Client Comparability Information – Household and Marriage

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1 Legal framework

1.1 Which legal provisions regulate private customer matters in your jurisdiction?

The following applies to Luxembourg private law matters:

Articles 718–892 of the Civil Code relating to inheritance; and
Articles 893-1100 of the Civil Code relating to gifts and wills.

Luxembourg income tax matters are governed by Articles 1–157ter of the Luxembourg Income Tax Act of December 4, 1967, as amended.

1.2 Do special regulations apply to certain people (e.g. foreigners, temporary residents)?

Luxembourg Naturalization Scheme: The Luxembourg Budget Act 2021 amended and codified the Luxembourg immigration scheme by implementing Circular 95/2 of the Luxembourg tax authorities in Luxembourg in 2014. This incentive system aims to attract foreign skilled workers to Luxembourg through tax savings. Under the new scheme, employee bonuses are granted to offset the cost of living from the 50% tax exemption, while at the employer level they are fully deductible as business expenses. This bonus is limited to 30% of the gross annual salary of the employee. To qualify for the new regulation, the employee's annual salary (excluding benefits in kind and in cash) must be at least € 100,000.

Luxembourg step-up regulation: According to the Luxembourg step-up regulation, people who hold a significant stake (> 10%) and migrate to Luxembourg can claim a higher purchase price for the stake in the amount of their market value on the day of migration to Luxembourg . A stake is deemed to be “material” if the transferor, individually or jointly, directly or indirectly held more than 10% of the company's capital in the five years prior to the date of sale.

Retention of original residence for EU civil servants: EU civil servants and other EU employees who establish their domicile in Luxembourg solely for their work in the service of the European Union enjoy a special tax regime that enables them to retain their original residence for the purposes of income tax, wealth tax and death grants (Article 13 of the Protocol on the Privileges and Immunities of the European Union).

1.3 Which bilateral, multilateral and supranational instruments in your country are relevant in the private customer area?

The EU Inheritance Law Regulation (650/2012) simplifies the rules on willful inheritance.

The Protocol (No. 7) on the privileges and immunities of the European Union sets out the privileges and immunities to which the European Union and a number of other EU institutions and officials are entitled.

Legal disputes in relation to foreign trusts are resolved by the Hague Convention of July 1, 1985 on the Law Applicable to Trusts and Their Recognition.

The agreements concluded by Luxembourg to avoid double taxation are tax-relevant in the private customer sector – in particular the following provisions of the model tax agreement of the Organization for Economic Cooperation and Development (OECD):

Article 4 on the definition of the term “resident”;
Article 10 on dividends;
Article 11 on interests;
Article 12 on royalties;
Article 13 on capital gains;
Article 15 on earned income; and
Article 16 relating to directors' fees.

Double taxation agreements concluded by Luxembourg traditionally follow the OECD model convention. Luxembourg has tax treaties with more than 80 countries.

2 taxation

2.1 On what basis are natural persons liable for tax in your country (e.g. place of residence / domicile / nationality)? How is this determined?

A natural person is considered to be resident for tax purposes in Luxembourg if they:

his / her tax residence in Luxembourg (ie permanent residence in Luxembourg that he actually uses and intends to maintain); or
his / her habitual residence in Luxembourg (habitual residence applies after an uninterrupted presence in Luxembourg for six months, which can be spread over two calendar years).

The above requirements (tax domicile or habitual residence) are not cumulative, but alternative.

2.2 When does the personal tax year start and end in your country?

The tax year for natural persons resident in Luxembourg corresponds to the calendar year: from January 1st to December 31st.

2.3 In relation to income: (a) What taxes are there and what are the rates? (b) How is the tax base determined? (c) What are the requirements for the tax return? and (d) What exemptions, deductions, and other reliefs are available?

(a) What taxes are levied and what are the rates?

Income tax rates are progressive and currently range from 0% to 45.78% (including a 7% surcharge for the Employment Fund). The surcharge is 9% for taxpayers in tax class 1 and 1a whose taxable income exceeds € 150,000 (€ 300,000 for taxpayers in tax class 2). Resident and non-resident natural persons are not subject to wealth tax in Luxembourg.

Luxembourg's income tax liability depends, among other things, on the person's personal situation (e.g. marital status). For this purpose, each person is given a tax class:

Class 1 for single people;
Class 2 for married couples and life partners (under certain conditions); and
Class 1a for single persons with children as well as single taxpayers who have reached the age of 65 on January 1st of the tax year.

(b) How is the tax base determined?

A resident taxpayer is subject to Luxembourg income tax based on their world income. A non-resident taxpayer who has neither his tax domicile nor his habitual abode in Luxembourg is subject to income tax solely on the basis of his income from Luxembourg source.

The taxable income is determined by adding up the various net income categories:

business income;
agricultural and forestry income;
Income from self-employment (e.g. director fees);
Earned income;
Income from pensions or annuities;
Income from movable capital (e.g. dividends and interest income);
Rental and license income; and
other income (e.g. certain capital gains and payments in the liquidation of a company in which the shareholder has a substantial interest).

Any income that does not fall into any of the above categories is not taxable. When calculating the net income of each category, only expenses related to taxable income are deductible. The net income is then reduced by various deductions to determine the taxable income.

Individuals must submit their income tax return by March 31 of the year following the income tax year (this deadline can be extended upon request). The self-employed usually have to make quarterly advance payments based on the tax due for the previous year. After the final tax assessment by the Luxembourg tax authorities, additional payments or refunds may be due.

Residents must apply if they meet any of the following criteria:

annual taxable income at source in Luxembourg of more than € 100,000;
Multiple streams of income from remuneration or pensions taxable at source in Luxembourg (annual income of more than € 36,000 for taxpayers in tax class 1 or 2 and € 30,000 for taxpayers in tax class 1a);
Income on which no withholding tax is levied in Luxembourg (e.g. rental income, income from self-employment);
Net investment income subject to withholding tax over € 1,500;
Directors' fees of more than € 1,500; or
a non-resident spouse if joint filing is requested.

Non-residents must file an income tax return in Luxembourg if they meet one of the following conditions:

annual taxable income at source in Luxembourg of more than € 100,000;
multiple streams of income taxable at source in Luxembourg – annual income over:
- € 36,000 for taxpayers in tax class 1 or 2; and
- € 30,000 for taxpayers in tax class 1a;
annual pension income subject to withholding tax in Luxembourg of more than € 100,000;
Income on which no withholding tax is levied in Luxembourg (e.g. rental income, income from self-employment);
net investment income subject to withholding tax (e.g. dividends) paid by a Luxembourg tax resident company;
Directors' fees of more than € 100,000; and

a non-resident spouse if joint filing is requested.

If there is no obligation to pay, there is the option of a voluntary return – for example to reimburse withholding taxes. In addition, the Luxembourg tax authorities may require the filing of a tax return for taxpayers who do not meet any of the above mandatory filing criteria.

(d) What exemptions, deductions and other reliefs are there?

Deductions are made on total net income and include:

Special editions like:
- compulsory state social security contributions (whether a Luxembourg foreign contribution): unlimited deduction;
- Contributions to qualified charitable organizations: a minimum of € 120 and a maximum of € 1 million or 20% of the taxpayer's total net income;
- voluntary contributions to qualified supplementary pension plans: maximum € 1,200 per year; and
- Maintenance payments to a divorced spouse: a maximum of € 24,000 per year (and per ex-spouse);
extraordinary burdens (e.g. non-reimbursed medical expenses), provided these are unavoidable and significantly reduce the taxpayer's ability to contribute. In practice, they are deductible if they exceed a certain percentage of the taxpayer's taxable income (depending on the amount of the net income and the tax class); and
an annual tax credit for employees ranging from € 0 to € 600, depending on income.

Exceptions apply depending on the income class, as described in more detail below for each type of income.

2.4 In relation to capital gains: (a) What taxes are levied and what are the rates? (b) How is the tax base determined? (c) What are the requirements for the tax return? and (d) What exemptions, deductions, and other reliefs are available?

(a) What taxes are levied and what are the rates?

In the context of private asset management, capital gains realized by a taxpayer resident in Luxembourg from movable assets (e.g. shares) are only taxable if they are realized within six months of the acquisition. Such speculative profits are subject to personal income at normal progressive tax rates. Capital gains that are held for more than six months are tax-exempt, unless the investment is substantial (> 10%). Capital gains realized after six months from significant investments benefit from a 50% interest rate cut (ie a maximum of 22.89%).

In the context of private asset management, foreign shareholders are only liable to tax when realizing a capital gain from a substantial investment (> 10%) if:

You will realize this capital gain within six months of the acquisition; or
they became non-resident taxpayers less than five years prior to the sale and have been resident taxpayers for more than 15 years.

Shareholders who are resident in a country with which Luxembourg has concluded a tax treaty that prevents Luxembourg from collecting this tax are, in principle, not subject to tax.

In the context of private asset management, capital gains from the sale of the main residence of a natural person are excluded. Capital gains on real estate realized within two years of acquisition are taxed as ordinary income (progressive). After two years have elapsed since the property was acquired, it is taxed as extraordinary income and receives a tax rate reduction of 50%.

(b) How is the tax base determined?

A taxable capital gain is the difference between the transfer price and the purchase price (determined under tax law including adjustment to the holding period).

Luxembourg tax residents must declare capital gains income on their annual income tax return (see question 2.3 (c)).

(d) What exemptions, deductions and other reliefs are there?

The taxable profits generated by a taxpayer resident in Luxembourg can be reduced every 10 years by an exemption of € 50,000 (or € 100,000 for couples filing together).

Foreign shareholders can be protected against capital gains tax based in Luxembourg on the basis of the double taxation agreement concluded between Luxembourg and their country of residence.

2.5 With regard to inheritance: (a) What taxes are there and what are the rates? (b) How is the tax base determined? (c) What are the requirements for the tax return? and (d) What exemptions, deductions, and other reliefs are available?

(a) What taxes are levied and what are the rates?

Inheritance tax is based on the Inheritance Tax Act of December 27, 1917 as amended.

Inheritance tax is levied on the net market value of all assets inherited by a Luxembourg resident (i.e. a natural person resident in Luxembourg at the time of their death), with the exception of immovable property located abroad, which is exempt from Luxembourg inheritance tax .

The tax rates differ depending on the degree of relationship between the heir and the deceased and the market value of the inheritance transferred. The rates vary between 0% and 15% and are increased by a surcharge if the share received from each heir exceeds a net tax amount of € 10,000. The maximum surcharge is 22/10 and applies to a net tax amount of more than € 1.75 million. The inheritance tax rate for unrelated persons can be a maximum of 48%.

(b) How is the tax base determined?

The tax base is the market value of the inherited net assets, with the exception of immovable property located abroad, which is exempt from Luxembourg inheritance tax. Gifts made by the deceased in the year before his death are not taken into account if they were subject to gift tax.

The heir of the deceased must make a declaration within six months of the date of death if death occurs in Luxembourg. If the deceased is not domiciled in Luxembourg, a natural person who inherits a property located in Luxembourg must file a declaration with the tax office where the property is located.

(d) What exemptions, deductions and other reliefs are there?

Inheritances that are passed on to descendants in direct line or to spouses are exempt from Luxembourg inheritance tax, with the exception of that part of the estate that exceeds the statutory share to which the descendants in direct line or the spouses otherwise under the Luxembourg regulations Forced inheritance (réserve hereditaire). In addition, an inheritance of less than € 1,250 is tax-free.

2.6 In relation to investment income: (a) What taxes are there and what are the rates? (b) How is the tax base determined? (c) What are the requirements for the tax return? and (d) What exemptions, deductions, and other reliefs are available?

(a) What taxes are levied and what are the rates?

A withholding tax of 15% applies to domestic Luxembourg dividends. However, this withholding tax is not final. With final taxation, dividend income is subject to the progressive income tax rate (maximum 45.78%).

Interest paid or attributed to an individual resident in Luxembourg by a Luxembourg resident paying agent is subject to final withholding tax of 20%, which is final tax and is not included in the individual's annual tax return. For interest (falling under the Relibi Act) that is paid or credited by foreign paying agents based in the European Union or in the European Economic Area, resident taxpayers who receive such interest in connection with their private assets can also apply for 20% final withholding tax withheld. A separate application should be submitted to the tax authorities before March 31 of the year following the year in which the person received the interest income. Interest payments that do not fall within the scope of 20% taxation or are not part of private asset management are subject to final taxation according to progressive income tax rates (max. 45.78%).

(b) How is the tax base determined?

The tax base for withholding and income tax purposes is the effective amount of dividends or interest paid to the recipient.

Luxembourg resident taxpayers must declare their capital gains on their annual income tax return (see question 2.3 (c)), unless there is final withholding tax on interest.

In addition, in the event of a dividend payment by a Luxembourg company, a withholding tax return should be filed and the withholding tax should be paid by the distributing company within eight days of the date on which the income is made available.

(d) What exemptions, deductions and other reliefs are there?

A tax exemption of 50% from income tax can be applied for on gross dividend income from:

a company fully taxable in Luxembourg;
a fully taxable company domiciled in a country that has concluded a double taxation treaty with Luxembourg; or
a fully taxable company based in the European Union.

A flat-rate total deduction of € 1,500 (doubled for jointly filing taxpayers) is applied to all dividend and interest income received during the tax year.

2.7 In relation to real estate: (a) What taxes are there and what are the applicable rates? (b) How is the tax base determined? (c) What are the requirements for the tax return? and (d) What exemptions, deductions, and other reliefs are available?

(a) What taxes are levied and what are the rates?

Capital gains on real estate realized within two years of acquisition are taxed at the progressive tax rate (currently a maximum of 45.78%). As part of the management of private assets, capital gains from real estate that are generated more than two years after acquisition are subject to income tax at 50% of the total rate (currently a maximum of 22.89%). Holding multiple properties and active transactions on such properties, such as trading, could easily lead to a reclassification of such activity as commercial rather than private asset management.

(b) How is the tax base determined?

The tax base corresponds to the difference between the purchase and sale price of the property. If the property is held for more than two years, the purchase price of the property is adjusted for inflation during the term of ownership.

Luxembourg tax residents must declare capital gains on real estate in their annual income tax return (see question 2.3 (c)).

(d) What exemptions, deductions and other reliefs are there?

Capital gains from the sale of an individual's main residence can benefit from tax exemption under certain conditions.

Capital gains made by natural persons from the sale of a property other than their main residence that were held for more than two years before the sale can be made every 10 years with an exemption of € 50,000 or € 100,000 (for jointly taxable taxpayers) be promoted.

A tax exemption of € 75,000 is granted for capital gains from real estate inherited in direct line that consisted of the parent's main residence.

2.8 In relation to all other direct taxes levied in your country: (a) What taxes are levied and what are the applicable rates? (b) How is the tax base determined? (c) What are the requirements for the tax return? and (d) What exemptions, deductions, and other reliefs are available?

We have not identified any additional taxes that could be particularly relevant for retail clients (e.g. no net wealth in Luxembourg for natural persons)

2.9 With regard to indirect taxes levied in your country: (a) What taxes are levied and what are the applicable rates? (b) How is the tax base determined? (c) What are the requirements for the tax return? and (d) What exemptions, deductions, and other reliefs are available?

(a) What are they and what are the applicable tariffs?

Value Added Tax: Value Added Tax (VAT) is essentially a consumption tax that is generally borne by the final consumer of goods and services (who is not a VAT payer).

The VAT is calculated as follows:

Standard rate of 17% (taxable transactions other than those listed below);
Intermediate rate of 14% (eg some depositary services, publication services);
reduced rate of 8% (e.g. electricity, gas); and
heavily reduced rate of 3% (essential goods and services such as food, transport, books, housing under certain circumstances).

Registration obligation: The registration fees are either fixed or proportional (value fee), depending on which document they refer to.

For example, a flat fee of € 75 is due for:

Establishment of a Luxembourg company;
Amendment of its statutes; and
Relocation of the legal seat.

Proportional registration obligations apply to documents that are registered with the registration authorities. Registration is compulsory in some cases and voluntary in others. For some documents, a rate proportional to the order value applies – for example for loan agreements (non-compulsory ad valorem duty of 0.24%).

According to the referencing theory (théorie de l & # 39; usage), contracts that are referred to in detail in a registered document are deemed to be registered with the corresponding collection of registration duties. This theory only applies to documents that require registration within a certain period of time.

The acquisition of real estate in Luxembourg is subject to a registration requirement of 6% plus a transfer tax of 1%. A municipal surcharge of 50% on the value of the registration duties is also due if the commercial property is located within Luxembourg City (ie combined maximum rate of 10%).

(b) How is the tax base determined?

VAT is charged on:

Supply of goods and services within the territory of the Grand Duchy of Luxembourg by a taxpayer in the course of his business activity;
Acquisition of goods and new means of transport within the EU; and
Import of goods from non-EU countries.

The transfer of a business as a going concern cannot fall within the scope of Luxembourg VAT.

The tax base is formed for:

Deliveries of goods and services or compensation for the delivery of goods or services;
Acquisition of goods and new means of transport within the EU according to the purchase price of the goods or similar goods or, if no purchase price is available, according to the cost price determined at the time these processes are carried out; and
in the case of goods imports, the value of the goods.

In the case of registration duties, the tax base generally corresponds to the value stipulated in the deed of transfer, unless the market value of the property in question exceeds the price stipulated in the deed of transfer. If there are any doubts about the market value, the Luxembourg indirect tax authorities can request an assessment that shows that the price corresponds to the market value.

Depending on the activity carried out, a person liable for VAT must submit VAT returns monthly, quarterly or annually.

A company registered under the simplified VAT system must submit a simplified VAT return every year. A VAT person registered under the normal VAT system must submit VAT returns as follows:

a single VAT return for annual sales of € 112,000 or less;
quarterly returns and an annual VAT return if annual sales exceed € 112,000; and
monthly returns and an annual summary VAT return for annual sales of more than € 620,000.

(d) What exemptions, deductions and other reliefs are there?

VAT exemptions are possible for a number of deliveries of goods and services. Examples are the following:

Exemptions with input tax credit:
- Deliveries of goods within the EU;
- Exports of goods outside the European Union;
- Work and repairs on goods carried out for the account of a foreign client that are to be carried out outside the European Union;
- the sale and rental of ships and aircraft used for international trade or professional fishing;
- Repairs, conversions and maintenance on ships and aircraft used in international trade or in professional fishing; and
- the international carriage of people or goods.
Exemptions without input tax credit
- Medical care or services provided by hospitals, doctors, dentists and laboratories;
- Transactions in human blood, milk or organs;
- Educational services;
- Insurance and reinsurance transactions (except when provided to clients outside the European Union);
- Administrative services, including specific and basic investment advice and research, for investment funds listed in Article 44 (1) (d) of the Luxembourg VAT Act (i.e. venture capital investment companies, specialized investment funds and collective investment schemes where regulated by the Commission de Surveillance du Secteur Financier (CSSF) or a similar public body of the EU as well as pension funds, provided these are supervised by the CSSF or the Commissariat aux Assurances or a similar public body of the EU, as well as securitization vehicles which the 2004 Securitization Act, the activities within the meaning of Article 1.2 of EU regulation 24/2009, and alternative investment funds, regardless of any regulation);
- Financial and banking services (except when provided to customers outside the European Union);
- the delivery and rental of real estate (unless the rental agreement is subject to VAT);
- the supply of gold and silver; and
- Transactions in stocks.

Entrepreneurs subject to sales tax have a right to deduct input tax, i.e. from the sales tax that is billed to their customers (input tax), the sales tax company deducts the sales tax on the goods and services that are used for business purposes (input tax). Only the excess sales tax is paid to the tax administration. If the input tax is possibly exceeded, the taxpayer can request a refund.

For some gifts – such as manual gifts (donation manual) and indirect gifts (donation indirecte) – registration is not always mandatory, so it may be possible to make a gift registration-free.

For registration tax purposes, a tax credit of up to € 20,000 applies to the registration and transfer fees in connection with the purchase of a personal apartment on the condition of the actual and personal use of the building.

3 succession

3.1 Which laws regulate succession in your jurisdiction? Can the succession be subject to the laws of another jurisdiction?

In domestic law, the succession is based on Articles 718 to 892 of the Civil Code.

Die Erbfolge richtet sich auch nach der EU-Erbrechtsverordnung (650/2012), die am 17. August 2015 in Luxemburg in Kraft getreten ist.

Ausländisches Recht – wie das Recht des gewöhnlichen Aufenthalts des Erblassers, das Recht seiner Staatsangehörigkeit oder das Recht des Ortes der geerbten Immobilie – kann auf eine Erbschaft in Luxemburg Anwendung finden.

3.2 Wie werden Rechtskollisionen gelöst?

Nach luxemburgischem Recht richtet sich die Erbfolge beweglicher Sachen nach dem Recht des letzten Wohnsitzes des Erblassers. Der Verstorbene kann sich jedoch dafür entscheiden, das Recht seiner Staatsangehörigkeit anzuwenden. Die Grundstücksnachfolge richtet sich nach dem Recht am Ort des Grundstücksvermögens.

Auf die Erbschaft eines EU-Bürgers ist nach der EU-Erbrechtsverordnung grundsätzlich das Recht des Staates anwendbar, in dem der Erblasser zum Zeitpunkt des Todes seinen gewöhnlichen Aufenthalt hatte. Eine Person kann jedoch auch das Recht des Staates ihrer Staatsangehörigkeit wählen, um ihre Erbfolge zu regeln.

3.3 Gelten in Ihrer Gerichtsbarkeit Regeln für die Zwangserbschaft?

Die luxemburgischen Vorschriften zur Zwangserbschaft (réserve héréditaire) verlangen mindestens:

50% des Nachlasses werden den Kindern vorbehalten, wenn es ein Kind gibt;
67 %, wenn es zwei sind; and
75% bei drei oder mehr.

Der Verzicht auf einen reservierten Teil soll durch eine förmliche Erklärung gegenüber der Geschäftsstelle erfolgen. Für die Zwangserbschaft in direkter Abstammung wird keine Erbschaftssteuer erhoben und auf den die Zwangserbschaft in der direkten Abstammung übersteigenden Anteil wird eine Erbschaftsteuer in Höhe von 2,5 % erhoben.

3.4 Gelten die Erbschaftsregeln, wenn der Verstorbene rechtskräftig ist?

Mangels testamentarischer Bestimmungen gelten die Regeln der Zwangserbschaft (siehe Frage 3.3).

Darüber hinaus richtet sich die Erbfolge, sofern keine testamentarischen Bestimmungen vorliegen, nach den geltenden Rechtsnormen wie folgt:

Nachkommen (Kinder, Enkel);
überlebender Ehegatte;
Eltern, Brüder, Schwestern und Nachkommen der letzteren;
andere Vorfahren als die Eltern (zB Großeltern);
andere Seitenverwandte als Brüder, Schwestern und Nachkommen der letzteren; and
der Staat.

3.5 Können die Erbfolgeregelungen angefochten werden? If so, how?

Ein Testament kann die allgemeinen Erbschaftsregeln anfechten, da es dem Erblasser erlaubt, die Erbfolge oder den den Erben zugeteilten Anteil zu ändern, vorausgesetzt, dass die Regeln der Zwangserbschaft eingehalten werden (siehe Frage 3.4).

4 Testamente und Nachlass

4.1 Welche Gesetze regeln Testamente in Ihrer Gerichtsbarkeit? Kann ein Testament den Gesetzen einer anderen Gerichtsbarkeit unterliegen?

Testamente richten sich nach innerstaatlichem Recht nach den Artikeln 967 bis 980 des Bürgerlichen Gesetzbuches.

Testamente unterliegen auch der EU-Erbrechtsverordnung und dem Haager Übereinkommen vom 5. Oktober 1961 über die Kollisionsnormen über die Form von testamentarischen Verfügungen. Ein Testament kann dem Recht einer anderen Gerichtsbarkeit unterliegen, sofern es die Anforderungen des EU-Erbrechtsverordnung (sofern zutreffend) und das Haager Übereinkommen.

4.2 Wie werden Rechtskollisionen gelöst?

Ein Kollisionsrechtsstreit in Bezug auf Testamente wird nach den Regeln des Haager Übereinkommens und der von Luxemburg unterzeichneten EU-Erbrechtsverordnung gelöst.

4.3 Werden ausländische Testamente in Ihrer Gerichtsbarkeit anerkannt? Wenn ja, wie wird diesbezüglich vorgegangen?

Nach Artikel 1 des Haager Übereinkommens ist ein Testament gültig, wenn seine Form dem Recht entspricht:

der Ort, an dem das Testament ausgeführt wurde;
das Land, dessen Staatsangehörigkeit der Erblasser zum Zeitpunkt seines Todes oder bei der Verfügung hatte;
der Ort, an dem der Erblasser zum Zeitpunkt seines Todes oder der Verfügung seinen Wohnsitz hatte; or
the place where the property is located.

The legalisation of a foreign will is required only where the foreign jurisdiction is not a party to the Hague Convention.

If the foreign jurisdiction is a party to the Hague Convention, a certification – which will be issued at the request of the person who has signed the document or of any bearer – will suffice.

4.4 Beyond issues of succession discussed in question 3, are there any other limitations to testamentary freedom?

In addition to the forced heirship rules, the validity of a will is notably subject to formal requirements, as described in question 4.5.

4.5 What formal requirements must be observed when drafting a will?

Under Luxembourg law, three types of wills are legally accepted:

A holographic will is valid where it is handwritten, signed and dated by the testator. The holographic will should be deposited with a notary;
An authentic or notarially recorded will must be received by two notaries or by a notary assisted by two witnesses. The will is dictated by the testator and drawn up by the notary. An authentic will is legally secure; and
A sealed will (or secret will) is written by the testator or by another person, signed by the testator, sealed and deposited with a notary, who draws up an authentic act of registration. The contents of the will remain secret until it is opened on the death of the testator.

All three types of wills must be registered in the Register of Last Wills.

4.6 What best practices should be observed when drafting a will to ensure its validity?

A will by public deed is preferred over a holographic will, considering the intervention of the receiving notary. In addition to the legal advice that the notary may provide to the testator, the intervention of the notary in the drafting of the will ensures that the testator's last wishes will not be affected by any formal or substantive defects that invalidate the will. Finally, the notary is legally obliged to request the registration of the authentic will in the Register of Last Wills.

4.7 Can a will be amended after the death of the testator?

After the death of the testator, a will can be amended only by a civil court.

4.8 How are wills challenged in your jurisdiction?

A will can be contested before a civil court on the following grounds:

applicable legal requirements as prescribed by law with respect to the form and execution of the will;
the validity of the will based on the infringement of rules relating to the forced heirs or capacity of the testator; or
the interpretation of the will.

4.9 What intestacy rules apply in your jurisdiction? Can these rules be challenged?

If there is no will, the order of succession will be governed by applicable rules of law as follows:

descendants (children, grandchildren);
surviving spouse;
parents, brothers, sisters and descendants of the latter;
ascendants other than parents (eg, grandparents);
collateral relatives other than brothers, sisters and descendants of the latter; and
the state.

Except for the provision relating to surviving spouses and forced heirship rules (réserve héréditaire), Luxembourg intestacy rules in principle cannot be challenged, except under certain specific circumstances (eg, indignity of the heir).

5 Trusts

5.1 What laws govern trusts or equivalent instruments in your jurisdiction? Can trusts be governed by the laws of another jurisdiction?

Luxembourg has no specific trust legislation. A bill introducing a private foundation (fondation patrimoniale) was drafted in 2013, but has never been voted on by the Parliament. Foreign trusts are generally recognised under Luxembourg law (see question 5.2).

5.2 How is any conflict of laws resolved?

Conflicts of law are resolved on the basis of the Hague Convention of 1 July 1985 on the Law Applicable to Trusts and on Their Recognition, which has been ratified by the domestic Law of 27 July 2003 on Trusts and Fiduciary Contracts, thereby formally recognising foreign trust.

5.3 What different types of structures are available and what are the advantages and disadvantages of each, from the private client perspective?

In the absence of types of structures such as Luxembourg trusts, foreign forms of trusts and private foundations such as the Stichting in the Netherlands and the fondation privée in Belgium can be used in combination with a Luxembourg company for private wealth purposes.

5.4 Are foreign trusts recognised in your jurisdiction? If so, what process is followed in this regard?

The Hague Trust Convention, adopted by Luxembourg, provides a legal framework for the recognition of trusts validly constituted under the laws of a jurisdiction that recognises this institution. The Hague Trust Conversion thus facilitates the recognition of foreign trusts that have been constituted in states which are signatories to the convention.

In accordance with the Hague Trust Convention, trustees will be recognised in Luxembourg as the persons or entities that have legal ownership of designated assets and that hold the assets for the benefit of the beneficiaries.

5.5 How are trusts created and administered in your jurisdiction?

Luxembourg has no specific domestic trust legislation (see question 5.1).

5.6 What are the legal duties of trustees in your jurisdiction?

Luxembourg has no specific domestic trust legislation (see question 5.1).

5.7 What tax regime applies to trusts in your jurisdiction? What implications does this have for settlors, trustees and beneficiaries?

The tax treatment of foreign trusts is generally determined on the basis of a corporate resemblance test, whereby the qualification of a foreign trust is determined by comparison of its legal characteristics with those of existing entities under Luxembourg domestic law. Consequently, the qualification of a foreign trust for Luxembourg tax purposes is determined on a case-by-case basis.

Based on general Luxembourg tax law, taxation follows economic ownership rather than legal ownership. It is the economic beneficiary of the fiduciary that is subject to taxation on income and gains derived from the fiduciary agent. If a fiduciary based in Luxembourg is not the economic owner of the assets, it will qualify as a tax transparent vehicle, so that any proceeds derived therefrom will not be taxable for the fiduciary in Luxembourg. As a consequence, revocable trusts and fixed interest trusts generally are assimilated to a fiduciary agreement (tax transparent entity); whereas irrevocable discretionary trusts should generally be assimilated to a collective organisation, in particular as a patrimoine d'affectation (tax opaque entity).

In case of revocable trusts and fixed interest trusts, which qualify as tax transparent entities, the resident settlor is considered the economic owner and will be thus fully taxable as if he or she holds the trust assets directly. Therefore, any ongoing income and capital gains derived from the trust assets should be allocated to him or her and be taxable in his or her hands. In case of irrevocable trusts and discretionary trusts, which qualify as tax opaque entities for Luxembourg tax purposes, the entity itself can be subject to taxation if the beneficiary cannot be identified.

5.8 What reporting requirements apply to trusts in your jurisdiction?

Luxembourg has no specific domestic trust legislation (see question 5.1).

5.9 What best practices should be observed in relation to the creation and administration of trusts?

Luxembourg has no specific domestic trust legislation (see question 5.1).

6 Trends and predictions

6.1 How would you describe the current private client landscape and prevailing trends in your jurisdiction? Are any new developments anticipated in the next 12 months, including any proposed legislative reforms?

While European private clients have been investing through Luxembourg for several decades, the greatest interest in the jurisdiction is now coming from South America and Asia. There are many reasons for this trend. As the second financial centre in the European Union, Luxembourg offers many advantages for multi-jurisdictional wealth management. As a prime EU wealth management hub, the country notably relies on its economic and regulatory stability, combined with diverse range of financial and legal services, to foster a strong culture of investor protection.

The COVID-19 pandemic has had a significant impact on Luxembourg's economy and present an unprecedented set of challenges for its financial sector. However, Luxembourg's strengths – including a robust institutional and regulatory framework and a resistant financial sector – have allowed the country to safeguard financial stability and to preserve a healthy investment environment, including for international private investors.

Earlier this year, the Luxembourg government confirmed that: "Luxembourg is fully in line and compliant with all EU and international regulations and transparency standards, and applies, without exception, the full arsenal of EU and international measures to exchange information in tax matters and combat tax abuse and tax avoidance." In this spirit of tax transparency, by implementing the necessary Organisation for Economic Co-operation and Development and EU standards, Luxembourg offers private investors a tax-compliant investment environment.

Legislative amendments are usually introduced by the annual Budget Law. The 2022 Budget Law is expected to be voted on by the end of the year 2021. No information in relation to potential legislative reforms is currently available.

7 Tips and traps

7.1 What are your top tips for effective private client wealth management in your jurisdiction and what potential sticking points would you highlight?

Private clients investing in Luxembourg structures generally have various financial and geographical investment objectives. Such objectives should be assessed on a case-by-case basis to achieve an efficient investment structure from a legal, regulatory and tax perspective. Luxembourg offers a wide range of both regulated and unregulated vehicles that can accommodate the investment strategies of each private investor. Private investors should assess the wide range of Luxembourg vehicles, including Luxembourg funds (eg, the special investment fund, the investment company in risk capital and the reserved alternative investment fund) and unregulated corporate vehicles (eg, the private wealth management company) in light of their personal investment objectives and needs.

The substance of these Luxembourg structures becomes increasingly important in the international context. Luxembourg substance is mainly of relevance in a cross-border context, as it is a condition to be able to secure tax benefits under EU tax directives and double tax treaties, and helps to mitigate the risk that other countries will view a Luxembourg entity as resident in their country and tax it accordingly. Therefore, in order to efficiently protect a Luxembourg company against challenges to its Luxembourg tax residency, particular attention must be paid to the residence and substance requirements of the jurisdictions in which a Luxembourg company invests.

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