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Outsourcing substance in Luxembourg: Key factors to consider

Outsourcing substance in Luxembourg: Key factors to consider

12 July, 2023
Luxembourg Corporate Directors & Substance

Luxembourg is renowned for its tax efficient environment and robust financial sector having emerged as a prime destination for businesses seeking to establish a substantive presence in Europe. The country's attractive legal framework, political stability, and well-developed infrastructure make it an ideal hub for a multitude of industries.

However, to fully leverage the benefits of establishing substance in Luxembourg, businesses must carefully navigate a range of key considerations under the upcoming anti-tax avoidance directive (ATAD III). In the below article, we look at what the ATAD III is and what businesses need to consider to meet substance requirements.

What does it mean to have substance in a company?

Substance refers to the extent a company has operational and economic activity in said jurisdiction. Substance regulations require entities with tax residence and income in impacted jurisdictions to evidence adequate local resources, facilities and control over income-generating activities.

Affected companies are required to be managed and directed, to have adequate employees, expenditure, physical presence and to conduct their core income-generating activities in the local jurisdiction to benefit from operating there.

What is ATAD III?

The European Union's anti-tax avoidance directive (ATAD III) is expected to come into force soon. ATAD III has been introduced to provide a clearer rule-based approach to entities seeking substance across Europe, through a series of tests to identify shell companies and high-risk entities.

What are some of the key substance considerations in Luxembourg?

1. Substance requirements

Entities under ATAD IIII will be examined against some cumulative gateways, entities that fail the substance test will face adverse tax implications.

2. Reporting obligations

Entities that pass the cumulative gateway requirements must then fulfil reporting obligations in their tax returns to prove ongoing compliance with the minimum substance requirement.

3. Domicile of choice

Luxembourg remains a popular choice for traditional asset classes such as private equity, real estate, and infrastructure under substance requirements. It is important to consider the key focus of the jurisdiction and what best suits your entity when considering your options (domiciliation or renting of office space).

4. Directorships

Substance requirements have led to changes in employee seniority levels. Entities need to ensure more than ever that they have knowledgeable employees and/or local directors relevant to their business activities, resulting in increased participation of senior managers in meetings and more comprehensive board meeting minutes.

How can Ocorian help to add corporate substance in Luxembourg?

Provision of a registered office solution in the heart of Cloche d'Or, Luxembourg

We are delighted to announce that Ocorian has office spaces available to rent on the first and second floor of the Fluke Building in Cloche d’Or, Luxembourg.

Each office space is fully fitted and furnished with various sizes available depending on your requirements.

These highly sought-after spaces are available now. If you wish to arrange a visit, please contact Delphine Schmidt or Jessica Bourgeois at [email protected] and they will be happy to arrange.

Provision of local directors and employees

Ocorian further offers the provision of local directors and employees to a wide client base looking for a complete substance solution. Employees, directors, and governance experts are all locally resident, qualified, and experienced.

Click here for more information on our substance services.