The evolution of the bill of law n°6595 regarding a private foundation in Luxembourg

On 22 July 2012, the Luxembourg Chamber of Deputies introduced the bill of law n°6595 on the creation of a private foundation, which aims at providing a new wealth management vehicle already established in neighbouring countries. This bill of law was amended to take into consideration the opinion rendered on 29 April 2014 by the Council of State and its supplementary notice dated 7 October 2014 (the "modified bill of law").

1- Legal aspects

Article 1 of the modified bill of law states that a private foundation is a private law vehicle subject to the applicable provisions of Luxembourg law, as long as it is not otherwise provided by this law on a private foundation. A private entity was further defined as any corporate or contractual structure, foundation or trust, owned directly or indirectly by an individual or a single family, whose members may be the beneficiaries or founding members. Moreover, a private foundation cannot be incorporated by will taking effect upon the death of the founder.

It also specifies that extra-statutory agreements cannot override the articles of association of a private foundation.

Pursuant to the recommendations of the Council of State, it is clearly stated that the establishment of a private foundation does not conflict with the public policy provisions applicable to the succession of the founder under the applicable law of succession to his estate. Any allocation made to a private foundation in fraud of creditors may be the subject of an action for restitution.

2- Tax aspects

The modified bill of law specifies the rules applicable for registration duty purposes when the founder is a corporate entity and a good or a right is transferred by the private foundation to a beneficiary.

In addition, the modified bill of law clarifies that allocations paid by a private foundation to an individual who is a beneficiary (or a certificate holder) or to its founder, and which are the result of an endowment capital decrease, are not considered as taxable income of the beneficiary.

Finally, the modified bill of law confirms that withholding tax paid on Luxembourg source income cannot be refunded to a private foundation.

Following a recent address of the Luxembourg Minister of Economy, the draft law relating to a private foundation will be adopted within six months following the implementation of new AML standards. As a consequence, the lawis likely to take effect in early autumn 2015. Further details can be found here.