The patrimonial foundation
Paolo Panico, December 2013
Paolo Panico TEP is Managing Director of Private Trustees SA in Luxembourg.
Background and main characteristics
In continental Europe, private foundations are used for the same purposes as common-law trusts. Luxembourg’s FP is influenced by the German tradition of Privatstiftungen, and, more significantly for private wealth management, Liechtenstein’s Law on Persons and Companies (Personen- und Gesellschaftsrecht) of 1926 and Austria’s Private Foundations Law of 1993, as well as by the Belgian and Dutch experience with stichting administratiekantooren (STAK).
An FP is a legal person and can own property in its own right.1 It may own movable and immovable property, be a policyholder or a beneficiary of a life assurance contract, and hold interests in subsidiary companies, provided it does not interfere with their management.2
Patrimonial foundations may issue depository receipts or certificates linked to foundation assets and representing the right to their income. This is comparable to an interest in possession trust
Unlike a company, an FP has no shareholders and so is often described as an ‘orphan entity’. The object of an FP is the administration of its assets for the benefit of one or more beneficiaries or to further one or more purposes that must not qualify as ‘charitable’ within the meaning of the law of 21 April 1928 on not-for-profit associations and foundations.3 The entities governed by the 1928 law (as amended), acquire their charitable status as a result of a complex incorporation process involving ministerial approval.
Incorporating an FP, on the other hand, requires only the execution of a notarial deed4 and a minimum endowment of EUR50,000 in cash or kind.5The deed of incorporation is published in the Luxembourg official journal (Mémorial C) and details of the FP are entered into the Luxembourg Register of Commerce and Companies.6Following the experience of other private-foundation jurisdictions, certain matters may be dealt with under a separate and confidential set of internal regulations or by-laws (règlements extrastatutaires).
Dramatis personae: founder, directors, supervisory board and beneficiaries
The founder of an FP may be a natural person or a ‘patrimonial entity’,7 which is a phrase used in various Luxembourg statutes to refer to a legal arrangement for private wealth management purposes, such as a trust or another private foundation. The founder may retain the right to amend the articles of incorporation of an FP, including the power to terminate it.8
An FP is managed by one or more directors (administrateurs), which may be natural or legal persons of any nationality or residence.9 The first directors are appointed by the founder and the rules for later changes are specified in the deed of incorporation or the internal regulations.
A supervisory board may be appointed as a governance mechanism and must consist only of natural persons. Its appointment is mandatory if the foundation assets exceed EUR20 million or if the foundation has more than five beneficiaries.10
Such large foundations in terms of assets and beneficiaries are also required to appoint an auditor for their annual accounts.11 Nonetheless, the financial reports of FPs, unlike those of Luxembourg companies, are not published.12
Certificates and general tax treatment
An FP may issue depository receipts or certificates linked to foundation assets and representing the right to their income.13 This certification corresponds to STAK, which evolved in Belgium and the Netherlands without a specific statutory reference. The Bill on FPs provides a detailed legislative regulation for this arrangement, the result of which is comparable to an interest in possession trust. The foundation has legal title to the underlying assets and effectively holds them on trust for the certificate holders, who are entitled to receive their income and any other economic benefits.
Apart from certification, FPs are subject to corporate income tax and thus should be covered by Luxembourg’s double-taxation treaties. Nevertheless, they benefit from a generous exemption on income and capital gains on financial securities, and they do not apply withholding tax on distributions to beneficiaries.
Bill no. 6595 gives Luxembourg a wealth-management vehicle deeply rooted in the civil-law tradition. FPs may be seen as an alternative to trusts, and are attractive for wealthy people who are not familiar with English legal tradition.
1. Bill no. 6595, article 1
2. Bill no. 6595, article 12(1)
3. Bill no. 6595, article 5
4. Bill no. 6595, article 6
5. Bill no. 6595, article 4
6. Bill no. 6595, article 9
7. Bill no. 6595, article 1
8. Bill no. 6595, article 23
9. Bill no. 6595, article 13
10. Bill no. 6595, article 18
11. Bill no. 6595, article 22
12. Bill no. 6595, article 26(2)
13. Bill no. 6595, article 12(2)