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Create your holding company in Luxembourg: the SOPARFI

by | Sep 13, 2024 | Corporate Structuring, Investment management

Luxembourg Holding: Leveraging SOPARFI for Tax-Efficient Asset Management

Introduction to SOPARFI

Luxembourg is a leading jurisdiction for establishing holding companies, particularly through the SOPARFI (Société de Participations Financières) structure. Designed for managing and holding financial participations and investments, SOPARFI offers a highly favorable legal and tax environment, making it an attractive option for both national and international investors seeking efficient management of their investments.

Legal Forms of SOPARFI

Luxembourg provides several legal forms for establishing a SOPARFI, each with distinct features:

  • Société Anonyme (SA): The Societe Anonyme or public limited company is suitable for larger holding companies and requires a minimum share capital of EUR 30,000. It offers flexibility in capital structure and governance, making it ideal for complex investment portfolios and large-scale operations.
  • Société à Responsabilité Limitée (SARL): The Luxembourg SARL or limited liability company is designed for smaller-scale operations with fewer shareholders. It requires a minimum share capital of EUR 12,000 and provides a simpler governance structure. This form is often preferred for family-owned businesses or smaller investment entities.
  • Société en Commandite par Actions (SCA): The SCA combines elements of partnerships and corporations. It includes general partners with unlimited liability and limited partners with liability restricted to their investment. This hybrid structure is useful for tailored investment strategies.

Tax Regime for SOPARFI

Luxembourg’s tax regime offers several benefits for SOPARFIs, including:

  • Corporate Income Tax: SOPARFIs are subject to Luxembourg’s corporate income tax, which has a base rate of 15% on taxable income up to EUR 175,000 and 24.94% on income exceeding this threshold. The effective tax rate can be reduced through various exemptions and allowances available to holding companies.
  • Municipal Business Tax: SOPARFIs are also subject to municipal business tax, which varies by municipality. The combined rate of corporate and municipal taxes typically ranges between 24% and 30%.
  • Net Wealth Tax: Luxembourg resident companies, including SOPARFIs, are subject to a net wealth tax levied annually. This tax is charged at a rate of 0.5% on net assets exceeding EUR 500,000,000. For assets up to EUR 500,000,000, the tax rate is 0.5%. Additionally, the law provides for minimum net wealth tax rules, which derogate from this principle to ensure a minimum tax burden.

Tax Exemptions for SOPARFI

The SOPARFI structure benefits from several tax exemptions, notably on dividends and capital gains:

  • Dividends: Under Luxembourg’s participation exemption regime, SOPARFIs can receive dividends from subsidiary companies without being subject to Luxembourg income tax. To qualify for this exemption, the SOPARFI must hold at least 10% of the subsidiary’s share capital or have an acquisition cost of at least EUR 1.2 million. Additionally, the subsidiary must be subject to a tax rate of at least 8.5% in its country of residence.
  • Capital Gains: SOPARFIs benefit from exemptions on capital gains derived from the disposal of shares in subsidiaries. These gains are generally exempt from Luxembourg taxation, provided certain conditions are met, including holding period requirements.

Types of Investment Sectors

SOPARFIs are versatile structures capable of managing investments across a range of sectors:

  • Financial Investments: SOPARFIs are frequently used to hold shares in financial institutions, investment funds, and other financial entities. This includes banks, insurance companies, and asset management firms.
  • Real Estate: SOPARFIs are commonly employed to manage real estate investments, including commercial properties, residential buildings, and development projects. Luxembourg’s favorable treatment of capital gains on real estate transactions further enhances the appeal of SOPARFIs in this sector.
  • Industrial and Commercial Investments: SOPARFIs also manage investments in various industrial and commercial enterprises, such as manufacturing companies, retail businesses, and service providers.
  • Technology and Innovation: Luxembourg’s growing technology and innovation sector has led to the use of SOPARFIs for investing in tech startups, research and development projects, and digital enterprises.

Establishing a holding company in Luxembourg through the SOPARFI structure provides numerous advantages, including a favorable legal environment, flexible legal forms, and a beneficial tax regime. With significant exemptions on dividends and capital gains, as well as its ability to manage a diverse range of investments, SOPARFI offers an efficient solution for investors. By leveraging the benefits of SOPARFI, companies can optimize their investment strategies and capitalize on Luxembourg’s strategic advantages in the global market.

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This information is not intended to be a substitute for specific individualized tax or legal advice. We suggest that you discuss your specific situation with a qualified tax or legal advisor.