The Substance Question: Investing In Germany From Luxembourg

Substance. More than ever, it's on everyone's mind, especially in the context of the OECD's Base Erosion and Profit Shifting (BEPS) action and the Multilateral Instrument (MLI).

From a domestic tax point of view, a company is tax-resident in Luxembourg if it is established under the laws of Luxembourg (i.e. has its statutory seat in Luxembourg) or if it is centrally managed in Luxembourg. Essentially, its place of effective management must be in Luxembourg.

When it comes to substance and tax residency, the country where the company's stakeholders are is of utmost importance. This could mean the tax authorities of the country where the Luxembourg company invests, or the country of residence of the country's investors, or that of its lenders. So, in practice, substance is usually a non-Luxembourg matter, and thus must be deeply analysed from different points of view.

Thanks to its broad range of investment vehicles, which go from no to high regulation and can thus satisfy a variety of investors, Luxembourg is very popular as a jurisdiction to set up alternative investment funds. It has become very popular to set up platforms in the Grand Duchy for investing in cross-border real estate, notably in Germany. But what are the key points when it comes to substance and operational requirements for a Luxembourg company owning real property in Germany?

A view from Germany

A company whose legal seat is in Luxembourg could be considered tax-resident in Germany if its place of management is assumed to be in Germany. As a result, it could be subject to corporate income tax and trade tax in Germany. The company's place of management also decides the applicability of the Germany-Luxembourg Double Tax Treaty. The place of effective management is not only where important decisions are taken but also where daily business operations (i.e. the day-to-day management of the company) are done.

To help you navigate these concepts, a rough guide of dos and don'ts for Luxembourg companies investing in properties located in Germany can be found below:

Dos

The Luxembourg company should preferably only have board members who are tax-resident in Luxembourg. If this cannot happen, then they must, at least, not be tax-resident in Germanythey should also maintain records of trips they take to Luxembourg to attend board meetings (e.g. travel expense reports). Board meeting minutes should accurately reflect where each director was located at the time of the meeting, what was...