Offshore operations may take place within the following forms:

Holding Company

Milliardaire Holding Company

Financial Holding Company

SOPARFI (Society with financial Participation)

Fonds Commun de Placement

SICAV (Investment Society of Variable Capital

SICAF (Investment Society of Fixed Capital

In July 2001 the EU's Finance Ministers decided to press ahead with a investigation of 'harmful tax measures' identified in the Primarolo report, named after British Paymaster-General Dawn Primarolo who chaired the EU committee that identified 66 measures two years before.

The Commission immediately announced that it was targetting 15 of the measures as illegal state aids, including Luxembourg financial holding companies. The investigation is expected to take at least two years.

In April 2002 the OECD, having published its final 'offshore' blacklist made threatening noises towards Luxembourg, saying it was considering what sanctions it could apply if the country didn't clean up its supposedly 'harmful' tax practices by a deadline of April, 2003.

Offshore entities are not covered by Luxembourg's Double Taxation Treaties except as indicated below.

Offshore companies are taxed as follows:

Holding companies formed under the law of 31st July 1929 are exempt from income taxes (the IRC and the Municipal Business Tax on Profits) and from the Fortune Tax. No tax is levied on the transfer of shares, and there are no taxes due on the liquidation of a 1929 Holding Company. No withholding tax is due on dividends payable to a 1929 Holding Company.

1929 Holding Companies are subject instead to the capital contribution tax (droit d'apport) of 1% of subscribed capital, either on formation or on a later capital increase, and to the subscription duty (taxe d'abonnement) which amounts to 0.20% of the value of the shares issued by the Holding Company, payable annually in four equal instalments. If shares are quoted, the value is the current market value; if there is no quotation, the paid-in value is used. There are adjustments if dividends are paid out during the year, if profits are written to reserves, or if losses are incurred.

Milliardaire Holding Companies are taxed on the basis of various percentage rates applied to interest paid out and dividends distributed by the company, and on the remuneration and fees paid to directors, auditors and liquidators residing less than six months of the year in Luxembourg. The minimum annual tax liability of a Milliardaire Holding Company is LUF 2 million (much less than an equivalent 1929 Holding Company would pay).

Financial Holding Companies are taxed on the same basis as 1929 Holding Companies.

SOPARFI companies, which were created under the law of 24th December 1990, are subject to the normal regime of income taxes etc,  but do receive the benefit of Double Taxation Treaties, and in many circumstances are exempt from taxation on dividends received from or paid to resident and non-resident companies in which they have a significant participation. The EU Parent-Subsidiary Directive also provides some withholding tax exemptions, but the SOPARFI benefits are more extensive. The rules are complex; there are conditions; and there are limitations on the deductibility of expenses.

The various forms of UCI are all exempt from all Luxembourg taxation, and pay only a capital duty of LUF 50,000 on start-up, plus an annual tax on net assets which varies between 0.01% and 0.06% depending on the type of fund.

The structure of Luxembourg company and tax legislation, along with its membership of the EU and its double taxation treatries, makes it a very suitable place in which to base various types of holding company.

Under the Law of 31st July, 1929, Luxembourg holding companies do not have a separate legal form; they can be formed as SAs or SARLs.

They are limited to holding and financing operations and may not undertake commercial operations themselves.

They are exempt from normal corporate taxes. More recently, a Grand-Ducal decree of 24th December 1990 created a further type of holding company, the SOPARFI or Societe de participation financiere, which is within the normal Luxembourg corporate tax net but can receive dividends which are exempt from tax, and which can take advantage of the country's double tax treaties (which the 1929 holding companies cannot).

Holding company structures are used chiefly for the following purposes:

The classic controlling or management holding company holds (for instance) the stakes of a multinational in its international subsidiaries, can accumulate dividends from them in a tax-efficient way, and is not subject to withholding tax when it pays out its own dividends to its international parent.

The finance holding company (under Circular 11/5020 dated 9th September 1965) can lend money to all members of a group (loosely defined) in which it has invested at least than 10% of its capital (rather than only to direct subsidiaries as previously). It can then receive interest or other types of payment in a tax-efficient way and can pay them on to its owners without taxation.

A substantial international banking sector has developed in Luxembourg due to a combination of factors, including a relatively relaxed regulatory regime, the 'holding' company legislation, the growth of the Euromarkets, and the existence of the Luxembourg Stock Exchange on which most Eurobonds are listed. It is also significant that CEDEL is based in Luxembourg.

There are more than 200 institutions with full (universal) banking licenses from 25 countries; 30 of the world's top 50 banks are represented in Luxembourg.

Broadly speaking, the needs of domestic companies are handled by local Luxembourg banks, while the international banks provide cross-border services. A very wide range of capital markets and commercial banking products are on offer; some of the key services are:

multi-currency lending and loan syndication;

issuance and listing of securities, particularly Eurobonds

custodial and depositary services

'fiduciary' business which is the local equivalent of the trust

project and international financing vehicles

equity and financial derivatives issuance and trading

foreign exchange trading

trade finance

gold trading (settled through CEDEL)

Private banking services are particularly strong in Luxembourg, due to the absence of withholding tax on interest payments, and tight banking secrecy, alongside the very wide range of financial products that is available. Banking secrecy has a statutory basis in Luxembourg, under articles 458 and 459 of the Penal Code, the Grand-Ducal Regulation of 1989 which prevents disclosure to the tax authorities, and most recently the law of 5th April 1993 which prevents bank staff from passing information on deposit accounts to parent banks. It is a criminal offence for bank staff to break secrecy laws except in clearly defined and very limited circumstances.

The Luxembourg courts are likely to permit disclosure of information only when there is clear evidence of tax fraud or money-laundering activity.

In a report issued in June 2002, Standard & Poor's gave Luxembourg's banking sector a clean bill of health. Although S&P expressed concerns over the possible impact of competition from other jurisdictions, and of the much-disputed EU savings tax directive on the Duchy's financial sector, its report concluded that:

The continued liberalization of Europe's financial markets, the Luxembourg government's and banks' initiatives to develop fee-earning businesses, and the sector's experience in certain niche activities should ensure that the Grand Duchy remains attractive as a center for all forms of personal investment business.

The analysis praised Luxembourg's long-established banking sector as 'cost-efficient', and cited factors such as the jurisdiction's political stability, favourable location, highly qualified and multilingual workforce, tight banking secrecy, and advantageous fiscal framework, as reasons why Luxembourg is attractive as a location for both foreign and domestic financial service providers and their clients.

As a civil law jurisdiction, Luxembourg's laws do not accommodate the anglo-saxon trust concept. In fact local institutions, particularly banks, have developed some expertise in setting up foreign trusts for their clients.

A local equivalent of the trust was established by the law of 19th July 1983 which permitted banks to offer 'fiduciary' services which have many of the characteristics of the trust.

The ownership of fiduciary assets does not pass to the bank managing them; and there is a contract under the 1983 law which resembles a trust deed. Such arrangements have been used for a variety of asset management and participation arrangements.

The Societe Anonyme, abbreviated SA, or joint stock company, is formed under the Commercial Companies Law 1915, as amended. SAs must have a minimum capital of LUF 1.25 million divided into freely transferable shares held by at least two shareholders, who may be resident or non-resident persons or juridical entities. The shareholders' liability is limited to the amount of their subscribed (not necessarily paid-up) capital. There is a Board of Directors (at least three), and day-to-day management may be delegated to a managing director.

Incorporation takes 2 or 3 days; the SA's statutes must be printed in French or German; a director must give his name, address and occupation. There must be registered office in Luxembourg, but only the share register need be kept there. 

Accounts need to be submitted annually to the Registrar of Companies, but need only be audited if a company exceeds a certain size: either the balance sheet is greater than LUF 93 million, or sales are greater than LUF 186 million, or there are more than 50 employees.

The Societe a Responsabilite Limitee, abbreviated SARL, or limited liability company, is also formed under the Commercial Companies Law 1915, as amended. The SARL must have a minimum paid-up capital of LUF 500,000 divided into 'participation certificates' which are not freely transferable.

There may not be more than 40 shareholders, and they are liable for the amount of their paid-up capital. If there are fewer than 25 shareholders an annual gemeral meeting is not necessary. In other respects, the SARL is similar to the SA.

General Partnerships are recognised in Luxembourg law either as a Societe Civile (most professional partnerships take this form) or as a Societe en Nom Collectif (for instance, a family business might choose this form).

The partners are liable jointly and severally for the full debts of the partnership. Partnerships must be registered with Greffe du Tribunal de Commerce.

Limited partnerships in Luxembourg have general partners, who are responsible for management, and have unlimited liability, and limited partners, who are liable only to the extent of their capital contributions to the partnership.

A limited partnership can either be a Societe en Commandite Simple in which case it is subject to the same rules as a general partnership, or it can be a Societe en Commandite par Actions, in which case the limited partners are issued with shares and the partnership is treated in the same way as an SA in most respects.