Lexology GTDT - Purpose-Driven companies

Legal recognition and certification

What legal forms or statuses are used in your jurisdiction to establish purpose-driven companies?

The Law of 12 December 2016 establishes a type of purpose-driven company called the societal impact company (SIS) and lays down specific requirements in this respect. If those requirements are met, companies are eligible for SIS certification, delivered by the Minister of Labour, Employment and the Social and Solidarity Economy. Existing companies and companies in the process of incorporation may also apply for this certification.

A SIS, however, must be established exclusively in one of the following corporate forms, as provided by the Law of 10 August 1915 on commercial companies:

• public limited company;
• private limited liability company ;
• simplified private limited company; and
• cooperative company.

Therefore, a non-profit company in the form of a non-profit association, would not be eligible to qualify as a SIS.

The B Corporation certification is a private certification granted to Luxembourg companies pursuing social or environmental purposes and meeting specific requirements. At present, only three companies have been granted the B Corporation certification in Luxembourg.

With regard to investment structures in Luxembourg, funds or investment vehicles that have an environmental or social purpose tend to request one of the sustainability labels delivered by LuxFLAG. LuxFLAG grants recognisable labels to provide comfort to investors regarding the responsible investment objectives of the investment vehicle.

Law stated - 05 October 2021

Purpose and mission

What rules and standard practices govern the establishment of companies’ social or environmental purposes and mission?

The purpose and mission of an SIS are regulated by the Law of 12 December 2016 and comprise:

• providing support to people in fragile situations, either because of their economic or social situation or because of their personal situation, particularly their state of health or their social or medico-social support needs; or
• contributing to:
•  the preservation and development of social ties;
• the fight against exclusion and health, social, cultural and economic inequalities;
• gender equality;
• the maintenance and reinforcement of territorial cohesion;
• the protection of the environment;
• the development of cultural or creative activities; and
• the development of initial or continuing education activities.

In addition, the articles of association of an SIS must include the listing of performance indicators that will make it possible to verify, in an effective and reliable way, the realisation of the corporate purpose.

The management body of an SIS is also required to prepare annually an extra-financial report to be presented at the general meeting. The report contains details on the implementation of performance indicators.

Law stated - 05 October 2021

Profit distribution, winding up and remuneration

What rules and restrictions govern profit distributions for purpose-driven companies in your jurisdiction?

The rules and restrictions on profit distributions for purpose-driven companies are governed by the Law of 12 December 2016 establishing SIS. In accordance with the Law, at least half of the profits made by any SIS must be reinvested in the maintenance and development of the company’s activities.

A distinction is made between an SIS, whose capital is composed of impact shares, and those whose capital is composed of performance shares, it being understood that the share capital may be composed of both types of shares. Impact shares do not allow its holders to benefit from the SIS profits; therefore, the profit allocated to those shares is exclusively intended for the realisation of the social purpose and is fully reinvested in the maintenance and development of the activity of the SIS.

Unlike the impact shares, the performance shares allow its holders to benefit from the SIS profits as long as the corporate purpose of the SIS, assessed by the performance indicators provided for in the articles of association, has been effectively realised.

Law stated - 05 October 2021

What rules and restrictions govern the winding up of purpose-driven companies?

The general regime provided by Law of 10 August 1915 is also applicable to purpose-driven companies in terms of the procedure of dissolution or liquidation of the company.

However, the Law of 12 December 2016 provides a specific regime applicable to the liquidation surplus of an SIS, which must be allocated either to:

• a donation in favour of another SIS pursuing the same or a comparable purpose as the SIS in liquidation; or
• a Luxembourg foundation or a non-profit association recognised as being of public utility by grand-ducal decree.

Consequently, the aim is for the funds of an SIS to benefit similar structures.

Law stated - 05 October 2021

What rules and restrictions govern the remuneration of directors, officers, employees and third parties?

The Law of 12 December 2016 provides that the maximum annual remuneration paid to employees of an SIS must not exceed the threshold corresponding to six times the amount of the minimum social wage. On 1 January 2021, the minimum social wage was €2201.93, which means that the maximum annual remuneration paid to employees of a societal impact company cannot exceed €158,538.96.

With regard to the remuneration of the members of the management body of an SIS, the common regime provided by the Law of 10 August 1915 is applicable. The remuneration is fixed by the provisions of the articles of association of the company or by the general assembly.

Law stated - 05 October 2021

Measurement, benchmarking and reporting

Are purpose-driven companies legally required to measure, benchmark and report the social and environmental impact of their business?

In addition to a report on annual accounts, purpose-driven companies, governed by the Law of 12 December 2016, are required to issue annually an extra-financial impact report. The report must detail the implementation of the performance indicators used by the management body of the company to measure the impact and achievement of the purpose of the company. The report must be submitted to the Minister of Labour, Employment and the Social and Solidarity Economy within the two weeks of the annual general meeting of the company.

Purpose-driven companies are not required to use specific indicators or indices to measure and report on their impact and may use the benchmarks currently available internationally.

Law stated - 05 October 2021

What statutory and voluntary standards, guidelines and best practices are followed by purposedriven companies in your jurisdiction with regard to the measurement and reporting of ESG and other non-financial factors?

Although purpose-driven companies governed by the Law of 12 December 2016 are required to report annually on their activity, no mandatory standards exist for the reporting of purpose-driven companies. Such companies are, therefore, free to refer to internationally recognised voluntary standards and best practices, including the Global Reporting Initiative sustainability standards; the Sustainability Accounting Standards Board guidelines; and the Task Force on Climate-Related Financial Disclosures.

B-Corp purpose-driven companies are required to report on their activity by answering specific disclosure questions provided by the B-Corp certification agency and make those answers available to the public.

Law stated - 05 October 2021

Director liability and private enforcement

What rules govern the liability of directors of purpose-driven companies for compliance with social and environmental standards and principles? In addition to shareholders, are stakeholders entitled to hold directors accountable through private enforcement action?

Luxembourg law does not include specific rules concerning liability of directors of purpose-driven companies for noncompliance with social and environmental standards and principles; therefore, provisions of the Law of 10 August 1915 apply in the event of the directors’ failure to comply with the company’s objects and articles of incorporation of the SIS.

The directors may be held personally or jointly liable, towards either the company or third parties, including shareholders.

Law stated - 05 October 2021

State supervision

Is there any form of state supervision of purpose-driven companies in relation to their social and environmental purposes?

An SIS is subject to strict supervision from the state in relation to its social and environmental purpose. It is specifically monitored by the Minister of Labour, Employment and the Social and Solidarity Economy through:

• the mandatory application for approval that must be filed with the Ministry; having this approval removed will, at any time, result in the dissolution and liquidation of the company;
• the annual audited statements and impact reports that must be issued by an approved auditor for each SIS; and
• specific surveillance since the Ministry must be informed of any change in the corporate purpose, the performance indicators or capital allocation of the SIS.

In addition, an SIS is also subject to additional strict requirements in terms of corporate governance. Its constitutive documents must provide for adherence to the principle of limited profitability of the company and enumeration of the performance indicators that will allow for the effective and reliable verification of adherence to the principle of limited profitability of the company.

Law stated - 05 October 2021

Incentives and benefits

Are any fiscal incentives or other benefits available for purpose-driven companies in your jurisdiction? What is the scope of these benefits and what requirements apply?

Luxembourg law provides for specific fiscal incentives and benefits for an SIS; however, in this respect, a distinction should be made between an SIS with a share capital of 100 per cent impact shares, which are shares that do not provide for the distribution of dividends and will therefore be subject to some tax benefits, and an SIS with a share capital of less than 100 per cent impact shares, which will not be subject to any tax benefits.

An SIS with a share capital composed of 100 per cent impact shares will be exempt from corporate income tax, municipal business tax and wealth tax. In addition, donations made to an SIS fulfilling this criterion may be deducted from the total net income of the donors.

Law stated - 05 October 2021

Public procurement

Do the public procurement rules and policies in your jurisdiction confer any advantages on companies for pursuing social or environmental purposes? If so, what conditions apply?

Unlike non-profit associations, an SIS is entitled to access public tenders at similar conditions as any other commercial companies.

Nonetheless, Luxembourg’s public procurement rules contain specific advantages for entities promoting social and sustainable activities:

• in the assessment of the most economically advantageous application for a public tender, the contracting authorities are entitled to take into account the social and environmental impact of the offer; and
• the contracting authorities have the power to reserve the rights to apply to a specific tender to entities whose main corporate purpose is the social and professional integration of disabled or disadvantaged people.

Although this does not constitute a direct advantage in relation to tenders for purpose-driven companies, it does constitute encouragement for contracting authorities to make use of tender procedures to promote sustainable development and social objectives.

Law stated - 05 October 2021

Economic sustainability and market competition

How would you describe the level of economic sustainability and market competition of purposedriven companies?

Although SIS benefit from some tax exemptions and tax benefits, those exemptions and benefits are limited to SIS with a share capital composed of 100 per cent impact shares.

SIS are subject to many restrictions:

• SIS are subject to the principle of the limited profitability of the company, meaning that the share capital must always comprise of at least 50 per cent impact shares, which are shares that do not provide for the distribution of dividends;
• the salary of the employees of an SIS cannot exceed six times Luxembourg’s minimum social wage; and
• SIS are subject to the legal requirement to have their accounts audited to certify that they respect the 50 per cent impact share threshold and to issue annually a report detailing the implementation of the performance indicators.

The above restrictions contribute to the slow growth of the number of SIS established in Luxembourg.

Law stated - 05 October 2021