Legal fundamentals for Start-Ups in Luxembourg
How to protect your idea ?
Luxembourg is member of the EU and Benelux and is signatory to international conventions on intellectual property rights which means that different systems may be resorted to in order to seek intellectual property rights protection in Luxembourg.
Copyrights, Neighbouring Rights and Databases
– Authors benefit from an exclusive right to authorize the reproduction of their original artistic and literary works, of any type or form of expression, including photographs, databases and computer programs;
– Copyrights include economic rights (right of reproduction and right of communication to the public) and moral rights;
– The author may assign all or part of these rights, to the extent that the honor or reputation of the author is not damaged.
Trademarks & Design rights
– Benelux trademark or Design: the Benelux Office for Intellectual Property is the authority responsible for the trademarks and design rights protection in Luxembourg, Belgium, and in the Netherlands;
– European Union trademark or Design protection throughout the 28 EU Member States, is delivered by the European Union Intellectual Property Office (EUIPO).
– A patent is defined as an exclusive right granted for an invention, which is a product or a process that offers a new technical solution to a situation. An invention must fulfil several conditions to be protected by a patent: its subject matter must be accepted as “patentable”, it must be of practical use, it must show an element of novelty; and it must show an inventive step.
– Any company may potentially collect and process data of its employees, customers, suppliers, and therefore be considered as a data controller under Luxembourg data protection;
– There is a general obligation of prior notification to the Data Protection Authority in order to be able to process personal data;
– Prior authorization is required for certain type of processing (including for the transfer of data in third countries, for video surveillance, for supervision of employees at the workplace).
Setting up a company
Any commercial undertaking must have appropriate facilities in order to carry out its activities. Thus, the creation of a Luxembourg company or subsidiary or the registration of a Luxembourg branch of a foreign company must be considered.
– Any person exercising commercial activities in Luxembourg must obtain a business license (“autorisation d’établissement”) delivered by the Ministry of Middle Classes.
Registration of a branch
– The establishment of a branch requires fewer administrative and operational steps than the creation of a subsidiary.
Incorporation of a limited liability company (“société à responsabilité limitée”) The main features of a limited liability company are:
– minimum subscribed capital: EUR 12.500;
– number of shareholders: from 1 to 40;
– Legal form of shareholders: individual or legal entity;
– type and par value of shares: registered and with or without par value;
– management of the company: one or more manager(s) (individual or legal entity);
– mandatory annual accounts which have to be prepared by the manager and submitted to the shareholders.
Incorporation of a public limited company (“société anonyme”)The main features of a public limited company are:
– minimum subscribed capital: EUR 31.000;
– number of shareholders: minimum 1 (no maximum);
– legal form of shareholders: private persons or legal entities;
– type and par value of shares: bearer or registered and with or without par value (bearer shares must be registered with an authorized depositary) ;Management of the company: board of directors with a minimum of three directors (individual or legal entity).If there is only one shareholder, it is possible to have only one director. Alternatively, a dual management system consisting in a management board, in charge of the management of the company, and a supervisory board, in charge of permanently monitoring the management board’s work.;
– mandatory annual accounts which have to be prepared by board of directors and submitted to the shareholders;
– requirement to have an internal auditor (and if certain thresholds are reached, an independent auditor (réviseur d’entreprise), to review the annual accounts.
There are several possibilities to raise funds for the company. It can either be owned capital, loans granted by banks or government financial aids.
Owned capital is made up of the following sources:
– Venture capital:venture capital refers to a minority and temporary (medium-term) shareholding taken by professional investors who decide to invest in a company. A venture capital network has been set up in Luxembourg under the name “LPEA – Luxembourg Private Equity & Venture Capital Association”;
– Business angels: their contributions usually take the form of an investment in the course of an increase of capital together with the participation in the decision-making process. A business angel network has been set up in Luxembourg under the name “Luxembourg Business Angel Network”;
– Financial markets: using the financial market for the public offering of shares is very much limited to a minority of companies and rarely resorted to in the start-up phase;
– After a traditional bank loan, financing may take the form of subordinated loans.
– Loans are generally provided by the shareholders or third parties, essentially financial institutions.
– A company that borrows from its shareholders must comply with certain limits in order to avoid excessive rates of interest and excessive debt relative to the capital contributions. The excessive portion of interest of such loans will be reclassified as hidden distribution of profits, and will be subject to the tax regime applicable to dividend distributions, even if the amount of debt is not in itself excessive. In general, the maximum accepted debt ratio is 15/85 i.e. the assets held must be at least 15% financed by equity and no more than 85% financed by debt.
– An alternative to fund a company will be to issue bonds
– When the shareholders do not have sufficient resources, financial institutions are generally resorted to in order to finance start-up companies. The lender will require guarantees or other security interests to secure the refund of the loan granted. There are many different banking solutions available depending on the purpose of the financing.
– After a traditional bank loan, a subordinated loan may be resorted to. A subordinated loan is a second level of debt, which, in terms of risk, is situated between the company’s shareholders’ equity and traditional bank loans. Subordinated loans can come in different forms. However, this type of financing is generally not resorted to by start-up companies.
– Using the financial market by issuing bonds is also very much limited to larger businesses.
Government financial aid
Luxembourg State offers a range of government financial aid schemes to help young businesses and investors to finance their projects. The type of financial aid granted may vary depending on the business and project in question.
– The “initial investment” aid scheme: designed to support the development of entrepreneurial spirit and encourage the creation and takeover of businesses by providing favourable conditions for those who set up accompany for the first time by either creating a new company or taking over an existing business. Aid is granted in the form of capital grants or interest relief.
– Financial aid for research and development (R&D) and innovation: financial aid in the form of a subsidy is available for that carry out research and development (R&D) projects and innovation initiatives. The aid can cover a percentage of the eligible costs, depending on company size and the type of project or initiative.
– Tax exemptions: in order to benefit from a tax exemption, businesses must set up new establishments or develop new processes which are known to contribute to the structural development and improvement of the economy it may be granted for a period of 10 years and may amount to 25 % of the total profit of the business. It can not exceed 10 % of the investments made.
– The national credit and investment institution (“Société nationale de Crédit et d’Investissement” – SNCI) is a public-law banking establishment specialised in the medium and long term financing of Luxembourg based companies. It grants various types of loans which depend on the size of the business and the project to be financed.
Taking on staff
Luxembourg employment law is mainly based on mandatory provisions of the Employment Code, which regulates in particular employment status, categories of the employment contract, its terms and conditions, and its termination.
There are three key elements that characterize the employment status:
– situation of subordination of the employee vis-à-vis its employer according to which the employee has to execute the orders received from the employer;
– service rendered by the employee;
– payment of a salary.
Categories of employment contracts
There are essentially two types of employment contracts:
– permanent contracts (“contrats à durée indéterminée”),for an undetermined period of time, is the most common type of contract;
– fixed-term contracts (“contrats à durée déterminée”) may be resorted in limited situations for a specific and temporary task.
In both cases it is possible to have part-time contracts i.e. for less than 40 hours of work per week.
– To limit his risk, the employer may resort to a trial period of a duration of generally 6 months (up to 1 year above a certain wage threshold).
Terms and conditions of the contract
– The mandatory terms include place of work, nature of the employment, normal working days and hours, basic salary, duration of the trial period if any, duration of paid annual leave, notice period in case of termination, description of a supplementary pension scheme if relevant;
– Additional terms may also be agreed. These may derogate from the Employment Code provided that they are more favorable to the employee than the provisions of the Code. Failing this, such terms may be considered as null and void.
Employment of foreign workers
– EU, EEA, and Swiss citizens may be freely employed in Luxembourg;
– Third countries citizens must apply for a residence permit which implies:
o an application for a temporary residence permit prior to entering the Country;
o a request of a Shengen visa application, as the case may be, within 90 days following the receipt of the temporary residence permit;
o once in Luxembourg, the filing of a declaration of arrival and a request for the delivery of the final residence permit.
Termination of the employment contract
The contract may be terminated either by:
– the employee, with prior notice to the employer, may resign in case of permanent contract (an employee may in principle not resign in the case of a fixed term contract);
– the employer who may dismiss an employee :
o with prior notice provided that the dismissal is based on real and serious grounds, relating to the employee’s competence (aptitude or conduct) or to working performance of the company (economic ground); the employee will receive a notice period and eventually a severance pay, based on his/her seniority;
o with immediate effect: in case of gross misconduct in order to justify the dismissal; the employee will not receive notice period and severance pay;
– by mutual agreement: either before or after a dismissal.
– the length of the prior notice will depend on the duration of the employment at the time of termination.
Any company which provides goods or services to consumers is subject to mandatory rules (compiled in the Consumer Code) for the protection of consumers.
Information of consumers
Certain rules aim at providing basic information to the consumers:
– general obligation of information, including main characteristics of the goods or services;
– price information, implying that price must be unambiguous, clearly legible, easily identifiable, and including all taxes.
Unfair commercial practices
A commercial practice shall be considered as unfair if:
– it is contrary to the requirements of professional diligence (which means the standard of special skill and care which a trader may reasonably be expected to exercise towards consumers); and
– it materially distorts or is likely to materially distort the economic behaviour with regard to the product of the average consumer whom it reaches or to whom it is addressed.
– unfair commercial practices include misleading commercial practices (both misleading actions and misleading omissions) and aggressive commercial practices which alter consumer’s freedom of choice; for example, making repeated and unwanted solicitations by telephone, fax, e-mail.
Contracts with consumers
Contracts between professionals and consumers are regulated by the Consumer Code which, in particular:
– prohibits abusive clauses, defined as clauses which establish a signification imbalance in the contract’s rights and obligations to the consumer’s detriment. Such clauses are considered as null and void;
– provides a legal guarantee of conformity of goods of a duration of 2 years;
– provides that consumers cannot waive the rights granted under the Consumer Code.
Consumers benefit from a high level of protection when they purchase a product or service at a distance, which implies that:
– clear and comprehensible information must be provided to the consumer, in due course prior to the conclusion of the contract (including identity of the supplier, characteristics of the goods or services, price including taxes, delivery costs, existence of a right of withdrawal, etc.);
– consumers have a right of withdrawal within a period of 14 calendar days, without penalty and without giving a reason;
– prior consent of the consumer should be obtained in order to send marketing communications either by email, by automated calling system without human intervention (automatic calling machine), or by facsimile machine (fax).
Any company established in Luxembourg should register for income tax, VAT and social security.
– Company must register with the Luxembourg administration (“Administration des contributions directes”) when it starts its activities in order to comply with its tax obligations;
– Income resulting from an economic activity carried out by a company is subject to corporate income tax (CIT). This CIT is levied on the taxable income made by the company during the tax year.
– Income tax for resident and non-resident companies is:
o 20 % where the taxable income does not exceed 15.000 Eur;
o 21 % where the taxable income exceeds 15,000 Eur;
An additional charge of 7 % on the corporate income tax amount is levied as a contribution to the employment fund.
o a municipal business tax is levied by the communes and varies from municipality to municipality. For Luxembourg city the rate is 6.75%
– The effective combined corporate income tax rate (i.e. CIT, solidarity surtax, and municipal business tax) for Luxembourg City currently is 29.22%. A tax reform is in progress in order to reduce this CIT.
– Standard VAT rate is 17% in Luxembourg. It is levied on every operation resulting from an economic activity and based on the value added to the product;
– Businesses that earned less than EUR 10,000 in the previous year (delivery of goods, provision of services) are exempt from VAT. They do not need to submit a VAT return but they are still of course obliged to provide the tax authorities, at their request, with information allowing them to ensure that the threshold of EUR 10,000 has not been exceeded. Of course, businesses benefiting from the exemption cannot charge VAT to an account nor can they show VAT on their invoices. They therefore cannot offset deductible VAT either. Nonetheless, opting for VAT is still possible. The option must apply to a minimum period of 5 years.
– The normal taxation regime applies to businesses with turnover of more than EUR 25,000 net of tax. Businesses benefiting from the exemption or graduated tax relief regime can opt for the normal regime.
– Businesses periodically file a VAT return, together with payment.
– Taxable persons shall be obliged to file monthly, quarterly and/or annual VAT returns depending on the limits exceeded by their total turnover net of VAT. To be subject to VAT, the transaction must involve either the delivery of goods(the delivery of a good is subject to value added tax (VAT) in Luxembourg if the delivery takes place in the country) or the provision of service.
– Any person carrying out a professional activity must, in principle, be registered with the social security in order to benefit from social protection in case of illness, unemployment, occupational accidents, pension, etc.
– Employer must declare each month the gross salaries paid to employees, as well as the exact number of hours worked to the social security centre (“Centre commun de la sécurité sociale”);
– Contribution rate is +/- 25% in total (+/-12,5% paid by the employer and +/-12,5% paid by the employee).