Luxembourg Form 506A for SOPARFI: report dividends & gains

Soparfi stands for “Société de participations financIères”, the famed Luxembourg holding and finance company. Form 506A (for informative purpose only) is the annex filed with the Luxembourg corporate tax return (Form 500) when the company applies the participation exemption regime (commonly called the “SOPARFI regime”). This annex is used to document and track exempt income (dividends, capital gains) and, above all, the directly related expenses connected to those shareholdings.

1) SOPARFI regime at a glance

Subject to conditions, the regime grants an exemption for dividends received and/or capital gains realized by a Luxembourg parent on a qualifying participation ^[1]. A key principle applied by the tax authorities: expenses directly linked to exempt income are not deductible ^[2]. In practice, the exemption applies if the company holds (or commits to hold) at least 10% of the subsidiary for at least 12 months, subject to the other statutory criteria ^[1].

Why is Form 506A essential?

Because it spells out the split between exempt income and directly related expenses, so your taxable result correctly reflects the regime’s effect. It provides audit-ready traceability and helps avoid assessments.

2) Two ways to express the same outcome

In practice, the tax effect can be presented in two equivalent ways:

• Method #1 – Non-deductibility of expenses directly linked to exempt income (you deduct the exempt dividend and then add back the non-deductible interest).
• Method #2 – Taxable up to directly related expenses (dividends are taxable up to the amount of direct expenses and exempt for the excess). This is the spirit of Form 506A.

Both lead to the same taxable result. The 506A favors clarity: it isolates, line by line, exempt income and the corresponding direct expenses.

3) What counts as a “directly related expense”?

These are expenses with a clear cause-and-effect link to the acquisition, holding, financing, arbitrage or disposal of the exempt participation. Common examples:

• Interest on a loan taken out to acquire the subsidiary.
• Hedging costs (rate/FX) related to that loan.
• Due-diligence fees, legal and valuation fees directly tied to the deal.
• Bank fees connected to the financing of the participation.

Conversely, general overhead (rent, general services, corporate bookkeeping) is not, in principle, a direct expense and remains deductible unless a specific functional link to the participation is shown. The 506A compels you to make and justify this distinction.

4) Filling in SOPARFI Form 506A: step by step

1. Identification: state the filing company, tax period and Form 500 references.
2. Participation details: name of subsidiary, holding percentage and duration, nature of the securities.
3. Covered income: list dividends received and capital gains separately for the period.
4. Directly related expenses: list and total (interest, transaction costs, etc.). Keep supporting evidence (contracts, statements, invoices).
5. Exemption computation: apply Method #2 (taxable up to direct expenses). Carry the net exemption and adjustments into Form 500.
6. Special cases: partially qualifying holdings (incomplete holding period), intra-group deals, refinancing, FX on foreign-currency debt.

Pro tip: maintain a participation file per qualifying subsidiary (loan agreement, amortization schedule, due-diligence invoices, legal advice). It substantiates your 506A figures and speeds audit responses.

5) Worked example

Assumptions:

• Service revenue: 400 000 €.
• Dividends on a qualifying participation: 1 000 000 €.
• Acquisition loan interest: 50 000 € (a direct expense).
• General operating expenses: 100 000 €.

Accounting profit: 1 250 000 €.

Comparison table of both methods

How 506A presents the example

6) Common audit focus points

• Capitalized interest: treatment follows the “direct relationship” logic. Document the accounting split.
• Refinancing: if an old loan is replaced, substantiate the continuity link with the participation.
• Acquisition fees: clearly separate deal-related fees (direct) from general services (indirect).
• Rate/FX hedges: if a derivative hedges an acquisition loan, related cash flows may be considered direct.
• Cash pooling: is the net interest attributable to acquiring/holding the participation? Formalize the allocation key.
• Holding period: if not yet met in-year, consider provisional taxation then adjust once the time requirement is satisfied.
• Impairments/losses: treat separately from exempt dividends; verify the tax characterization of the loss.

7) Ready-to-use pre-filing checklist

8) Presentation tips & best practices

• Transparency: avoid catch-all buckets. Classify expenses by nature and link them to the relevant participation.
• Traceability: number exhibits (P-01, P-02…) and reference them in a short computation note attached to the 506A.
• Allocation key: if an expense is mixed, explain the key (project hours, average balance, etc.).
• Anticipation: for year-end acquisitions, document the minimum holding intention and the financing timeline.

9) Quick FAQ

• Are general expenses automatically non-deductible?

No. Only directly related expenses follow the non-deductibility rule. General overhead is ordinarily deductible unless a specific functional link is proven.

• What if the holding-period condition is not yet met?

You may face provisional taxation and then an adjustment once the time condition is fulfilled. Document the holding intention.

• Do I need a 506A per participation?

The form tracks items per participation. Duplicate the tables/sections if several subsidiaries are involved.

Form 506A is more than a formality: it is your dashboard for the SOPARFI regime. By clearly isolating exempt income and direct expenses, you secure your tax position and streamline interactions with the authorities. Put a simple, consistent documentation routine in place and you’ll gain peace of mind year after year.

This content is informational and does not constitute tax or legal advice. For case-by-case analysis, consult a qualified professional.

References

1. [1] Article 166 LIR: participation exemption for dividends and capital gains – qualifying conditions.
2. [2] General principle: an expense is deductible only if it contributes to taxable income (matching of expenses and income).
3. [3] Article 166(5) LIR: treatment of expenses directly related to exempt income.