. 

There is currently no FDI regime in force in Luxembourg but the Bill submitted to parliament is aimed at setting up a national screening mechanism for FDI that is likely to affect Luxembourg’s security interests and strategic sectors. 

Scope of the Bill

The Bill envisages a screening mechanism based on a prior notification obligation and pre-evaluation procedure for certain FDI that may affect national security or public order made by a foreign investor (ie, an investor from a non-EU or European Economic Area country) in a Luxembourg entity conducting activities in a critical sector in the territory of Luxembourg. 

The Bill provides a list of activities considered as critical, including: energy, transport, water, health, telecoms, data processing and storage, space, defence, media and certain financial activities (central bank, infrastructure and systems for the exchange, payment and settlement of financial instruments).

Portfolio investments in Luxembourg entities, ie, acquisitions of shares aimed at making a financial investment without taking control of the said entity, are expressly excluded from the scope of the Bill.

Notifiable Control

The foreign investor will have to notify the investment project if the envisaged investment allows the foreign investor to acquire control of the Luxembourg entity, by either: 

• having a majority of the voting rights of the shareholders or associates of an entity incorporated under Luxembourg law; 
• having the right to appoint or remove the majority of the members of the administrative, management or supervisory body of an entity governed by Luxembourg law and being at the same time a shareholder or associate of that entity; 
• being a shareholder or associate of an entity governed by Luxembourg law and controlling, by virtue of an agreement with other shareholders or associates of that entity, a majority of the voting rights of the shareholders or associates of that entity; or
• crossing, directly or indirectly, the threshold of 25% of the capital.

Procedure

The acquisition of a controlling stake in any Luxembourg entity that takes part in critical activities will have to be notified to the minister of economy by the foreign investor before the FDI is made. As an exception, in the event the foreign investor exceeds 25% of the capital of an entity governed by Luxembourg law as a result of events which modify the distribution of the capital, the foreign investor will have a period of 15 days to notify the operation.

As part of the notification, the foreign investor will be required to provide the following information: 

• the ownership structure of the foreign investor and of the Luxembourg entity before the completion of the FDI or after events that changed the capital structure, including information on the beneficiary;
• the investment volume;
• the products, services and commercial operations of the foreign investor and the Luxembourg entity;
• the countries in which the foreign investor and the Luxembourg entity carry out their commercial activities;
• the source of financing of the investment; and
• the date on which the investment is contemplated to be made or was made.

Failure to provide the aforementioned information will result in a request to provide the missing information without undue delay. Should the information provided be insufficient or not allow the Luxembourg authorities to make a decision, additional information will be requested.

The notification will not suspend the preparatory steps for the realisation of the envisaged investment but the authorisation of the minister will be necessary to implement the FDI.

Assessment

The Bill provides for the setting-up of an inter-ministerial committee and expert group which shall:

• review the mandatory notifications to be made by foreign investors;
• prepare and propose an opinion on the triggering of the filtering procedure and, if necessary, on the screening decision to the minister of economy and to the minister of finance (the “Ministers”); and
• provide advice to the Ministers on the administrative measures or sanctions to be applied.

Within two months of the notification, the Ministers will perform a preliminary analysis and decide, on the advice of the inter-ministerial investment screening committee, whether the FDI should be subject to a screening procedure or not. 

Where a screening procedure is initiated, the authorities will assess within 60 calendar days if the FDI will affect public security or public order based on various factors.

At the end of the process, the minister of economy will notify the foreign investor of the approval, with or without conditions or commitments, or the rejection.

The Bill provides that the Luxembourg authorities will assess the likelihood that the FDI endangers security or public order on the basis of its potential effect on:

• the integrity, security and continuity of the supply of critical infrastructures in relation to sensitive activities, either in physical or virtual form;
• the sustainability of activities related to critical technologies and dual-use goods, bearing in mind that such dual items include materials that can be used for both civil and military purposes in the nuclear industry; 
• the supply chain for essential inputs including commodities and food security;
• access to sensitive information, including personal data, or the ability to monitor such information; and
• the freedom and pluralism of the media.

The following may also be taken into consideration:

• whether the foreign investor is directly or indirectly controlled by the government of a third country, including public bodies or the armed forces;
• the fact that the foreign investor has already participated in activities undermining security or public order in a member state; and 
• whether there is a serious risk that the foreign investor is carrying out illegal or criminal activities.

The Bill does not provide for a different filtering process with respect to investments made by partnership or joint ventures, the controlling triggering event remaining the acquisition by a foreign investor of a controlling shareholding in a Luxembourg entity carrying out critical activities.

The Bill provides that the clearance of the FDI can be subject to one or several conditions, to be determined having regard to the filtering criteria listed in 7.2 Criteria for Review aiming to ensure that the investment does not endanger security or public order. In addition, the foreign investor will be required to report on the implementation of the conditions on the basis of the terms provided in the ministerial clearance decision. 

The Bill does not, however, contain any specific details on the conditions and types of remedies or commitments that may be required by the Luxembourg authorities. In light of the filtering criteria, such commitment could range from the allocation of resources and guarantees to a more monitored oversight of the activities conducted by the foreign investor.

Administrative Measures

If an in-scope FDI is made without the required notification or without the clearance decision, it will be possible for the Ministers to require the foreign investor to undo the investment or modify the transaction at its own expense.

After an investment is made, if the conditions under which the authorisation has been granted are not complied with, the Ministers may:

• order the foreign investor to comply with the conditions set out in the clearance decision within a given period;
• order the foreign investor to execute substitution measures within a given period for any obligation that has been breached, including restoration of the situation prior to non-compliance with such an obligation, or the transfer of all or part of the activities; or

• withdraw the clearance granted to the FDI.

These are known as the restrictive orders.

Administrative Sanctions

Failure of the foreign investor to comply with the restrictive orders will lead to a fine of a maximum amount of EUR1 million if the foreign investor is an individual, and of EUR5 million for a legal entity. 

In the determination of the fines, the Bill envisages that the Ministers will take into account all relevant circumstances, including, where applicable:

• the seriousness and duration of the breach;
• the degree of responsibility of the investor in said breach;
• the financial situation of the foreign investor;
• where possible, the potential advantage derived by the investor from such breach;
• where possible, the extent of any damage suffered by third parties as a result of the breach; 
• the degree of co-operation of the foreign investor with the Ministers;
• previous breaches committed by the individual or legal entity held responsible for the breach; and 
• the potential consequences of the breach on the integrity, security and continuity of operations, or supply of the critical infrastructure.

Administrative Appeal

The foreign investor will be able to appeal the disputed decision before the administrative court on the basis of the general administrative procedure. The appeal must be brought within one month of the date of notification of the decision on pain of foreclosure.

Foreign investors are, in principle, not subject to any prior supervisory or regulatory approval except for certain regulated activities (as described below). There are no currency control or foreign exchange regulations in Luxembourg. Likewise, there is no merger control legislation. However, certain factors need to be taken into consideration before starting an activity in Luxembourg.

Business Licences

Any company established in Luxembourg operating, on a principal or accessory basis, an independent activity in the field of trade, crafts, industry or liberal professions within the scope of the Law of 2 September 2011, as amended, must obtain a business licence from the Ministry of the Economy before starting its activity.

The purpose of the Law is to guarantee the integrity of the aforementioned professions, the qualifications of these professionals and the protection of future co-contractors and clients. For this reason, in order to obtain a business licence, the person responsible for managing the business must satisfy various conditions, in particular, professional integrity.

Banking and Insurance Institutions

The acquisition of companies operating in certain sectors may be subject to an additional regulatory review or approval process. For example, the acquisition of a company in the financial or insurance sectors will be subject to specific authorisation by the competent regulatory authority.

• Financial sector – banking and investment institutions in Luxembourg are governed by the Law of 5 April 1993 on the financial sector, as amended. Any entity contemplating establishing itself in Luxembourg in order to carry out an activity in the financial sector is subject to ministerial authorisation. Regulatory authorisations are granted by the minister of finance through an application submitted to the CSSF.
• Insurance sector – Luxembourg insurance and reinsurance undertakings, professionals of the insurance sector, and insurance and reinsurance intermediaries are subject to the Law of 7 December 2015 on the insurance sector, as amended. In order to carry out insurance-related activities, specific authorisation needs to be granted. Authorisations required for Luxembourg insurance and reinsurance undertakings are granted by the minister of finance after submission of an application to the Insurance Commission (Commissariat aux Assurances).

Anti-money Laundering

Foreign investors will need to comply with the stringent provisions applicable in Luxembourg to tackle money laundering and terrorist financing; the provisions are of significant importance to the strategy of the Luxembourg government to maintain the flexibility and prime position of the Luxembourg financial sector while remaining compliant with international standards provided by the financial action task force and the EU. 

The Luxembourg Law of 12 November 2004 on the fight against money laundering and terrorist financing as amended (the “AML Law‟) requires that the ultimate beneficial owner(s) in a given transaction be identified. In the context of the AML Law, an ultimate beneficial owner(s) refers to any individual(s) who ultimately owns or controls the client or any individual(s) on whose behalf a transaction or activity is being conducted. 

In the case of corporate entities, the control can derive from the direct or indirect ownership of a sufficient percentage of the shares, voting rights or ownership interest or any other means. The AML Law specifies that a percentage of 25% plus one share or an ownership interest of more than 25% are considered as an indication of direct or indirect ownership or control, which means that a natural person may also be considered as a beneficial owner of a corporate entity even if the 25% threshold of ownership or control in that corporate entity is not met. 

Register of Beneficial Owners

The Luxembourg government has also enacted the Law of 13 January 2019 on the register of beneficial owners (the “RBE Law”). The RBE Law applies to all Luxembourg companies registered with the Luxembourg Trade and Company Register. The RBE Law requires such entities to identify, obtain and maintain up-to-date information relating to the ultimate beneficial owner(s) and to file such information with the Register of Beneficial Owner(s). The ultimate beneficial owner(s) is defined by reference to the AML Law (see above).

Luxembourg companies may, however, request an exceptional exemption in order to limit access to the register of beneficial owners only to the national authorities for a certain period of time. This is in case unrestricted public access exposes the ultimate beneficial owner of the company concerned to (i) a disproportionate risk, or (ii) a risk of extortion, or (iii) a risk of harassment. Such exemption is granted on a case-by-case basis under exceptional circumstances.

In its decision dated 22 November 2022, the Court of Justice of the EU considered that access to information on the beneficial ownership of companies and other legal entities in all cases to any member of the general public is invalid.

Following this decision, the access to the Register of Beneficial Owner(s) was limited to certain professionals within the meaning of the AML Law.

Register for Fiduciary Arrangements and Trusts 

The Law of 10 July 2020 has introduced a Luxembourg register for fiduciary arrangements and trusts, requiring Luxembourg trustees or fiduciary agents to collect and maintain certain information on the ultimate beneficial owner(s) of trusts or fiduciary arrangements that are administered from Luxembourg. The information must be kept in a register held by the Luxembourg Registration Duties, Estates and VAT Authority (Administration de l’enregistrement, des domaines et de la TVA). In contrast to the RBE Law and notwithstanding the access of Luxembourg authorities or certain professionals, access to the trust register is limited to a legitimate interest related to the fight against money laundering and terrorist financing.

Luxembourg tax resident companies (ie, with a statutory seat or central administration in Luxembourg) are subject to tax in Luxembourg on their worldwide income unless an exemption applies under domestic law or a relevant double taxation treaty (DTT).

Non-resident companies are subject to tax in Luxembourg only on their Luxembourg source income, unless relief is granted by a relevant DTT.

Corporate Income Tax (CIT) and Municipal Business Tax (MBT)

Luxembourg tax-resident companies are subject to CIT at a rate of 17% (other rates exist for companies realising annual taxable income below EUR200,001), a contribution to solidarity surcharge at a rate of 7% calculated on the CIT rate, and to MBT at a rate of 6.75% for the municipality of Luxembourg leading to a combined CIT rate of 24.94% for Luxembourg-City for the year 2023.

Luxembourg partnerships are treated as fiscally transparent for CIT purposes. They should not be subject to MBT if they do not carry out a commercial activity in Luxembourg and they are not commercially tainted.

Net Wealth Tax (NWT)

Luxembourg companies are subject to NWT on their worldwide net wealth unless an exemption applies under a relevant DTT or under domestic law. The NWT rate is 0.5% for net wealth up to and including EUR500 million and 0.05% for net wealth exceeding EUR500 million. Minimum NWT may apply under certain conditions.

Luxembourg partnerships are treated as fiscally transparent for NWT purposes.

Interest 

Arm’s length interest paid to resident or non-resident companies is not subject to withholding tax (WHT) in Luxembourg, provided the debt instrument is not profit participating. However, interest paid by a paying agent to a Luxembourg tax resident individual is subject to 20% withholding tax, which may be a final tax under certain conditions.

Dividends

Dividends distributed by Luxembourg tax resident companies are subject to a 15% WHT (unless a reduced rate under a DTT or an exemption under domestic law applies).

Domestic legislation provides for a WHT exemption if the following conditions are fulfilled, and general anti-abuse rules do not apply:

• the beneficiary is among others one of the following – (i) a collective entity covered by Article 2 of the Parent Subsidiary Directive; or (ii) a Luxembourg-resident fully taxable company; or (iii) a company resident in a state with which Luxembourg has signed a DTT and which is fully liable for income tax comparable to the Luxembourg CIT; and 
• at the date on which the income is made available, the beneficiary holds or commits to hold, directly, for an uninterrupted period of at least 12 months, a participation in the share capital of the Luxembourg distributing company of at least 10% or with an acquisition price of at least EUR1.2 million. 

A participation held through a tax transparent entity should be regarded as a direct participation proportional to the interest held in the tax transparent entity.

Tax Deductibility of Operating and Financial Expenses

Expenses incurred by a Luxembourg company are tax deductible in Luxembourg if they are exclusively caused by the business, are not economically related to exempt income and do not fall under one of the Luxembourg rules denying or limiting such deductibility.

Use of Net Operating Losses

Tax losses generated until 31 December 2016 can be indefinitely carried forward. However, tax losses incurred as from 1 January 2017 may only be carried forward for 17 years. 

Tax Unity

Tax unities are permitted in Luxembourg under certain conditions (among others (i) the members must be fully taxable resident companies; (ii) the parent company must hold directly or indirectly at least 95% of each subsidiary’s capital; and (iii) the members start and end their fiscal year on the same date). Tax profits that are generated by group members during the consolidation period are offset against the tax losses of the other group members.

Capital gains realised by a non-resident investor are taxable in Luxembourg (at a rate of 18.19% for 2023) in the following limited situations (subject to the application of a relevant DTT):

• disposal of Luxembourg real estate property or of a substantial shareholding (more than 10%) in a Luxembourg company where the disposition occurs within six months of the acquisition of the shares;
• disposal of a major shareholding in a Luxembourg company six months after the acquisition of the shares by a non-resident investor being a former Luxembourg resident under certain circumstance; or
• disposal of a shareholding in a Luxembourg company by a non-resident investor with a taxable presence in Luxembourg.

Capital gains realised by non-resident investors without taxable presence (permanent establishment or permanent representative in Luxembourg) should not be taxable in Luxembourg upon disposal of partnership interest unless such partnership holds real estate assets or shares in Luxembourg companies (under certain circumstances).

Transfer Pricing (TP)

Transactions between related parties (cross-border and domestic) should be at arm’s length.

Luxembourg entities carrying out intra-group financing activity should comply with more specific Luxembourg transfer pricing rules (ie, have an appropriate level of equity at risk, realise an arm’s length margin, and meet the minimum substance requirements).

Luxembourg Interest Deduction Limitation Rule (IDLR) 

The IDLR applies to exceeding borrowing costs, which are the amount by which the deductible borrowing costs of a taxpayer exceed taxable interest revenues and the other economically equivalent taxable revenues of that taxpayer. The IDLR provides that the deduction of the exceeding borrowing costs incurred by a taxpayer during a given year is limited to the higher of (i) 30% of the taxpayer’s EBITDA; or (ii) EUR3 million. 

Luxembourg Anti-hybrid Rules

Under these rules, expenses incurred by a Luxembourg company will not be tax deductible if they lead to a double deduction or a deduction without inclusion outcome because of a hybrid mismatch, or in cases of so-called “imported mismatches” between associated enterprises, or in the case of a structured arrangement.

As of 1 January 2022, the reverse hybrid mismatch rule is applicable in Luxembourg under certain conditions, namely when an entity considered as tax transparent in Luxembourg (such as Luxembourg partnerships) is considered as tax opaque in the jurisdiction of its investors. Such Luxembourg entity will become liable to Luxembourg CIT at 18.19% on a portion of its net income (if such income is not taxed elsewhere) when certain conditions are met. Exemptions might apply under certain conditions for certain types of entities.

Payment to Entities Established in EU-Blacklisted Jurisdictions

Effective as of 1 March 2021, interest (and royalties) due to entities established in jurisdictions listed on the EU list of non-co-operative jurisdictions for tax purposes (the “EU Blacklist”) are not tax deductible under certain conditions unless the Luxembourg taxpayer can prove that the transaction has valid commercial reasons and reflects economic reality.

Controlled Foreign Company Rules (CFC Rules)

Under these rules, undistributed income of foreign subsidiaries or permanent establishments (PEs) is reallocated to a Luxembourg parent company, irrespective of any effective distribution, when such foreign subsidiary or PE qualifies as a controlled foreign company (control test and effective tax test to be cumulatively met). Luxembourg CFC rules only apply to “non-genuine” arrangements.

In Luxembourg, employment and labour matters are based on national laws and regulations which are principally codified in the Labour Code. The applicable case law provides for constant interpretation of the said Labour Code. 

In addition, there are national collective agreements, which are generally binding in certain sectors, and collective agreements negotiated within certain companies or groups of companies. 

International and European regulations also apply (eg, the GDPR, Convention on Mobbing). 

Opinions or directives issued by national bodies, such as the Labour Inspectorate (Inspection du Travail et des Mines or ITM) or the National Commission for Data Protection (Commission Nationale de Protection des Données or CNPD), are also regularly followed by employers to implement and apply the labour and employment rules.

It should be noted that in companies with more than 15 employees, a staff delegation must be elected by the employees. The elected staff delegation will then have a consultation and/or collaboration right within the company's decision-making process in matters defined by the Labour Code.

In the Luxembourg jurisdiction, employees are most often paid in cash on a monthly basis (in 12 or 13 instalments, depending on the company). Often, they also have benefits in kind such as a car allowance, luncheon vouchers, performance bonus and pension plans. 

In the case of a business transfer, employees՚ employment contracts are automatically transferred and their rights are preserved. There cannot be any negative impact on employees՚ remuneration.

Employees’ Rights

Regarding employees՚ rights, in the case of a business transfer, the Labour Code provides that the transferor՚s rights and obligations under the employment contracts are transferred to the transferee. This means that the transfer will have no impact on employees՚ rights, which must remain unchanged.

Collective Bargaining Agreement

Regarding rights provided by a collective bargaining agreement, after the transfer, the transferee must maintain the terms and conditions of employment until the date of termination or expiration of the collective bargaining agreement or the coming into force of another collective bargaining agreement.

Transfer

In addition, the transfer is binding for both parties. If an employee disagrees with the business transfer, that employee will have to resign. If the resignation is due to a substantial change in the working conditions to the detriment of the employee, the termination of the contract will be considered as a dismissal by the employer.

Staff Delegation

With respect to the obligation to inform and consult the staff delegation, the transferor and the transferee are required to communicate to their respective staff delegations, in due time before the transfer, a certain amount of information, such as the reason for the transfer; the legal, economic and social consequences of the transfer for the employees; and the measures envisaged for the employees. 

In companies without staff delegation, the employees concerned must be informed in advance and in writing of the above-mentioned information.

While it has long been proven that Intellectual Property Rights (IPR) encourage FDI as a sign of a safe environment for innovation and growth, it remains unclear to what extent intellectual property is an important aspect in the screening of FDI, since intellectual property is neither addressedin the Bill nor the Regulation. 

However, it is important to highlight that every organisation, in any sector, holds intellectual property. Although this does not necessarily imply that said intellectual property is protected or even exploited, the higher the level of sensitivity of the activity, the greater the probability of strong IP and data protection. In other words, intellectual property protection can indicate the critical nature of the activity carried out by a company, which would then fall under the scope of the Bill. 

Any FDI in that specific entity would first need to go through the FDI screening process. For instance, some of the activities considered as critical in the Bill concern the media, data storage and the military. These sectors are known to be protected by strong IPR because of the sensitivity of the content and the risk for security and public order that the diffusion of such information and content represents. 

Therefore, intellectual property may not directly be an important aspect of the screening process of FDI, but the presence of strong intellectual property and data protection may be an indication of the critical nature of the activity, leading FDI targeting those entities to fall under the scope of the Bill and go through the screening process.

For further details, see 2.1 Outlookand FDI Developments and 7. Foreign Investment/National Security.

Legal Framework

With its vast array of international, European and national legal and regulatory dispositions, Luxembourg provides strong intellectual property protection. 

An additional level of protection is provided by the Benelux Organisation for Intellectual Property, which includes the Benelux Office for Intellectual Property (BOIP), the registration office for IPR in the Benelux region. The BOIP was born out of the Benelux Convention on Intellectual Property of 2005. 

Furthermore, the new fiscal regime for intellectual property in Luxembourg, introduced by a draft Bill of 4 August 2017 and entered into force on 1 January 2018, provides an attractive tax regime compatible with the modified link approach adopted by the OECD and member states of the G-20 under Action 5 of the BEPS Project.

Level of Protection

According to this extensive legislative and regulatory framework, there appears to be no particular sector of activity in which it would be difficult to obtain intellectual property protection or that is subject to significant limitations on protection or enforcement. 

However, each category of intellectual property mechanism (ie, copyrights, patents, trade marks, trade secrets, drawings) has its own limitations.

Mandatory Compliance to the GDPR

The General Data Protection Regulation (GDPR) (Regulation (EU) 2016/679), which entered into force in 2016, is mandatory to all organisations worldwide as long as they target and/or collect data related to people of the EU. 

It is therefore mandatory for persons and entities collecting and/or processing data within Luxembourg, as a member state of the EU, to comply with the GDPR. 

The GDPR sets out the possibility for member states to include additional provisions for specific matters, and for this purpose, Luxembourg adopted two laws on 1 August 2018:

• the Law on data protection in criminal matters and in matters of national security; and
• the Law on the organisation of the CNPD.

Extraterritorial Scope of the GDPR

Article 3 of the GDPR provides information regarding the territorial scope of the regulation and highlights the extraterritorial scope of the GDPR, to be understood as going beyond the borders of the EU. 

Therefore, EU privacy laws are extended to data collectors and processors located outside European territory, that: (i) offer goods or services to individuals in the EU; or (ii) monitor individuals within the EU. 

This means that even non-EU data processors and controllers must comply with EU data protection laws as long as data related to an EU person is involved. 

Penalties

Article 83 of the GDPR, on the general conditions for imposing administrative fines, provides that each national supervisory authority must ensure that the imposition of administrative fines in respect of infringements of the GDPR is, in each individual case, effective, proportionate and dissuasive. 

In Luxembourg for instance, the CNPD can impose an administrative fine of up to EUR20 million, or, where the guilty party is a company, up to 4% of total annual worldwide sales. 

Legal Loopholes Regarding the Enforceability of the GDPR Outside the EU

There is no doubt regarding the enforceability of the GDPR within the EU, with each member state setting up the necessary measures to ensure its application and, if needed, the enforceability of the sanctions attached to it. 

However, this certainty becomes a legal grey zone when organisations involved in the collection and processing of the data of EU persons are located outside the EU, and thus beyond the scope of EU institutions. 

For this reason, questions remain on the enforceability of the GDPR outside the territorial scope of the EU. Theoretically, should these organisations collect data within the EU, they are bound by the GDPR and can potentially face the above-mentioned sanctions in the event of an infringement. 

However, it remains unclear as to how these penalties would be enforced, as this would require international co-operation with non-EU states to establish the necessary means to enforce the GDPR and national penalties, and extend European and Luxembourgish IP law to foreign investors in their own jurisdiction.

There are no significant issues not covered elsewhere in this chapter.