Luxembourg Taxation Key Pointers | Corporate Structuring

Luxembourg is a world-renowned financial centre for a number of reasons. Its updated legal and regulatory framework and expansive network of double taxation treaties result in optimized financing and asset-holding entities that encourage foreign entrepreneurs in setting up a company in the Grand Duchy. Its stable political landscape and central location in Europe make it one of the most attractive countries for permanent residence and business purposes.

The country is included in the OECD “white list” and is top rated due to its dependable and transparent jurisdiction. At present, Luxembourg holding companies are being utilized by high-net worth personalities, wealthy families, international entities, private equity forms, and investments due to its healthy economic, legal, and political environment.

SOPARFI refers to an unregulated investment vehicle with no limitations on its business operations  and is commonly used as a holding company by foreign entrepreneurs. The two most common legal forms of SOPARFI are as follows:

Public Limited Liability (SA)

  • Minimum share capital set at €30,000, 25% of which must be paid upon registration
  • Must have a registered Luxembourg office address
  • Must have one shareholder at least, with permission to nominate nominee shareholders
  • Must have three directors. In the case of a company with only one shareholder, only one director is allowed
  • SAs are required to submit annual fiscal statements

Private Limited Liability Company (SARL)

  • Minimum share capital set at €12,000, 100% of which must be paid upon registration
  • Must have a registered Luxembourg office address
  • Must have one director, with his or her information publicly available
  • Must have one shareholder at least, with his or her information publicly available.
  • SARLs are required to submit their annual fiscal statements

SOPARFI Taxation Fundamentals

  • 17% VAT will be assessed on the transfer and exploitation on intellectual property rights by a SOPARFI
  • A balance of 24.94 % is taxable at the corporate tax rate (including the corporate income tax and an average municipality business tax of 7.5%). Royalties paid overseas are tax exempt as enforced by the EU Interest and Tax Directive
  • Certain assets will be exempt from Net Wealth Tax, including notable qualifying participations provided certain conditions are met
  • Dividends paid out to corporate shareholders from an EU, DTT, or EAA country should not be frozen if the beneficiary is subject to the conditions mentioned above. In other instances, a 15% withholding tax shall be imposed upon distributions
  • Dividends will be exempt from tax when it meets the following criteria:
    • A resident or non-resident subsidiary will be subject to a similar tax regime
    • A SOPARFI owns at least 10% of shared capital of the underlying subsidiary or a minimum investment of €1.2 million
    • Ownership of interest in the subsidiary must be held for at least 12 months or a SOPARFI must agree to hold shares in the subsidiary for 12 straight months
  • Interest received is deemed fully taxable at the set corporate tax rate. On the other hand, interest paid abroad is tax exempt subject to EU Interest and Royalty Directive
  • Liquidation proceeds from a subsidiary is tax exempt under certain conditions
  • Liquidation proceeds paid by a SOPARI to its shareholders are tax exempt
  • Net Wealth Tax is set at 0.5% but only to a base of €500 million as assessed net asset value every 1st of January each year
  • Starting 2017, the minimum Net Wealth Tax is €4,815 and applicable to all SOPARFIs whose financial assets go beyond 90% of their respective gross assets
  • To fully qualify for capital gain taxation, a SOPARFI subsidiary investment must be 10% or worth €6 million, with the seller holding the corresponding shares for a period of at least 12 months
  • Up to 80% of royalties and other income sources such as capital gains coming from intellectual property rights, including software, patents, designs, trademarks, internet domains, and models are tax exempt
  • Within the limit of 85:15 debt to equity ratio, interests may be paid or accrued on debt are tax deductible. Moreover, payments will not be assessed of withholding tax unless the EU Savings Directive applies

Private Wealth Management Company

SPF may be utilized by individuals and private investors to start a company in Luxembourg. It is fully exempt on income derived from bonds, notes, shares, deposit accounts, mutual funds, and any form of financial instrument. A SPF is limited in its operation as it can only perform acquisition, management, holding, and disposal of financial assets, but may still passively invest in any type of securities. It is not allowed to undertake any commercial trading operations or in the management of other companies, cannot hold real estate, grant interest-bearing loans, or intellectual property rights.

Different Types of SPF Legal Forms

  • SARL is required a minimum share capital of €12,000 with at least one manager and one associate
  • SA is required a minimum share capital of €30,000, with 25% paid upon registration, with at least one shareholder, one director, and a statutory auditor
  • SCA is required a minimum share capital of €30,000, with 25% paid upon registration, with two shareholders, one general partner, one limited partner, one manager, and three statutory auditors
  • COOPSA is a cooperative company borrows some qualities from a public limited liability company that permits variable capital, with a minimum of one shareholder and one director

SPF Taxation Fundamentals

  • A subscription tax at 0.25% will be applied on paid-in capital share, including share premium with a minimum of  €100 and a maximum of €125,000
  • Dividends and interest payments on financials received by an SPF may be subject to withholding tax, if any, will be paid in the source country or state and in accordance with tax rules of that state.
  • Exemptions from corporate income tax, municipal business tax, and net wealth tax
  • SPFs are not entitled to make use of benefits from the Luxembourg double tax treaties or the EU Directives
  • Subscription tax will be assessed to part of the debt that exceeds the 1:8 equity-to-debt ratio
  • There will be no withholding tax assessed on profit distributions from an SPF to its shareholders and on liquidation proceeds
  • Withholding tax levied at the source on the interest paid in advances and debt of a SPF to individuals set at a rate of 10% and 35% for Luxembourg residents and EU residents respectively, while 0% in all other cases.

Here at Damalion, we take pride in our team of wealth management experts that will help you with any concerns that you may have in starting a SOPARFI or SPF in Luxembourg. We will be help you navigate through the business formation process, so you can take advantage of the great opportunities waiting for you in Luxembourg. Contact us today for more information.

This information is not intended to be a substitute for specific individualized tax or legal advice. We suggest that you discuss your specific situation with a qualified tax or legal advisor.