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

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.

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:

• Trading and Service Company governed by the Trading Company Law of 1915
• Commercial Trading Organisations

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.