LUXEMBOURG SOPARFI 1990 HOLDING COMPANY
WHY TO ESTABLISH A HOLDING COMPANY IN LUXEMBOURG?
LUXEMBOURG HOLDING COMPANIES ENJOY
A highly respected jurisdiction with full European Union Membership, usually used for holding companies wishing to make use of absence of withholding taxes.
The 'Société de Participations Financières' (SOPARFI) is a type of holding company which, unlike the Holding 1929, is fully eligible to the benefits offered by Double Tax Treaties (and EC directives).
A SOPARFI can have all the same activities as a 1929-type Holding, but it can also have a connected activity such as the management of participations, financing, real estate, etc., or a real commercial/industrial activity in relation to the aim stated in its by-laws.
Therefore, on one hand, a SOPARFI can have a Holding activity and on the other hand, an activity subject to VAT. This is called a mixed holding.
The SOPARFI structure is fully compliant with the European Union Holding Directive.
Dividends received by a resident company (a SOPARFI, for instance) are tax exempt :
- the SOPARFI must own a minimum of 10% of the subsidiary (or 1.25 million Euros in investments),
- the subsidiary may be resident or non resident, but is subject to a similar tax regime (min.11% corporate tax),
- the Soparfi must have owned the subsidiary for at least 12 months.
For exemption on proceed of liquidation, the same rule applies.
For capital gain exemption, the SOPARFI must own 10% (or 6 million Euros worth) of its subsidiary for at least 12 months.
It is worth noting that expenses linked with participations are fully deductible, as long as they do not exceed the annual amount of exonerated income: financing costs, bank charges & fees, audit fees, management fees, auditors, surveys, etc.
Depreciations on participation are accepted.
Losses resulting from liquidation are fully deductible.
Since 1/1/96, this exemption regime now also applies to non resident companies. No withholding tax is claimed. It is therefore very worthwhile to establish such a branch in order to avoid the withholding tax, if the company is a resident of a country with which Luxembourg has concluded a Double Tax Treaty.
Dividends paid by the Soparfi are exempted of withholding taxes if the mother is resident in the EU et hold the participation in the Soparfi for more then 12 months for at least 25% - this rate is reduced to 15% from 2007 & 10% from 2009.
Others conditions may apply for companies resident in double tax treaty countries.
Boni of liquidation paid to shareholders are always tax exempt.
Highly respected jurisdiction. Full European Community member. Good jurisdiction for Holding Companies
Large amount of paid up capital required. Civil code, rather than Common Law legal base.
CORPORATE LEGISLATION SOURCE
Company Law 15 August 1915 as amended; Articles 18-32 et Seq. of the Civil Code and fiscal status of holding companies by law of 31 July 1929 respectively by LIR (namely article 166) for SOPARFI (1990) and others
Holding Company – SARL
SOPARFI - Societe de participation financiere
USUAL MINIMUM CAPITAL
Authorised minimum Euro 12,500 fully paid up and deposited in a local bank prior to incorporation
Any name may be chosen, although there are some restrictions on sensitive names
TIME TAKEN TO INCORPORATE
ARE SHELF COMPANIES AVAILABLE
In certain cases
Called "droit d'apport": 1%
MINIMUM NUMBER OF SHAREHOLDERS
ARE BEARER SHARES / SHARES OF NO PAR VALUE POSSIBLE?
Yes if the share capital is fully paid up and the company is a ‘Societe Anonyme’ not a ‘Societe a Responsabilite Limitee’ and provided they are held by a custodian such as Fiduciary Trust Limited / Yes
DIRECTORS: MINIMUM NUMBER / CORPORATE DIRECTORS ALLOWED / LOCATION
Three / Yes / No restriction
SECRETARY: MANDATORY / CORPORATE SECRETARY ALLOWED / LOCATION
No / No / No restriction
IS THERE A REQUIREMENT FOR A REGISTERED OFFICE / REGISTERED AGENT
Yes / No
IS THERE A REQUIREMENT BY THE AUTHORITIES PRIOR TO INCORPORATION OR PRIOR TO TAX STATUS BEING GRANTED
Banking Certificate to evidence payment of share capital
INFORMATION AVAILABLE ON PUBLIC FILE
Registered Office / Share Capital details / Directors / Objects / Articles of Association / Annual Accounts
DOCUMENTS TO BE KEPT AT REGISTERED OFFICE
Shareholders register and certain financial books
CORPORATE BOOKS AND SEAL
Not in common law sense
ACCOUNTS REQUIRED / FILED
Yes / Yes
ANNUAL RETURN REQUIRED
WHERE ARE MEETINGS TO BE HELD
S.A. must hold its AGM at its registered office, otherwise there are no restrictions
ANNUAL FEES PAYABLE TO THE GOVERNMENT: TAX / ANNUAL RETURN FILING FEE
Variable SOPARFI – 30.38% / Nil
ARE THERE ANY EXCHANGE CONTROLS
DOUBLE TAX TREATIES
Many but not applicable to the holding 1929 companies. Are fully applicable to the SOPARFI.
The Grand Duchy of Luxembourg, a founding member of the European Union, is situated at the cross-roads of Europe in the triangle where Belgium, France and Germany meet. It covers an area of 1,600 square kilometres with a population of approximately 340,000. The capital is Luxembourg City which is the home of the European Court of Justice, the Secretariat of the European Parliament, the European Investment Bank, the European Court of Auditors and a section of the European Commission and NATO.
Traditionally Luxembourgers have been farmers, the Italians arrived at the end of the 19th Century to work in the steel industry, while the Spanish and Portuguese arrived in the last twenty years.
German and French are the two official languages of Luxembourg with English being widely understood and spoken.
Due to the fortress of Luxembourg City, the Grand Duchy of Luxembourg survived the collapse of the Holy Roman Empire and the unification of the German states by Bismarck during the 19th Century.
Today the country is a constitutional Duchy where the Grand Duke has similar powers to the Queen in England. Elections are held every five years.
Luxembourg follows the civil law system and therefore Trusts are not yet recognised.
Corporation tax is currently 30%. Luxembourg has enthusiastically followed European Union directives on SICAVS, SOPARFI’s and Reinsurance to build in fiscal advantages for investment activities to supplement the traditional 1929 style holding company. Currently Luxembourg is a party to 22 double taxation treaties (the traditional 1929 style holding company is expressly prohibited from taking advantage of these double tax treaties.
BANKING, SECRECY AND THE LUXEMBOURG MONETARY INSTITUTE (IML)
The Grand Duchy is the home of 212 banks and during the last two decades Luxembourg has become an important financial centre mainly due to its central location, its membership of the EU and the size and efficiency of the banking sector.
It has a long history of enjoying banking secrecy which is very strongly enforced and covers all financial institutions. Breaking banking secrecy is a criminal (and jailable) offence. One of Luxembourg’s major objectives is to maintain this secrecy. There is and no withholding taxes on dividends arising from investments held in other EU States.
All financial institutions, operatives and deposit takers in Luxembourg are controlled by the IML. The IML has recently introduced onerous regulations for the holders of Luxembourg banking licenses and other deposit takers. One of the strongest regulations enforced is the ‘know your customer rule’ and therefore opening of bank accounts for people and companies not known to Luxembourg Banks has become a time consuming activity.
COMMON USES OF HOLDING COMPANIES
Investments - The special fiscal status of the company enables the investor, whether an individual, family or institution, to manage an investment portfolio without incurring income or capital gains taxes on its profits. In addition, the absence of any withholding taxes and freedom from exchange control allow profits in the form of dividend income or capital gains to be freely transferred to other jurisdictions.
Management - The most common form of a holding company is that which centralises and controls the business and/or financial management of groups of companies in a convenient European location. The freedom of capital flow, enables a holding company to centralise financial resources of the group and use this finance or finance raised on the Euro-currency markets to lend to its subsidiaries at favourable rates. This is of particular interest where local credit restrictions exist or local interest rates are high.
Patents - The company may hold patents and licences and earn royalties from granting licenses and sublicenses to affiliated or non-affiliated companies. In addition, patents can be registered and protected in Luxembourg. Trademarks can only be licensed to subsidiaries.
KEY POINTS OF HOLDING COMPANIES
No corporation, income, capital gains, liquidation or stamp duty tax payable
No withholding taxes levied on dividends or bond interest paid to non-resident individuals or corporations.
Only tax payable is the 1% Capital Registration Duty (Droit d’apport) on incorporation and increases of Share Capital and the Annual Capital Tax (Taxe d’Abonnement) of 0.2% per annum (payable in quarterly instalments). Where dividends of more than 10% of the paid up share capital are paid out in any one year then the taxe d’abonnement for that year will be calculated on ten times the value of the dividend.
NORMAL LUXEMBOURG COMPANY WITH
“SOPARFI” PROVISIONS (SOPARFI 1990 Holding)
A normal taxable Company with restrictive holding Company objectives.
Dividends and capital gains are exempt from tax but because the Company is subject to tax in other areas ie interest it can benefit from the double tax treaties and also from the EU parent / subsidiary directive on tax free dividends and capital gains.
SOPARFI means Societe de participation financiere. The main advantage of the normal Luxembourg Company with SOPARFI is that while the company is fully subject to corporate tax, exemptions to corporate tax are granted by law for:
Dividends received from shareholding, providing shareholdings of at least 10% have been held uninterrupted since the start of the financial year prior to receipt of the dividend from it’s shareholding in the subsidiary.
Liquidation gains on liquidation of companies in which shares are held.
Capital gains on sale of shareholding providing shareholdings of at least 25% have been held uninterrupted since the start of the financial year prior to receipt of the dividend from it’s shareholding in the subsidiary.
There are also no withholding taxes levied on dividends paid by a normal Luxembourg Company with SOPARFI provisions to its EU parent and either 25% or the reduced tax treaty tax is levied if payment is made to a non-EU parent. Therefore the company can benefit from full double tax treaty protection. No special tax authority ruling is required and these companies can combine shareholding with commercial, industrial or other financial activities.
TRADING AND COMMERCIAL COMPANY
Similar to the SOPARFI but the objects clause of the company is focused more on the trading activities of the company and it is usual to have to apply for a trading permit.
GENERAL REQUIREMENTS FOR LUXEMBOURG COMPANIES
The Company must have a minimum capital of Euro12,500 fully paid-up. A local bank or well established foreign bank (recognised by the Notary) will be asked to certify to the Notary drawing up the deed of incorporation that funds are held for the company in a blocked account for the formation of the company.
There are a minimum of two shareholders required who may be individuals or companies and of any nationality or residence. Full details of the their names, occupation and residence are required.
There are a minimum of three directors required who may be individuals or companies and need not be resident in Luxembourg.
An auditor is required who is either a ‘commissaire aux comptes’ or a ‘reviseur d’entreprise’, depending on the size of the company.
The statutes correspond to the Anglo-Saxon Memorandum and Articles of Association and may be in English with either a French or German translation. They specify the objects, capital, shareholders, directors, year end and details of the annual general meeting of the Company.
Accounting records for all Luxembourg companies must be kept. They are normally kept in Luxembourg, but can be kept outside the country. Extracts of the Balance Sheet and Profit and Loss Account are required for registration each year after being audited by the ‘Commissaire’ and approved by the Annual General Meeting.
5% of the Company’s net profits must be paid into a legal reserve until the reserve reaches 10% of the issued capital.
An Annual General Meeting of shareholders must be held in Luxembourg to approve the Company’s accounts and give discharge to the directors and auditor. The time, day and place of the meeting are specified in the statutes of the Company. If all the shares are registered, the meeting can be convened by registered letter containing the agenda of the meeting, otherwise, notice must be published in the Memorial and a Luxembourg Journal at eight day intervals, the second notice appearing not less than eight days before the meeting.
A Holding Company must produce quarterly tax d’abonneent returns.
A normal Company with SOPARFI provisions must produce annual (calendar year end) corporation tax returns.
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