FAQ Luxembourg Private Foundation

What is the difference in setting up a Luxembourg private foundation in Luxembourg compared to other countries?

The Luxembourg private foundation stands up as a homologue of foundations in other countries. The Foundation enables to achieve the same degree of assets protection and estate planning, especially in the context of inheritances. But, as from a tax perspective, the Luxembourg framework is more attractive and some features of the law allows more flexibility or different type of structure (eg the issuance of certificate).

Can the Foundation be set up in a different country from the one the founder is resident in?

Yes. The founder, directors or members of the supervisory board may be non-resident. However the registered office of the Foundation is always be located in Luxembourg.

As a Foundation has no shareholder(s), does it mean that the founder is not considered as the owner ?

Indeed, the Luxembourg Private Foundation does not issue shares, thus no shareholders and therefore nobody “owns” the Foundation.

The founder dispossesses himself of his assets in favour of the Foundation and can appoint beneficiaries (including himself) during the constitution or after.

Once  assets are given to the Foundation, they will no longer belong to the founder. Nevertheless, the founder can be part of the Board of Directors and manage the assets himself.

How does the Foundation repay beneficiaries ?

The founder decides in advance whom will be, how many beneficiaries will receive (or not) grants or annuities, or assets from the Foundation.

The founder can also sets conditions to distribute the assets of the foundation.

Can a Foundation be remunerated by dividends from companies of its assets ?

Indeed. The Foundation can also invest into participations or a securities portfolio which would then generate dividends. Likewise if the foundation holds IP rights, movable and immovable properties the foundation will then receive income related to these assets.

If assets were given to a Foundation based in Luxembourg, would the founder be freed of estate taxes on those assets?

Transfers of assets to the Foundation by non-residents or payment of incomes to non-residents will not be withheld at source. However and depending on the country in which they are resident these income could be taxable there and also some exemptions might apply. (eg sometimes the transfer of assets is not a taxable event at all or the assets transferred to beneficiaries are not taxable, etc).

What is the amount of the “flat registration duty”?

The amount of a fixed registration fee is set at EUR 75 and must be paid to the Land Regitration and Estates Department.

Does the board have to be composed of members all living in the country where the Foundation is based in?

No. The settlor, directors or members of the supervisory board may all be non-resident. The important thing is to keep a link with Luxembourg where the administration is based; thus entities usually appoint one Luxembourg-based director at least.

Is there a minimum assets’ worth recommended to set up a Foundation?

No, there isn’t. There is only a minimum contribution to be brought to the entity: EUR 50,000 in cash or in kind. After what other assets can be contributed or simply lent to the Foundation.

Who values the assets in the Foundation?

The initial contribution, made in kind is under the responsbility of the founder, who will then be in charge of the valuation of the assets transferred to the Private Foundation. The valuation of the assets brought subsequently to the Foundation will be under the responsbility of the Board of Directors of the Foundation, whose role is clearly defined in the Constitution Acts. The Board has the power to accomplish all the useful tasks to the realisation of the objectives of the Foundation. It can be assisted by external service providers to valuate the assets.

What is a “custodian” when it comes to the valuation of the assets?

A custodian can be appointed by the Board of Directors to hold some or all the assets of the Foundation. The custodian of financial instrument often gives a valuation of the financial assets and helps the process of fair value adjustment done by the Manager.

A custodian can also hold other types of assets like art collection, participation in private equity or other alternative investments. It minimises risks in the safeguard of the Foundation’s assets.

Custodian and experts in valuation are independent from the Foundation and its Manager.

Would a Foundation be more advantageous than charitable donations in terms of tax exemptions?

It depends where the founder, beneficiaries are resident, at the set up and after the death of the founder. Don’t hesitate to contact us to analyse of a specific situation.

Does the Foundation need to be not for profit and for the public’s interest to be eligible for tax exemption?

The Foundation cannot perform commercial or financial activities, but is a “for-profit” vehicle. It can be used for the private estate of the settlor without being for the public interest. The Foundation can be set up to make profit on its assets and generate incomes.

Does the settlor need to be a High Net Wealth Individuals?

The Foundation is an ideal structure for family groups or whoever is seeking for an appropriate vehicle to obtain protection and tax optimisation for his assets. Many players willing to structure their investments via a trust might consider the Foundation as more appropriate as they can manage it themselves. There is not need for the settlor, founder to be a HNWI at the beginning. Some very small Foundation can be set up at the beginning of the career of its settlor and grow over time.

Can we decide that we are on board for a limited time, for instance 3 years?

The special notarial deed incorporating the Foundation will necessarily contain information relating to the details and powers of the directors, in particular regarding the term of the directorship, and the details and powers of the members of the supervisory board. Another solution is to appoint a protector who is in charge to change and appoint director (this can be the founder).

Are the members of the board free to leave their position at any point in time?

Members of the board of directors are free to resign from the board of directors at any time. The incorporation deed will specify the conditions for the directors’ resignation.

How to replace members of the board?

If at a certain point in time, one or several directors need to be replaced, the new member(s) of the board of directors shall be appointed by the founder(s) or chosen amongst a list prepared and executed by the founder(s), unless the incorporation deed specifies otherwise. This mechanism should be provided by the incorporation deed and the list have to exist at the time of the vacancy. The law does not require that the list exists at the time of the incorporation deed as this list can be drafted afterwards by the settlor.

In this case, their appointment will be effective as from the day of their written acceptance of the mandate. Such a list will enable a founder to influence the appointment of future directors even after his death.

In the absence of any such appointment by the founder(s), new directors will be appointed by the supervisory board (if any). Should the Foundation not have a supervisory board, and then the new directors will be coopted. Finally, if a cooptation appears to be impossible, then the new directors will be appointed by the competent District Court. Directors may only be dismissed in accordance with the conditions of the incorporation deed.

Could the Founder be in charge of the management while the members of the family are the beneficiaries?

Yes. This is indeed possible. The Foundation is composed of:

The founder ;

The directors or board of directors in charge of the management; and

One or several beneficiaries.

Founder, director and beneficiary may be the same person. The governance rules also apply to the Foundation. Thus, a director cannot be a member of the supervisory board at the same time.

The founder or one or several beneficiaries can be member(s) of the supervisory board unless they are already member of the board of directors.

What happen if the founder has no family (spouse, children) or if he is single or in a relationship not recognised by the law in his country?

The Foundation aims at ensuring the continuity in management which means that the Foundation separates the economic ownership, the familial estate and the management by the family of its business. This could be useful when a founder has no children or if he considers that some of his heirs are not fit born or they do not wish to run the family business.

Also it can allow a family business to move towards a more open structure. In case the founder has no family it can appoint another third party person as beneficiary.

How can we ensure that we do not need to pay for the preservation of the Foundation if income is not sustainable?

Directors are protected (unless the management is the cause of the liability). If the Foundation is not able to function anymore, it can be liquidated.

What is the relation between the guidelines for the management and the will? Are these both legally binding?

There is no will as such but only a charter of the Foundation in which the settlor has indicated how the Foundation should be ran. The articles of incorporation of the Foundation and such a charter are the documents which are binding.

Are accounting reports requested?

The Foundation must keep books but there is no requirement for the annual accounts to be published in the Trade and Companies Register.

The appointment of a statutory auditor is optional but becomes mandatory of the Foundation has more than five beneficiaries or if its assets exceed EUR 20,000,000.

What are the Bill’s restrictions on provisions regarding the liability of the directors and liquidators?

Directors shall not contract any personal obligation by reason of the commitments of the Foundation. Directors are liable for the performance of their mandates and for any misconduct in the management. This liability only exists towards the Foundation.

The Foundation is only represented by the directors and general meetings do not exist as this is an orphan structure.

The liability action against the directors of a Foundation may be initiated on behalf of the Foundation by a founder, a beneficiary, another director, the supervisory board, the liquidator or any third party appointed in the incorporation deed.

The third party appointed in the incorporation deed will exercise several founders’ rights in case the founder is unable to exercise his rights.

The law leaves the possibility to the incorporation deed to adapt the list of persons which can initiate the liability action.

It also should be noted that the liability of directors only exists towards the Foundation and not towards the founder or one or several beneficiaries.

Directors are not subject to joint and several liabilities as there are no general meetings to which the directors could indicate misconducts in order to avoid the responsibility.

Liquidators are liable towards the Foundation, the founder, beneficiaries or any third party for the performance of their mandates and for any misconduct in the management of this mandate.

What is a certificate of entitlement?

The Foundation may issue certificates in registered form linked to assets it holds and representing the rights as defined in the incorporation deed or in separate regulations or in the documents relating to the issuance of such certificates to any individual or patrimonial entity acting in the framework of the management of the patrimony of one or several individuals.

Such mechanism allows the Foundation to keep legal control over an asset in its patrimony while at the same time granting certain economic rights over such asset to the holder of the certificates.

The Foundation will keep a certificates register similar to that of a public limited liability company and it will be possible, according to the terms and conditions of the deed of issuance, to exchange such certificates against part of or all of the underlying assets. Certificates may only be transferred between the person having received such certificates at the time of the issuance, the founder(s), the beneficiaries and their respective patrimonial entities.

Since Foundations, as opposed to Trusts, are based on Civil Law, are there problems if settlor is based in a Common Law jurisdiction (i.e. UK)?

There is no problem about that. The only question is to make sure that the forced heirship rule is duly respected, when speaking about a civil law resident/citizen.

What is the difference between trust and foundation in term of ownership of the assets?

Contrary to a trust, the Foundation will acquire a separate legal personality as from the date of the passing of the notarial deed and the contributions in cash or in kind made by the founder(s) shall become the Foundation’s own property.

A Trust is not a company; therefore the assets remains held by a trustee. In a Foundation the assets are held by the Foundation itself, as if there are held by a company.

The trust is a contractual relation where as the Foundation is a company (without shareholders)

The settlors sometimes do not want to hand their assets to a trustee they don’t know and prefer to set up foundation in which they can be appointed as member of the board of directors and go on managing these assets as before.

Would new assets (i.e. works) created after the set-up of the Foundation be easily added to the Foundation?

Indeed any other assets can be added to the Foundation. The Foundation can also buy, sell or invest in any assets, business or rights.

Can the Founder change articles of incorporation subsequently?

Indeed, upon incorporation the founder can reserve the right to modify the articles of the foundation and also the list of the beneficiaries.

This power can also be reserved to a specific (group of) person.

What are the possible issues if the founder moves to another country (and residence) during his life?

Depending on the country of residence, some taxation might be due upon transfer of further assets (or not), upon death (or not), upon payment to a partner (see above), etc.

Don’t hesitate to contact us to analyse any specific situation.

What happen if the founder suddenly dies?

Should the founder be a Luxembourg resident at the time of his death, the transfer of the assets held by the Foundation upon his death is subject to inheritance taxes whose rates vary in accordance with the degree of kinship between the founder and the beneficiary:

0% for spouses, partners for more than 3 years prior to the decease of the founder, children and parents, 12% for the other members of the founder’s private, and 40% for beneficiaries who do not have any kinship with the founder.

Should the founder not be a Luxembourg resident at the time of his death, only the transfer of real estate situated in Luxembourg is subject to Luxembourg inheritance taxes.

To transfer assets, does a notary document in each instance be required?

Assets can be transferred during time without the need of a notary document. Some real estate assets might need a transcription in the land register in the country where they are situated.