A guide to the Luxembourg holding company (“SOPARFI”)

February 2013
A guide to the Luxembourg holding company
(“SOPARFI”)
Introduction
This brochure provides a general description of the Luxembourg tax treatment of a
normally taxable Luxembourg holding company, which in French is often referred to as a
“Société de participations financières” abbreviated as “Soparfi”.
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1.General
As from January 1, 2013 the minimum taxation
1.1 Corporate and tax status
rules have been amended. As per 2013, Soparfis
A Soparfi is a normal commercial company, which
that (i) have their statutory seat or effective place of
may carry out any activities that fall within the scope
management in Luxembourg and (ii) own at least
of its corporate object clause. It may take the form of,
90% of financial assets, are subject to a minimum
inter alia, a Société Anonyme (S.A., a public limited
(advance) tax that amounts to EUR 3,210 (including
company), a Société à responsabilité limitée (S.à.r.l.,
solidarity surcharge)3. Tax transparent entities held
a private limited liability company), or a Société
by a Soparfi are considered financial assets for the
en commandite par actions (S.C.A., a partnership
90% test referred to under (ii) above. The relevant
limited by shares). As such, a Soparfi is fully subject
balance sheet for determining whether a Soparfi
to Luxembourg income tax and net wealth tax,
is captured by the minimum tax for e.g. 2013 is, in
and its profit distributions are generally subject to
principle, the statutory balance sheet per the end of
Luxembourg withholding tax. It is entitled to benefit
the financial year 2013.
from the tax treaties concluded between Luxembourg
and other countries (64 are currently in force and
Additionally, as of 2013, also Soparfis that form
effect) and the relevant EC Directives .
part of a fiscal unity are subject to the minimum tax
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(provided they meet the two tests set out above).
1.2 Profit taxes
The aggregate minimum tax of the fiscal unity
The Luxembourg profit tax system consists of
entities is payable by the parent of such fiscal unity.
national corporate income tax (“impôt sur le
The aggregate amount of minimum tax payable per
revenu des collectivités” or “IRC”) at a rate of 21%
annum per fiscal unity is capped at EUR 21,400
and municipal business tax (“impôt commercial
(including solidarity surcharge).
communal” or “ICC”) at a rate of 6.75% . In addition,
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there is a 7% solidarity surcharge, calculated on the
This minimum tax is an advance payment that
IRC. The total combined tax rate for 2013 (inclusive
becomes final only if no corporate income tax is
of surcharge) is therefore 29.22%.
incurred in the following years. Losses carried
forward remain in existence.
1.3 Minimum tax
Since January 1, 2011, Soparfis are subject to
1.4 Net wealth tax
minimum taxation rules under which a minimum
A Soparfi is subject to an annual net wealth tax,
tax of EUR 1,575 (including solidarity surcharge)
which is levied at a rate of 0.5% on its worldwide net
was levied from companies (i) carrying out activities
wealth on January 1 of each year. Amongst others,
not subject to an authorisation by a ministry or a
qualifying participations (see Section 2.2) net of
supervisory authority and (ii) owning at least 90% of
allocable debt4 are excluded from the taxable base.
financial assets.
1
Such as the EC Parent-Subsidiary Directive (2003/123/EC), the EC Merger Directive (90/434/EEC) and the EC Interest & Royalty Directive
(2003/49/EC), as amended from time to time.
2 Provided that the company is established in Luxembourg City.
3
Note that for “non-Soparfis” a minimum taxation has been introduced per January 1, 2013, which minimum tax is determined on the basis
of balance sheet total of such taxpayer. For taxpayers with a balance sheet of EUR 350,000 or less, the minimum tax is EUR 535 (including
solidarity surcharge) increasing to a maximum of EUR 21,400 (including solidarity surcharge) for taxpayers with a balance sheet total
exceeding EUR 20 million.
4
Allocable debt that exceeds the value of the participation is deductible against other assets.
3
The annual burden of a Soparfi’s net wealth tax can
A Soparfi, like any other normally taxable entity, may
therefore generally be limited to the legal minimum
be entitled to the participation exemption. Capital
of EUR 63 for an S.A. or EUR 25 for an S.à r.l.
losses on alienation or otherwise (e.g. liquidation or
Luxembourg IRC, not being levied as minimum tax,
depreciation) derived from a participation are tax-
is creditable to the net wealth tax, provided certain
deductible.
conditions are met.
1.5 Capital duty
2.2 Participation exemption for dividends
and capital gains
A fixed registration duty of EUR 75 applies to
Luxembourg income tax law provides for an
(i) incorporation of Luxembourg entities, (ii)
exemption of dividends (including liquidation
amendment of the articles of Luxembourg entities,
dividends) received and capital gains (including
and (iii) the transfer of the statutory or actual seat to
currency exchange gains) realised by a Soparfi,
Luxembourg.
provided that the following requirements are met:
1.6 Chamber of Commerce fees
a.
the subsidiary is either (i) a qualifying
Soparfis, like other Luxembourg commercial
Luxembourg resident entity, or (ii) an entity
companies are automatically members of the
which is covered by article 2 of the EC Parent-
Luxembourg Chamber of Commerce and subject
Subsidiary Directive, or (iii) a capital company
to annual membership fees of the Chamber of
subject in its country of residence to a profit tax
Commerce. The annual fee for a Soparfi amounts to
comparable with the IRC (the “Subject to Tax
EUR 350 .
Test” as further set out in Section 2.5); and
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2. Taxation of dividends and capital
gains
b.
at the time of a dividend/liquidation distribution
or a capital gain realised upon the alienation
of the shares in the subsidiary, the Soparfi
must have held (or commits itself to do so)
2.1 Participation exemption (general)
a direct participation of 10% or more of the
The taxable basis of a Soparfi corresponds to its
nominal paid up capital of the subsidiary or a
accounting profit as reflected in its stand-alone
direct participation having an acquisition price
commercial accounts (prepared in accordance with
of at least EUR 1.2 million for dividends and
Luxembourg GAAP), unless the tax law expressly
liquidation proceeds or EUR 6 million for capital
provides otherwise. Often, therefore, a number of
gains, for an uninterrupted period of at least 12
adjustments (for example, additions or deductions
months.
resulting from tax exemptions and disallowed
expenses) must be made in order to establish the
The exemption also applies to participations held
taxable basis of the company.
through a Luxembourg tax-transparent entity
(e.g. a partnership), which may or may not have
legal personality6. As in such case, the Soparfi is
5 The membership fee for other Luxembourg companies of a certain year (T) is determined by reference to the relevant company’s taxable
profit (prior to loss compensation) of the year T-2. The fee is calculated on the basis of degressive rates starting at 0.2% of the taxable profit.
6 The law only refers to Luxembourg entities. However, in practice also non-Luxembourg entities may qualify, provided that these are not
covered by the EC Parent-Subsidiary Directive (2003/123/EC).
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considered to have a direct investment equal to
to start. In order to benefit from the tax-exempt
its pro rata part of the tax-transparent entity’s net
exchange operations, the book value of the alienated
assets. The exemption applies to the net dividend
shares or of the converted loan must be maintained
income, i.e. the dividend income less directly related
in the commercial (and tax) accounts for the shares
costs and write-offs on the participation in connection
received in exchange.
with a dividend distribution in the same year.
If a non-qualifying participation (i.e. a participation
In case the minimum holding requirement mentioned
which does not meet the conditions stated above
under (b) above is not met, an exemption of 50% is
under Section 2.2.) is exchanged for a qualifying
available for dividend income (excluding liquidation
participation through a tax-neutral exchange of
proceeds) provided that the dividends are distributed
shares, dividends received from that qualifying
by subsidiaries mentioned under (a) above.
participation in the first five years following the
exchange are not exempt. The same applies to
2.3 Exchange of shares and conversion of
loan into shares
a gain realised on the alienation of shares in a
Luxembourg tax law provides for some a number
through a tax-neutral exchange of shares in a non-
of tax-neutral exchange operations. A tax-neutral
qualifying participation. The same anti-abuse rule
exchange facility is available for (i) conversions of a
applies for the 50% dividend exemption referred to
loan whereby securities are allocated to the creditor,
above. A tax treaty may override the application of
(ii) transformation of a capital company into another
the five year rule.
qualifying participation within 5 years acquired
capital company, (iii) mergers or demergers of capital
companies or companies resident in an EU Member
State, and (iv) certain share-for-share mergers.
2.4 Participation exemption under tax
treaties
Most tax treaties concluded by Luxembourg
A tax-neutral share-for-share merger is allowed if a
contain a participation exemption for dividends,
Soparfi transfers shares in (i) a company resident
and in many cases also for net wealth tax. The
in an EU Member State7 or (ii) a non-EU resident
minimum ownership period on the basis of a treaty is
capital company that meets the Subject to Tax
generally shorter than the 12 months required under
Test referred to under Section 2.5., to a company
Luxembourg law. In many cases the relevant shares
as referred to under (i) or (ii) in exchange for
must be held from the beginning of the accounting
shares, whereby the acquiring company acquires
year. One should therefore carefully compare the
or increases the majority of its voting rights in the
requirements under Luxembourg domestic law and
acquired company.
the applicable tax treaties. Most of the participation
exemption provisions in (especially) the older
In case of a tax neutral exchange, the acquisition
treaties do not contain a Subject to Tax Test (e.g.,
price and date of the shares acquired will be
Switzerland, France, Belgium).
the same as those of the shares/loans given in
exchange, thus avoiding a new holding period
7 An EU resident company is defined as a company covered by the Merger Directive (90/434/EEC).
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2.5 Subject to comparable income tax
further in this brochure. However, foreign dividend
As outlined above, non-resident subsidiaries which
tax may in some cases be credited against other
are not resident in an EU Member State or which are
(taxable) foreign income, even if the dividend itself
not covered by article 2 of the modified EC Parent-
is tax-exempt under the participation exemption.
Subsidiary Directive must, in order to qualify for the
On the basis of domestic law, no credit applies as
Luxembourg participation exemption, be subject in
regards the ICC, but some tax treaties concluded by
their country of residence to a profit tax comparable
Luxembourg extend the credit method to the ICC.
with the IRC. The legislator has indicated that a
The Luxembourg Supreme Court has nevertheless
foreign tax is comparable if it is levied at a rate of
ruled that no credit is allowed against ICC under the
at least 10.5% on a taxable basis which is similar
Luxembourg-Spain tax treaty, and the same may
to the basis applied in Luxembourg. A temporary
thus apply for other tax treaties. Each treaty should
tax holiday granted to a participation, especially to
therefore be analysed carefully. In practice, however,
encourage investments, should not be a problem,
the Luxembourg tax authorities are generally
provided the ordinary system of taxation applicable
unwilling to allow this extension of the credit method.
to the participation in the relevant country is
comparable with the IRC.
3. Deductions / recapture / currency
exchange
2.6 Luxembourg permanent establishment
The participation exemption applies to income
3.1 Expenses and write-offs
from and gains on participations attributed to a
Expenses (e.g. interest expenses on loans) directly
Luxembourg permanent establishment of an entity
connected to an exempt participation, and certain
which is covered by article 2 of EC Parent-Subsidiary
write-offs thereon, are tax-deductible in a given
Directive, as amended, or a capital company resident
year to the extent that they exceed exempt income
in a treaty country. The participation exemption also
(dividends and gains) from the participation in the
applies for net wealth tax purposes at the level of
same year. Expenses are allocated to the extent
the permanent establishment. Luxembourg does not
possible on a historical basis and otherwise on
levy withholding tax with respect to the repatriation of
a pro rata basis. The deductions could be offset
profits to a foreign head office.
against other sources of income, such as from
financing activities, or commercial activities, or may
2.7 Credit for foreign withholding tax
result in tax losses. Losses may be carried forward
It is possible to obtain a credit for foreign dividend tax
indefinitely. No carry-back is allowed.
withheld, but this is a rather complex matter which
depends entirely on the income and tax situation
of a specific Soparfi. It is therefore not dealt with
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3.2 Recapture
The capital gains exemption (for gains arising on an
alienation of shares) does not apply to the amount
previously deducted in relation to those shares
(recapture). Here below a simplified example is
given:
3.3 Currency exchange results
Currency gains and losses on, inter alia, liabilities
4. Exit from SOPARFI: distribution of
dividends / capital gains
incurred to acquire a subsidiary are taxable or
deductible, respectively. As a result, currency
4.1 Domestic dividend tax and tax treaties
exposure should be avoided, preferably by
Dividends (including hidden dividends) paid by a
denominating such liabilities in the accounting
Soparfi are subject to Luxembourg withholding tax
currency. If such currency is not the Euro, functional
at the rate of 15% (17.65% if the dividend tax is
currency may be requested for tax purposes.
not charged to the shareholder), unless a domestic
Agreements which are concluded to cover the
law exemption or a lower tax treaty rate applies.
exchange exposure of a non-Euro denominated loan
Reduced withholding tax rates or an exemption also
are acceptable.
apply to participations held through a (Luxembourg)
tax-transparent entity, e.g. a partnership, which
Currency gains on the investment itself are exempt
may or may not have legal personality8. The
by virtue of the participation exemption (see above
(indirect) shareholder is considered to have a direct
Section 2). Currency losses on the investment itself
investment equal to its pro rata part of the net assets
are tax deductible, but subject to recapture rules.
of the tax transparent entity.
8 The law only refers to Luxembourg entities. However, in practice non-Luxembourg entities may also qualify, provided they are not covered by
the Parent-Subsidiary Directive.
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4.2 Withholding tax exemption
way of liquidation in a Soparfi), unless the alienation
Dividends paid by a Soparfi to either (i) a fully taxable
benefits from the participation exemption regime as
Luxembourg entity, or (ii) an entity falling within
set out in above.
the scope of article 2 of the EC Parent-Subsidiary
Directive or to a permanent establishment thereof, or
A non-resident shareholder, not having a
(iii) a Swiss resident capital company that is subject
Luxembourg permanent establishment to which the
to corporation tax in Switzerland without benefiting
shares and/or income/gains from the shares in a
from an exemption, or (iv) a company resident in a
Soparfi are attributed, is only subject to Luxembourg
treaty country that meets the Subject to Tax Test (or
tax when it holds a direct or indirect substantial
to its Luxembourg permanent establishment), will be
interest and (i) the alienation, including liquidation,
exempt from Luxembourg dividend withholding tax
takes place within 6 months after the acquisition (a
provided that the parent company holds (or commits
speculation gain), or (ii) in the case of an alienation
itself to do so) a shareholding of at least 10% or
after more than 6 months, in the event that the non-
more of the nominal paid up capital of the Soparfi or
resident shareholder was a Luxembourg resident
a shareholding in the Soparfi having an acquisition
taxpayer for more than 15 years and became a
cost price of EUR 1.2 million, for an uninterrupted
non-Luxembourg taxpayer less than 5 years before
period of at least 12 months.
the alienation takes place. Note however, that
Luxembourg does, in general, not have taxation
4.3 Capital gains realized by a shareholder
rights over the gain under an applicable tax treaty.
Under Luxembourg law, a resident individual
shareholder9 is taxable on the alienation of shares in,
4.4 Liquidation of a Soparfi
including by way of (partial) liquidation of, a Soparfi
Under Luxembourg law, a (partial) liquidation
if: (i) the alienation takes place within 6 months
distribution by a Soparfi is not considered as a
after acquisition (a speculation gain), and (ii) the
dividend but an alienation of shares and is, therefore,
alienator directly or indirectly holds a substantial
not subject to Luxembourg dividend withholding tax.
interest in the Soparfi. In broad terms, a substantial
interest exists if a shareholder, either alone or with
4.5 Capital reduction by a Soparfi
certain close relatives, has held more than 10% of
A repurchase of shares by a Soparfi, followed
the shares in a Luxembourg company at any time
by a cancellation of the shares, may be subject
during the five-year period preceding the alienation.
to Luxembourg dividend withholding tax if the
A gain realised on the alienation of convertible debt is
repurchase price exceeds the par value per share.
subject to Luxembourg income tax if the holder has a
However, a repurchase by a Soparfi of all the shares
substantial interest in the debtor.
held by one or more shareholders (who thereby
cease to be shareholders), followed by a cancellation
A resident corporate shareholder and Luxembourg
of those shares (a partial liquidation) is not
permanent establishments of foreign companies are
considered a dividend and is therefore not subject
fully taxable on the alienation of shares (including by
to Luxembourg dividend tax. A repayment of capital
9 Not being an entrepreneur whose business assets include the shares concerned. For such shareholder, different rules apply, which are not
further discussed in this memo.
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(share capital and/or share premium) by a Soparfi
loans taken up from third parties, and the loans are
is treated as a dividend, unless the Soparfi proves
used for financing e.g. equity participations, the
the repayment is based on sound business reasons.
Luxembourg tax authorities apply a debt-to-equity
Sound business reasons are deemed not to exist if
ratio of 85:15.
the reduction is financed by a loan taken up for that
purpose, or if the Soparfi has reserves available for
Financing the acquisition of a participation to a
distribution.
greater extent with debt is accepted in principle,
5. Financing activities
as long as the interest on the total debt cannot be
considered as excessive. The interest will not be
considered excessive if the total interest on the
On January 28, 2011, the Luxembourg tax authorities
debt does not exceed the interest that would have
clarified the transfer pricing rules applicable to
been due if the participation had been financed
Luxembourg resident companies involved in intra-
with 85% debt carrying an arm’s length interest
group financing transactions by issuing a circular
rate. The Luxembourg tax authorities generally
(the Circular). The concerned financing transaction
consider that interest is at arm’s length if it does not
encompasses every activity consisting of the
exceed 12 months’ EURIBOR plus 200 basis points.
granting of loans to affiliated companies financed by
Higher interest rates or income-sharing interest
funds and financial instruments, such as public or
remuneration are acceptable if their arm’s length
private debt, loans or bank loans. The key element
nature can be substantiated. If interest payable on
of the Circular is the arm’s length remuneration
loans taken up to finance participations is considered
that should be earned by intra-group financing
excessive, the excess interest will be treated as
companies as well as the conditions to be fulfilled,
a deemed dividend, so that dividend withholding
e.g. substance and equity at risk in order to obtain
tax may in principle become due and the interest
written confirmation from the Luxembourg tax
deduction of that excess interest is disallowed.
authorities, in the form of so-called Advance Pricing
Agreements (APA). The remuneration to be earned
6.2 Withholding tax on interest
by such financing companies is to be supported in a
Arm’s length fixed or floating rate interest payments
transfer pricing report which takes into account the
are not subject to Luxembourg withholding tax.
fact that the concerned company has equity at risk
However, interest paid on certain profit-sharing
with respect to its financing activities to determine the
bonds and, arguably, profit-sharing interest paid on
appropriate gross remuneration.
loans, is subject to 15% withholding tax unless a
6. Other items of attention
lower tax treaty rate applies.
Luxembourg introduced a potential withholding tax of
6.1 Debt-to-equity ratio
currently 35% on interest paid through a Luxembourg
Luxembourg tax law does not contain debt-to-
paying agent (usually a bank) to an EU or Territory
equity ratio provisions. Nevertheless, when loans
resident individual or residual entity within the
are taken up from related parties or those related
meaning of article 4 (2) of the Luxembourg law of
parties guarantee the repayment of obligations under
21 June 2005 transposing the EU Savings Directive
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into Luxembourg law. In general, residual entities are
entities other than legal entities which are taxed as
legal entities and UCITs. No withholding tax will be
due if the beneficial owner consents to the exchange
of information or submits a defined certificate issued
by its state of residence. Furthermore, under certain
circumstances, interest paid on a loan granted to
a Soparfi by its shareholder(s) may fall outside the
scope of the Savings Directive.
Under the law of December 23, 2005 a final
10% withholding tax is due on interest paid by a
Luxembourg paying agent if it is (i) for the immediate
benefit of individuals resident in Luxembourg or (ii)
paid to residual entities (as referred to above) for the
effective benefit of Luxembourg resident individuals,
unless the residual entities opt for the exchange
of information or assimilation to an UCIT for tax
purposes.
6.3 Withholding tax on royalties
There is no withholding tax on royalty payments,
except on certain artistic and literary royalties.
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About Loyens & Loeff
Contacts
Loyens & Loeff N.V. is the first firm where attorneys at
●
Marc Meyers
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T +352 466 230 306
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[email protected]
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Peter Moons
Loyens & Loeff is an independent provider of
T +352 466 230 244
corporate legal services. Our close cooperation with
[email protected]
prominent international law and tax law firms makes
Loyens & Loeff the logical choice for large and mediumsize companies operating domestically or internationally.
●
Pieter Stalman
T +352 466 230 403
[email protected]
Loyens & Loeff Luxembourg S.à r.l.
Avocats à la Cour
18-20, rue Edward Steichen
L-2540 Luxembourg
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whatsoever for any consequences arising from the information in this publication being used without its consent. The information provided in the
publication is intended for general informational purposes and can not be considered as advice.
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