The EU Parent-Subsidiary Directive primarily aims to eliminate double taxation for subsidiaries and parent companies incorporated in EU Member States.
- Avoid double taxation of income for large shareholders
- By rule, large shareholdings are assessed with tax on income from capital during dividends distribution. Additionally, they are typically assessed with corporate income tax and business tax during the receipt of dividends.
- Avoid double taxation on capital gain as a result of transfer of large shareholders, which by rule, is subject to both corporate income tax and net worth tax.
- Avoid double taxation of shareholdings, which originally are subject to net worth tax.
Operations between a parent company and subsidiary may also benefit from tax exemption under the EU Parent-Subsidiary Directive.
Who is Included in the EU Parent-Subsidiary Regime?
For both parent and subsidiary companies are required to meet the following criteria to benefit from the EU Parent-Subsidiary Regime.
- The capital company is assessed with corporate income tax or a similar corporation tax in its home country
- Required to meet certain requirements in terms of percentage of shareholdings
- Private companies
- Public limited companies
- European companies
- European co-operative entities
Income from Exempted Shareholdings
Under Article 166 L.I.R., income coming from shareholders will only be exempted if the parent company has committed to hold for a minimum of 12 months, given that it holds at least 10% of a subsidiary’s share capital, or in the case where the purchase price is at least EUR 1.2 million.
Capital Gain from Transfers Exemption
Capital gain from share transfers may only be exempted if the parent company has held or has committed to hold at least 10% of the subsidiary’s share capital, or in the case where the purchase price is valued at EUR 6 million.
Taxation of Income from Holdings
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Distribution of Dividends Exemption
Under the EU Parent-Subsidiary Directive Article 147 L.I.R., subsidiaries cannot apply for withholding tax on income from capital for the purpose of distributing dividends to the parent company.
The distributing company is deemed to indicate the total amount of exempted tax for income from capital upon submission of their withholding tax return on income capital. The form also known as form 900 must be submitted to the Luxembourg Inland Revenue within eight days from the date the income from capital becomes available.
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Receipt of Dividends
Under Article 166 L.I.R, income from crucial shareholdings paid to the parent company by the subsidiary will be exempted from business tax and corporate income tax.
Additionally, all expenses related to income, such as in the case of interest, management expenses, deductions, and depreciations, will not be deducted altogether.
A beneficiary has to include all information about dividends received from their profit and loss accounts and expenses in relation to the holding under Article 166 L.I.R. (form 506A), as well as indicate their corporate income tax return (form 500) in the following instances:
- Exempted income from substantial participations
- Share of profits in collective commercial undertakings and profit shares from a holding of at least 10% under a fully taxable corporation, such as deductions and municipal business tax.
Taxation of Capital Gain from Transfers
Within the framework of the EU Parent-Subsidiary Directive, any capital gain from the transfer of shares held by a parent company in a subsidiary’s capital will be exempt from corporate income tax.
All expenses related to exempted income, such as in the case of deductions for depreciation, interest, and management expenses will not be deductible altogether.
Taxable Capital Gain from Transfers Exemption
Capital gains from transfer may be taxable during the time of transfer of the holdings in the following conditions:
- A holding company has deducted an expense in relation with their holding. In this scenario, capital gain will be fully taxable based on the total amount of deductions.
- In the case wherein a holding company was acquire through the reinvestment of capital gain. Reinvested capital gain will be taxable up to an amount that was previously transferred and tax exempt.
For this, a beneficiary must complete Article 66 L.I.R. and submit together with the tax return and other pertinent documents.
If you are wondering whether your subsidiary qualifies for the EU Parent Subsidiary Directive, you can rely on our reliable team of Damalion experts to assist in your tax-related concerns. As a consulting firm, we will also guide you in determining the right legal form when incorporating a company in Luxembourg such as a Soparfi or an investment fund. To learn more about the Parent-Subsidiary Directive, 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.
What does the EU Parent–Subsidiary Regime cover in 2025?
A high-level view of the rules to anticipate for safe structuring and filings in Luxembourg.
- Participation exemption. Qualifying profit distributions and capital gains on shares may be exempt at Luxembourg level if legal thresholds and conditions are met.
- Withholding tax relief. Outbound dividends within the EU may benefit from domestic exemptions or treaty/EU relief where conditions are satisfied.
- Anti-hybrid and GAAR overlay. Benefits can be denied where arrangements are artificial or create hybrid mismatches.
- Interest limitation interface. Financing costs remain subject to local interest-limitation rules; exemptions may apply.
- Transfer pricing. Intragroup flows must meet arm’s-length standards and be supported by robust documentation.
- Substance and governance in Luxembourg. Local decision-making and documentation by managers (S.à r.l.) or the board (S.A.) are key.
- Minimum net wealth tax. A minimum charge may apply depending on balance sheet size and composition.
How to implement the regime correctly from Luxembourg
Turn policy into board-approved steps for your SOPARFI/S.A./S.à r.l. holding chain.
- Map participations and income. Classify dividends, interest, and gains; identify qualifying shareholdings.
- Test eligibility per flow. Check legal thresholds, holding period, and anti-abuse; record conclusions.
- Chart withholding outcomes. Match destination countries with domestic/EU/treaty relief and source-state requirements.
- Finance discipline. Set intragroup loan terms and pricing; model interest-limitation caps.
- Substance & governance. Hold meetings in Luxembourg and minute decisions; align directors/managers with activities.
- Transfer pricing file. Maintain contracts, functional analysis, market comparables, and formal approvals.
- Plan minimum net wealth tax. Monitor cash and financial assets at year-end.
- Close & file. Approve accounts, file returns, and archive evidence for future audits.
FAQs
Is a Luxembourg holding fully taxable?
When does the participation exemption apply?
How do we evidence arm’s-length pricing?
What triggers the minimum net wealth tax?
Are management and advisory fees deductible?
How should we prepare for year-end?
| Theme | EU Parent–Subsidiary Regime at a glance |
|---|---|
| Participation exemption | Potential exemption for qualifying dividends and gains, subject to anti-abuse |
| Withholding tax | Relief possible via domestic law, EU rules, or treaties |
| Interest limitation | Net financing costs capped under local rules |
| Transfer pricing | Arm’s-length documentation and formal approvals required |
| Minimum net wealth tax | Minimum charge linked to size and balance sheet |
Explore more: SOPARFI essentials, incorporating a S.à r.l., benefits for investors & family businesses, and RAIF tax regime.
