Luxembourg

The most common for-profit organizational form used in Luxembourg is the limited liability company (“société à responsabilité limitée” or “SARL”), closely followed by the public limited company (“société anonyme” or “SA”).

Both the SARL and the SA have a legal personality that is distinct from that of its shareholders. As legal persons, they have their own rights and obligations under commercial, accounting and fiscal law. There is a common understanding that, while the SA represents the classical legal form of a corporation (société de capitaux), the SARL can be seen as a hybrid form. In fact, the SARL has the characteristics of both a corporation – being the financial liability of its shareholders limited to the level of their contribution to the company capital – and of a partnership – because of the limited number of shareholders (limited to one hundred shareholders) and the strict legal framework governing the transfer of company shares to non-shareholders).

The other most used for-profit organizational forms in Luxembourg – listed in decreasing order of popularity – are:

• The limited partnership (“société en commandite simple” or “SCS”), being a commercial company, that requires at least two partners, one of which is a general partner (with unlimited liability) and the other, a limited partner (with a liability limited to its capital contribution);
• The partnership limited by shares (“société en commandite par actions” or “SCA”), is a commercial company that combines features of an SCS (but with shares that are freely transferable) and an SA (but with unlimited liability of the general partner);
• The simplified shareholder company (“société par actions simplifiées” or “SAS”), a flexible legal form, modeled on the structure of a SA, with greater contractual liberty in particular with regards to corporate governance;
• The cooperative company (“société cooperative” or “SCOP”), being a commercial company, with variable capital, a variable number of partners (minimum of two), whose liability regime may be limited or unlimited and that may be set up as a SA or as a “European cooperative society”; and
• The simple partnership (“société en nom collectif” or “SENC”), is a commercial company, whose partners (minimum of two) are jointly and severally liable, with unlimited liability, for all of the company’s commitments (most commonly used for small and medium-sized “family-run” businesses).

a. Enterprises that seek financing from investors and will have multiple owners tend to form a SARL or a SA. Particularly relevant for Luxembourg – being the second largest investment fund center worldwide – are the limited partnerships – namely, the SCA, the SCS (both as defined above) and the special limited partnership (“société en commandite spéciale” or “SCSp”).

b. Luxembourg has not established an official legal form for Social Enterprises as a stand-alone category, but has only provided for an accreditation to Social Enterprises, notably the SIS accreditation as set out under Question I.4 below.

• Under the wide array of legal forms that may qualify as Social Enterprises, the most common for-profit organizational form is the SARL, followed by the SCOP.
• Please also note that Nonprofit associations (“associations sans but lucrative” or “ASBLs” – addressed below) may carry out accessory commercial activities, which can in principle create a profit, but such profit must be exclusively reinvested in the pursuit of the altruistic purposes of the association and cannot be distributed to its members.

Under Luxembourg law, the board’s primary duty is to act in the best interests of the company and its shareholders, while pursuing the company’s corporate purpose.

Under good corporate governance, the board is however also encouraged to take into account the interests of other direct or indirect stakeholders of the company (such as bondholders, creditors, commercial and business partners, employees and, to some extent, even the community at large).

Although no statutory fiduciary duty towards these stakeholders is generally established, companies issuing securities listed and/or admitted to trading on the Luxembourg Stock Exchange and the Euro MTF are required to apply the “X Principles of Corporate Governance of the Luxembourg Stock Exchange” (the “X Principles”).

The X Principles – approved by the Luxembourg Stock Exchange – aim to ensure the highest market standards in terms of transparency, business ethics and controls.

In particular, the board is required inter alia to “act in the corporate interest, and shall serve all the shareholders by ensuring the long-term success of the company. They shall consider corporate social responsibility aspects and shall take into account the interests of all stakeholders in their deliberations”. Furthermore, it is recommended for the company to “define its corporate social responsibility policy with respect, including to it those responsibilities related to social and environmental aspects”.

Non-listed companies may voluntarily adopt the X Principles to demonstrate their commitment to good corporate governance and CSR best practices.

Furthermore, please note that the SIS Law (please see our reply to Question I.4 below) sets forth that the articles of association may provide that the company “is not incorporated for the purpose of procuring a direct or indirect economic benefit for its shareholders”.

The Luxembourg legislator introduced in December 2016, by the enactment of the law of 15 December 2016 (the “SIS Law”), a new legal framework for the actors of the social and solidarity economy, namely by creating the Social Impact Company (“société d’impact societal” or “SIS”).

The SIS is widely regarded as the official form of Social Enterprise in Luxembourg. However, the SIS-accreditation is available for companies structured in various organizational forms, traditionally reserved for for-profit entities.

By acquiring the SIS-accreditation, these companies will have access to incentives and opportunities by reason of having obtained the accreditation as SIS.

The SIS Law goes beyond simply regulating the SIS by providing more general rules and principles for the social and solidarity economy (“économie sociale et solidaire”).

The social and solidarity economy is defined by the SIS Law as a “mode of doing business” of entities: (i) active, on a continuative basis, in the production, distribution or exchange of goods or services; (ii) supporting people in a fragile situation or contributing to the preservation or development of specific social or societal issues as well as combating exclusion or inequality and discrimination; (iii) maintaining autonomous management; and (iv) reinvesting at least half of the potential benefits for the maintenance and development of the corporate purpose.

Any SA, SARL (including simplified limited liability companies or “SARL-S”) or SCOP, which complies with the above principles of the social and solidarity economy, can opt for the status of an SIS and be approved as such by the Ministry of Labor, Employment and the Social and Solidarity Economy.

The social (or societal) purpose of the SIS must be referred to in its articles of association, together with key performance indicators (“KPIs”) allowing for the effective and efficient measurement of the pursuit of such purpose.

The new legal framework aims to enable SIS-accredited companies (i) to be financed both by philanthropic investors and impact investors and (ii) to pursue commercial activities.

The share capital of the SIS may be composed of:

• “Impact shares” (“parts d’impact”), which do not entitle their holders to participate in the profits of the SIS. Any profits to be allocated to Impact Shares must remain in the SIS and be reinvested in order to maintain and develop its corporate purpose; and
• “Return shares” (“parts de rendement”), which entitle their holders to profits, provided however that the SIS’s social or societal objectives, measured in the light of its KPIs, have been met.

The share capital of the SIS must consist of at least 50% impact shares, it being understood that if there are 100% impact shares the SIS is granted with tax incentives, as further set out in our reply to Question III.1 below.

The SIS must have autonomous management in the sense that it must be able to choose and dismiss its management bodies and retain the necessary control and capacity to organize its activities.

The SIS is subject to a specific transparency and supervision regime, namely:

• The annual accounts of the SIS must be audited by an independent auditor (“réviseur d’entreprises agréé”);
• The management bodies must annually draw up an extra-financial impact report to be submitted to the shareholders which details the implementation of the KPIs; and
• The independent auditor’s report and the extra-financial impact report are thereafter communicated to the Ministry of Labor, Employment and the Social and Solidarity Economy, which is in charge of the prudential supervision of the SIS, ensuring that it fulfills the conditions of its status on a continuous basis.

As mentioned in our reply to Question I.4 above (and with the caveats made therein), while the SIS may be regarded as the sole “official” accreditation status of Luxembourg for-profit Social Enterprises, Luxembourg also recognizes ASBLs and foundations as Nonprofit Social Enterprises.

Non-profit associations (“associations sans but lucrative” or “ASBLs”) are groups of persons who have established a common organization to achieve a goal or a joint objective and which do not normally pursue industrial or commercial activities nor seek to provide a material profit to its members. In other words, while the ASBL may not have a profitable purpose (“but de lucre”), it is however considered that it may pursue an accessory profitable purpose provided such activity is dependent on the main non-profitable activity. If the conditions provided by the law are met, the ASBL may obtain the legal personality. The ASBLs represent a significant majority of all Luxembourg Social Enterprises.

The foundation (“fondation”) is an independent, separately constituted non-profit entity, with its own established and reliable source of income and its own governing board. A foundation is a legal person which has no members and the relevant organizational form is reserved for organizations that undertake philanthropic, social, religious, scientific, artistic, or educational activities.

Traditionally, the Luxembourg organizational form that is closest to a “worker-owned Enterprise” is the cooperative company (SCOP).

• Cooperatives are organizations with variable shareholding and/or share capital, whose shares are not transferable to third parties. The cooperative aims first and foremost to serve the interests of its members, thus moving away from traditional business models, which most often seek to maximize results for the sole benefit of shareholders.
• Most Luxembourg cooperatives have adopted market-oriented business models and derive most, if not all, of their resources from their commercial activities.

The main reporting and accounting rules applicable to SIS companies are those determined in accordance with the rules applicable to the company’s legal form.

In addition, as mentioned in our reply to Question I.4 above, the SIS is subject to a specific transparency and supervision regime, namely:

• The annual accounts of the SIS must be audited by an independent auditor (“réviseur d’entreprises agréé”) (who shall inter alia monitor and control the composition of the share capital of the SIS and the compliance with the non-distribution constraints);
• The management bodies must annually draw up an extra-financial impact report to be submitted to the shareholders which details the implementation of the KPIs; and
• The independent auditor’s report and the extra-financial impact report are thereafter communicated to the Ministry of Labor, Employment and the Social and Solidarity Economy that is in charge of the prudential supervision of the SIS, ensuring that it fulfills the conditions of its status on a continuous basis.

There is no meaningful jurisprudence on Social Enterprises to mention.

The regulations applicable in the financial services sector are the following:

• Regulation (EU) 2019/2088 of 27 November 2019 on sustainability-related disclosures in the financial services sector (the “SFDR”) that partially applied as from 10 March 2021 – the objective is to harmonize EU rules on sustainability disclosure obligations for manufacturers (including AIFM, UCITS ManCos and advisors, insurers) of financial products (including investment funds) toward end-investors. Disclosures shall be implemented on a website and, under the pre-contractual documentation shared with investors and under periodic reports (including annual reports);
• Regulation (EU) 2020/852 of 18 June 2020 on the establishment of a framework to facilitate sustainable investment, and amending Regulation (EU) 2019/2088 (the “Taxonomy Regulation”) that will partially be applied as from 1 January 2022 – the Taxonomy Regulation will amend the SFDR and will require additional disclosures to be published and elaborate a classification tool to help plan and report the transition to an economy that is consistent with the EU’s environmental objectives. The Taxonomy Regulation establishes criteria for whether an economic activity (as defined under the Taxonomy Regulation) is environmentally sustainable to establish the degree of environmental sustainability of an investment. This regulation will mainly impact investment funds investing in economic activities environmentally sustainable;
• Regulation (EU) 2019/2089 of 27 November 2019 amending Regulation (EU) amending Regulation (EU) 2016/1011 as regards EU Climate Transition Benchmarks, EU Paris-aligned Benchmarks and sustainability-related disclosures for benchmarks (the “Benchmark Regulation”). A wide variety of indices are currently grouped together as low-carbon indices. Those low-carbon indices are used as benchmarks for investment portfolios and products that are sold across borders The purpose of the Benchmark Regulation is to allow comparability of climate benchmarks methodologies while leaving benchmark’s administrators flexibility, to provide investors with a tool aligned with their respective investment strategy, to increase transparency on investors’ impact, specifically with regard to climate change and energy transition. This Benchmark Regulation will have practical implications of UCITS ManCos, AIFMs and benchmarks administrators and will offer better comparability and transparency to investors;
• Expected amendment to the AIFMD and UCITS to include reference to sustainability risks in organization requirements, operating conditions, risk management and disclosures;
• Expected amendment to MIFID II to (i) integrate sustainability preference in the product oversight and governance process, integrate sustainability factors in the suitability assessment, integration of sustainability risks and factors in the areas of organization requirements, operating conditions and risk management;
• Expected approval of a Directive on corporate due diligence and corporate accountability (whose scope is expected to go even beyond the financial sector).

There are no specific ESG requirements for Social Enterprises in general. However, in order to qualify as SIS, the candidate entity must meet either of the following criteria:

• Having the aim of bringing support to persons finding themselves in a fragile situation, either due to their economic or social situation, or their personal situation, especially related to their health or their needs of social or medico-social support. These persons can be employees, clients or customers, members, adherents or beneficiaries of the enterprise; or
• Having the aim of contributing to the preservation and development of social links, combating exclusion and discrimination, whether sanitary, social, cultural or economic, developing male-female parity, maintaining and reinforcing territorial cohesion, protecting the environment, developing cultural or creative activities, and instigating or continuing initial vocational training.

No (but please see our reply to Question II.1 below for particular investor classes).

Financial market participants (as defined under the SFDR and including AIFMs, UCITS ManCos, Insurers and advisors) which market products (including investment funds) which classify as article 8 product under the SFDR (i.e. financial products which promote, among other characteristics, environmental or social characteristics, or a combination of those characteristics, provided that the companies in which the investments are made follow good governance practices products or article 9 products under the SFDR, i.e. financial products having sustainable investment as its objective) shall disclose, under the pre-contractual documentation of those products:

• the manner in which sustainability risks are integrated into their investment decisions;
• the results of the assessment of the likely impacts of sustainability risks on the returns of the financial products they make available; and

as from 30 December 2022

• provide a clear and reasoned explanation of whether, and, if so, how a financial product considers principal adverse impacts on sustainability factors; or
• a statement that the financial market participant does not consider the adverse impacts of investment decisions on sustainability factors and the reasons therefor.

Furthermore, for article 8 products, the following shall be diclosed:

• information on how the environmental and social characteristics are met;
• if an index has been designated as a reference benchmark, information on whether and how this index is consistent with those characteristics and an indication of where the methodology used for the calculation of the index is to be found.

Furthermore, for article 9 products, where an index has been designated as a reference benchmark, the following shall be provided:

• information on how the designated index is aligned with the sustainable objective;
• an explanation as to why and how the designated index aligned with that objective differs from a broad market index.

Where a financial product has sustainable investment as its objective and no index has been designated as a reference benchmark, an explanation on how that objective is to be attained.

Where a financial product has a reduction in carbon emissions as its objective, information on the objective of low carbon emission exposure in view of achieving the long†term global warming objectives of the Paris Agreement (as defined under the SFDR).

Financial participants shall also disclose on their website (i) the information mentioned above and (ii) additional “general sustainability disclosures” which apply directly to the financial Market Participants without taking into consideration each product they market, e.g. information on how their remuneration policies information on how those policies are consistent with the integration of sustainability risks.

While the access to funding through the traditional banking sector is quite limited, the main source of financing for Social Enterprises in Luxembourg is public, namely from State or Municipal entities (see our reply to Question II.4 below). Other funding opportunities come from philanthropic foundations, investors and crowdfunding. The SIS scheme’s introduction was expected to release the entrepreneurial potential of many Social Enterprises, triggering both investment demand and supply that is not available to many socially driven organizations such as ASBLs. Nonetheless, as resulting from a recent study of the European Commission, all of the SISs created so far are composed of 100% impact shares, hence they have not attracted private, external investment.

Luxembourg has a very long track record in structuring out microfinance, social and environmental impact investment funds. Luxembourg in that context offers an adequate framework to so-called blended finance funds, consisting of public-private partnerships where public investors agree to take on the first risks and the last revenues, so as to attract private investors in the impact finance sector.

According to the KPMG - European Responsible investing Fund market 2019 report, responsible investment funds (RIF) have significantly increased over the past year in Europe with 2816 RIF domiciled in Europe in 2018. Please see below:

* Source: KPMG – European Responsible investing Fund market 2019 report

Luxembourg is the 1st domiciliary country of RIF in Europe with 34% of the European market domiciled in Luxembourg in terms of number of Responsible Investment Funds and 35% in terms of assets under management.

*Source: KPMG – European Responsible investing Fund market 2019 report

The main feature of the Luxembourg Social Enterprise ecosystem is certainly the substantial support it receives from public bodies.

The Ministry of Labor, Employment and Social Solidarity, in collaboration with local municipalities, has played an important role in stimulating the social and solidarity economy and the promotion of Social Enterprises. It is worth mentioning that, in the context of the Covid-19 crisis, new impulse and economic support is provided by the government to Enterprises active in the social and solidarity economy.

European support is important, especially in the start-up phase of enterprises.

No.

For the financial services sector: please see our replies above under section II.1 for information that shall be published in pre-contractual documentation and on a website applicable to all investment funds (even non listed).

In addition and accordance with article 11 of the SFDR, financial market participants shall publish in the annual reports for the investment funds classified as article 8 or 9 products under SFDR they market:

1. for a financial product (as referred to in Article 8(1) of the SFDR), the extent to which environmental or social characteristics are met;
2. for a financial product (as referred to in Article 9(1), (2) or (3)) of the SFDR:
   1. the overall sustainabilityâ€related impact of the financial product by means of relevant sustainability indicators; or
   2.  where an index has been designated as a reference benchmark, a comparison between the overall sustainability†related impact of the financial product with the impacts of the designated index and of a broad market index through sustainability indicators.

In addition, under Luxembourg law, companies of a certain size (i.e. in principle listed companies) are required to include in the consolidated management report a consolidated non-financial statement containing information – to the extent necessary for an understanding of the development of the business – the performance, the situation of the group and the impact of its activity, relating at least to environmental matters, social and personnel matters, respect for human rights and the fight against corruption.

Luxembourg is the green bond capital of the world. Over 50% of all worldwide sustainable bonds (green, social, and sustainability bonds) are listed on the Luxembourg Green Exchange (LGX), which is the world’s first platform dedicated exclusively to sustainable securities and a trading point for issuers and investors.

There are no restrictions on foreign investment and donations in Luxembourg that are specific to Social Enterprises.

Currently, Luxembourg has no specific legal framework for crowdfunding or peer-to-peer (P2P) lending, but is generally accepted. However, it is not used as a tool by most successful enterprises due to cost, restrictions (including a cap on the maximum investment amount) and ongoing reporting obligations.

Other than the tax exemptions available for Nonprofits generally, an SIS having a share capital composed exclusively of impact shares is exempt from Corporate Income Tax, Municipal Business Tax and Net Worth Tax. An SIS whose share capital includes return shares does not benefit from any tax exemption and shall be subject to tax like any other commercial company.

• An SIS enterprise does not receive any tax benefits if the share capital of the company consists of less than 100% impact shares. Certain practical and structural advantages are still possible, as the possibility to distribute dividends to the holders of profits’ shares (while keeping the status of “social enterprise”). However, statistically, the utmost majority (if not the totality) of SISs have 100% impact shares

Donations made to the SIS are deductible as special expenses in the hands of the donors to the extent the SIS’s share capital is solely composed of Impact Shares. 

Luxembourg offers a friendly tax environment for SIS companies.

Yes, to the extent allowed under double-taxation treaties.

The SIS Law is regarded as the Luxembourg Regulatory Sandbox for Social Enterprises.

Luxembourg government offers wide operational and financial support to small businesses and/or Social Enterprises, which includes support in the start-up phase of the respective entity.

All SIS are subject to the same compliance requirements, by reason of their status as SIS. The other non-SIS Social Enterprises, namely the ASBLs and foundations are subject to different same compliance requirements than the SIS.

Europe’s first ever ministry for social and solidarity economy was established in Luxembourg in 2009.

More precisely, in 2009 a new Department of Solidarity Economy was established within the Ministry of Economy and Commerce, while in 2013 the Department of Solidarity Economy was adopted by the Ministry of Labor, Employment and Social and Solidarity Economy and, as a result, was renamed the Department of Social and Solidarity Economy. The mandate of the Department of Social and Solidarity Economy includes the provision of increased public support for the development of the social and solidarity economy and a commitment to the promotion and development of the social solidarity economy. The role of the Department of Social and Solidarity Economy is crucial to the success of the Luxembourg social solidarity economy as a consistent part of the public funding is channeled through the Ministry of Labor, Employment and Social and Solidarity Economy (while other sources of public funding are industry related and would be channeled through other governmental or municipal bodies).

No.

Theoretically, the formation of an Enterprise in Luxembourg takes a couple of days, as a company is considered as validly incorporated as soon as the notary executes the relevant deed of incorporation.

In practice, the legal and corporate steps to incorporate a company are quite straightforward: the procedure to verify the availability of a corporate name is fully online, and provides almost instantaneous results and at very limited costs; the preparation and notarization of the deed on incorporation take in average one or two days and, in addition to any notarial/lawyers’ fees, minor stamp and registration duties apply.

Upon completion of the incorporation (or in parallel with such procedure), the Enterprise applies for a business license (certificat d’établissement) to be possibly issued by the Ministry of Middle Classes, for commercial activity, or by the Ministry of Economy, for industrial activities. This procedure normally takes up to a couple of weeks.

As mentioned in Question no. 4 above, the main accreditation available for Social Enterprises is the accreditation as SIS, which is granted by the Ministry of Labor, Employment and the Social and Solidarity Economy.

The country’s startup ecosystem has grown rapidly in only a few years to become an attractive investment hub for many startups and innovative companies looking to expand their business to Europe.

2019 Cisco’s Digital Readiness Index has ranked Luxembourg as the world’s most attractive environment for startups, best positioned for its agility and ability to foster innovation. They have a number of Enterprise forms available to choose from, there are relatively few reporting requirements for private for-profit businesses and incorporation processes are fast, cheap and simple. Furthermore, State (and EU) funding support and the easy access to qualified private partners position Luxembourg as the must-go place for companies looking to accelerate their business.

Social and solidarity economy has always represented a mayor sector in the Grand Duchy. In most recent years, all trends indicate an upturn in terms of employment and overall (financial and non-financial) revenues originating from Social Enterprises, whose role is crucial to the maintenance of the social infrastructure especially in challenging times. Furthermore, the State is accountable for a continued and consistent financial support to Social Enterprises.

There are no laws that are obstructive to the formation of Social Enterprises in Luxembourg.

No.

In general, Luxembourg legislation on Social Enterprises may be regarded, as of today, as one of the most developed among the European jurisdictions. However, given the fast-evolving nature of the social environment, the Luxembourg legislator shall remain reactive in order to respond to the operational, financial and taxation concerns of the Social Enterprises.

Further incentives (such as tax incentives) would help to enhance the ESG/CSR awareness of the Enterprises.

No.