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Global Roadmap: Navigating the Complexities of Global Business Expansion

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Establishing and operating a global business is a complex endeavor. Legal professionals involved in global expansion will need to address compliance, mitigate risks, and facilitate a smooth international business operation while managing variations in regulatory, compliance, and tax frameworks across jurisdictions.

CSC’s team of in-market experts from various jurisdictions across the globe come together in this CLE webinar series to discuss considerations for establishing and operating a global business and critical factors for success.

Webinar transcript

Disclaimer: Please be advised that this recorded webinar has been edited from its original format, which may have included a product demo. To set up a live demo or to request more information, please complete the form to the right. Or if you are currently not on CSC Global, there is a link to the website in the description of this video. Thank you.

Caitlin: Hello, everyone, and welcome to today's webinar, "Global Roadmap Series: Navigating the Complexities of Global Business Expansion – Luxembourg." My name is Caitlin Alaburda, and I will be your moderator.

Joining us today are FX Goossens. FX is the Executive Director, Co-head of Corporate and Legal Services Luxembourg. He is leading a team of approximately 150 legal and financial professionals dedicated to clients in the EMEA region.

FX: Hello.

Caitlin: Ed Breedveld is Executive Director, Co-head of Corporate and Legal Services Luxembourg. He and his team provide a full range of private equity services.

Simon Maire. Simon is Head of Commercial and Growth Development in Luxembourg. He is leading a team focused on financial transactions for corporate and private equity clients, holding and operational companies in Luxembourg.

And Helena Ledic. Helena is the Associate General Counsel with CSC. She works out of CSC's Chicago office.

And with that, I'd like to welcome FX, Ed, Simon, and Helena.

Helena: Thank you so much, Caitlin. Oh, I just jumped a little bit too far there, everybody. Thank you very much, Caitlin, for that introduction. Thank you to the audience for joining us today to learn a little bit more about business transactions in London (sic), navigating those complex complexities with your business expansion.

So let me just take us through what our agenda is going to be today. We're going to talk a little bit about why Luxembourg. So we'll learn a little bit about it in terms of just some facts and figures, and then we'll get into some of the greater detail over there. Then what we're going to do is we're going to go through typical structures in Luxembourg. We're going to learn about the different type of corporate entities. We'll drill a little bit deeper into things with SAs and SARLs. That's going to be the corporate governance and taxation.

We are going to learn a lot of about substance today. The very first time I ever spoke with FX, he mentioned substance to me, and there has not been a single time that I have spoken to FX that I have not learned more about substance.

And then what we'll do is we'll go into know your customer and anti-money laundering in terms of due diligence. And, of course, we'll end up with a Q&A session at the end.

So first what I want to do is I just want to walk us through a little bit about the profile of Luxembourg. So it's often considered to be the gateway to Europe, and it is the largest investment fund center in Europe and the second largest in the world after the U.S., with €5.5 trillion assets under management. So Luxembourg has a reputation for being very stable and quite frankly very wealthy. It has got the highest per capita GDP within the world. You can see the number is over there. It was estimated at $135,000 in 2023. It has a AAA rating, 1 of only 10 jurisdictions that has that.

There's 126 different banks that operate in the country. They clearly specialize in private banking, life insurance, and investment fund administration. They are the eurozone's leading financial center and currently ranks at number 12 in the world.

And the official languages are Luxembourgish, French, and German. English is also very widely spoken. I mean and I believe that there's literally dozens of languages that are, in fact, spoken in our CSC office in Luxembourg.

So let's just then now go into a little bit more over here about, in terms of the business aspects, why Luxembourg. So FX is going to get us started along on this slide. So FX, why don't you tell the audience why is Luxembourg just such an attractive nation for investment?

FX: Yeah. Thanks, Helena. For many different reasons, by the way, that I'm going to elaborate a bit on during this presentation. So the first one, as you mentioned, so Luxembourg is the second largest investment fund center worldwide and number one in Europe. For such a small country, it's quite an achievement with €5.5 trillion of assets under management. And domiciled investment funds are distributed in 80 countries, focusing mainly on Europe, Asia, Latin America, and the Middle East. What's important to note is that around 76% of the top 60 asset management firms have chosen Luxembourg as their hub to operate their business and activity.

Obviously, one of the reasons we can we can ask is why those asset management firms have chosen Luxembourg. First of all, for its political stability. It's actually important for investors and potential clients in the sense that, as perhaps the vast majority of the attendees knows, Luxembourg is a very stable country with a favorable tax environment. What do I mean by that? It's quite simple. At least the last 10 or 20 years, since I joined Luxembourg, I have never seen any sort of law or regulations that is into force with a retroactive effect when it come to tax. So it actually means that the tax treatment of any sort of structure is predictable. And you can even go a step further by asking the tax authorities to have a sort of a pre-wash of the structures you are contemplating to incorporate in Luxembourg so that you are perfectly aligned and you are avoiding any sort of surprise when it comes to tax treatments in Luxembourg.

About alternative investment funds, Luxembourg is a prime location for private equity and venture capital, with around €962 billion of assets under management. Or infrastructure in the country, I think we can we can fairly say that it's an excellent infrastructure for data storage, with around 23 data centers that are based in Luxembourg and an ultra high-speed broadband network, which makes Luxembourg best in class in the European Union.

I think you briefly touched upon it, Helena. When it comes to the workforce in Luxembourg, there are two things that are perhaps important to note. First of all, more than 50% of the population in Luxembourg speaks at least two foreign languages, which is significantly higher than the average of the other European countries. I'm coming from Belgium, for instance, and I can tell you that not everybody in Belgium can speak more than one or two languages. So that makes Luxembourg quite specific and also attracting because every and each investor can actually find a provider that can communicate with them in their own language, when it comes to Spanish, Italian, English of course. Even Mandarin, we do have we do have people that are speaking Mandarin. It tremendously helps to make sure that the communication is smooth between the client and the service providers here in Luxembourg.

Luxembourg also attracts highly-skilled talents, mainly from European universities, and needless to say that because of the financial industry that we do have in Luxembourg, most of them they are holding a graduate, a master's in economics or in law.

That's very high level why Luxembourg is, let's say, a preferred hub in Europe for financial institutions and investors. So I think we can . . .

Helena: So FX . . .

FX: Yeah.

Helena: . . . and I was going to say now, FX, why don't we go now into the different corporate and private equity structures? We have two examples. Can you walk us through these of what could our audience expect to see if they were in Luxembourg?

FX: Yes, of course. So those two slides are pretty similar. So I'm going to spend a bit more time on the first one, when I've deliberately chosen to have a U.S. PLC on top, and we're going to look at the chart on the right side and on the left side.

So if we start on the left side of it, we do have the U.S. entities holding 10% of LuxCo A, which in its turn holds 100% of LuxCo 1, holding ultimately a real estate property let's say something. What's interesting, from a tax perspective, is that in case LuxCo 1 would like to repatriate dividends up to the top of the structure, so in this case the U.S. PLC, that can be free of tax if certain conditions are met.

So here, let's assume that dividends are going to be repatriated from LuxCo 1 to LuxCo A and LuxCo A to the U.S. PLC. Because of the participation that the U.S. PLC holds in LuxCo 1, which is above 10%, and that the U.S. entity is holding the assets for an uninterrupted period of 12 months, those dividends are going to be repatriated free of tax. That's scenario one.

Now the question is, obviously, what happens if the U.S. entity is not holding 10% but 5%? Then the same so-called participation exemption can apply, but then we're going to look at the value of the investment made by the U.S. entity. So even if the U.S. company is holding only 5% of LuxCo B, and I'm looking at the right side of the org chart here, but the value of the underlying asset is about 1.2 million, then the participation exemption will apply and dividends can be repatriated without any sort of negative tax impact in this example.

So that's what makes Luxembourg quite interesting for these kinds of structures. It also applies to many different assets, not only to real estate, of course. And perhaps for the benefit of the audience, this is coming from a European directive that has been translated into force in the Luxembourg environment I think many, many years ago. So it's a waterproof structure that we are using nearly every day with our clients here in Luxembourg.

So perhaps, Helena, we can go to next slide.

Helena: Here we go so.

FX: So it's very much the same, but here I deliberately decided to only go for one structure where we do have 65% of shareholding of Lux SA, which holds in its turn 100% of a PropCo holding two assets that are real estate property. And again, from a dividend perspective, it's going to be repatriated free of tax. And also, if we want to be to go a bit more in detail, it's not only dividends. But if we decide to liquidate the structure, the liquidation proceeds, because of these structures, is also going to be free of tax. So it's very similar to the previous slide. But what's important to note is that the participation exemption applied to dividends and to liquidation proceeds.

Helena: FX, we have a question right over here that someone has, and they wanted to know, what is the significance of the 1.2. Could you please explain that one more time for everyone?

FX: Sure, absolutely. So perhaps you can go back to the slide 6. Okay. So what I tried to explain, we do have two scenarios. Scenario one is the U.S. entity is holding 10%. I think we do not have any question on that one. Scenario two, so on the right side is the U.S. entity is holding 5%, which is not the threshold that needs to be met to benefit from the participation exemption unless the value of the final investment is equivalent to €1.2 million. If the value of the real estate property in this instance is €1.2 million, then the participation exemption will apply.

Helena: Okay.

FX: Does that answer the question?

Helena: I think so. Let me ask you one more question that we got from the audience that came here. I think it's better to address now than later. The question is, who would own the remaining percentages in these structures?

FX: It depends on the structure that has been set up. There can be other investors, of course. We can have a joint venture on top. Here, we can perfectly imagine to have the U.S. entity holding 100% of the LuxCos. That can also work. But I deliberately focused on the percentage here I chose 10% because that's the condition that needs to be met, or alternatively the value of the underlying assets, which is €1.2 million. But it can easily be other investors or other shareholders aside of the U.S. entity.

Helena: Okay. Thank you, FX. What I'm going to do now is I will jump ahead. I will go past our example two because we already covered that. And then we have now, FX, if you can tell us about the two different main kinds of companies that you will find in Luxembourg, the SARL, which is similar to a U.S. LLC, and the SA, which is a public limited company. So can you talk a little bit about these here now?

FX: Yes, absolutely. Thanks, Helena. So there are, obviously, similarities between the two because those two entities are the ones that we do see very often in Luxembourg and that are very much used in international structuring.

When it comes to incorporation, both of them need to be incorporated by a notarial deed. So it means that the article of associations or the bylaws, which is actually the same documents, needs to be enacted in front of a notary in Luxembourg.

The legal personality because those two entities, they do have a different legal personality than their partners or shareholders, but what is important to note, especially if you compare with certain other European countries, is that the legal personality exists at the time of the signing of the notarial deed. Let me perhaps elaborate a bit more on that one.

So what we do see, especially in PE world, is that around November December, there are quite a lot of transactions in the pipe that needs to be closed by the end of the year. In Luxembourg, if you incorporate an entity, the entity will start to exist at the time of the signing of the notarial deed. If you compare that with Belgium, for instance, or France, the entity will only exist at the time of the publication in the official gazette, which is sometimes highly unpredictable and can jeopardize the closing of certain transactions. So here in Luxembourg, it's very clear the entity exists, irrespective if it's a SARL or an SA, it exists at the time of the signing of the of the deed in front of a notary.

When it comes to share capital, a slight difference between the SARLs and SAs. So the minimum share capital for a limited liability company is €12,000, and it needs to be paid up in full at the time of the incorporation. While for a public limited liability company, it's €30,000, that needs to be paid up by at least 25%.

When it comes to shareholders, for a SARL, it can be created by only 1 shareholder up to a maximum of 100. And for an SA, if we think, for instance, about limited listed entities, we can have one shareholder till a number that is actually indefinite.

The management body, it's, in both cases, a board, a board of managers for a SARL with a minim of one manager, and for a public limited liability company, it's a board of directors of one director if there is only one shareholder. As soon as there are two shareholders in an SA, we need to have a minimum of three directors in the board. And I think Ed and Simon are going to elaborate a bit more on the board composition later on during this webinar.

Obviously, one other question can be around the financial statements and the annual accounts, if they need to be audited or not. What makes the limited liability company very flexible is that the audit of the annual accounts is not mandatory. Obviously, you can go for a contractual audit in case you would like to have those accounts audited, but that's on a contractual basis. To the contrary, for SAs, which are the public limited company, the audit by an external audit firm is mandatory.

And the annual accounts for both of them needs to be approved every year six months after the closure of the financial year that is going to be under review. And the audit report needs to be made available for SAs.

This is very high level the main differences between the two main structures we do see in Luxembourg and that are actually used every day by all clients and investors.

Helena: So now what we're going to go is we're going to jump into the annual corporate governance duties that we have. So, of course, for our U.S. audiences, they're very familiar with some of the requirements. But let's now have Simon talk to us about what we can see in Luxembourg. So, Simon, walk us through the key elements here.

Simon: Yeah. Thank you, Helena. So from a legal perspective, each entity have to fulfill some obligations regarding the annual accounts preparation and filing, together with the preparation and the filing of the corporate income tax. So from the inception and until the liquidation, any company in Luxembourg must prepare annual accounts and submit them to the Luxembourg Trade Register of the company.

Then the annual accounts are composed by three elements —the usual balance sheet and P&L accounts and the accompanying notes. The accompanying notes are simply a summary of the activity of the year, disclosing all the captions from the balance sheet and the profit and loss accounts.

The accounts will then be presented to the board of managers sitting in Luxembourg so we have a review of the annual accounts disclosing all the capture in front of the managers in a readable format. And then we're going to submit them officially to the shareholders, and we will hold a shareholder meeting to approve the annual accounts based on the draft that has been submitted to the board of managers together with the management report.

After this exercise, it's important to note that Luxembourg, since 2018, has its own standard chart of accounts, which is called the eCDF. So on an annual basis, once the accounts are approved by the board and by the shareholders, we will submit the balance sheet and the profit and loss accounts in a certain format that is the same for all of the Luxembourg entities. So it's a common practice that we all use the same standard chart of accounts.

Then the second one is after the approval and submission of the annual accounts, we will have the preparation of the corporate income tax, summarizing the profit or loss of the companies. We have two types of tax returns that must be filed in Luxembourg to the tax authority by the latest December 31st on a yearly basis. And the two tax returns are the corporate income tax and the municipal business tax.

Then I will let Ed . . . Sorry, Helena.

Helena: Let me just ask you one question over here, Simon. When we talk about the annual accounts, you said the balance sheet, the profit and loss accounts, and then the accompanying notes. Can you talk a little bit more about what the notes are?

Simon: So the notes is a summary of the annual activity of the company. So the first pages will be a disclosure on the company activity, confirming the different rules in Luxembourg. Then we will go into the different captions. So we will start to have a disclosure on the assets and the liabilities of the company, a disclosure on the result of the year, and the potential allocation of any potential dividends, etc. And then also a disclosure and explanation of the different profit and loss captions. So just to give an example, if we have some financing activity that is basically a loan granted or received, we will have some disclosure on the interest rate, the time for the loan, if it's a shorter one, if it's a long-term one. And then in the profit and loss, we will also have some explanation on the expenses or potential income triggered by this loan.

Helena: Okay, very good. Thank you. So what Simon mentioned is our next speaker is going to be Ed, and Ed is going to be speaking to us about general taxation issues in Luxembourg. As you can see, we have a few different kinds. And also then Ed is going to start talking about a little bit more of the . . . Oh, I'm sorry. I'm misreading my notes, but Ed will take us away. Sorry about that.

Ed: Thank you, Helena, indeed. So let's go through the general taxation in Luxembourg.

The first one is, Simon already touched on it a bit, the corporate income tax and the municipal business tax. So Luxembourg income tax is calculated on the worldwide income of the Luxembourg entity, and currently it's at the combined rate of 24.94% for the companies that are established in Luxembourg City in 2024.

So how is this rate let's say composed? So we have kind of three different components. So one is indeed the municipal business tax. So that's 6.75% in Luxembourg City. So if the company is established in another city than Luxembourg City, it differs a bit of this 6.75%. In most cases a bit lower than this number. Then we have the solidarity surcharge. That's 7% on the corporate income tax. That's for the benefit of the employment fund in Luxembourg.

And then coming to the corporate income tax, that's based indeed also on percentages, and it's based on different buckets. So for the first €175,000, companies pay 50% of corporate income tax. Between €175,000 and €200,000 one, the company pays a flat fee of €26,250 and additional 31% above on the €175,000. If companies earn more than €200,001, they pay 17% on that number. So if you combine everything, then companies who have profits more than €200,001, they pay an nominal rate of 24.94%, including the municipal business tax and the solidarity surcharge.

This rate is a nominal rate. So it could be that the effective tax rate is lower. Why? Because the worldwide income of Luxembourg could be that certain elements of this worldwide income is tax exempted. Think about some dividends income why this is exempted because of certain rules and because of certain taxes already paid elsewhere in other countries and to avoid double taxation. So the yearly nominal rate is 24.9%, but the effective rate could be lower.

The second tax that we deal with in Luxembourg is net wealth tax. It's something quite specific to Luxembourg because net wealth tax I think a lot of people know it's in most cases related to your personal income tax, but also in Luxembourg it's also related to the company. So how does it work? We have Luxembourg tax resident companies that are subject to net wealth tax — the abbreviation is the NWT tax — on the net worth at a rate of 0.5% for the total net worth below €500 million and 0.05% above.

So how is it calculated? It's calculated by taking all the assets minus the liabilities, and then the net worth, what you have then, the amount will then be taxed to these two numbers. It's all always based on the first of January of each year. So what then is happening is that we use the financial statements of the 31st of December to determine the net wealth worth of the company. Even if you have an negative net worth, that is your liabilities are more than your assets, you still have to pay a net wealth tax because the minimum net wealth tax for most of the companies is €4,850.

What you normally see in Luxembourg is that towards the end of the year, so we talk about let's say November, December, the companies are assessing their financial position and their net worth. And if this net worth is quite high for instance, for example, you have a lot of cash on your balance sheet, so let's have an example that you have €1.1 million cash on your bank account as assets and you have only €100,000 liabilities in this simplified example, and you have a net worth of €1.1 million minus €100,000. And then you need to pay 0.5% on this amount. That's €5,000. What then normally happen is that companies, before the end of the year, would like to distribute cash assets to its shareholder to avoid to pay a high net worth tax amount on the first of January. So they really distribute some money up through the structure to make sure that the net, let's say the assets minus liabilities is as small as possible.

The third one is the Luxembourg VAT. So we all know VAT. So the VAT is, in Luxembourg, 17%. That's the standard rate. And holding activities are outside the scope of the Luxembourg VAT, and financing activities are VAT exempt. So how does it work? So if you have an passive holding company and this company gets an invoice let's say in Luxembourg from their tax advisor or their law firm, then this 17% VAT is an expense for this company because you are not entitled to deduct this VAT.

What about loans? Granting loans do not have the right to deduct input VAT. The exception of this rule is that the holding company that financed non-EU parties. So in the example that the holding company and Luxembourg finance a subsidiary or a group related entity outside the European Union, then you might get a kind of right to deduct input VAT partially.

You also see that in Luxembourg some companies that do management services or consultancy services, that's not a VAT, so you can also deduct input VAT. In this respect, it's quite important to share that if you do this, that you need to prove that you really provide these management or consulting services by having underlying documents and also prove that you really grant these kind of services.

Last point I would like to touch on is the liquidation proceeds. So liquidation proceeds paid by a Luxembourg holding and financing company, a so-called SOPARFI in Luxembourg, to its shareholders are not subject to withholding taxes. So if you have a company that's put into liquidation and you then decide to cash out money to its shareholders or assets, it's free of tax. If you're not yet into a liquidation and you just, during your life cycle, want to distribute money to your shareholders, so if you're not liquidation as an active company, then you could tax. But that's, of course, dependent on which countries and if there are tax treaties in place. If you were to decide to pay dividends out, you need to make sure that you have your interim accounts prepared, and then you need to have a board resolution and shareholders' resolution to do this dividends distribution.

But you also see in Luxembourg because sometimes during the life cycle of your company, you want to distribute dividends and you have, because of the country that your dividend distribution is going to, you have some different withholding tax, then you can also make use of class of shares. So in Luxembourg it's quite, let's say, common to have class of shares. So for instance, we have Class A, we have class B, Class C, Class D, and further and so forth. And then you can redeem the class of shares, that's also sometimes partial liquidation, and then the distribution related to this class of shares that's to be redeemed can be distributed free of tax as a kind of partial liquidation.

These are the general taxation rules in Luxembourg, of course in a nutshell, because you can talk about taxation, I think, for a long time. But these are the four, let's say, main components in Luxembourg.

Helena: Thank you, Ed. So Ed is now going to continue talking to us, and he's now going to talk about participation exemption. So if you thought taxation could take a while, Ed, please tell us all about the participation exemption.

Ed: Yeah. So already I think talked about it a bit during the beginning of the presentation. I also just talked about the dividends and liquidation proceeds that were distributed by a Luxembourg company. But in this case, we talk about dividends and liquidation proceeds received by a Luxembourg entity.

Now these are, under certain conditions, exempted from tax in Luxembourg, and these conditions I have to explain that you should have the subsidiary, the ownership of at least 10%. And if it's not the case, then you need to have the subsidiary again an acquisition cost of at least €1.2 million. If that's the case, then dividends and liquidation proceeds received by a Luxembourg company are exempted from tax.

If you then go to the capital gains, so an example that, during the year, you want to dispose, to sell your subsidiary, and you made a capital gain, then this can also be tax exempt also under certain conditions. So at least again 10% of your shareholding should be in the subsidiary. If that's not the case, then the acquisition cost should be at least €6 million. So that's a bit of difference compared with the dividend income. For the capital gains, this threshold is set at €6 million. There's also another condition, and that's that the shares in the subsidiary should be held for an uninterrupted period of at least 12 months. So if you have a capital gain of your subsidiary within, let's say, one year, then you have an issue because then you still need to pay legal taxes.

The third one is net wealth tax. So I talked about ne wealth tax a few minutes ago. As you might recall, I explained the calculation is based on the assets minus liabilities. Some assets are excluded, and one of them is the subsidiary of an Luxembourg entity. It's only exempted also under certain conditions. So these are exempted from the net wealth tax calculation if the share capital of the subsidiary is at least 10% or with an acquisition cost of at least €1.2 million. So it's the same condition as the dividend income and the liquidation proceeds. There's no minimum retention period for this tax. So that's only above the 10% or €1.2 million. So if you have done the net wealth tax calculation, you take all your assets and excluding the subsidiary, if you meet this condition, minus liabilities, that's then your net worth that you need to pay taxes on.

Helena: Before we move on to the next slide, let me just interrupt Ed here and run a question past him that came through from the audience. So the question is, when we are talking about subsidiaries and assets held by a LuxCo and the tax participation exemptions, do these assets have to be held in Luxembourg, or is it anywhere in the you EU or anywhere in the world?

Ed: Yeah. Thank you very much for the good question. So now it's irrespective of the of the location. So the participation exemption is really based on these conditions, €1.2 million and 10%, irrespective if the subsidiary is in Europe, is in Luxembourg, is in Africa, or elsewhere. And it also can be anywhere.

Helena: Okay, very good. So our next topic that we are going to be discussing is going to be substance. So as I mentioned in the introduction, I heard about substance the very first time I spoke with FX. I've heard it from Ed and Simon. And so what we need with substances, it's needed to manage the tax residency of companies, and very importantly it is determined on a case-by-case basis. So now what we're going to do is, our next couple of slides, we are going to have Simon review the different substance indicators with some of the elements of such as bank offices or bank accounts, resources, board composition, and then the own offices. So can you now take it away please, Simon?

Simon: Thank you, Helena. So as mentioned by Helena, substance is really a crucial word in our environment in Luxembourg, and it's something that is assessed at the very beginning of the incorporation of a company, but also during the life cycle of the company that can evolve and we can add different elements of substance. As mentioned before, Luxembourg is definitely a prime destination for businesses seeking to establish a substantive presence in Europe due to it its very tax efficiency environment and the robust financial sector. To fully leverage the benefits of establishing substance in Luxembourg, the businesses must carefully navigate a range of key considerations to meet substance requirement to fit into the different anti-tax avoidance directives.

Substance refers to the operational and economic activity in Luxembourg and also in other jurisdictions too. The substance regulations require entities with tax residence and income in Luxembourg to evidence adequate local resources, facilities, and control over income and income-generating activities. The activities are required to be managed and directed, to have adequate employees, expenditure, physical presence, and to conduct their core activities in the local jurisdiction to benefit from operating there. Having the right substance in Luxembourg is essential while considering the potential benefit of the double taxation treaty and what add-on effects explained before regarding the participation exemption.

So we have different substance indicators, and I will start with the first one, which is own office and resources, which can also include the registered address. So all companies in Luxembourg must have a registered address where it should keep all the books and records. There are no specific provisions which require a company to have its own premises in Luxembourg, but often advisable to have dedicated office space with a minimum level of facilities, meaning an access to the reception, to the mailing, and to have an office space that is fully equipped and where the daily activities are conducted. On top of it and coming back on the preparation of the annual account, this will allow the different companies to also include in the expenses general costs, such as electricity, phone cost, etc.

A company must also employ or have an access to qualified personnel to manage and control the different activities and the risk also. Decision-taking people that are allowed to take real decisions are more than welcome in Luxembourg and to be employed by the companies. And also something that we always pay attention to is to keep the own letterhead and own email accounts to be used for the different correspondence.

These are really the own office and resources element. The second one will be one of the crucial one — the board composition and decision-making. We require in Luxembourg to have a majority of board of managers resident in Luxembourg, and if not the majority, at least 50% of local compared to external managers.

At least one resident manager with the relevant skills, experience, and knowledge involved in the decision-making process. So this guy or person should be actively involved in all the matters concerning the entity, with the authority to bind the company. So this person, as I said, must be included in the decision-taking process, and we always require being informed on the different activities with regular business updates and information on different activities of the companies.

Regular board meetings must be held in Luxembourg and appropriately documented. So meeting outside of Luxembourg can also be allowed, but only on exceptional basis. We will always require and recommend to a physical board meeting, preferably no proxies unless proxies is wanted by the Luxembourg resident. Conference call and video meeting are also allowed, but it has to be initiated from a Luxembourg point of view. The decision-making element is very important that we can ratify that any decision that must be made by a company is discussed and approved during the board meetings and properly minuted.

I think that's it for this one.

Helena: Okay, very good. And then can you keep taking us through, Simon, and now address the resources and bank account?

Simon: Yes. So the next one is the resources. So we always recommend to also have some outsourcing of the activities to service providers to prepare the annual accounts and the legal and administrative services that are not the crucial decision taking for the client. So this will be out of the risk control and the decision-making for the company. And so it is helpful for the company to also have part-time employees, meaning that people that will be on the payroll. So we'll have a subcontract with a service provider for a certain number of hours per week per month, where the different accounting and legal matters will be handled by some person. This will also add some expenses to the annual accounts of the companies as we will have a direct contract between the employees and the companies.

The bookkeeping performed Luxembourg is kept by the affiliate in Luxembourg in case we have our own office or by the service provider. It's important that the tax return on an annual basis is signed in Luxembourg by the board of managers. So it is something that is also reviewed during the board meeting, presented as for the annual accounts, and signed in Luxembourg.

The final one, the bank account in Luxembourg, it is a quite a significant discussion that we have. All companies should have a bank account in Luxembourg to manage the daily operations and to proceed with the payment of different expenses and invoices for the Luxembourg entity. All the financial transactions should flow through the Luxembourg bank account to ensure day-to-day cash flow. The Luxembourg resident managers should have signing authority to operate the bank account. So we always work with the A and B authorization and power on the bank account. So it's always a jointly power to approve payment in Luxembourg. There are, however, no Luxembourg rules that invalidate the use of foreign bank accounts, but highly recommended to open a bank account in Luxembourg for the daily activities.

These are the main substance indicators, the best practice that we see. We follow the different rules, and as I said, this can evolve during the life cycle of the company, and we can always navigate with these key elements and to add substance to the different elements.

Helena: Simon, before we continue, we got a question from the audience, and I think that this is best that we address this one now. So the person said, "Can you please explain again what the purpose of substance is?" So explain one more time and what happens if you do not have substance.

Simon: Yeah. So then we can be challenged by the economic reasoning of being in Luxembourg and of having a company in Luxembourg, which can trigger some important change in the participation exemption. So we need to fulfill to some obligations to make sure that we have a sufficient level of substance. So it's very important to keep the benefit of the robust taxation environment in Luxembourg.

FX: So, Helena, if I may, the purpose of substance, and I had that case a few months ago, is just to make sure that at any time the company is effectively managed from Luxembourg and that we able to demonstrate that to avoid being challenged by foreign tax authorities. So we're never going to be challenged by the Luxembourg tax authorities, but we might be challenged by the German ones, the U.S. ones of course, unless we can demonstrate that the company is effectively managed from Luxembourg. So, for instance, strategic decisions when it comes to an investment or a disinvestment, those decisions are typically taken in Luxembourg during a physical board meeting.

Does that answer or does that clarify the question?

Helena: I am sure that it does. Yes. Okay. So what we will do is let's now go on to our next slide, where we can talk about the anti-money laundering framework, the key concepts. So Ed, why don't you take us through this, please?

Ed: Sure. Thank you, Helena. So the AML framework the key components, so this framework is used by the service providers in Luxembourg, but also with a lot of other parties, like banks. But it's important to know for you how this is being, let's say, addressed because a lot of new client entities will go through this phase of AML components.

So the first one is the business risk appetite. So each firm, I think as also your firm, have their own business risk appetites. So what we see in Luxembourg, for instance, that some banks they don't want to have clients on board that are let's say private wealth. That's a possibility that the bank say, "Okay, we don't want to work with private wealth structures because of the business risk." They also think about some industries. Some firms don't want to be associated with the weapon industry. So the first thing is to determine, assess your own business risk appetite.

Then the second step is the risk assessment. So imagine that you will get a new potential client entity, a new structure is then what you do is that you go through your risk assessments. So the risk assessment, you can think about a lot of different elements. The first one is, okay, who are your investors and initiators of this new structure. Are these SEC regulated or not, for instance. We look at the target investments. Which industry are we talking about? Are we talking about the telecommunication industry, the oil and gas industry? You can imagine that the oil and gas industry is more risky than a telecommunication industry. We also look at the countries involved. Are we talking about low-risk countries or high-risk countries?

The services that we provide, are these just ancillary services, like accounting or corporate secretarial, or also domiciliation or directorships? These are also more supervised by the local regulator here in Luxembourg.

Think also about the tax risk assessment. Are we talking about tax-aggressive structures or less tax-aggressive structures?

Screenings, what we also we have to screen all the stakeholders in the structure. It could be that the stakeholder in the structure is also a political-exposed person. There's maybe negative media available or let's say on Google.

So all these risk elements are taken into consideration, and at the end you have a kind of risk rating of each entity. So based on the risk assessment, you look at, okay, is it in line with the business risk appetite that we have as a company?

Now if you have done also the risk assessment, you go to the next one, that's the risk-based approach. So based on the risk assessment, you do your KYC collection, and then you identify the client and the ultimate beneficial owners. You also do the verification documents, like the utility bill and copy of passports. And also really important is to verify the source of funds and the source of wealth. Where are the funds coming from? How is the wealth created, because these funds will go through the structure, and, of course, what we all want to avoid, the banks and all the service providers is to have funds that are coming from illegal sources. We don't want to have this in the structure. That's why we are also looking at the source of funds and the wealth.

Now if you have done all these three steps, then there's an internal, let's say, committee in each service provider or bank that then decides on the acceptance or rejection of this new structure. So this is the first, let's say, yeah, onboarding stages one, two, and three. Then you have accepted the client entity, but then it doesn't stop because during the whole life cycle of the company, the structure you need to do ongoing due diligence, the so-called transaction monitoring. So I will come back to that step five in the next slide to give you more details about this step.

Going to step six is the cooperation with the authorities. So in Luxembourg, we have a local regulator that's the CSSF. So you need to cooperate with the authorities. So it's very important that we can demonstrate all the players in Luxembourg how we approach the onboarding of a new company, so the steps two and three, and also the ongoing transaction monitoring during the life cycle of the company.

Also the CSSF is looking at our internal control environment. That's shared on the number seven. So they look at our systems, the policies and procedures, how often we give training to our people so they are aware of, let's say, the regulation and also to flag if they see something unusual, the recordkeeping, internal controls, and the three line of defense that we have. The first line is always the business. The second line is compliance, and the third line is internal audit. So can I think every bank and every service provider in Luxembourg gets a kind of audit from CSSF, so they visit the firm. So now and then, they do then a kind of audit on the onboarding of client entities, transaction monitoring, or just at the whole AML framework.

So that's a bit the key elements. These are the key elements of, yeah, the AML framework of all the regulated companies in Luxembourg. So then talking about funds providers or the service providers, banks, insurance companies, these are the steps I think quite important because for companies and for clients then they know what they can expect. It's sometimes a bit of a painful process. On the other hand, because Luxembourg is regulated very well, it's also kind of unique selling point that if you have your structure in Luxembourg, you have really, let's say, a very onshore structure compared with sometimes the offshore structures, and that gives also a lot of, let's say, clarity and also very I think a good sign to your investors that if you have your company in Luxembourg, it's very well organized and very well, let's say, from a due diligence point of view, it's very well organized.

So we can go to the number five, the ongoing due diligence. That's the next slide.

Helena: Yes. And we are going to hear now from FX, who is going to dig deeper into the ongoing due diligence with transaction monitoring.

FX: Yeah, okay. Thanks, Helena, and thanks, Ed, for the intro on KYC AML. I'm going to keep this quite high level, and I'm not going to go line by line because, let's face it, KYC AML is not the most exciting topic, but it's definitely very important when it comes to anti-money laundering and the fight against financing of terrorism. Let's perhaps look at this from and taking a concrete example.

So as Ed mentioned, we are supervised by a regulator called the CSSF, and those regulators, they are obviously active in many different countries. So I do assume that lawyers in the U.S. are also regulated. The same goes for the banks and other financial institutions. So we need to make sure that we do have a robust transaction monitoring plan in place, meaning that each time there's a transaction that is occurring, we know exactly what's the purpose of that transaction and if it fits the client profile.

Again, let's take an example. I think we all know Google, right? So the way we're going to look at it is let's imagine that Google is investing in R&D activities for the launch of a new software, and they're going to inject cash in the structure. So typically, that kind of transaction will not surprise us because it's definitely their core business to do softwares and to develop softwares. So we're going to simply check if that's in line with the purpose of the objectives of the client entity, the answer is yes, and if it fits the risk profile that we've defined at the onboarding stage that Ed explained a few minutes ago, and if that's an expected activity. The answer is yes. So we're going to perform what we call a customer due diligence, which is a simplified one. So we're going to check obviously the transaction and monitor the transaction, but we are not going to go in a lot of details.

Now to the contrary, still taking Google as an example, let's imagine that they invest in a food manufacturing. So their core business has nothing to do with food, right? So there, we're going to obviously start what we call an enhanced due diligence because it's something that is not in scope with, let's say, their risk profile and the purpose of the of Google as a group. So they are much more obviously focusing on IT matters and applications, so nothing to do with food. Then we're going to perform an enhanced due diligence, and that means that for that specific one, so the investment they are contemplating to do in the food manufacturing, we're going to ask for all the transaction documents, so the board minutes evidencing the approval of that transaction, how is it going to be financed, the cash flow, all the agreements that are going to be signed by the boards to create a sort of audit trail and to make sure that we do have an in-depth understanding of that transaction.

So to keep it very high level, there are two different transactions monitoring processes. We do have the simplified one, when the transaction that is happening is in line with the corporate objective and the activity of the client entity, and the enhanced due diligence, where it does not fall within the activity of the group that is a client of ours.