Despite being one of the smaller countries, the Grand Duchy of Luxembourg is considered as one of the most investment friendly on a global scale. The superb quality of life, the strong economy,  the attractive financial sector, the excellent tax system, and infrastructure are among the major selling points of Luxembourg especially for entrepreneurs who wish to grow their investments over time. SOPARFI (Société de Participations Financières) is a commonly used vehicle to structure investments and the localization of holding companies for foreign groups. Once certain requirements are met, financial participation companies are essentially not taxed on dividend income they receive and on capital gains earned from the sale of participations, during liquidation, and the liquidation surplus.

The Luxembourg SOPARFI as holding and finance company

SOPARFI is extremely popular as it offers numerous tax exemptions, takes various forms to perfectly match the needs of shareholders. Contrary to misconceptions, SOPARFI is not a specialty company but is categorized as a standard commercial entity that follows common law. While it does not afford shareholders special tax regime, it can however greatly reduce the tax burden by limiting its activity to holding and structuring investments, enabling participation companies can take advantage of the rules under the European union Directive in tax regime applicable to Parent-Subsidiary companies.

Consequently, all forms of commercial activity hosted by a SOPARFI are subjected to corporation income tax and value added tax. Since SOPARFI is subject to tax, it takes advantage of prevailing double tax treaties in Luxembourg. The major characteristics of SOPARFI makes it an attractive vehicle for operating holdings for a group of businesses. To date, it is also considered the best holding and financing vehicles for private equity and venture capital investments.

SOPARFI Management Type

A SOPARFI registered as a private company is required to have one manager, who may or may not be a Luxembourg resident; hence can be a citizen of any country, with the option of holding shares in the company.

On the other hand, a SOPARFI formed as a SA public entity must have at least one director or up to three directors if not a solely owned company.

Most common SOPARFI Legal Forms

• A Sàrl provides excellent operational flexibility but has limited degree to get access to capital and welcome investors.
• SA is a public limited company that is often used by large businesses but also by SMEs as it limits shareholders’ liabilities to the contribution level and allows them to operate in relative anonymity. It is also easier for this type of company to access financial markets.
• SAS is a simplified limited company tailored to meet the needs of start-up ventures
• SCA pertains to a form of limited partnership used by private equity and venture capital managers who wish to take full control of their funding.

The Primary Benefits of Luxembourg SOPARFI

• Foreign investors can own up to 100% of shares
• You only need at least one shareholder to incorporate a SOPARFI
• There are no requirements for audits
• Companies that are not operating in Luxembourg are required to pay a flat annual tax fee amounting to Eur 4,815. Foreign investors however should report their income to their respective country’s tax agencies.
• A SA or Société Anonyme may be created with individually registered shares or held by nominees that can be easily transferred without full public disclosure
• It can hold all types of real estate within Luxembourg or in any other country
• It can hold various intellectual property rights, including patents, designs, copyrights, domain names, and brands
• Presents tax exemptions on capital gains by meeting specific conditions and requirements.

SOPARFI Double Taxation Relief for Dividends and Capital Gains on Shares

 One of the major advantages that are afforded to SOPARFIs is the non-double taxation in terms of dividends and capital gains. In essence, SOPARFIs fall under the domestic participation regime based on the EU Parent Subsidiary Directive, which means that dividends will be exempted from taxes when the conditions mentioned below are fulfilled:

• The organization also called as qualifying subsidiary paying the dividend must be under the Parent Subsidiary Directive imposed by the EU and pays corporate income tax in its country of residence.
• Income tax exemption on dividends received is distributed to a SOPARFI at the time when the dividend or liquidation distribution has held continuous operations for at least 12 months with direct participation of 10% or greater nominal capital by the subsidiary. In the event of lower participation rate, an organization must have a direct participation with an acquisition price of at least EUR 1.2M.

If these two general conditions are met, a SOPARFI is considered automatically qualified for 50% exemption.

DIVIDENDS

Dividends paid by a SOPARFI are subject to Luxembourg dividend tax at a rate of 15% unless a prevailing tax exemption or a lower tax treaty rate is applicable. Lower dividend tax or tax exemption is also applicable for SOPARFIs formed through Luxembourg tax transparent entity. Additionally, reduced dividend tax is given to a shareholder with a direct investment equal to is pro-rated tax transparent net assets.

A full withholding tax exemption is applicable if the parent company is verified as a fully taxable company established in the European Union, EAA, or a treaty country, that:

– has held uninterrupted operations for at least 12 months or

– has committed to continue to hold until a continuous 12 months of uninterrupted period has elapsed a direct participation no less than 10% of the nominal capital of the paid up capital of the SOPARFI.

In the case of a lower percentage participation, a direct participation with an acquisition price of EUR 1.2M is to be met in terms of dividends and liquidation proceeds. In 2016, after further amendment of the EU Parent Subsidiary Directive, an anti-abuse rule has been created to prevent non-genuine arrangements that does not reflect economic from obtaining exemption of dividend and  withholding tax. Another anti-abuse provision was introduced stating that taxable profit distributions or dividends under the EU Subsidiary directive will not be given benefits from participation exemption.

CAPITAL GAINS

Capital gains and losses of a SOPARFI are deemed taxable for corporate income tax.  The same participation exemption rules on dividends are also applicable to capital gains when disposal of shares resulting in capital gains happen under these conditions:  (1) A SOPARFI running for an uninterrupted period of at least 12 months and (2) a SOPARFI with direct participation of no less than 10% of nominal paid capital of the subsidiary. In the case of entities with lower percentage participation (less than 10%), a direct participation at an acquisition price of EUR 6M is a requirement.

Additionally, tax exemption on capital gains is also applicable to participations that are approved as a result of tax-transparent entities. Capital gains generated from qualifying subsidiaries are taxable provided that related expenses, including interest loans from financing the purchase of shares are deducted from non-exempted profits in the past few years.

LIQUIDATION PROCEEDS

SOPARFI liquidation proceeds or advance payments are generally not assessed with dividend withholding tax.

ROYALTIES

The Grand Duchy of Luxembourg does not impose any withholding tax on royalties that may be held by a SOPARFI.

FINANCING

The tax law of Luxembourg does not have any provisions for debt-to-equity ratio. For holding activities however, it is commonplace to follow compliance with a standard 85:15 debt-to-equity ratio for related parties in the event that debt financing is approved by a shareholder to ensure tax deductibility of interest of interest payments made by the payer.

INTEREST AND ROYALTIES

An arm’s length, fixed, or floating rate interest payments are not assessed with Luxembourg’s withholding tax rules. In some cases, sharing interest paid on certain debt instruments may be subjected to a 15% withholding tax , unless any lower tax treaty is deemed applicable, or a tax exemption may be applicable.

Other SOPARFI General Taxation Treatments

• Corporate and Tax Status

A SOPARFI is fully subject to Luxembourg income tax and net worth tax. Additionally, its profit distributions are subject to dividend tax.

• Profit Taxes

The SOPARFI is a fully taxable company which is liable to 24.94 % corporate income tax on its trading revenues and therefore enjoys the benefits of European Directives and double tax treaties signed by Luxembourg with foreign countries.

• Net Worth Tax

Please note for your information that there is an annual minimum net wealth tax of EUR 4 815 on finance and holding companies. In fact, companies whose aggregate financial assets, transferable securities, and cash deposits exceed:

• 90 percent of their overall balance sheet and
• EUR 350,000 will be subject to a minimum lump-sum NWT of €4,815. Companies that do not achieve the criterion mentioned above are liable to a minimum NWT ranging from EUR 535 to EUR 32,100, depending on their total financial sheet.

Luxembourg SOPARFI Names

The company name of a SOPARFI must be unique; hence should be different from other company names registered in Luxembourg.

The company name must end with the appropriate term or abbreviation that describes the type of company, such as Public Limited Company or PLC and Limited Liability Company or LLC (S.à.r.l.).

SOPARFI Formation

 The Articles of Association must be filed by a local notary public with Luxembourg Business register.

The Articles of Association will be publicly released in the Official Bulletin. One individual or legal entity from any country is required to fill out the application to guarantee formation.

Foreign entrepreneurs often set up a Public Limited Company or PLC (société anonyme) or a limited liability company (Sàrl) as SOPARFI.

Prior to registration, it is required that a SOPARFI that wishes to operate commercial activities should obtain a written approval with a business license or trade license from Luxembourg’s Ministry of Small and Medium-Sized Businesses. Lastly, a SOPARFI about to engage in commercial activity is required to apply for a VAT number.

If the primary purpose of a SOPARFI is to function as a holding company of equity shares in other companies, there shall be no further registration needed.

The articles of Association along with the names of directors will be published within one month following the deed of incorporation duly issued, into the Luxembourg Business Register (Registre de Commerce et des Sociétés).

SOPARFI Minimum Capital

SAs must have a minimum capital amount of Eur 31,000 with a minimum of 25 % paid. SARLs must have a minimum capital of Eur 12,000 to be formed.

The capital may be paid in cash or in-kind contribution. If a shareholder decides to pay in-kind for an SA company, the SOPARFI is expected to submit an auditor’s report regarding its value.

SOPARFI Domiciliation Agent and Registered Office

Every SOPARFI company is required to appoint a local domiciliation agent to perform the registration procedure and establish a local business address.

SOPARFI Audits

SOPARFIs do not necessarily need to obtain audits or file accounts with the Luxembourg government. A public SA however, must have its own independent auditor to check and verify annual business accounts.

If you wish to learn more about SOPARFI or need assistance on how to set up and manage your SOPARFI in Luxembourg, please contact one of our Damalion experts.