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The Key Features and Differences Between a Luxembourg Trading Company vs. a SOPARFI

by | Oct 1, 2021 | Company Management, Startups

Consulting Firm – Luxembourg

Although a Luxembourg SOPARFI (société de participations financières), the Luxembourg holding and finance company,  is treated in the same way as a trading company, the former’s primary function is to manage local and foreign investments acquired through shares. Additionally holding companies or SOPARFIs are not permitted to perform any commercial activities in the Grand Duchy. For a SOPARFI to conduct commercial activities, the company needs to gain authorisation from the Ministry of Middle Classes. The Ministry of Middle Classes will then assess the reputation, professional history, and qualifications of a holding company’s head or director before permission may be granted to host any commercial activity in Luxembourg.

In terms of share capitals, the minimum share capital for a SaRL and trading company is set at EUR 12,500 and EUR 31,000 for a SA. SOPARFIs are only allowed two types of shares, namely nominal and bearer shares, while shares registry is neither required nor permitted.

SOPARFIs and trading companies are established utilising the same processes. The articles of association are created with the help of a notary public and in front of the Registrar of District Court. If you do not have the time nor knowledge on how to proceed with a business registration, you may seek the expertise of company formation specialist to streamline and ensure the success of your business registration proceeding.

SOPARFI Luxembourg Holding Company Explained | Tax Benefits, Double Tax Treaties & EU Advantages

The Different Types of Holding Companies in Luxembourg

A SOPARFI presents the most beneficial format due to its special taxation system. Under the Luxembourg Commercial Law of 2007, wealth management companies carrying special tax status for holding companies are duly categorized as SOPARFIs as well.

One of the main motivations of foreign nationals for starting a holding company in the Grand Duchy is that registering as a public company may come in the form of single ownership. To that end, SAs may be set up  as a holding company or as a trading company in Luxembourg.

If you wish to learn more about the laws and regulations that govern holding companies in Luxembourg, we will be more than happy to guide you in this journey.

The Different Types of Trading Companies in Luxembourg

Under the Commercial Law, there are two types of trading companies that operate in Luxembourg:

A trading and service company is meant for entrepreneurs who want to operate commercial, trading, and skills-related activities, while commercial trading organisations are not legal entities per se. A trading company may be registered under any type of legal form, just like holding companies. However, it is only limited to certain legal structure such as cooperatives, partnerships, and European companies.

One of the major strengths of establishing a trading company is the absence of red tape during the registration process. Additionally, prevailing rules and regulations favour the creation of trading and service companies in the  Grand Duchy, especially that those who decide to use the European company structure as this is fully recognized in other EU Member States. Managing a trading company is simple and straightforward as opposed to other company forms in Luxembourg. Lastly, it is mandatory for trading companies to obtain a Luxembourg EORI number in order to run their business in Luxembourg.

Administration of Trading vs Holding Companies in Luxembourg

The management system in holding and trading companies are identical. The main body in a trading company and SOPARFI is held during the general meeting of shareholders who share powers in the creation of rules and regulations of the company.

A general meeting is held at least once a year, with the date and time specified in the articles of association. The corporation is administered by a board of directors, at least three members in the case of a public limited company, and one shareholder for a private limited company.

The appointed directors will run for a term not exceeding six years. A corporation may also be managed by a board made up of a management or supervisory officials. Depending on the size of a company the general meeting is required to assign an auditor who will be responsible for auditing tasks and overseeing financial statements for a period not exceeding six consecutive years.

The annual accounts of trading and holding companies in Luxembourg must be submitted annual among shareholders and completely filed with the District Court Registrar. Notice of filed annual accounts are then published in the Grand Duchy of Luxembourg Gazette.

SOPARFI is required to submit their consolidate annual accounts in the following scenarios:

  • If it holds the majority of voting rights in another company
  • If it has minority stakes but controls another company or under agreement with other shareholders
  • If the company owns a minority stake in another company and has the right to appoint or remove majority of the board members.

The advantages of the participation exemption regime specific to the SOPARFI

Dividend distribution and liquidation boni

SOPARFI benefits from a specific participation exemption regime. Under the Luxembourg participation exemption regime, dividends and liquidation boni received by a Luxembourg SOPARFI from its subsidiary are fully exempted from payment of Corporate income tax and Municipal Business Tax as long as the following terms are fulfilled.

– The subsidiary which distributes the dividends is:

– an entity listed and governed by Article 2 of the EU Parent-Subsidiary Directive (2011/96/EU)

– a Luxembourg resident limited company; or

– a non-resident limited company subject to a tax equivalent to the Luxembourg corporate income tax

– the SOPARFI must hold a participation of at least 10% (or, alternatively, a participation of an

acquisition cost of at least EUR 1,200,000) in the subsidiary; and

– the qualifying participation must be held during an uninterrupted period of 12 months, at least.

During the holding period, related expenses exceeding revenue derived from the qualifying participation are deductible. Otherwise, the deductibility of expenses associated with tax exempted revenue covered by the participation exemption regime is not possible during the 12 months where the distributed dividends were paid (the recapture rule).

Capital Gains

Capital gains derived from sale of shares owned by the SOPARFI in a subsidiary are fully exempt from Luxembourg Corporate Income Tax (CIT) and Municipal Business Tax (MBT) provided the following conditions are satisfied:

– the subsidiary must satisfy the same conditions as those applicable to the qualifying participations which benefit from the participation exemption regime

– the Luxembourg holding and finance company (SOPARFI) must hold a participation of at least 10% (or, the acquisition price of the said participation had a cost of EUR 6,000,000 at least) and

– SOPARFI holds this qualifying participation during 12 months at least, without any interruption.

The expenses and value corrections that were imputed on the tax result of the current year or former years can’t benefit from the tax exemption regime (capital gain recapture rule).

Net Wealth Tax

The qualifying participations held by a Luxembourg holding and finance company (SOPARFI) are exempt from the annual Net Wealth Tax (NWT) amounted to 0.5% as long as the conditions hereafter are satisfied:

– the subsidiary itself complies with the equal conditions applicable to the dividends which benefit from the participation exemption regime, and

– the SOPARFI holds at least 10 % of the share capital of the subsidiary (or, a participation amounted to a purchase price of EUR 1,200,000 at least).

The minimum holding period of 12 months is not mandatory in order to benefit from the exemption of the Net Wealth Tax (NWT).

Withholding taxes

The dividends paid out by a Luxembourg holding company to a non-resident or a resident shareholder are subject to a withholding tax of 15 % (regular rate).

SOPARFI benefits from double tax treaties to minimize withholding tax

Under certain conditions, the dividends distributed by a SOPARFI to its shareholders may be fully exempted from withholding tax provided that the SOPARFI meets the following conditions :

–  the SOPARFI is owned by a company or a permanent establishment listed under article 2 of the Parent-Subsidiary Directive, or a Luxembourg resident limited company, or a non-resident company (or Permanent establishment) fully subject to a tax equivalent to Luxembourg Corporate Income Tax and which is tax resident whether in a State having signed a double tax treaty with Grand-duchy of Luxembourg or in a country located into European Economic Area (other than Luxembourg); and

– its shareholder holds 10% at least of the capital of the SOPARFI (or, alternatively, a participation of a purchase price of EUR 1,200,000 at least), during an uninterrupted 12-month period.

The General anti-abuse rules (GAAR) set by Luxembourg prevail for the application or not of the withholding tax exemption. The “GAAR” state that no tax exemption on dividend distributions or withholding tax shall apply in case of nongenuine arrangements put in place for the main purpose of obtaining tax advantages without reflecting economic reality. In addition, profit or dividend distribution which are deducted at the level of a European subsidiary may be excluded from the participation exemption regime.

If you wish to learn more about the formation and successful management of Luxembourg trading and holding companies, contact your Damalion expert today. 

Damalion – Luxembourg

Luxembourg trading company vs. SOPARFI — key features, legal points, tax outline, governance, and practical uses for investors and entrepreneurs

For founders, shareholders, family offices, private equity and international groups • This guide explains in clear terms how a trading company differs from a SOPARFI in Luxembourg law and practice.

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Overview

A Luxembourg trading company carries commercial activity with third parties (goods or services). It invoices customers, contracts with suppliers, hires staff, and usually registers for VAT when required.

A Luxembourg SOPARFI (holding and finance company) is a fully taxable company used mainly to hold shares and manage intragroup financing. It does not perform commercial activity with third parties. It may benefit from the participation exemption when legal conditions are met.

At a glance

Topic Trading company SOPARFI
Purpose Sell goods or services to third parties; daily operations Hold participations, receive dividends, manage intragroup loans
Legal forms S.à r.l. or S.A. are common S.à r.l., S.A., or S.C.A. are common
Minimum capital S.à r.l.: EUR 12,000+; S.A.: EUR 30,000+ Same minimums as the chosen legal form
VAT Usually VAT-active if thresholds or activities require Usually not VAT-active if pure holding/financing
Tax base Tax on operating profits Fully taxable; possible participation exemption on qualifying dividends and gains
Withholding tax on outbound dividends 15% standard; treaty/Directive relief may apply 15% standard; exemptions possible under conditions
Net wealth tax Applies; minimum NWT rules apply Applies; qualifying participations may be NWT-exempt
Substance Premises, staff, and systems consistent with the activity Governance and documentation consistent with holding/financing
Typical use Sales, services, import-export, operating groups Equity holding, exits, intragroup treasury, dividend flows
Licences Business permit for commercial activity No business permit for pure holding; finance/licence if regulated activity

When each structure fits

  • Choose a trading company when you sell to clients, run operations, or employ staff in Luxembourg.
  • Choose a SOPARFI when you hold participations, plan acquisitions or exits, or provide intragroup loans at arm’s-length.

Frequently asked questions

What is the basic legal difference between a trading company and a SOPARFI?
A trading company carries commercial activity with third parties. A SOPARFI holds participations and manages intragroup financing. Both are ordinary commercial companies, but their permitted activities differ.
Which legal forms are commonly used?
Both often use S.à r.l. or S.A. A SOPARFI may also use S.C.A. The choice depends on governance, shareholder base, and financing needs.
What are the minimum capital amounts?
As a guide: S.à r.l. from about EUR 12,000 and S.A. from about EUR 30,000. The same thresholds apply whether used for trading or for a SOPARFI.
Does a SOPARFI need a business permit?
No for pure holding and intragroup financing. A business permit is required if it performs commercial activity with third parties.
How are trading companies taxed?
They are fully taxable on operating profits under corporate income tax and municipal business tax rules. VAT applies when the activity or thresholds require registration.
How is a SOPARFI taxed?
It is fully taxable. However, dividends and capital gains from qualifying participations may be exempt when statutory conditions are met. Anti-abuse rules apply.
What are the participation exemption thresholds?
For dividends: at least 10% shareholding or EUR 1,200,000 acquisition price, held for at least 12 months, with a qualifying subsidiary. For capital gains: at least 10% or EUR 6,000,000, held for at least 12 months, with a qualifying subsidiary.
Is there withholding tax on dividends paid by a Luxembourg company?
Yes, 15% as a general rule. Exemptions or reductions may apply under EU Parent-Subsidiary rules, double tax treaties, or domestic law, subject to anti-abuse provisions.
Does a SOPARFI register for VAT?
Not usually when it is a pure holding company. VAT registration may be needed if it supplies taxable services or performs activities beyond passive holding.
What substance is expected?
Substance should match the activity. Trading companies usually have premises, staff, and systems. SOPARFIs should have governance and documentation that reflect decision-making and risk management.
How are boards and management set up?
S.à r.l. typically has managers; S.A. has a board. Directors or managers act under Luxembourg law and the articles of association. Terms and appointments are recorded and kept current.
Are annual accounts required?
Yes. Annual accounts are approved and filed. Publication duties apply. Consolidation may be required when control thresholds are met.
Is there a minimum net wealth tax?
Most companies are subject to a minimum NWT. For SOPARFIs, qualifying participations may be exempt from ordinary NWT; minimum NWT can still apply.
Can a SOPARFI grant intragroup loans?
Yes, at arm’s-length with proper transfer pricing, documentation, and cash-flow analysis. If lending becomes a regulated activity, licensing rules may apply.
When is a trading company the right choice?
When you sell to clients, keep inventory, provide services to third parties, or manage operating teams and contracts.
When is a SOPARFI the right choice?
When you centralise holdings, plan acquisitions or exits, or manage intragroup treasury and dividends under clear governance.
Can one group use both structures?
Yes. Many groups use a SOPARFI for holding and financing and a trading company for operations. Each company follows its own legal and tax rules.
What anti-abuse standards apply?
General anti-abuse rules apply to tax benefits such as withholding tax exemptions and participation exemption. Structures must have valid business reasons and reflect economic reality.
Do treaties matter?
Yes. Double tax treaties can reduce withholding taxes and allocate taxing rights. Eligibility depends on residence, beneficial ownership, and other conditions.
Should investors seek tailored advice?
Yes. Facts differ by group structure, sector, and countries involved. Professional legal and tax advice helps align the structure with current Luxembourg rules.

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