1. Introduction - Elvinger, Hoss & Prussen

LUXEMBOURG2.6. Indirect taxesNo stamp duty or similar duties are payable on the transfer of shares in a Luxembourgcorporation.In the case of a contribution in kind of shares in the target to a Luxembourgacquiring company against the issuance of new shares of the acquiring company(share-for-share exchange), capital duty at the rate of 1 per cent is in principlepayable on the value of the contribution to the acquiring company. An exemptionis available under article 4-2 of the law of 29 December 1971 on capital dutywhere the shares contributed represent at least 65 per cent of the share capital ofthe target and the target is a company with its headquarters or registered office inthe EU. However, the exemption requires that the Luxembourg recipient companykeeps all the share contributed to it and at least a 65 per cent participation inthe target for at least five years. If either of these conditions is not fulfilled, thisexemption from capital duty is subject to a claw-back except where the disposaloccurs within a capital duty exempt transaction or as a result of the liquidation ofthe acquiring company.A capital duty exemption also applies for asset mergers involving Luxembourgor EU entities. Article 4-1 of the law on capital duty provides that, undercertain conditions, transactions where one company contributes all its assets andliabilities to an existing or new company may be exempt from capital duty. Thisprovision in particular applies to mergers and demergers which will thus beexempt from capital duty. No claw-back applies to such asset mergers.The acquisition of a going concern may be realised in a neutral manner forvalue-added tax purposes, where the recipient may be considered as the successorof the transferor, in accordance with the domestic provisions implementingarticle 5(8) and article 6(5) of the Sixth VAT Directive. The sale of individualassets may, however, be subject to VAT by application of common tax principles.Registration duty is due on the transfer of assets if the transfer deed is passedbefore a Luxembourg notary public or recorded in a deed, which is registered inLuxembourg. Such a registration is, however, only compulsory in respect of certainassets such as real estate located in Luxembourg or planes or ships registeredin Luxembourg. The basic rate is 6 per cent, and a higher rate of 7 per cent to 10per cent applies to the transfer of real estate. Several exemptions and lower transferrates are also available, depending on the nature of the assets transferred.2.7. Acquisition financingIf a Luxembourg company is funded with debt in order to finance the acquisitionof shares in a target company, the financing costs are generally deductible for taxpurposes. Financing costs comprise interest but also other costs related to theacquisition debt. The deduction is available irrespective of whether the targetcompany is a Luxembourg company or not.However, any expenses or costs which are economically linked to exemptincome will not be tax deductible. That limitation only applies to the extent thatthe company actually receives exempt income. Any excess of acquisition or othercosts related to the exempt participation over the exempt income received in agiven fiscal year will reduce the taxable base. However, the participation exemp-448