The Luxembourg holding and finance company also called “Soparfi” is categorized as an ordinary commercial company governed by Luxembourg’s common law, specifically the 1916 Law that delineates the provisions imposed on commercial entities. Due to its inherent nature, a Soparfi does not enjoy any tax regime and is fully taxable by law. As a financial holding company, a Soparfi is not restricted on its field of activity.
A Luxembourg Soparfi, however, can reduce its tax burden by limiting its activity to holding and structuring investment, so it can benefit from the EU Parent-Subsidiary Directive. The EU Parent-Subsidiary Directive offers tax exemption on all dividends paid by companies in which a parent company has a holding and/or capital gains on the sale of its holdings.
On the other hand, all commercial activities undertaken by a Soparfi will be assessed with corporate income tax and value added tax (VAT), Since a Soparfi acting as a commercial company is liable to tax, it may benefit from double taxation treaties contracted by Luxembourg with other countries.
Its flexible financial policies, structural features, lack of investment limitations, and its advantage in gaining access to treaty benefits, the Luxembourg Soparfi has taken a crucial role in establishing cross-border transactions, as well as sovereign wealth funds, investment funds, and many more.
Are Luxembourg Soparfis under the supervision of the Commission for the Supervision of the Financial Sector (CSSF)?
The Luxembourg Soparfi structure is categorized as an unregulated vehicle, therefore, it is not under the authority or supervision of the Commission for the Supervision of the Financial Sector (CSSF). This is applicable provided a Soparfi does not engage in activities that require a commercial license or financial supervision.
This feature alone makes the Soparfi an attractive investment vehicle for managing holdings for a group of businesses. It is also the vehicle of choice for financing the holding venture capital initiatives and private equity investments.
Why do many investors choose to set-up a Soparfi?
- The Grand Duchy of Luxembourg is a premier domicile for financial holding structures. The presence of attractive regimes such as the EU Parent-Subsidiary Directive gives it a competitive advantage over other offshore jurisdictions such as Jersey and Cayman Islands.
- To date, Luxembourg has more than 82 double tax treaties signed with other EU and non-EU member states. This gives investors a high level of confidence and certainly on excellent fiscal treatment of investments.
- Apart from double tax treaties, Luxembourg also entered bilateral investment protection treaties (BITs) that provide investments with excellent tools to protect their respective underlying assets.
- Holding an investment through a Soparfi provides you with the choice to pull out your participation either by selling shares or underlying assets. The Grand Duchy offers a well-structured route for investments in an easy and straightforward manner.
- Luxembourg is a multi-lingual country with a top-notch workforce. You can create your company’s articles of association and incorporation documents are drafted in English, French, and German. This is extremely useful when investments are coming in from nearby countries, such as Germany, France, Switzerland, Belgium, and Austria.
- Luxembourg has a highly effective taxation regime that strictly adheres to EU and OECD standards.
- The Grand Duchy enjoys a well-established and attractive legal and tax framework.
- Luxembourg has established the lowest VAT rate within the European Union.
What type of assets can be held by a Luxembourg Soparfi?
There are no investment restrictions or risk-spreading requirements in a Luxembourg Soparfi structure. Investors can typically invest into the following asset classes:
- All types of securities, including bonds, shares, and stocks
- Real estate properties
- Cash, commodities, and currencies
- Distressed assets and loans
- Material and immaterial assets
In essence, the corporate purpose of a Soparfi is exclusive for holding financial participations, receiving and approving loans to subsidiaries and group entities, and to provide management services to subsidiaries.
Lastly, Soparfis that work within their scope of intended activity does not necessitate the approval of any supervisory authority in Luxembourg.
Are there any limitations for investors in a Soparfi structure?
There are no limitations when it comes to the eligibility requirements for investors looking to participate in a Soparfi. Unlike other investment vehicles in Luxembourg, an investor does not have to be sophisticated nor well-informed to invest into a Soparfi. Investors can be institutional organizations, natural persons, trusts, foundations, investment funds, and other Soparfis.
A Soparfi SA and SCA can have an unlimited number of investors while a SARL can only have a maximum of 100 shareholders. A SCA needs to be incorporated with a minimum of 2 shareholders, one assuming the role of a limited partner and the other one being the general partner. Finally, a SA can be incorporated with only one shareholder. It means concretely that you may incorporate a Soparfi Sàrl or a Soparfi SA.
What are the main steps in setting up a Luxembourg Soparfi?
- Opening a Luxembourg bank account, where shareholders can deposit their share capital.
- Transferring of share capital, with the minimum share capital of EUR 30,000 for SA and SCA and EUR 12,00 for SARL.
- Name selection for a holding company.
- Selecting the corporate form.
- Drafting of articles of incorporation.
- Identifying proxy by the shareholders for company incorporation.
- Issuance of blocking notice by the bank.
- Setting an appointment with the notary public in Luxembourg.
After an appointment with a notary public, a company will then be duly incorporated and has its own legal personality.
Following successful company incorporation, it will then be registered with the Luxembourg Trade and Companies Register.
What type of service providers does a holding company should appoint?
By rule, Soparfis are not deemed to have a registered address in Luxembourg. It should, however, Soparfis should operate for substance purposes in a manner that it cannot be categorized as tax resident in jurisdictions where investments are located. The registered address will be provided by a domiciliation agent.
Tax treaty may require access to additional substance in Luxembourg. However, this will primarily depend on the investment or investor jurisdiction, as well as the transaction entered into a Soparfi.
A Soparfi’s annual accounts are subject to an audit conducted by a statutory external auditor. There is no legal requirement in Luxembourg to assign a residential director or manager, although this may be a requirement for substance purposes.
How long will it take to establish a Soparfi in Luxembourg?
An unregulated holding vehicle such as a Soparfi does not require any regulatory approvals, so long as it does not engage in commercial activities.
Once a bank account has been successfully set-up, a Soparfi is formally incorporated. The incorporation process can be finalized within two to three days after opening a bank account in Luxembourg. Upon incorporation before a notary public, a Soparfi gains its legal personality and can enter into legally binding contracts.
What is the applicable taxation regime for Luxembourg Soparfis?
The standard tax rate for entities is at 24.94% which includes corporate income tax, solidarity surcharge, and municipal business tax.
Soparfis will be assessed with wealth tax at 0.5%. This is the rate established on the base of net asset value owned by a Soparfi.
Corporate income tax for resident and non-resident companies has been set at the following rate in 2019:
- 15 % where the taxable income does not exceed EUR 175,000;
- 17 % where the taxable income exceeds EUR 200,000.
An additional charge of 7 % is levied on corporate income tax as a contribution to the employment fund.
For collective entities whose total financial assets, bank deposits, and transferrable securities is more than 90% of the balance sheet, and when the balance sheet exceeds EUR 350,000 will be liable to pay minimum net worth tax amounting to EUR 4,815, including solidarity surcharge. On the other hand, legal entities with a total balance below EUR 350,00 is deemed to pay a minimum net worth tax amounting to EUR 535, including solidarity surcharge annually.
Luxembourg Participation Exemption Regime
All dividends, liquidation proceeds, and capital gains realized by a Soparfi from its shares may benefit from the provisions under the Luxembourg participation exemption regime, which provides 100% exemption from Luxembourg income taxes.
- All dividends received by a Soparfi may be exempt from corporate income tax and municipal business tax.
- All capital gains realized by a Soparfi on the sales of shares may be exempt from corporate income tax and municipal business tax.
- All dividends remitted by a Soparfi are exempt from withholding tax.
- Currently holding or commits to hold at least 10% of total shares in an eligible subsidiary- one which qualifies under the EU Parent-Subsidiary Directive or an organization that is subjected to income taxes that is comparable the prevailing figures imposed by Luxembourg during a period of at least 12 months. Foreign income tax is considered comparable if it is assessed at a rate of 8.5% on a tax basis similar to Luxembourg.
- Consequently, any participation with an acquisition price of at least EUR 1.2 million for dividends exemption and EUR 6 million for capital gains exemption during a period of at least 12 months.
- All dividends distributed by a Soparfi are subject to 15% withholding tax.
- In some cases. withholding tax may be reduced under provisions of applicable treaties or received exemption under domestic withholding tax exemption rules. With proper structuring, the withholding tax for a Soparfi may be avoided altogether.
- Distribution of liquidation proceeds will not be assessed with withholding tax.
- Non-resident shareholders of a Soparfi are not subject to capital gains taxation upon the sale of its shares unless they meet the following criteria:
- A non-resident holds an important participation or more than 10% of a Soparfi’s capital share
- The sale takes place six months from particpation acquisition.
- Therefore, a non-resident shareholder that holds an important participation for more than six months would not be subject to taxation for the capital gains derived from the sale of that participation.
- Where capital gains taxation is applicable, tax treaties contracted by Luxembourg with other countries will prevent it from imposing capital gains taxation altogether.
As an independent consulting firm, Damalion guides clients on their most critical business decisions when incorporating a financial holding company in Luxembourg. We have a vast network consisting of multi-disciplinary professional services network that provides legal, accounting and tax, and financial consulting to natural persons and institutional investors from all across the globe. To learn more about investment vehicles in Luxembourg or the Soparfi company setup, reach out to a Damalion expert 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.