Nothing is sure but death and taxes
When a person domiciled in Luxembourg dies, respectively real estate property is in Luxembourg, the net assets left to the heirs are in principle subject to inheritance tax. Neither the benefactor nor the heirs want to see a large part of their inheritance going to be highly taxed. With some planning in due time, the impact of the taxes can be minimised. Ernst & Young has just released its latest tax publication called "International Estate and Inheritance Tax Guide 2012", a guide that is quite unique, according to Ernst & Young Luxembourg.
The tax guide summarises the estate and inheritance tax systems and describes wealth transfer planning considerations in 27 jurisdictions. It is written for family businesses/entrepreneurs, corporate executives, and high net worth individuals in general.
In Luxembourg, this practical guide targets, among others, the Luxembourg banking community and family offices, which is increasingly faced with succession questions from their clients either buying Luxembourg-domiciled products or moving their residence to Luxembourg
John Hames, Partner at Ernst & Young Luxembourg Business Tax Services underlines that this guide is pretty unique: “You will find single country guides on estate and inheritance taxes in the respective countries, including Luxembourg, but you will not find an international guide like the one just published by E&Y.” One of Ernst &Young’s goals is to put the message across that they are not only dealing with corporate tax matters, but also with questions around individuals and their estate.
“Under the Luxembourg law, inheritances are subject to inheritance taxes respectively death duties whereas gifts are subject to registration duties,” says Giuseppe Tuzzè, Executive Director at Ernst & Young Luxembourg. The inheritance tax rates vary from zero percent for direct heirs to 48 percent for non-relatives. The inheritance tax rates are variable and progressive based on the degree of relationship between the heir and the deceased and based upon the value of the estate left.
He adds that discriminations between residents and non-residents have been abolished by the law of 18 December 2009. “Until recently there was discrimination for non-residents heirs in terms of exemptions, allowances and deduction of debts. For example before the legislative change, non-resident direct heirs were taxed at a rate of 2% and non-resident spouses having common children were taxed at a rate of 5 %, while there were no inheritance tax for residents at all. These rates have been harmonized because the EU Commission has asked to remove this discrimination.”
A typical example is one of a family with children in which the children inherit from their parents without a testament or any specific will to one or the other child: in this case, the inheritance tax or death duty exemption would apply. According to the Ernst & Young guide, gift taxes may be fixed or based on a percentage. The fixed duty is €12. The percentage duty depends on the degree of relationship between the donor and the donee.
For gift tax purposes, the fiscal domicile of the donee or donor is in principle irrelevant as the gift itself is taxable with different rules that might apply if the gift concerns movable or immovable property and/or if the gift require a written evidence or not.
Luxembourg civil law on succession
The succession of a person begins with his or her death. Luxembourg generally applies the law of the deceased’s domicile for moveable assets and the law of situs (or place where property is situated) for immovable property. In the absence of a will, the succession is regulated in accordance with the legal order.
This means that children and their descendants come first, followed by the surviving spouse, then the parents and their descendants, and so on. In this context, Giuseppe Tuzzè talks about the civil law protecting the rights of the descendants of a deceased individual: “We have the forced heirship rules, which protect children and grandchildren. However, third parties may benefit from the gifts and legacies provided that the statutory compulsory shares of the children are respected.”
When the deceased is survived only by a spouse, he or she is entitled to the full ownership of the estate. Since this person is not a protected heir under Luxembourg civil law, they can be disinherited by a testamentary provision.
One can say that Luxembourg is generally more competitive in terms of inheritance tax rates than its neighboring countries France, Belgium and Germany. John Hames gives a reason for this, which is not very flattering: “Luxembourg is very attractive with regards to inheritance, more by accident than by political will, because we have a very old law. It is nice to have this law, despite the absence of double tax treaties in this area, in order to promote Luxembourg as an attractive place to live and work. For sure, it is however not one of the main criteria to come here.”
High net worth individuals may find Luxembourg an interesting residence jurisdiction because of its tax regime, but John Hames says that there is room for improvement. “The biggest barrier to attracting wealthy people is the capital gains tax system. We are for instance in competition with Switzerland and Belgium, which either don’t levy capital gains taxes at all or have an attractive lump sum tax regime for retired persons.
For people who have a portfolio of trading assets, it is not attractive to come to Luxembourg because of the six-month speculation period for capital gains. Six months for someone who is invested in stock markets is too long”, he explains.
Since the financial crisis, starting in 2008, the priorities of decision makers in tax policy have changed. John Hames reminds us that there was good will a couple of years before the crisis started: at that time, the wealth tax for individuals had already been abolished in Luxembourg in 2006. “For some reasons, that has not been done for companies,” he wonders aloud.
Also, at the time, the 10% flat tax on interest had been introduced for Luxembourg tax residents. Mr Hames admits that at current times it is not easy to abolish or lower a tax if there is no replacement solution to counter finance it. CW