SOPARFIS - the fully taxable holding companies

1 - DEFINITION

The Law of 6 December 1990 organising the tax reform in the Grand-Duchy of Luxembourg modified some of the tax provisions in order to make the creation of fully-taxable holding companies that hold participation in resident or non resident companies more attractive by application of the affiliation privilege (EUROPEAN DIRECTIVE 90/435/CEE of 23 July 1990) and of the provisions of tax treaties from which they benefit as fully-taxable companies (contrary to the 1929 holding companies).

These companies, when certain conditions are fulfilled, are not taxed on dividends they receive and on capital gains they can realise.

2 - TAX SYSTEM

A fully-taxable holding company is a limited-liability company subject to the tax system applicable to any commercial limited liability company.

Taxes due at the time of incorporation

A capital contribution tax of 1% of the net amount of capital contributed is levied at the constitution of the company and at the time of any capital increase by new contributions (an incorporation of reserves to the capital is not subject to capital contribution tax).

Taxes due during the life of the company

Corporate Income Tax – C.I.T. (Impôt sur le Revenu des Collectivités)
Municipal Business Tax - M.B.T. (Impôt Commercial Communal)

These two taxes are levied on the taxable income of a company. Both taxes sum up to 30.38% for a company established in the City of Luxembourg

Net Worth Tax N.W.T. (Impôt sur la Fortune). This tax is 0,5%.

Tax advantages

A fully-taxable holding company can carry on any other business or industrial activity, and its tax burden can nevertheless be considerably reduced when it limits its activities to the holding of participation.

Exemption of dividends
In accordance with the parent-subsidiary Directive (90/435/CEE) of 23 July 1990, Luxembourg Internal law foresees the exemption of the dividends (including liquidation dividends) realised by a limited-liability company. This exemption, commonly called “affiliation privilege” or substantial holding privilege (“Schachtelprivileg” in German) is granted if
“the Luxembourg company holds or engages to hold a participation of at least 10% of the share capital of the subsidiary (or a participation with an acquisition price of at least EURO 6.000.000.-) for an uninterrupted period of at least 12 months since the moment of the acquisition of the participation”

Exemption of capital gains
Capital gains are tax exempt under the following conditions:
“the Luxembourg company holds or undertakes to hold a participation at least 10% of the subsidiary’s capital (or the acquisition price of this subsidiary must amount to at least EURO 6.000.000.-) for an uninterrupted period of 12 month since the acquisition of the participation”.

Double tax treaties
Double tax treaties concluded by the Grand-Duchy of Luxembourg with others countries may reduce the minimum shareholding period but in that case, a withholding tax remains generally applicable /the required minimum participation rate .

Withholding tax on dividends
Dividends distributed by a Luxembourg company to its parent company are not subject to Luxembourg withholding tax ( the rate for the withholding tax is 20% unless reduced by a treaty) provided that:
• the dividend paying company is fully subject to tax in Luxembourg
• the parent company is resident and fully subject to tax in a Member State of the European Union.
• And that it holds or undertakes to hold a participation of at least 10 % (or the acquisition price of the Luxembourg subsidiary must amount to at least EURO 1.200.000.-) for an uninterrupted period of 12 months since the acquisition of the participation. (art. 149 L.I.R.)


3 - LEGAL SYSTEM

As the corporation (“société anonyme”) is the form of company most commonly adopted, we have limited our analysis to the legal regime applicable to this company.

Incorporation

The issued share capital of a corporation must amount to at least EURO 31.000.- or its equivalent expressed in another currency. Each share must be paid up to at least 25%.
The incorporation of the company requires the participation of at least two founding shareholders. They may be individuals or corporate entities.

Management

The board of Directors constituted by at least three members is in charge of the management of the company. The directors may be individuals or corporate entities, nationals or foreigners, residents or non residents. The directors cannot be appointed for a period of more than six years.

Annual financial statements

The annual accounts underly the audit by either a statutory auditor, called “commissaire aux comptes “ or by a registered auditor. The annual financial statements include the report of the statutory auditor, the balance sheet, the income and loss account, notes on these finacial statements and the management report. The audited annual financial statements are then approved during the ordinary shareholders and then filed with the Trade Register along with the official approbation of the year’sprofitsand details of the directors and auditor.

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