Differences Between a Luxembourg Trading Company vs. a SOPARFI

Although a Luxembourg SOPARFI  is treated in the same way as a trading company, the former’s primary function is to manage local and foreign investments acquired through shares. Additionally holding companies or SOPARFIs are not permitted to perform any commercial activities in the Grand Duchy. For a SOPARFI to conduct commercial activities, the company needs to gain authorisation from the Ministry of Middle Classes. The Ministry of Middle Classes will then assess the reputation, professional history, and qualifications of a holding company’s head or director before permission may be granted to host any commercial activity in Luxembourg.

In terms of share capitals, the minimum share capital for a SaRL and trading company is set at EUR 12,500 and EUR 31,000 for a SA. SOPARFIs are only allowed two types of shares, namely nominal and bearer shares, while shares registry is neither required nor permitted.

SOPARFIs and trading companies are established utilising the same processes. The articles of association are created with the help of a notary public and in front of the Registrar of District Court. If you do not have the time nor knowledge on how to proceed with a business registration, you may seek the expertise of company formation specialist to streamline and ensure the success of your business registration proceeding.

The Different Types of Holding Companies in Luxembourg

Holding companies in Luxembourg are subdivided into different categories, as each one falls under a special regime:

  • Operative Holding Company (head office holding company)
  • Financial Holding Company (SOPARFI)
  • Management Holding Company (Strategy Holding)
  • Organizational Holding (Structural Holding)

Of all holding company categories, a SOPARFI presents the most beneficial format due to its special taxation system. Under the Luxembourg Commercial Law of 2007, wealth management companies carrying special tax status for holding companies are duly categorized as SOPARFIs as well.

One of the main motivations of foreign nationals for starting a holding company in the Grand Duchy is that registering as a public company may come in the form of single ownership. To that end, SAs may be set up  as a holding company or as a trading company in Luxembourg.

If you wish to learn more about the laws and regulations that govern holding companies in Luxembourg, we will be more than happy to guide you in this journey.

The Different Types of Trading Companies in Luxembourg

Under the Commercial Law, there are two types of trading companies that operate in Luxembourg:

A trading and service company is meant for entrepreneurs who want to operate commercial, trading, and skills-related activities, while commercial trading organisations are not legal entities per se. A trading company may be registered under any type of legal form, just like holding companies. However, it is only limited to certain legal structure such as cooperatives, partnerships, and European companies.

One of the major strengths of establishing a trading company is the absence of red tape during the registration process. Additionally, prevailing rules and regulations favour the creation of trading and service companies in the  Grand Duchy, especially that those who decide to use the European company structure as this is fully recognized in other EU Member States. Managing a trading company is simple and straightforward as opposed to other company forms in Luxembourg. Lastly, it is mandatory for trading companies to obtain a Luxembourg EORI number in order to run their business in Luxembourg.

Administration of Trading vs Holding Companies in Luxembourg

The management system in holding and trading companies are identical. The main body in a trading company and SOPARFI is held during the general meeting of shareholders who share powers in the creation of rules and regulations of the company.

A general meeting is held at least once a year, with the date and time specified in the articles of association. The corporation is administered by a board of directors, at least three members in the case of a public limited company, and one shareholder for a private limited company.

The appointed directors will run for a term not exceeding six years. A corporation may also be managed by a board made up of a management or supervisory officials. Depending on the size of a company the general meeting is required to assign an auditor who will be responsible for auditing tasks and overseeing financial statements for a period not exceeding six consecutive years.

The annual accounts of trading and holding companies in Luxembourg must be submitted annual among shareholders and completely filed with the District Court Registrar. Notice of filed annual accounts are then published in the Grand Duchy of Luxembourg Gazette.

SOPARFI is required to submit their consolidate annual accounts in the following scenarios:

  • If it holds the majority of voting rights in another company
  • If it has minority stakes but controls another company or under agreement with other shareholders
  • If the company owns a minority stake in another company and has the right to appoint or remove majority of the board members

Trading Company and SOPARFI Withholding Tax

SOPARFIs are exempt from many tax regimes, or at the least, enjoys reduced payments due to various double tax treaties signed by Luxembourg with other countries through the years. Typically, dividends distributed by a Luxembourg company is subject to withholding tax at 15%, but this may be reduced as a result of double tax treaty provisions.

As a result of participation exemption regime, dividends that are paid by a Luxembourg company are not subject to withholding tax if any of the following conditions are met:

  • A SOPARFI owns at least 10% of capital subsidiary
  • Acquisition price amounts to EUR 1.2 million for a period of at least 12 months
  • Dividend recipients are fully taxable entities in Luxembourg, such as residents in a state with which Luxembourg has a double tax agreement with
  • A joint company taxed in Switzerland
  • EEA or EU resident fully subject to income tax comparable to the Luxembourg income tax

If you wish to learn more about the formation and successful management of Luxembourg trading and holding companies, contact us at Damalion today.