Luxembourg as a Holding Location — Luxembourg Law as an Opportunity, but also as a Potential Danger for Investors

For funds as well as for private equity investors and mezzanine lenders, a Luxembourg holding and/or fund structure is highly popular. Today, Luxembourg is probably the largest fund center in Europe and number two in the world after the USA. At the same time, many European private equity investors are acquiring assets across Europe through Luxembourg holding structures. Here, it is important to take a close look at the positive effects but also the possible dangers.

The most common buzzwords used to describe the advantages of Luxembourg structures are:

• Tax benefits both on dividend receipt and on subsequent sale of the asset and no restriction on tax deductibility of debt interest,
• no excessive regulation,
• political and economic stability, and
• highly skilled, multilingual workforce.

With one qualification or another, these advantages are rightly mentioned. In addition, there are some special advantages of Luxembourg law, which are quite significant in times of economic crisis. For example, in the case of a Luxembourg holding structure, it may be interesting for planning purposes that in Luxembourg insolvency law over-indebtedness alone is not a ground for insolvency. In addition to an existing inability to pay (illiquidity), the loss of creditworthiness is necessary. The insolvency filing obligations are also much less strict than under German law. Moreover, it is often advantageous for shareholders that Luxembourg law does not contain any equity substitution rules comparable to German law. Furthermore, the problem of a taxable reorganization gain, which regularly arises in the case of debt-for-equity swaps or the acquisition of loans for the purpose of acquiring control (loan-to-own), does not exist in Luxembourg. For these reasons, the targeted use of Luxembourg law can be very attractive. It may also still make sense during ongoing investment management to transfer assets/companies to Luxembourg (for example, by means of a merger across the border).