1. Confusing dividends and capital gains
The purpose of investing is to grow your assets. Investments are remunerated in various ways. In this case, it is important to distinguish between interest or dividends paid and capital gains realised. Why is this important?
“The tax treatment is not equivalent,” explains Antoine Dupuis, partner in the international & corporate tax department at Atoz. “In Luxembourg, capital gains realised on investments in financial securities held for more than six months are tax-exempt, provided that you hold no more than 10% of the financial securities linked to the asset in question. On the other hand, dividends and interest received are subject to tax at a progressive rate (at half the overall rate in the case of certain dividends). Insofar as these factors affect the return profile associated with an investment, it is therefore crucial to consider these tax aspects before investing.”
2. Disregard double taxation
Whilst dividends are subject to Luxembourg tax, they may also be subject to withholding tax in the country where the asset in which you invest is located. For example, a dividend paid by an American company to its shareholders is taxed in the United States, regardless of the place of residence of the shareholder. This dividend may also be taxed in the investor’s country.
“From a tax point of view, this can have a significant impact on expected returns,” comments Dupuis. “To avoid this problem, Luxembourg has signed agreements with 90 foreign jurisdictions. When income is subject to tax in a foreign jurisdiction with which there is an agreement, a tax credit can be granted in Luxembourg to reduce this double taxation. However, it is up to the taxpayer to prove this, and the calculation between the chargeable and deductible part of the foreign tax can be complicated.”
Interest generated by mining or staking activities is also taxable and may even, in some cases, be considered a commercial activity.
3. Private assets: neglecting structuring
If, with the aim of diversification, you decide to invest in private assets, such as real estate or private equity, it is essential to be vigilant about how you structure your approach. “The choice of vehicle is important,” says Dupuis. “Depending on the legal structure put in place, investors can avoid being exposed to tax implications linked to the companies in which the fund invests or the jurisdictions in which it operates. Depending on the fund's strategy, the investment chain envisaged and the geographical areas in which it operates, the most appropriate structure should be put in place.”
4. Not controlling fund information
When investing, it is also vital to ensure that the information that the fund manager is likely to share with the tax authorities is correct. Otherwise, you could be in for a nasty surprise. “Every year, a Luxembourg vehicle considered to be fiscally transparent in which an investor has an interest must draw up a declaration. Some of the information declared, such as the income allocated to investors, is used as a basis for taxing them,” comments Dupuis. “However, sometimes this information is incorrect and, when the investor realises this, the time limit for appealing to have it amended has passed. It is then no longer possible to intervene. This is why it is essential to ask to receive the investment vehicle’s tax information as soon as it is available, so that you can check it.”
5. Consider that crypto is not taxable
There is a lot of talk about cryptoassets. It is now easy to buy tokens (bitcoins, ethers or non-fungible tokens) on a number of platforms. What’s more, these tokens can be converted very easily. “The price of these assets is highly volatile. Following a sudden rise in bitcoin, there may be a temptation to quickly reinvest the profits made in other tokens,” explains Dupuis. “However, we must not forget that investment in these assets is subject to the same tax rules as any other. If the asset has not been held for more than six months, the capital gain realised on the cryptocurrency cannot therefore benefit from a tax exemption. Interest generated by mining or staking activities is also taxable and may even, in some cases, be considered a commercial activity.” If the authorities were to take a closer look at these activities, the investor could be called to account.
This article was written in for the to the magazine, published on 26 February. The content of the magazine is produced exclusively for the magazine. It is published on the website as a contribution to the complete Paperjam archive. .
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