Section 1: China outbound investment

a. What are the key sectors in your jurisdiction that attract, or to which the government is seeking to attract, China outbound investment (COI)?

Some of the leading sectors into which the Luxembourg government has been seeking to attract foreign investment are biotechnology/health technologies, e-commerce, logistics and eco-technologies.

Over the past few years, Luxembourg has become a focal point for Chinese companies' outbound investment by their setting up offshore companies in Luxembourg through holding and pooling investments. Luxembourg is also an obvious choice to locate all kinds of (pan-European) operations, whether it is a European headquarters for Chinese banks, where Luxembourg is to act as Europe's hub for renminbi products (Industrial and Commercial Bank of China (ICBC), Bank of China (BoC), Chinese Construction Bank), or for structuring tax-efficient acquisitions in Europe.

The Luxembourg Stock Exchange is one of the leading listing places for renminbi denominated bonds in Europe. Luxembourg is the most important hub for cross-border renminbi business in the Eurozone and it is the only country in Europe with renminbi denominated mutual funds.

b. Is the government generally supportive of COI? Which government, and regional, bodies are responsible for driving COI in your jurisdiction?

The government, banking and fund associations and the financial regulatory authority of Luxembourg have continually shown their support for foreign investors, including COI. The tax authorities in particular apply a pragmatic approach to foreign investment with a tax-efficient structure for repatriation of profits and access to a broad double taxation treaty network which includes China, Hong Kong and various other Asian countries.

Section 2: Investment vehicles

a. What are the most common legal entities and vehicles used for COI in your jurisdiction? How long do they take to become operational?

Undertakings for Collective Investment in Transferable Securities (UCITS) is the retail fund vehicle distributed on a pan-European basis that benefits from a European passport. This makes them freely marketable throughout Europe and subject only to a simplified notification procedure. The 2008 Memorandum of Understanding signed between Luxembourg and China qualifies UCITS as eligible assets in China under the Qualified Domestic Institutional Investors (QDII) regime. Luxembourg is one of very few financial centres to have such an agreement in place with China.

Luxembourg has developed various alternative investment products and bespoke investment structures such as hedge funds and funds of hedge funds, private equity vehicles and real estate funds. The recent implementation of the alternative investment fund management (AIFM) regime is expected to create a global alternative investment fund branch for non-UCITs funds. In 2004 and 2007 respectively, Luxembourg created the investment company in risk capital (SICAR) and the specialised investment fund (SIF). In addition, financial holding companies (SOPARFIs) are unregulated entities often used for the efficient structuring of investments in combination with SIFs and SICARs.

UCITs, SIFs and SICARs are all regulated entities for which the approval process by the Luxembourg financial regulatory authority (CSSF) may take two to three months.

For many years now, Luxembourg has been used for international acquisitions structuring via unregulated vehicles (SOPARFIs), which can be up and running within a few weeks.

In order to offer high net worth individuals (HNWI) a flexible vehicle for their wealth management, Luxembourg introduced in 2007 the Family Wealth Management Company, commonly known as the SPF (Société de gestion de Patrimoine Familial), for the purpose of the acquisition, holding, management and sale of financial assets.

A draft bill has been presented to Parliament which is soon expected to be adopted into law and will introduce the Luxembourg private foundation regime (foundation patrimoniale), a new wealth management regime expected to be a suitable solution to secure private or business assets, to separate economic ownership from decision-making authority or to protect private spheres.

b. What are the key requirements for establishment and operation of these vehicles which are relevant to COI (e.g. is there a requirement for local directors)?

There is a minimum share capital for the UCITs, SIFs, SICAR and SOPARFI. Regarding the SOPARFI and the SIFs and SICARs established in corporate form, there are no residence or nationality requirements for the shareholders or board members. However, under Luxembourg law, a company is of Luxembourg nationality if its domicile (its seat of administration) is located in Luxembourg. Having local Luxembourg directors supports the position that the seat of administration is located in Luxembourg.

Section 3: Investment approval

a. For foreign investment approval (including any national security review) explain the approval process and timing.

There are no limits on foreign ownership or control, only general screening of investment, which is non-discriminatory between foreign and domestic investors.

b. Briefly explain the investment restrictions for any specially regulated/restricted sectors (natural resources, financial services, telecoms and infrastructure, etc), including whether the government is entitled to any special rights (e.g. golden share) in those sectors.

There are no official restricted sectors.

c. Which authority oversees competition clearance, when is notification mandatory, and what is the merger clearance process (including whether pre- or post-closing)?

The Competition Council (le Conseil de Concurrence) monitors compliance with competition law. The European Commission has jurisdiction over anti-competitive practices.

There is no compulsory filing for mergers in Luxembourg. Where acquiring stakes in listed companies, applicable stock exchange rules may require notification.

d. Are there any unique processes that potentially could block a foreign investment, e.g. consent from labour unions?

No.

e. Are there approval requirements when a foreign investor increases or exits its investments?

No.

Section 4: Tax and grants

a. Are there tax structures and/or favourable intermediary tax jurisdictions that are particularly useful for FDI into the country?

Luxembourg is widely used as an intermediary tax jurisdiction for FDI in other countries. The use of Luxembourg as a holding company location may offer substantial tax advantages to Chinese companies making outbound investments. The abovementioned SOPARFI refers to ordinary, unregulated, fully-taxable Luxembourg resident companies whose main activity is the holding of shares benefiting from the participation exemption. The participation exemption is a key element of the Luxembourg corporate tax system and is aimed at avoiding double taxation of profits.

The Luxembourg-Hong Kong double tax treaty makes Hong Kong and Luxembourg a desirable path for Chinese investment in Europe, as it combines two favourable tax regimes and allows flexible and tax-efficient returns on profits and cash from Luxembourg to Hong Kong.

b. What are the applicable rates of corporate tax and withholding tax on dividends?

The total corporate income tax is moderate by European standards at 29.22%. Luxembourg levies a 15% withholding tax on dividends. However, no tax is withheld where dividends are paid to a qualifying company under the EU parent-subsidiary directive. Tax treaty relief may also be applicable.

c. Does the government have any FDI tax incentive schemes in place?

Luxembourg offers a very attractive tax regime for IP revenue: 80% of income derived from IP rights acquired or created by a Luxembourg company or permanent establishment, and gains from the disposal of such rights, are exempt from income tax (excluding the acquisition of IP rights from a related party).

Luxembourg is also the tax jurisdiction of choice when it comes to investment funds as they benefit from a wide range of exemptions: no taxation on income and capital gains, no withholding tax (unless the EU savings directive applies) and no wealth tax.

Shipping companies also have the benefit of various tax incentives, such as tax credits and exemption from municipal business tax.

d. Other than through the tax system, does the government provide any other financial support to FDI investors? If so, please provide an overview.

Successive Luxembourg governments have been proactive in attracting foreign investments in various industries through offering capital investment subsidies, equipment financing and financial assistance (through the State lending agency, SNCI), loans at reduced rates, cash grants for investments in high technology and R&D of innovative products as well as industries involved in manufacturing processes and services, and financial incentives to audio visual productions using production and location facilities within the Luxembourg territory.

e. Are there any reciprocal tax arrangements between your jurisdiction and China? If so, how can they aid investors?

There is an agreement between China and Luxembourg for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income and capital.

Section 5: Forex controls and local operations

a. What foreign currency or exchange restrictions should foreign investors be aware of?

None.

b. Are there any legal restrictions on bringing in foreign workers and how difficult is it for foreign investors to secure expatriate visas for shareholder representatives, senior managers and workers in practice?

A citizen of a Third Country (a non-EU country) requires a permit to work as an employee. This permit also serves as a residence permit. This work permit must be applied for before entering the country unless the person is already a legal non-working resident.

As an incentive for attracting highly skilled workers to Luxembourg, certain costs borne by the employer for the move, stay and exit of the employee in Luxembourg, may be exempt from tax to the employee during a five year period (while remaining tax is deductible at the level of the employer).

Section 6: Dispute resolution

a. Does your jurisdiction have a bilateral investment protection treaty with China or other jurisdictions commonly used for investing into the country?

There is an agreement between the Belgian-Luxembourg Economic Union and the Government of the People's Republic of China on the reciprocal promotion and protection of investments, which was signed on June 6 2005.

b. How efficient are local courts' enforcement and dispute resolution proceedings, and are there any procedural idiosyncrasies foreign investors must be aware of?

Luxembourg courts are reasonably efficient. Civil and commercial disputes before the District Court are introduced through a writ of summons. Interim remedies are sometimes available in urgent cases to avoid imminent damage or to abate an illegal nuisance.

c. Do local courts respect foreign judgments and are international arbitration awards enforceable?

Luxembourg is party to a number of treaties for the reciprocal recognition and enforcement of foreign judgments, notably the Brussels I EU Regulation and the Lugano Convention of October 30 2007. In the absence of such a regulation or convention, recognition and enforcement of foreign judgments may be obtained in accordance with applicable exequatur provisions and general Luxembourg rules applicable to the recognition and enforcement of foreign court decisions. In order to declare the foreign judgment enforceable, the Luxembourg court will verify certain matters such as the enforceability of the foreign judgment in the country of origin, that the country of origin had jurisdiction according to its own rules and to Luxembourg conflict of jurisdiction rules, that the foreign judgment was regular according to the procedural rules of the country of origin and did not violate the rights of defence, and, most importantly, that the foreign judgment is not contrary to Luxembourg international public policy.

Luxembourg is party to the New York Convention of June 10 1958 on the Recognition and Enforcement of Foreign Arbitral Awards and will recognise arbitral awards as binding, and will enforce them in accordance with the rules of procedure of Luxembourg, under the conditions laid down in the New York Convention (which lays down grounds for refusal of recognition and enforcement of an award).

d. Are local judgments and arbitration awards from your jurisdiction generally enforceable in other jurisdictions?

The answer to this question is really dependant on the jurisdiction in which enforcement of Luxembourg judgments and arbitration awards is sought. However, it is certainly relevant that as far as enforcement within Europe is concerned, Luxembourg judgments are enforceable in other European countries pursuant to the Brussels I EU Regulation and the Lugano Convention. As mentioned above, Luxembourg is also party to the New York Convention, which is based on the reciprocity for the recognition and enforcement of arbitration awards made in the territory of another contracting State.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.