The Luxembourg private wealth management company or the SOPARFI (the Luxembourg holding and finance company) are two structures born in the Grand-duchy of Luxembourg. Luxembourg is highly regarded as a premier wealth management hub in Europe. The strategic location, advanced economy, and solid legal and regulatory frameworks of the Grand Duchy attracts numerous international investors and high-net-worth individuals keen in protecting their assets through the implementation of various management strategies.
What is Private Wealth Management (SPF)?
One of the most popular forms of wealth management in Luxembourg comes in the form of Private Wealth Management (SPF). This investment vehicle allows individuals to structure their estate in a straightforward, unregulated, and tax efficient manner for various applications. For asset protection and wealth preservation, flexibility of the Private Wealth Management (SPF) makes it an appealing legal form for many investors, both local and foreign. The SPF may be combined with a trust or a foundation as its owners. Luxembourg, being a highly sophisticated centre of legal and financial solutions, enable private individuals to their respective private assets’ holding and financial capabilities from a one-stop-shop that meets all of their requirements.
Key Features of a Private Wealth Management (SPF)
- As a separate legal entity, a Private Wealth Management (SPF) carries limited liability.
- Due to its private character and design, it benefits from its certainty in relation to its co-investors and a highly targeted approach to the allocation of risks.
- Leverages holding company structure as opposed to direct investment of capital for private investors.
- Highly flexible investment structuring
- Simplified taxation regime
- Simple to set-up characterized by a streamlined incorporation process and initial share capital requirements.
- Permitted to acquire, hold, and manage various financial instruments, including money and assets.
- Not allowed to conduct commercial activities and exempted from certain tax assessments.
Apart from the above-mentioned key features, a Private Wealth Management (SPF) must adhere to the provisions under the Law of 11 May 2007. The Private Wealth Management (SPF) Law. It is important to note that investors are not required to acquire authorization to open a Private Wealth Management (SF) and that as a legal entity it cannot be listed stock market exchanges.
- A Private Wealth Management (SPF) is registered as a capital company. The share capital varies based on the legal entity chosen upon registration. Typically, share capital ranges between EUR 12,500 and EUR 31,000.
- Shareholders for a Private Wealth Management (SPF) must be a natural person. While a Private Wealth Management (SPF) is related to family wealth, its investors need not be related by blood.
- A Private Wealth Management (SPF) enjoys exemptions from a wide range of tax assessments, including corporate income tax, municipal business tax, and net wealth tax.
- Private Wealth Management (SPF) structures are subject to subscription tax assessed at a rate of 0.25%, but is not required to register for value added tax.
Private Design of a Private Wealth Management (SPF)
- Private investors mange their own wealth and assets.
- Private Wealth Management (SPF) entities that work exclusively for the estate of one or two more individuals must be resident or non-resident entities such as in the form of foundations and trusts. The eligibility of these requirements is interpreted in a broad sense, with its sole function focusing on asset management for one or more natural persons.
- Intermediaries or fiduciaries may act on behalf of a Private Wealth Management (SPF) investors.
The Private Wealth Management (SPF) structure is an appealing vehicle for both investment organizations and/or novices and non-professional investors who wish to gauge the overall status of their relationships with potential co-investors. Investors enjoy a high level of discretion and anonymity from a well structured Private Wealth Management (SPF) .
Separate Legal Entity and Limited Liability of a SPF
The very nature of a Private Wealth Management (SF) being a separate legal entity, limits its liability to their respective contributions, which in turn improves their position in terms of liability towards third parties, especially in the case of borrowing operations for estate planning purposes.
Flexible Investment Structuring for a Private Wealth Management (SPF)
A Private Wealth Management (SPF) functions as a passive investment structure for family assets, succession planning, matrimonial property management, and similar applications. It is only allowed to perform the following functions, including holding and sale of financial assets under Law of 5 August 2005 on financial collateral arrangements such as debt instruments, structured investments, shares, options, derivatives, equities, transferrable securities, as well as cash and other assets held in an account with trusted professional financial service experts.
Operational Limitations of a Private Wealth Management (SPF)
- A Private Wealth Management (SPF) is prohibited from rendering service, including the approval of interest-bearing loans. It may, however, initiate cash advances or guarantee liabilities of an entity where it holds participation shares, but only in an incident manner and free of charge.
- A Private Wealth Management (SPF) is not allowed to participate in the management of entities where they hold participation shares. This is applicable even if a great portion of capital is held by a Private Wealth Management (SPF) and holds certain management rights.
- Only voting rights may be exercises, as long as the activity does not interfere with the above-mentioned conditions.
- A Private Wealth Management (SPF) is prohibited from participating any type of commercial activity, with the exception of entities in which a Private Wealth Management (SF) that holds participations may perform commercial activities, provided they are subject to their own corporate rules and provisions.
- A Private Wealth Management (SPF) is not allowed direct holding of intellectual property and real estate.
- Private Wealth Management (SPF) is now permitted to engage in life insurance contracts.
The Private Wealth Management (SPF) Law does not impose direct limitations financing and indebtedness, and the Private Wealth Management (SPF) financing may be performed through borrowing operations, whether from credit institutions, for its shareholders and investors. Contributions in kind are accepted in Euros and other denominations.
Private Wealth Management (SPF) Simplified Taxation Regime
The very nature of a Private Wealth Management (SPF) being an extension of an individual’s private property and without engagement in any commercial activity, makes this legal form a tax neutral vehicle. It is exempt from municipal business tax, net wealth tax, and corporate income tax. The stringent nature of a Private Wealth Management (SPF) allows it to avoid double taxation for the same assets as a result of change in ownership.
- Annual subscription tax of 0.25% paid annually, or the amount of EUR 125,000 is applicable to all Private Wealth Management (SPF) companies.
- Tax base is calculated as the sum of all paid share capital and share premiums. When applicable, the portion of debt exceeding eight times the total sum of share capital will be factored in the calculation of tax base.
- Due to the tax neutral nature of a Private Wealth Management (SPF), it does not benefit from Luxembourg’s bilateral double taxation treaties or the EU-Parent Subsidiary Directive.
- Private Wealth Management (SPF) may be subject to irrecoverable foreign withholding taxes in countries where investments and assets are located.
- Dividends and interest paid by Private Wealth Management (SPF) are not assessed with withholding tax, except where Law of 23 December 2005 is applicable. The law relates that domestic withholding tax on certain interest income on interest payments to resident investors are applicable.
- Dividend and interest payments may be assessed with tax under the name of the recipient under income tax laws for Luxembourg residents. On the other hand, non-residents may also be subject to tax in their country of origin.
- Capital gains from share transfers and liquidation surpluses for non-residents are not subject to Luxembourg tax assessments.
- As a Private Wealth Management (SPF) does not hold any commercial activity, it is regarded as a non-taxable person or entity, and therefore will not be subject to value added tax.
- Tax supervision of a Private Wealth Management (SPF) is carried out by indirect tax authorities, such as the Administration of Registration, Domains, and VAT. They are responsible for informing direct tax authorities should a Private Wealth Management (SPF) fails to meet the conditions to benefit from the Private Wealth Management (SPF) Law. As a result. a Private Wealth Management (SPF) will be treated as a fully taxable company subject to pay corporate income tax and other Luxembourg taxes.
Private Wealth Management (SPF) Legal Forms
- Private Limited Company (SARL)
- Public Limited Company (SA)
- Partnership Limited by Shares (SCA)
- Cooperative Company (SCSA)
Registration and incorporation requirements, minimum share capital, representation, annual general meetings, annual accounts reporting, and other relevant activities are included in Law of 10 August 1915 on commercial companies. All provisions will be applied according to the specific legal form a Private Wealth Management (SPF) chooses to operate in Luxembourg. Finally, there are no specific authorizations or licensing requirements needed to incorporate a Private Wealth Management (SPF).
The Soparfi or Luxembourg financial holdings company is an ordinary commercial entity that follows Luxembourg common laws. It does not benefit from any special tax regime and is a fully taxable company. As a commercial entity, there are no restrictions imposed on a Soparfi’s field of activity.
- Foreign investors can protect their financial assets through a Soparfi. Investors may invest in various industries and may even provide management services for high-net-worth individuals.
- A Soparfi can reduce its tax burden by limiting its activity to holding investments and structuring them strategically to benefit from the EU Parent-Subsidiary Directive.
- Under the EU Parent-Subsidiary Directive, a Soparfi, under well-defined provisions, may be exempt on dividends paid by companies where a parent company has holdings or on capital gains on the sale of its holdings.
- All commercial activity under a Soparfi company will be subject to corporate income tax and value added tax.
- Given that a Soparfi is assessed with tax like any other commercial company in Luxembourg, it enjoys benefits from double tax treaties made by Luxembourg with other contracting countries.
Soparfi Legal Forms
- Public Limited Liability Company (SA)
- Private Limited Liability Company (SARL)
- Public Limited Liability Partnership (SCA)
Soparfi Taxation Regime
- Overall income tax rate at 24.94% for Luxembourg-domiciled Soparfis.
Net Wealth Tax
- Annual net wealth tax will be based on total assets minus liabilities, which is assessed at 0.5% every 1 January of each year.
- Applicable minimum wealth tax of EUR 4,815 (including 7% solidarity surcharge) as taxable base for Soparfis whose financial assets exceed EUR 500 million.
- Soparfis with financial assets exceeding 90% of its total balance sheet will be assessed EUR 4,815 (including 7% solidarity surcharge) for minimum wealth tax.
- Minimum net wealth tax varies between EUR 535 and EUR 4,815.
- Net wealth tax may be reduced through tax credits from creating a five-year reserve, with provisions that certain conditions are met.
Value Added Tax
- A pure holding company is not a taxable person, and therefore does not have to register for value added tax purposes.
Income Tax Exemption from Dividends Received
- Dividends received by a Soparfi will be subject to corporate income tax at a standard rate of 24.94%.
- Under domestic participation exemption rules under the EU Parent-Subsidiary Directive, dividends are exempt from taxes provided certain provisions are met:
- A Soparfi must be an eligible entity under the EU Parent-Subsidiary Directive.
- A legal entity which is subject to corporate income tax in its country of residence.
- At the time of liquidation or dividend distribution, a Soparfi must have held direct participation of more than 10% of nominal paid up capital to the subsidiary for 12 straight months.
- In the event of lower participation percentage, direction participation with an acquisition pride of at least EUR 1.2 million.
- All qualifying subsidiaries are exempt from 50% dividend exemption.
Withholding Tax Exemption on Dividends Paid
- 15% withholding tax rate on dividends paid by a Luxembourg company, unless the rate is reduced based on applicable treaties or domestic dividend withholding tax exemptions regime by Luxembourg.
- Full withholding tax exemption is applied if the parent company is a fully taxable company based in a EU or EEA (European Economic Area countries, and has held direct participation of more than 10% of nominal paid up capital to the subsidiary for 12 straight months.
- In the case of a lower participation percentage, direct participations with an acquisition price of at least EUR 1.2 million, full withholding tax exemption is deemed applicable.
- Capital gains and losses are taxable for corporate income tax.
- Participation exemption rules for capital games are similar to those of dividends. Full exemption is applied if the parent company is a fully taxable company based in a EU or EEA (European Economic Area countries, and has held direct participation of more than 10% of nominal paid up capital to the subsidiary for 12 straight months.
- In the case of a lower participation percentage, direct participations with an acquisition price of at least EUR 6 million.
- Capital gains tax exemption are also applicable to participations help through tax-transparent entities.
- Any capital gain realized on eligible subsidiaries are only taxable if the extent of their expenses were deducted from non-exempted profits from previous years.
Interest and Royalties
- Interest payments made to legal persons will not be assessed with Luxembourg withholding tax.
- Profit sharing interest payments on certain debt instruments may be subject to 15% withholding tax, unless there are no lower tax treaty applicable or an exemption may be applicable.
- Luxembourg does not assess withholding tax on royalties.
- There are no debt-to-equity provisions under the Luxembourg tax regime.
- However, for holding companies, administrative practice mandates compliance with 85:15 debt-to-equity ratio for concerned parties whenever debt financing is approved by shareholders to act as a guarantee for tax deductibility for interest payments of the payer.
Tax Agreement Requests
- Luxembourg has an existing framework for Advance Tax Agreements under Law of 19 December 2014. It provides all provisions and procedures for all types of tax agreement requests.
Damalion takes pride in its superior expertise in wealth management structures in Luxembourg. Contact us and let our Damalion experts guide you through deciding which vehicle suits your needs and professional assistance in incorporating a private wealth management or financial holdings company today.
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.