Luxembourg is a very attractive jurisdiction for holding companies and many major multinational groups have indeed located a holding vehicle in Luxembourg (the commonly called Société de Participations Financières or SOPARFI). The competitive participation exemption regime (100 percent exemption) on dividends received and capital gains on shares is one of the main reasons why Luxembourg is so popular as a host country for holding companies.
In order for a Luxembourg company to be entitled to the participation exemption for dividends received and for capital gains realized on shares, two sets of requirements must be met:
- The first set of requirements concerns the shareholding in the subsidiary, i.e. the participation held by the Luxembourg parent must be important (i.e. it may not be a portfolio investment). The Luxembourg holding company must own either a participation of 10 percent in the share capital of the subsidiary or, alternatively, a participation with an acquisition value of at least €1.2 million (this threshold is however higher for the capital gains exemption, i.e. € 6 million). This qualifying participation must be held for a period of one year.
- The second set of requirements pertains to a (relatively complex) subject-to-tax test imposed on the subsidiary. Under the Luxembourg participation exemption regime, a subsidiary will be deemed to pass this test if it is either:
(i) a qualifying Luxembourg resident entity fully subject to Luxembourg income tax or
(ii) an EU entity covered by article 2 of the Parent-Subsidiary Directive or
(iii) a capital company that is subject in its country of residence to an income tax which is “comparable” to the Luxembourg corporate income tax (i.e. a tax rate of at least 10.5 percent and a comparable tax base).
SOPARFI (SOciété de PARticipations FInanciéres) is the most common vehicle dedicated to holding and financing activities in Luxembourg. The company may also carry out other activites, provided they are provided for in the bylaws and a business license is obtained if required. Any undertaking or private person can be eligible as an investor.
A SOPARFI is a fully taxable unregulated company, not subject to any supervisory authority. It does not require authorisation unless quoted and/or commercial activities are carried out.
The SOPARFI can be constituted either as a “société anonyme” (public limited company- SA), a “société à responsabilité limitée” (private limited company- SARL) or a “société en commandite par action” (limited partnership by shares).
The minimum share capital for incorporation of a Luxembourg Company is €12.500 for a “société a responsabilité limitée”, which must be fully paid up, and €31.000 for a “société anonyme” of which a minimum of 25% must be paid up. A company incorporated as a “société anonyme” may have bearer shares. However, shares are nominative until the entire capital has been paid-up.
Tax advantages of a SOPARFI in Luxembourg
- Exemption from tax of dividends and sale and liquidation proceeds from investments
Since January 1st, 2013, the rate of corporate taxation on the distribution of dividends and sale and liquidation proceeds to a SOPARFI in Luxembourg has been 29.22% (21% or 20% corporation tax, plus the Solidarity Surtax at a rate of 7% as well as the Municipal Business tax at a rate of 6.75%). All corporations resident in Luxembourg which do not require a trade license and whose assets, securities and bank balance together exceed 90% of its total balance sheet are required to pay only the minimum corporate taxation of 3,210 EUR (3,000 EUR plus the 7% Solidarity Surtax).
Notwithstanding this, in the context of the application of the „inter-corporate privilege“, the dividends and sale and liquidation proceeds distributed to a SOPARFI in Luxembourg are exempt from tax upon satisfaction of the following requirements:
- Requirements for the parent company
The parent company (SOPARFI) must be either a corporation resident in Luxembourg with unlimited tax liability or the permanent establishment in Luxembourg of an EU Company within the meaning of the parent subsidiary Directive or must be a corporation resident in a country which has agreed a double taxation agreement (DTA) with Luxembourg. Furthermore, the parent company is required to hold at least 10% of the capital of the subsidiary company or to have acquired the said investment for at least 1.2 million EUR (or 6 million EUR for sale profits) and at the time of the making available of the dividends, the investment must have been held for an uninterrupted period of at least 12 months or a commitment existed to do so.
- Requirements for the subsidiary company
The subsidiary company must either be a corporation which has its registered office in Luxembourg with unlimited tax liability or a foreign corporation with unlimited tax liability which is liable to a tax comparable to Luxembourg’s corporation tax or be an EU-subsidiary company fully liable to corporate taxation (congruity with Luxembourg’s rate of corporation tax is not mandatory) within the meaning of the parent subsidiary Directive.
If these requirements are not met, dividends can be at least 50% tax exempt if they are distributed by a corporation which is resident in Luxembourg with unlimited tax liability or a foreign corporation which is liable to corporate taxation (corresponding with Luxembourg’s rate of corporation tax) and which has its registered office in a country which has agreed a DTA with Luxembourg or an EU-Subsidiary Company within the meaning of the parent subsidiary Directive.
- Deduction of investment-related expenses
Investment-related expenses are deductible to the extent they exceed the tax-free income generated from investment in the respective year. This also applies to value adjustments as well as losses suffered from the sale of investments.
- Exemption from net wealth tax
The net wealth tax in Luxembourg applies, in principle, at a rate of 0.5%. Notwithstanding this and in accordance with the following requirements, the value of an investment remains exempt from the net wealth tax. For the application of the parent subsidiary privilege herein, no minimum holding period is prescribed:
The parent company (SOPARFI) in Luxembourg must hold at least 10% of the capital of the subsidiary company or must have acquired the investment for a sum amounting to at least 1.2 million EUR and the subsidiary company must have been a resident or non-resident corporation with unlimited tax liability
- Exemption from withholding tax
- Withholding tax on dividend distributions
In principle, the dividend distributions of a SOPARFI in Luxembourg are subject to withholding tax at a rate of 15%. However, the said tax will not be levied if the following requirements are satisfied:
Firstly, the company distributing the dividends must be a resident legal person with unlimited tax liability. The benefiting company must also be a resident corporation with unlimited tax liability or a corporation resident in an EU member state within the meaning of the parent subsidiary Directive or the resident permanent establishment of a parent company with its registered office in a country which has agreed a DTA with Luxembourg. In addition, the benefiting company is required to have an investment in the SOPARFI in Luxembourg amounting to at least 10% of the company’s share capital or of a purchase price amounting to at least 1.2 million EUR and which has been held for a period of 12 months or a commitment existed to do so.
In the case of the dividends of a SOPARFI in Luxembourg being distributed to companies from countries outwith the EU yet which have agreed a DTA with Luxembourg, there exists a reduced rate of withholding tax of 5%.
- Withholding tax on royalty payments, interest and liquidation proceeds
Royalty payments, interest payments as well as the distribution of liquidation proceeds are also exempt from withholding tax in Luxembourg.
- Double taxation agreements (DTA’s)
Moreover, a SOPARFI in Luxembourg can benefit from Luxembourg’s multiple double taxation agreements (DTA’s) due to the use of the tax exemptions arising from the „inter-corporate privilege“ not affecting the general tax liability of a SOPARFI.
- Value-added tax (VAT)
If the business activity of a SOPARFI in Luxembourg is not exclusively limited to the holding of investments, it will be liable to value-added tax (VAT) and is consequently required to register for value-added tax (VAT). Luxembourg’s rate of value-added tax (VAT) is 15%. A reduced rate applies to certain goods and services (e.g 3% on e-books).