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Avocats
2, rue Peternelchen I Immeuble C2 I L-2370 Howald I Luxembourg
T. +352 26025-1 I F. +352 26025-999
[email protected] I www.bsp.lu
www.bsp.lu
ww
LUXEMBOURG, SEPTEMBER 2013
THE LUXEMBOURG HOLDING COMPANY
(THE “SOPARFI”)
Page 2 of 15
INDEX
1. OVERVIEW OF THE SOPARFIs ..................................................................................................... 3
2. TAX FRAMEWORK ...................................................................................................................... 4
2.1. General ............................................................................................................................... 4
2.1.1. Income Tax .............................................................................................................................. 4
2.1.2. Net Wealth Tax ........................................................................................................................ 4
2.1.3. Witholding Tax ........................................................................................................................ 4
2.2. Tax Treatment in a Nutshell ............................................................................................... 5
2.3. Participation Exemption ..................................................................................................... 6
2.3.1. Dividends and Capital Gains Exemption .................................................................................. 6
2.3.2. Withholding Tax Exemption .................................................................................................... 7
2.3.3. Net Wealth Tax Exemption ..................................................................................................... 7
2.3.4. Minimum Holding Period and Shareholding Threshold .......................................................... 7
2.3.5. Costs Linked To Exempt Income/Recapture/Capital Loss ....................................................... 8
2.4. Tax Treatment of Non-Resident Shareholders ................................................................... 8
2.5. Double Tax Treaty network ................................................................................................ 9
3. LEGAL FRAMEWORK ................................................................................................................. 11
3.1. Share Capital and Shares .................................................................................................. 13
3.2. Management .................................................................................................................... 13
3.3. Distributions ..................................................................................................................... 14
3.4. Annual Accounts ............................................................................................................... 14
Page 3 of 15
INTRODUCTION
Luxembourg is one of the most important financial and business centres, the second largest
investment fund domicile in the world after the United States, and the most important private
banking centre in the Eurozone.
Its membership of the European Union, its political stability, its legal environment which
constantly adapts to fit new market trends though preserving the stability of the sector, its
competitive taxation, its multilingual and experienced workforce are some of the factors that
have contributed to the development and success of Luxembourg.
In addition to having an investment-friendly environment, the regulations on the fight against
money-laundering and the unceasing work from the legislator to promote Luxembourg as a full-
regulated on-shore location have greatly contributed to the attractiveness of the country.
1. OVERVIEW OF THE SOPARFIs
SOPARFI is the acronym for “Société de Participations Financières”, the French term for “Holding
company”. A SOPARFIs is a normal commercial company subject to the general provisions of the
company and tax law. The term SOPARFI is not a precise legal concept but describes a company
that carries out a holding activity under the general tax regime.
A SOPARFI is an unregulated vehicle which does not require any authorisation for its
incorporation and which is not subject to the continuous supervision of any regulator or
government body. It offers flexibility regarding investment policies while providing investors with
the opportunity to take advantage of the Luxembourg participation exemption regime. A
SOPARFI is generally incorporated in the form of a public limited company (SA) or a private
limited company, (S.à r.l).
The success of the SOPARFI is based on the participation exemption regime which was introduced
into the Luxembourg law in 1967 with the income tax exemption for dividends. The exemption
was then further extended to capital gains making the Luxembourg participation exemption very
attractive and making Luxembourg a very competitive jurisdictions for holding activities.
Compared to other jurisdictions, the conditions for the availability of the Luxembourg
participation regime are clear and simple. The extensive Luxembourg tax treaty network and the
availability of the EU Parent-Subsidiary Directive allows the SOPARFI to obtain dividends from its
participation with reduced or nil withholding tax rates. Currently, the number of SOPARFIs in
existence is estimated at 50,000.
Many multinational companies have opted to locate their headquarters and/or holding company
in Luxembourg. The SOPARFI is also extensively used by the retail investment fund industry to
acquire directly or indirectly the target investments.
This brochure give a general overview of the legal and tax regime applicable to the SOPARFis.
Page 4 of 15
2. TAX FRAMEWORK
2.1. General
2.1.1. Income Tax
A SOPARFI, as any Luxembourg fully taxable company, is subject to Corporate Income Tax
(‘’CIT‘’) at a rate of 22.47% and Municipal Business Tax (‘’MBT‘’) at a rate of 6.75% (for
companies located in Luxembourg city). The combined income tax rate for 2013 is hence
29.22%.
The taxable basis corresponds to the commercial profit as per the stand-alone accounts
adjusted pursuant to the specific provisions of the tax code. For a SOPARFI, the main
adjustment is the deduction of the income which is exempt under the participation exemption
(see chapter 2.3.1).
A SOPARFI may be subject to the minimum corporate income tax of EUR 3,210. This minimum
tax is applicable to corporation having a taxable result lower than EUR 14,299 and whose
financial assets (fixed financial assets, amounts owed by affiliated undertakings, transferable
securities and cash) exceed 90% of their total balance sheet.
2.1.2. Net Wealth Tax
A SOPARFI is subject to an annual net wealth tax which is levied at the rate of 0.5% on the net
asset value as of January 1st of each year. Broadly, the net asset value is equal to the net
equity. If a SOPARFI holds exclusively shareholdings that meet to the conditions of the
participation exemption (see chapter 2.3.3), it will only pay the minimum amount of net
wealth tax (EUR 62 for a SA and EUR 25 for a S.à r.l.).
2.1.3. Withholding Tax
Dividends distributed by a SOPARFI to its shareholders are subject to withholding tax at the
rate of 15% unless a reduced treaty rate or the withholding tax exemption (see chapter 2.3.2)
is available.
Page 5 of 15
2.2. Tax Treatment in a Nutshell
The main characteristics of the tax treatment of the SOPARFI are described in the table below.
Income tax 29.22%
(CIT 22.47% and MBT 6.75%)
100% exemption of dividends
and capital gains from
participations qualifying for the
participation exemption regime
Net Wealth Tax 0.50%
Exemption of participations
qualifying for the participation
exemption regime
Access to EU Directive YES
Mainly the Parent-Subsidiary
Directive(2003/123/EC), the
Merger Directive (90/434/EEC)
and the Interest Royalty
Directive (2005/49/EC)
Access to double tax treaties YES
SOPARFIs are common
commercial companies fully
subject to tax
Withholding Tax on dividends 15%
- Exemption for participations
qualifying for the participation
exemption regime
-Exemption/reduced rate under
double tax treaties
Withholding tax on interests 0% Unless EU Savings Directive
applies
Capital Duty €75
Upon incorporation and
amendments of the articles of
association
Carried forward losses YES Indefinitely
Debt-to-equity ratio 85/15
No statutory provisions
85/15 debt-to-equity ratio for
holding activities pursuant to
administrative practice
VAT NO Pure holding companies are non
VAT taxable persons
Page 6 of 15
2.3. Participation Exemption
The participation exemption regime is available if the following three conditions are met
(further detailed below) :
Minimum holding period : 12 months
Minimum shareholding : 10% or acquisition cost of EUR 1.2m (dividends)/ EUR 6m
(capital gains);
Subsidiary: Luxembourg resident fully taxable company, EU company covered by the
EU Parent-Subsidiary Directive, non-resident joint-stock company subject to
comparable income tax.
2.3.1. Dividends and Capital Gains Exemption
The Luxembourg income tax law includes a full exemption from income tax for dividends,
liquidation proceeds and capital gains realised by the SOPARFI provided the following
conditions are met:
1. The subsidiary is:
A Luxembourg resident fully taxable company;
An EU company covered by article 2 of the EU Parent-Subsidiary Directive;
A non- fully taxable joint-stock company which is subject in its country of
residence to a tax comparable to the Luxembourg corporate income tax
(corporate tax rate of at least 10.5% and taxable basis similar to that one used in
Luxembourg).
2. On the date of the realisation of the income, the SOPARFI holds or commits to hold for
an uninterrupted period of at least twelve months a direct participation in the share
capital of the distributing company/the company whose shares are sold of at least
10% or having an acquisition price of at least EUR 1.2 million in case of dividends or
EUR 6 million in case of capital gains.
If the minimum holding period and/or minimum shareholding threshold are not met, the
SOPARFI will still benefit from a 50% exemption with respect to dividends. This exemption is
applicable to dividends received from
A Luxembourg resident fully taxable company;
An EU company covered by article 2 of the EU Parent-Subsidiary Directive;
A company resident in a country with which Luxembourg has concluded a double
tax treaty and which is subject to a tax comparable to the Luxembourg corporate
income tax.
The dividends and capital gains exemptions detailed above are also available, under the same
conditions, to a Luxembourg permanent of (i) an EU company covered by article 2 of the EU
Page 7 of 15
Parent-Subsidiary Directive, (ii) a non EU joint-stock company resident in a country with which
Luxembourg has concluded a double tax treaty.
2.3.2. Withholding Tax Exemption
No withholding tax will be levied on dividends paid by a SOPARFI provided the following
conditions are met:
1. The parent company is:
A Luxembourg resident fully taxable company;
An EU company (or its Luxembourg permanent establishment) covered by article
2 of the EU Parent-Subsidiary Directive;
A company (or its Luxembourg permanent establishment) resident in a country
with which Luxembourg has concluded a double tax treaty and which is subject to
a tax comparable to the Luxembourg corporate income tax.
2. On the date of the distribution, the parent company holds or commits itself to hold for
an uninterrupted period of at least twelve months a participation in the SOPARFI of at
least 10% or having an acquisition price of at least EUR 1.2 million.
2.3.3. Net Wealth Tax Exemption
Participations which qualify for the dividend exemption (see conditions under 2.3.1) will also
be exempt from net wealth tax. No minimum holding period is however required for the net
wealth tax exemption.
2.3.4. Minimum Holding Period and Shareholding Threshold
The holding period must not be met at the time the income is realised but can be satisfied
subsequently. Also, it does not apply share by share. A SOPARFI may therefore acquire 15% of
the share capital of a company, sell 5% shortly thereafter free of income tax on the basis of
the capital gain exemption provided that the SOPARFI continues to hold a 10% shareholding
for the remaining of the 12-month holding period.
The 10% minimum shareholding threshold is assessed exclusively on the basis of the total
share capital of the subsidiary. The different classes of shares are ignored and the participation
exemption regime will therefore not be available if the SOPARFI hold 10% of the shares of a
specific class but not 10% of the total share capital.
Page 8 of 15
2.3.5. Costs Linked To Exempt Income/Recapture/Capital Loss
Expenses directly linked to a tax-exempt dividend (e.g. interest expenses on a loan taken up to
finance the acquisition of participation) are only deductible to the extent that they exceed the
exempt dividend arising in the same accounting year. If no exempt dividend is received during
a specific year, the expenses will be fully deductible and available to offset against other
taxable income of the SOPARFI, and in the absence of any taxable result, as carry forward
losses.
The exempt amount of the capital gain realised upon disposal of a participation qualifying for
the capital gain exemption is reduced by the amount of the aggregate expenses deducted in
the previous and current year (Recapture Rule). This mechanism results from the facts that the
expenses linked to a participation remain deductible in the years during which no exempt
dividend is received (or for the portion exceeding the exempt dividend) and is designed only to
ensure that the participation exemption cannot be used to generate both exempt income and
deductible expenses which could be offset against taxable income.
The loss that may be realised on a participation qualifying for the participation exemption is
deductible even if in the opposite situation the capital gain would be exempt.
2.4. Tax Treatment of Non-Resident Shareholders
As mentioned above, dividend distributions to non-resident shareholders will be subject to
withholding tax at the rate of 15% but may benefit from a reduced treaty rate or a nil rate
under the participation exemption regime.
Under most of the double tax treaties entered into by Luxembourg, the country of residence
of the shareholder is entitled to tax the capital gains realised upon the disposal of the shares in
a Luxembourg company. Also, under domestic law, the taxation of capital gains realised by
non-resident shareholders who do not hold their shares in the SOPARFI through a
Luxembourg permanent establishment is very limited and will only occur if the disposal occur
within the 6-month period following the acquisition of the shares and the shareholder holds
directly or indirectly a substantial interest in the SOPARFI. A substantial interest exists when
the shareholder alone or with certain close relatives holds or has held during the 5-year period
preceding the disposal, 10% of the share capital of the SOPARFI.
Under domestic law distribution of liquidation proceeds will not be subject to withholding tax.
Page 9 of 15
2.5. Double Tax Treaty network
The tax treaty network of Luxembourg has expanded rapidly over the last 10 years and there
are currently more than 60 treaties in force. As regards the participation exemption, the treaty
network is of relevance mainly with respect to the withholding tax exemption which is
available to shareholders resident in a treaty country (and provided the conditions set forth
above are met).
The tax treaties concluded by Luxembourg may also include a dividend exemption provision
which may be subject to conditions that are more favourable in certain circumstances. For
instance the holding period test may be determined by reference to the beginning of the
accounting year or no “subject to comparable tax” condition may be included.
Page 10 of 15
T A X T R E A T I E S I N F O R C E
Armenia Austria Azerbaijan B a h r a i n B a r b a d o s Belgium B r a z i l B u l g a r i a
C a n a d a C h i n a Czech Republic Denmark E s t o n i a F i n l a n d F r a n c e G e o r g i a
Germany Greece Hong-Kong Hungary I c e l a n d I n d i a Indonesia I r e l a n d
I s r a e l I t a l y J a p a n L a t v i a Liechtenstein Lithuania M a l a y s i a M a l t a
Mauritius Mexico M o l d o v a Monaco Mongolia* Morocco Netherlands N o r w a y
Panama Poland P o r t u g a l Q a t a r R o m a n i a R u s s i a San Marino Singapore
Slovenia South Africa South Korea S p a i n S w e d e n Switzerland T h a i l a n d Trinidad and Tobago
T u n i s i a Turkey United Arab Emirates United Kingdom United States of America Uzbekistan V i e t n a m
T A X T R E A T I E S S I G N E D O R I N N E G O T I A T I O N
A l b a n i a Argentina B o t s w a n a B r u n e i C r o a t i a Cyprus E g y p t Guernsey
Isle of Man J e r s e y K a z a k h s t a n K u w a i t Kyrgystan L a o s L e b a n o n Macedonia
New Zealand O m a n P a k i s t a n Saudi Arabia S e r b i a Seychelles S r i L a n k a S y r i a
T a i w a n Tajikistan U k r a i n e U r u g u a y
*Revoked by Mongolia in 2013
64 Double tax treaties in force
30 Double tax treaties pending
As of September 2013
Page 11 of 15
3. LEGAL FRAMEWORK
The incorporation process of a SOPARFI is quite short (it can take less than one week). and
does not require the approval or authorisation of any regulatory or government body. The
SOPARFI comes into existence with its own legal personality as soon as the founding
shareholders of the SOPARFI have resolved on its incorporation and articles of association in
front of Luxembourg public notary. The share capital of the SOPARFI may be denominated in
any currency and the articles of association can be drawn up in any language provided that a
translation into French or German is also available.
A SOPARFI may take the form of i. a public limited liability company (Société anonyme - SA.), ii.
a private limited liability company (Société à responsabilité limitée - S.à r.l.) or iii. a partnership
limited by shares (Société en commandite par actions – SCA). The choice between these
different legal forms depends on the specific needs of the investors. One of the main
differences between the SA and the S.à r.l. is with respect to the shares and their
transferability. In a SA, the shares may be in registered or bearer form and are freely
transferrable. In an S.à r.l., the shares are exclusively in registered form and the transfer of the
shares to a non-shareholder requires the consent of the shareholders representing three
quarters of the share capital. The SCA is more frequently used in the retail fund industry; with
the investors holding the limited partnership interest and the management holding the
general partnership interest.
Page 12 of 15
The main characteristics of the SA, S.à r.l. and SCA are summarised in the table below:
Public limited company
(Société anonyme - S.A.)
Private limited company
(Société à responsabilité limitée - S.à r.l.)
Partnership limited by shares
(Société en commandite par actions - S.C.A.)
Authorisation of a supervisory
authority No No No
Minimum share capital
EUR 31,000 (or the equivalent value
in another currency)
Fully subscribed and paid-up to a
minimum of 25%
EUR 12,500 (or the equivalent value in
another currency)
Fully subscribed and paid-up
EUR 31,000 (or the equivalent value in
another currency)
Fully subscribed and paid-up to a minimum
of 25%
Contributions
In cash or in kind
Valuation report by an independent
auditor required for contribution in
kind
In cash or in kind
In cash or in kind
Valuation report by an independent auditor
required for contribution in kind
Form of the shares Bearer, registered or
dematerialised shares Registered shares Bearer, registered or dematerialised shares
Share transfer Freely transferable
Transfers between shareholders : free
Transfers to third parties : subject to the
prior approval of shareholders
representing at least three-quarters of the
share capital
Freely transferable
Listing of shares Allowed Not allowed Allowed
Shareholders At least 1
No maximum
At least 1
Maximum 40
At least 1 general partner
At least 1 limited partner
No maximum
Liability of shareholders Limited to their contribution Limited to their contribution
Limited partners: limited to their
contributions
General partner: unlimited
Type of shareholders No requirement: the shareholders may be resident or non-resident, individual or legal bodies
Management
Board of directors: at least 3
directors.
If there is only one shareholder - 1
director is sufficient
At least one manager
At least one manager (liable under common
liability regime) or at least one general
partner
Supervision and control Statutory auditor ("commissaire")
< 25 partners: no statutory auditor
> 25 partners: statutory auditor
("commissaire")
At least 3 statutory auditors
("commissaires")
Page 13 of 15
3.1. Share Capital and Shares
The share capital of a SOPARFI is divided into shares all having the same nominal value. It may
be divided into classes of shares having different rights and it can be expressed in Euro or any
other currency provided that the amount converted into Euro corresponds to at least the
minimum share capital (EUR 31,000 for an SA and SCA and EUR 12,500 for an S.à r.l.).
The issuance of new shares is in principle decided by the shareholders. The articles of
association may, however, include a provision authorising the management to issue new
shares up to the maximum authorised share capital.
Under certain circumstances, capital contributions without the issuance of shares are possible.
3.2. Management
An SA and S.à r.l are respectively managed by a board of directors/managers which are not
necessarily shareholders while an SCA is generally managed by the general partner (because of
its/their unlimited liability (the “Management”).
The management of an SCA may be delegated to the persons, who are not general partners
with management functions similar to those exercised by the managers of an SARL. The
limited partners of an SCA may carry out certain internal management acts (such as providing
opinions and advice, granting loans, guarantees or collateral or any other assistance to an SCA
or its affiliated entities etc.) without being automatically exposed to a risk of unlimited, joint
and several liability alongside the general partners.
The SA may be governed by 2 different forms of managerial organisation:
Single-tier system: where the board of directors (composed of a minimum of 3
directors if there is more than 1 shareholder) is in charge of the management of the
SA; and
Two-tier system: where the management board manages the SA under the permanent
control of a supervisory board.
The Management represents the SOPARFI vis-à-vis third parties and in legal proceedings. It has
the power to take any action necessary or useful to realise the corporate object of the
SOPARFI with the exception of the powers reserved by law or by the articles of association to
the general meeting of shareholders. The modification of the articles of association, the
change of the nationality and the increase of the engagement of the shareholders are some of
the actions which are reserved to the general meetings of shareholders.
There are no specific requirement regarding the members of the Management: they may be
resident or non-resident, individuals or corporate entities. If a corporate entity is appointed as
Page 14 of 15
member of the Management, it must designate a permanent representative to exercise the
management functions in its name and on its behalf.
The directors of an SA, the managers of an S.à r.l and the managers of an SCA (who are not
general partners) are liable to the company for the execution of their mandate and for
management faults. They are also jointly and severally liable towards the company and any
third parties for damages resulting from the violation of the law or the articles of association.
3.3. Distributions
Each year 5% of the net profit must be allocated to a legal reserve until the legal reserve
amounts to 10% of the share capital. The profit after allocation to the legal reserve increased
by the carried forward profits and the distributable reserves and decreased by the carried
forward losses (if any). is available for distribution to the shareholders.
Dividend distributions are in principle decided by the shareholders at the shareholders’ annual
meeting. The Management of a SOPARFI may be authorised by the articles of association to
proceed to interim dividend distributions.
3.4. Annual Accounts
SOPARFIs are required to prepare annual accounts including a balance sheet, a profit and loss
account and notes to the accounts. The annual accounts are prepared in accordance with the
Luxembourg GAAP (Generally Accepted Accounting Principles) with the option to value certain
assets at fair value or IFRS (International Financial Reporting Standards). The accounts are
expressed in the currency of the share capital.
To annual accounts are prepared by the Management and are approved annually at the
general meeting of shareholders. They are further filed with the Trade Register. The control of
the annual accounts of the SOPARFI by an independent auditor (“réviseur d’entreprises agréé”)
is generally not required.
DISCLAIMER
The information contained herein is of a general nature and is note intended to address the circumstances of any
particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no
guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the
future. No one should act upon such information without appropriate advice after a thorough examination of the
particular situation. Therefore, BONN STEICHEN & PARTNERS cannot accept any liability for any errors, omissions or
pinions contained herein and for the implementation of the principles set out without its active involvement.
Page 15 of 15
YOUR CONTACTS AT BSP:
Avocats
2, rue Peternelchen I Immeuble C2 I L-2370 Howald I Luxembourg
T. +352 26025-1 I F. +352 26025-999
[email protected] I www.bsp.lu
Alain STEICHEN Partner [email protected] +352 26025 - 1
Christine BEERNAERTS Senior Counsel [email protected] +352 26025 - 1
BANKING & FINANCE
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