A Q&A guide to outsourcing in Luxembourg.
This Q&A guide gives a high-level overview of legal and regulatory requirements on different types of outsourcing; commonly used legal structures; procurement processes; and formalities required for transferring or leasing assets. The article also contains a guide to transferring employees; structuring employee arrangements (including any notice, information and consultation obligations); and calculating redundancy pay. It also covers data protection issues; customer remedies and protections; and the tax issues arising on an outsourcing.
To compare answers across multiple jurisdictions, visit the Outsourcing Country Q&A tool. This article is part of the PLC multi-jurisdictional guide to outsourcing. For a full list of contents, please visit www.practicallaw.com/outsourcing-mjg.
National law does not specifically regulate outsourcing transactions. However, some legal and sector-specific regulatory provisions can apply to outsourcing (see Question 2).
The main rules applicable to outsourcing in the financial services sector (including insurance and reinsurance as a result of Directive 2004/39/EC on markets in financial instruments (MiFID)) stem from the Act of 5 April 1993 on the financial sector (as modified) (Financial Sector Act), which defines professionals of the financial sector (PFS). In particular, the following Circulars of Luxembourg's regulatory authority in the financial sector (Commission de surveillance du secteur financier) (CSSF), on the administrative and accounting organisation of PFS, specify how the Financial Sector Act should be interpreted and applied, particularly for IT outsourcing:
Circular 96/126.
Circular 05/178.
Circular 06/240.
Circular 08/350.
In addition, the Grand-ducal regulation of 13 July 2007 defines the organisational requirements and the rules of conduct in the financial sector.
There are no regulations specific to business process outsourcing. However, if the outsourcing of a business process involves IT or human resources (HR), for example, it can be subject to certain sector-specific, or more general, regulations.
There are no regulations specific to IT outsourcing. An IT outsourcing is considered as any other service and is therefore regulated by the Civil Code. However, specific regulations apply to IT outsourcing in the financial sector (see above, Financial services). If the IT services involve, for example, development or modification of software and the transfer of IP works, the Act of 18 April 2001 on authors' rights, neighbouring rights and databases (Authors' Rights Act) can apply.
If the outsourcing of telecommunication services leads to the setting up of a network, or the provision of electronic communications to the public, the laws regulating the operation of electronic communications networks and the provisions of electronic communication services can apply. The most important is the Act of 30 May 2005 (as modified) on electronic communications networks and services (Telecom Act). The Telecom Act provides for a general authorisation regime (that is, a free access regime). Companies intending to operate electronic communications networks or provide electronic communications services must notify Luxembourg's regulatory authority in the electronic communications sector (Institut Luxembourgeois de Régulation) at least 20 days before starting the operation or provision. There are some exceptions, notably concerning rare resources, such as radio frequency spectrums.
The Act of 25 June 2009 on public markets (Public Markets Act) provides specific rules concerning the award of service agreements by public bodies in relation to non-discrimination. The Public Markets Act defines, according to the nature and value of the contract, the:
Principles regulating these agreements.
Bidding process (such as open tender, restricted tender with advertisement or restricted tender without advertisement, or negotiated procurement).
Awarding criteria.
Duration of the agreement.
See Question 4.
Depending on the type of outsourcing, competition rules and the following can apply:
The Act of 14 August 2000 on electronic commerce.
The Act of 27 July 1991 on electronic media.
The Act of 2 August 2002 on the protection of individuals with regard to the processing of personal data.
In addition, the Civil Code's rules that apply to any contractual relationship apply for all aspects not specifically regulated elsewhere.
There are specific requirements for an outsourcing in the financial sector.
Under the principles of sound management and adequate organisation, the PFS must ensure that any outsourcing:
Conforms to a documented outsourcing policy, validated by the board of directors.
Is formalised by a service level agreement (with particular attention to business continuity and the possibility of terminating the outsourcing and internal and external control integrity) that clearly describes the responsibilities of both parties and the takeover of these activities whenever continuity or quality of the service might be affected (reversibility).
Does not impede the PFS from continuing operations in exceptional circumstances, such as interruption of communication means for an extended period of time.
IT support services include the supply, installation, configuration (according to the PFS's instructions), and corrective or adaptive maintenance of hardware; and the development and maintenance of software, as well as advice in this respect.
In relation to these services, the PFS must operate strict control, ensure quality, and guarantee the strict protection of confidential information relating to clients.
The PFS can ask any third party for advice, programming or maintenance for its IT systems, under the conditions set out in Circular 96/126.
IT system operation and management services (rather than simple support services) must be carried out by IT system and communication networks operators of the financial sector (support PFS). Support PFS are entities to which a specific licence has been granted, and are subsequently supervised by the CSSF.
An IT service is considered an operation or management activity when it is carried out in a production environment and if either the:
Responsibility for the proper operation or management of the hardware or software is explicitly transferred.
PFS has actually lost control over, and knowledge of, the hardware and software subject to the supplier's intervention.
Supplier can intervene in the hardware or software without the PFS necessarily being aware (for example, if the service provider is able to physically or remotely access the PFS's IT system without control by the PFS).
Notification to, or authorisation from, Luxembourg's data protection regulatory authority (Commission Nationale pour la Protection des Données) (CNPD) can be required, depending on:
The type of processing envisaged.
The type of data concerned.
The aim of the processing.
Whether the data is transferred within Luxembourg or not.
Existing notification or authorisation can require modification if the scope of the processing changes.
The notification process takes between two and three weeks, whereas an authorisation is generally granted from two to six months, depending on the complexity of the processing.
In the financial sector, the project must be notified to, or obtain authorisation from, the CSSF, depending on the outsourcing scheme (for example, whether functions are outsourced to the mother company, a subsidiary, or to a service provider external to the group).
Outsourcing can take place with third parties and can have any commercial forms which can form part of the same group of companies or not.
Description of structure. This involves a customer entering into an agreement with a third party to provide services. The third-party supplier can intervene directly in the customer's premises and on its infrastructure, or use its own infrastructure and employees for the performance of the services (for software, this model is known as "software as a service" or "application service provider").
Several third parties can be involved in providing services that are closely linked (selective sourcing). The customer can choose one of these third parties or appoint another supplier to manage relationships with all other suppliers.
Assets and employees can be transferred to the supplier.
Sometimes, the parent company of a group (the customer and/or supplier) enters into a service contract in the name of several group entities (framework agreement), making the agreement more complex.
Advantages and disadvantages. The advantages of this structure include:
Quick implementation.
Cost savings for the customer.
Benefit from the wider experience and knowledge of a specialised international supplier.
Flexibility.
The disadvantages include loss of know-how and control, and security, IP and data protection issues.
Description of structure. In a group of companies, it can be strategically helpful to outsource certain activities (for example, IT-related services) of all group entities to one company. This company can be an existing one or specifically incorporated for this purpose.
Advantages and disadvantages. The advantages of this structure include:
Improvement of quality by pooling know-how.
Security.
Control.
Specialisation in the specific field of services.
Reduction of redundancies.
The disadvantages of this structure include the time it takes to implement, start-up and recurring costs, lack of flexibility, and not benefiting from the know-how of specialised suppliers.
Description of structure. The customer and the supplier can set up a joint venture or partnership to provide services, or run an outsourced division as a joint venture or partnership. Alternatively, one or more suppliers can form a joint venture or partnership to provide their services. In this case it is important that the responsibilities and liabilities of each party to the joint venture or partnership are clearly defined.
Advantages and disadvantages. The advantages of this structure include:
Improvement of quality through use of their respective know-how.
Control at shareholder level.
The possibility to provide services to third parties, the joint venture or partnership.
Subsidiaries of the shareholder can also benefit from this structure.
The disadvantages of this structure include the time it takes to implement, start-up and recurring costs, and lack of flexibility.
It is necessary that the supplier clearly understand the needs of the customer to avoid the failure of the outsourcing. For that, the customer must draw up a specification of the services to be outsourced. This exercise can also assist the customer in establishing which suppliers it will invite to tender.
The customer draws up an invitation to tender. This should specify the:
Expected services (and, if possible, service levels; unless, for example, these can only be set after the supplier has conducted a due diligence process on the actual level of service (see Question 16)).
Process and rules of the tender (the type and form of documents required and timing for responses).
Criteria for the assessment of bids.
Following the invitation to tender, the customer assesses the bids and generally retains a shortlist of one or several potential suppliers it wants to negotiate with.
If the customer is a public entity, it may have to advertise the invitation to tender, depending on the nature and value of the procurement. If this is the case, responses and assessment processes are also regulated under public procurement rules.
The parties negotiate to agree the main terms and conditions of their collaboration (for example, duration, scope of service, price or pricing method). The pre-contractual process also creates rights and obligations for the parties, and breaking negotiations can constitute a pre-contractual breach.
The supplier commonly conducts due diligence at this stage, to precisely determine the details of its offer, by analysing the:
Actual performance of the service.
State of the existing facilities, hardware and software.
Existing agreements.
This helps the supplier to determine whether services can be provided for the price the customer is willing to pay.
Negotiation can start with (depending on the balance of power between the parties, as well as the experience of the customer in these transactions):
A contract being drafted by the supplier, which the customer comments on (suppliers generally have a contract ready for the services provided).
The customer imposing some contractual terms and conditions.
Before entering into negotiation, the parties can sign a non-disclosure agreement and a letter of intent or memorandum of understanding that regulates negotiation (for example, the duration and consequences of failure to reach an agreement, including from a financial perspective, particularly if a due diligence process has been conducted).
Ideally, the negotiation also includes the price of the reversibility to avoid an exorbitant fee being imposed by the supplier in the future to recover the services. Under case law, this documentation is binding under certain conditions.
The transfer of immovable property must be in writing or notarised and registered by a notary (to be enforceable against third parties). Additional formalities can be required where any of the following have pre-emption rights:
Tenants.
The state.
The municipality.
Joint tenants.
The transfer of IP rights generally requires a written agreement and a registration, depending on the type of right (to be enforceable against third parties).
The transfer of IP licences must generally be, for evidencing purposes, in writing and registered (to be enforceable against third parties).
Generally, movable property can be transferred by an agreement concluded orally or in writing. However, for evidencing purposes, a written contract is advisable. A sale of movable property is perfected once the parties have agreed on the asset and the price to be paid for it, even if the asset has not been physically transferred and payment for it not yet been made. The promise to sell can therefore be considered a sale.
There are specific formalities for certain transactions, for example, the sale of a vehicle or seized assets.
It is debatable whether the transfer of a contract is an assignment, or if it results from the assignment of rights on the one hand and the assignment of obligations (debts) on the other.
The assignment of debts can be difficult as the debtor (that is, the person that is to perform the debts for another's benefit) might be essential to the other party (intuitu personae). Various contractual mechanisms exist to assign debts. Importantly, the party who benefits from the debts must agree to the assignment, and a clause in the contract should provide for this. Novation agreements have the same effect; that is, the assignor, the assignee and the benefiting party agree to terminate existing debts and create new identical obligations.
The assignment of rights merely requires the debtor to be notified of the transfer.
Generally, outsourcing agreements contain specific wording providing either that the contract:
Cannot be assigned.
Can only be assigned with the other party's prior written consent.
There are no particular formalities for a commercial lease (bail commercial), but a written agreement is recommended for evidencing purposes. In addition, the lease should, in principle, be registered by either party with the competent tax administration, namely the Registry (Administration de l'enregistrement et des domaines). A lease does not need to be registered to be valid, but registration makes the contract enforceable against third parties. If a commercial lease is registered, the landlord and new property owner cannot evict the tenant from the property when it is transferred.
It is advisable to license IP rights in writing, as these licences are strictly interpreted and generally require registration to be enforceable against third parties.
There are no specific formalities for leases of movable property.
The lease or licence of a contract is not regulated under Luxembourg law and is viewed as the assignment of rights and obligations (see Question 5).
Outsourcing can, in some cases, be regarded as a transfer of undertaking, which is defined in Article 127-1 onwards of the Luxembourg Labour Code. If so, the employees are transferred to the incoming supplier by operation of law.
An undertaking is defined by case law as a "stable economic entity" which retains its identity (that is, "an organised grouping of resources, which has the objective of pursuing an economic activity, whether or not that activity is central or ancillary").
Under Luxembourg and European case law, to determine whether the conditions of a transfer of undertaking are met, all the facts and circumstances that characterise the transaction must be taken into account, such as:
The nature of the activities and the degree of similarity of the activities exercised before and after the transfer.
Any transfer of the buildings and other tangible assets.
The value of the non-tangible assets at the time of the transfer.
The transfer of the main part of the staff.
The transfer of the client portfolio.
The duration of the possible interruption of activities.
These criteria must be considered generally (the list above is purely illustrative), and the importance to be given to each criterion varies according to the type of activity exercised. The qualification of a transaction as a transfer of undertaking ultimately depends on the interpretation the judge gives to the factual elements of the particular case (the Luxembourg and the European courts tend to adopt a broad interpretation of the concept of transfer of undertaking).
Under European case law, a change of supplier can be considered as a transfer of undertaking (Articles 127- 1 onwards, Luxembourg Labour Code), involving the automatic transfer of the employees to the new supplier.
The taking-back of activities by the customer on termination can be regarded as a transfer of undertaking, implying the automatic transfer of the employees back to the customer, under the usual conditions (see above, Initial outsourcing).
In the case of a transfer of undertaking, all rights and obligations resulting from the existing employment contracts of the employees at the date of the transaction are automatically transferred to the transferee. This applies to all employees linked to the business transferred.
As a consequence of the automatic transfer of the employment contracts, the transferee (supplier) must, in principle, maintain the employees' working conditions.
The pension rights of the affiliated employees are transferred to the transferee. If the transferee has its own pension scheme, it must grant equivalent rights to the transferred employees.
The transferee must maintain the salary and all other benefits of the employees.
The seniority of the employees must be calculated taking into account the day of their engagement by the transferor (customer). This is important in relation to the seniority bonus, the notice period and severance payments due in the event of termination of the employment contract.
The transferee must maintain the terms and conditions provided by the collective agreement applicable to the employees, if any, until either the:
Expiration of the collective agreement.
Termination of the collective agreement by one or more parties to the agreement and commencement of a new collective agreement.
Redundancy pay is calculated on the length of service of the employee. Based on the length of seniority within the firm, the employee will be entitled to:
A notice period depending on their seniority. The period will last:
two months if the employee has been employed for less than five years;
four months, if the employee has been employed between five and ten years;
six months, if the employee has been employed for ten years or more.
Redundancy pay depending on the length of their employment:
no payment for an employee employed for less than five years;
one month's pay for an employee employed for between five and nine years;
two months' pay for an employee employed for between ten and 14 years;
three months' pay for an employee employed for between 15 and 19 years;
six months' pay for an employee employed for between 20 and 24 years;
nine months' pay for an employee employed for between 25 and 29 years;
12 months' pay for an employee employed for more than 30 years.
Material and moral damages if the dismissal is regarded as abusive by the Labour Court:
material damages correspond to the loss of income experienced through a certain period of time (reference period) and caused by the abusive dismissal. This reference period depends on the age, professional background of the employee, and the economic situation of the employment market (a few months to a year);
moral damages depend on the circumstances of the dismissal (how the employee has been treated, and so on). Based on current case law, moral damages generally amount to about one month's salary.
Terms and conditions provided by collective agreement cannot be amended until either the:
Expiration of the collective agreement.
Termination of the collective agreement and commencement of a new one.
Harmonisation of terms and conditions can therefore only take place on the commencement of a new collective agreement, applicable to all employees.
Terms and conditions which are not provided by a collective labour agreement can be amended either:
With the consent of each employee.
Unilaterally by the employer (under certain conditions).
Employers can amend non-essential terms of their employees' contracts, and make amendments that are not unfavourable to those employees. Any unfavourable modification of an essential element of the employment contract (for example, regarding salary and other benefits) is subject to a specific procedure similar to a dismissal procedure. If the procedure is properly followed, the amendment takes place at the end of the applicable notice period, even in the absence of the employee's consent.
On a transfer of undertaking, neither the transferor nor the transferee can dismiss an employee on the grounds of the transfer of undertaking. Under case law, such dismissals are considered abusive and entitle the employee to claim damages.
However, dismissals for individual reasons or due to economic, technical or organisational factors independent from the transfer itself are possible, subject to compliance with the general Luxembourg rules concerning dismissals (notably, the need for a real and serious cause of dismissal).
There is no requirement in this respect.
A seconded worker performs his professional activity for a third entity while remaining under the authority of his employer, who continues to (Labour Code):
Give instructions to the seconded employee.
Control the carrying out of the employee's tasks.
Monitor the employee's performance.
In principle it is therefore not possible to structure the employee arrangements of an outsourcing as a secondment. For an outsourcing, authority over the employee is usually transferred to the supplier.
The transferor must notify the transferee in a timely manner (that is, as soon as possible) of all the rights and obligations linked to the employment contracts to be transferred.
A copy of the notification must be filed by the transferor with the Labour Supervisory Body (Inspection du Travail et des Mines).
In the framework of a transfer of undertakings, there are two sets of notice:
Information and consultation of the employees or the employees' representatives.
Information to the transferee.
Under the Labour Code, both the transferor and the transferee must provide some information to their respective employees' representatives, if any, or the employees themselves. The information must be provided "in useful time" (that is, as soon as possible) to allow the representatives or the employees to exercise their right to express an opinion on the operation, and in any case before the transfer takes place and the work conditions of the employees are affected.
The information must be provided on, in particular:
The envisaged date of transfer.
The reasons justifying the transfer.
The transfer's legal, economic and social consequences for the employees.
The measures the transferor and the transferee intend to adopt towards their employees, if any.
Finally, when the former or the new employer envisages some measures towards its respective employees (notably in view of the harmonisation of the remuneration package), it must negotiate these measures in useful time with the employees' representatives to reach an agreement.
Under the Labour Code, the transferor must notify to the transferee in useful time of all the rights and obligations that will be transferred to the transferee. A copy of this notification must be transmitted to the Labour Inspection.
Violating the information proceedings for the employees' representatives incurs fines from EUR250 to EUR15,000 (as at 1 February 2012, US$1 was about EUR0.8) (Laws on the workers' representatives and the joint works council).
Depending on the type of outsourcing, the Act of 2 August 2002 on the protection of individuals with regard to the processing of personal data can apply.
Data subjects (including employees, customers and suppliers) must be informed of the transfer of their data to a third party at the time of the transfer, at the latest. Ideally, this information is conveyed to data subjects at the time the relevant data is collected.
Except under certain limited circumstances (including the data subject's consent), an authorisation is required for transferring data:
Outside the EU to countries not offering an adequate level of protection according to the European Commission (Commission).
To US companies not adhering to the safe harbour principles.
The data exporter must give sufficient guarantees in relation to the safeguard of privacy and fundamental rights and the freedom of the data subjects and the exercise of their rights.
Entering into an agreement with the data importer using the model contracts for the transfer of personal data to third countries approved by the Commission, or putting in place corporate binding rules in a group of companies, provides a good basis for being granted an authorisation.
Any subcontract relating to the processing of personal data in the name of the data controller must be carried out in the framework of an agreement, which must notably include provision that the subcontractor can only act in accordance with the data controller's instructions (except as provided by law) and the subcontractor must ensure security, integrity and confidentiality of the data processed to the same extent as the data controller.
Depending on the type of outsourcing and the activities that are carried out by the entity that wishes to outsource certain functions, Article 458 of the Criminal Code and/or Article 41 of the Financial Sector Act can apply.
Several regulated and non-regulated entities which are not directly bound by the banking secrecy stemming from the Financial Sector Act can still be subject to a general duty of non-disclosure.
Service specification is a key factor in successful outsourcings. It is either included in the core of the outsourcing agreement, or preferably in a service level agreement (SLA) attached as a separate schedule to the agreement and usually drafted by the supplier.
The SLA ideally specifies the scope of the services and the details relating to the quality of the services to be provided.
Service levels are usually provided for in the SLA (see Question 15).
Contract documentation usually includes specific service penalties for failure to perform services by a specified percentage below the target level agreed between the parties based on objective and measurable criteria (see Question 21). Additionally, termination rights are generally provided for serious breaches or repeated failures to perform certain specific services considered vital to the customer.
Penalties give the customer the right to lower agreed supplier fees (through set-off). However, the courts can generally lower excessive penalties.
There are several charging methods. The parties may have preferences, depending on the services covered by the outsourcing agreement.
This model implies that the service or product to be provided is determined or determinable. The fixed price is set out in the outsourcing agreement.
A clause in the agreement sets out the parameters which determine the final price (for example, hourly rates, volumes or other units), and the customer pays sums according to the use made of the service.
This involves a combination of the fixed and flexible price method. A fixed price is paid for a certain type of service or product, and other (usually additional) services and products are charged on a flexible basis.
It is possible, but not common, to include an indexation clause in an outsourcing agreement. Specific adjustment and benchmarking clauses can also constitute charge variation mechanisms.
If the outsourcing involves installation and/or implementation costs, the agreement should include a provision stating which party must bear these costs and a mechanism on how these costs are charged and to whom, particularly where the agreement is terminated early by either party.
Under general law, the customer can choose either to:
Force the supplier to execute the agreement where possible (specific performance).
Terminate the agreement and ask for damages where the supplier has not performed its obligations in accordance with the agreement terms.
This choice is only available as a remedy if specific performance is also available.
Termination of the agreement is not seen as abusive if the supplier's failure is serious. The decision on whether the failure is serious is taken by the judge. In addition, termination of the agreement is not an automatic consequence of a breach and must be notified by the injured party.
The termination clause of the outsourcing agreement can list several circumstances, initially decided on by the parties, under which termination is possible.
Customer protections typically include:
Governance allowing for the prevention of problems, such as the provision of strategic or monitoring committees.
Service credits or penalties (see Question 16).
Reversibility and co-operation obligations of the supplier.
A list of various circumstances in which the customer can terminate the agreement (see Question 16).
Supplier warranties (see Question 21).
Supplier's insurance (which generally increases the price for the service) and/or, if the agreement is entered into with a local subsidiary, a parent company guarantee.
Confidentiality.
Benchmarking.
Supplier non-compete obligations, depending on the particular service.
The condition that the supplier can only assign the obligations under the agreement with the customer's prior written consent.
Exclusions preventing the supplier from subcontracting for specific agreements between the parties (see Question 5, Key contracts).
Audit rights.
Possibility to assign the contract.
Possibility to subcontract.
Each party generally warrants that:
It has full capacity and authority to enter into and perform the agreement.
Its ability to carry out its obligations under the outsourcing agreement is not affected by civil actions or regulatory investigations before any court, administrative body or arbitration tribunal (for example, concerning the IP rights), whether pending, threatened against that party, or affecting that party.
It has not suffered any bankruptcy or reorganisation in the recent past.
The supplier also typically warrants that it:
Will perform and procure the performance of its obligations under the agreement in compliance with all applicable laws.
Will at all times use sufficient human and technical resources to perform the agreement.
Holds, and continues to hold, all consents and regulatory approvals necessary to provide the services (for example, in the financial and insurance sectors).
There are no legal provisions imposing limitations on fitness for purpose and quality of service warranties.
The Labour Code provides for joint and several liability of the customer and supplier for obligations towards the employees resulting from the employment contracts and before the transfer occurs. Clauses by which the customer and supplier organise their mutual responsibilities are valid and enforceable between the parties (not towards the employees). Therefore, the terms by virtue of which the customer undertakes to indemnify the supplier against the costs of employing and dismissing any employees within the outsourced business function, are, in principle, valid.
Generally, professional liability insurance covers employee liability, property damage and professional indemnity risks and fraud. It is not easy to obtain insurance for loss of data and the cost is generally very high.
National law does not impose any maximum or minimum term on an outsourcing. The parties are free to choose the term of an outsourcing (although agreements must not be perpetual). However, market practice is to set the term between five and seven years for outsourcings involving important customer functions or supplier investments. Otherwise, in practice, the parties usually choose a three-year period (one year for less significant outsourcings).
National law does not regulate the length of notice period required (maximum or minimum). However, under national case law, the courts have discretion to view termination of a contract as abusive if reasonable notice was not given. The factors for determining the reasonableness of the notice period relate to the level of prejudice the party given notice suffered. The reasonableness of the length of the notice period can also vary according to the exact nature of the services concerned.
Luxembourg law does not specify circumstances in which termination is justified. However, in the case of breach, any party to a reciprocal agreement has the right to either:
Ask for specific performance.
Termination (if the breach is serious (see Question 19)) and damages.
Under the law, the right to damages only exists if termination is not sufficient to entirely satisfy the claim. However, termination of the agreement is not a condition for claiming damages for bad performance or non-performance of the agreement (Civil Code).
The law does not provide for particular circumstances in which the parties can exclude or agree additional termination rights. However, there is a general principle that the parties have freedom to set obligations, and therefore that they can agree on additional rights or exclude certain rights in specific circumstances. It is therefore possible to provide for termination rights for the following reasons:
Breach.
Change of control.
Convenience.
Loss of a licence or specific status (for example, IT system and communication networks operators of the financial sector).
However, the termination clause should be drafted carefully to clearly define particular termination rights. Courts can consider abusive termination rights as null and void.
There are no specific legal rules concerning continued use by the supplier of licensed IP rights post-termination. IP licences are generally subject to strict interpretation and limited to what is expressly agreed. However, it remains advisable to include a clause in the agreement stating that at any time after termination of the agreement, both:
The licensee must not use the licensed IP as part of its corporate or business name, or for the sale of goods or provision of services.
The licensee must ensure that sublicensees, if any, observe this condition.
The parties can agree that the licensee is entitled to a specified transition period to complete any activity started before termination.
In principle, the customer cannot gain access to the supplier's know-how after termination of the agreement, unless an agreement between the two provides otherwise.
If, on termination of the agreement, employees are transferred to the customer, the customer can gain access to the supplier's know-how, unless this know-how is subject to confidentiality or constitutes a business secret.
The parties can agree that, during the performance of the agreement, the customer can use the know-how that is developed by the supplier specifically for the customer.
Clauses excluding or limiting the contractual liability of the parties are, in principle, valid. However, clauses excluding or limiting liability are unenforceable where there has been:
Gross negligence or wilful misconduct.
A breach of a material obligation of the contract to the extent that limitation results in emptying the contract of its essence.
In a case of force majeure, as defined by case law (an unforeseeable, external and irresistible event), the supplier does not incur liability.
These principles apply to relations between professionals as well as between consumers (although there are additional protections for consumers under consumer protection regulations). Liability for tort cannot be contractually limited or excluded.
The supplier can exclude liability for indirect and consequential loss, and any loss of business, profit or revenue, if causation is shown and the loss was foreseeable at the time of conclusion of the agreement.
The parties can agree a cap on liability. It is up to the parties to set this cap, depending on the importance of the outsourcing and the risks involved. A common option is to set the cap at an amount equal to the average price paid during a certain number of years of contractual relationship.
Corporate income tax (at 28.80%) may be due by tax resident customers on their worldwide income profit or income realised from the transfer of assets to suppliers. Exemptions may be available depending on the specific asset and the situation as well as by the applicable double tax treaties (currently 64 in force) and EU Directives implemented by Luxembourg. For example, the transfer of a business unit to another company of the same group may be tax neutral under certain circumstances.
VAT is also generally applicable to the transfer of assets and supply of services. The VAT rate depends on the particular asset or service concerned, but exemptions may be available. Real estate transfer tax may also be applicable, if real estate objects are the asset sold. The law foresees registration duties on certain transactions (see below).
Where employees are temporarily put at the service of the supplier, this is considered as a service realised at the place where the company rendering such service is located and is then subject to the applicable VAT. The income generated by this service is generally covered by the tax rules (see below).
There is no particular tax applicable to a transfer of employees in Luxembourg. Where the transfer is imbedded in a transfer of branch of activity, the transaction may be exempt from corporate income and municipal business taxes as well as from VAT.
Luxembourg residents who independently perform a commercial or economical activity on a regular basis are generally taxable persons for VAT purposes, irrespective of the results of such an activity.
Generally, VAT applies to the transfer of assets and goods as well as services. The VAT rate depends on the particular asset transferred or the service rendered. Luxembourg VAT rates are 3%, 6%, 12% and 15%, the latter being the general applicable rate.
Intangible services provided in the framework of an outsourcing deal are normally subject to VAT. Depending on the nature of the service, certain exemptions apply (for example, under certain conditions, several services which may be defined as "financial services'' from a VAT perspective are VAT-exempt unless the service is viewed as technical or as a support, and not as a true financial service).
Depending on the activity performed, and proportionally to the income generated by activities giving the right to deduct VAT with respect to income generated by all the activities performed (so-called pro rata), VAT supported for intangible services may be recoverable.
The transfer by a Luxembourg taxpayer of an entire enterprise or a piece of it constituting an independent branch of activity (including technical and human resources) is generally VAT exempt.
Not applicable.
In 2009, stamp duty due on contributions in kind or cash to a company was abolished.
Luxembourg legislation foresees registration duties that are triggered on the registration (voluntarily or obligatorily) of a certain transaction. The registration duty can be a flat rate or ad valorem (that is, in proportion to the value of the asset registered) depending on the nature of the underlying transaction.
For example, transactions covered by registration duties are:
Transfers of certain goods and real estate objects (located in Luxembourg).
Donations.
Debt recognition.
Renting and leasing of real estate objects.
Granting of certain kinds of warrants and guaranties.
Mortgages.
Exceptionally, where the transaction is subject to VAT, registration duties are generally only due at the flat rate (currently EUR12). This does not apply for transfer of real estate, which is in general subject to both registration duty and VAT.
The rental of real estate objects may be exempt from VAT but the taxpayer can opt to subject such transaction to VAT triggering the effect that the rental would not be subject to proportional registration duty but only to the flat fee mentioned above.
With respect to real estate, the transfer of real estate object(s) located in Luxembourg are subject to registration duty of 6%. The rate may be increased under certain circumstances if the real estate objects are located in the city of Luxembourg. The duty may also be reduced to the flat rate in case the transaction implies the contribution of a real estate object to a Luxembourg corporation in exchange for share capital in such company.
Luxembourg tax resident companies are subject to corporate income tax, municipal business tax and net worth tax.
The combined corporate income tax and municipal business tax rate is 28.8% for 2011 and 2012 (including the contribution to the employment fund and assuming the municipal business tax for the city of Luxembourg. This can slightly vary for other municipalities).
Foreign companies may be exposed to foreign taxation under (limited) circumstances, which can be softened by EU directives as well as double tax treaties entered into by Luxembourg.
As of 1 January every year, net worth tax rate is 0.5% on the net asset value of Luxembourg companies.
Under certain circumstances, income (dividends and capital gains) derived from certain participations may be exempt and such participations (assets) may also be exempt from the purposes of calculating the net worth tax liability.
An 80% exemption of the net income applies under certain conditions, to either the capital gain derived from the disposal of certain qualifying IP rights or the income generated by the licensing of such IP rights. This can be of interest where an outsourcing deal involves the licensing or transfer of specific IP rights. Under certain circumstances, taxpayers developing and using IP rights themselves may equally benefit from an exemption on 80% of the net income that the taxpayer may have realised if they licensed the IP rights to a third party.
There is no withholding tax on royalty payments made by a Luxembourg company under domestic regulations.
The law predicts that transactions amongst related parties must be at arm's length. Transactions between unrelated parties are presumed to respect such principles. Therefore, although there is not yet any specific guidance provided by Luxembourg domestic rules, general international recognised transfer pricing principles should be observed. As a result, tax payers should be able to provide the tax authorities with sufficient and satisfactory information on demand.
Custom and other excise duties may be applicable depending on the goods or assets.
*The authors would like to thank Marielle Stevenot for her invaluable contribution to the employment aspects of this chapter.
T +352 26 48 42 1
F +352 26 48 42 35 00
E cywie@mnks.com
W www.mnks.com
Qualified. Member of the Luxembourg Bar, 2006 and of the Brussels Bar (Belgium), 2001
Areas of practice. Technology matters (including telecommunications, internet, domain names, digital signature, data protection and legal aspects of IT security); IP; media; IT outsourcing agreements in the financial sector; software licensing agreements; commercial contracts.
Recent transactions
Assisting a leading insurance provider in drafting and negotiating IT outsourcing agreements.
Assisting a leader in delivering broadband and other communication innovations in the Luxembourg part of an IT outsourcing transaction with a worldwide banking institution.
Assisting a European leading financial service provider in negotiating and drafting a EUR20 million IT outsourcing agreement covering the rationalisation of the European computer production of the financial service group by way of a consolidation and outsourcing to a support PSF in Luxembourg.
Assisting an international group, specialised in the provision of outsourcing services, that wished to extend its activity in Luxembourg by providing services to professionals of the financial sector and to insurance undertakings.
T +352 26 48 42 1
F +352 26 48 42 35 00
E mongin@mnks.com
W www.mnks.com
Qualified. Member of the Luxembourg Bar, 2008
Areas of practice. Technology and IP matters; IP and IT agreements (outsourcing agreements and all types of assignment and licenses related to intellectual property); telecommunication; e-commerce and regulatory compliance requirements (such as data protection regulation).
Recent transactions
Assisting a leading insurance provider in drafting and negotiating IT outsourcing agreements.
Assisting a leader in delivering broadband and other communication innovations in the Luxembourg part of an IT outsourcing transaction with a worldwide banking institution.
Assisting a European leading financial service provider in negotiating and drafting a EUR20 million IT outsourcing agreement covering the rationalisation of the European computer production of the financial service group by way of a consolidation and outsourcing to a support PSF in Luxembourg.
Assisting an international group, specialised in the provision of outsourcing services, that wished to extend its activity in Luxembourg by providing services to professionals of the financial sector and to insurance undertakings.
T +352 26 48 42 1
F +352 26 48 42 35 00
E guevara@mnks.com
W www.mnks.com
Qualified. Spain, 1999
Areas of practice. International corporate taxation in particular in the private equity sector.
Recent transactions
Advised on international transactions and reorganisations and international tax planning.
Advised Luxembourg financial services providers (fund industry, banks).
