Luxembourg SOPARFI
Financial Holding Company

General Overview

The SOPARFI structure in Luxembourg, known formally as “Societe de Participations Financières,” is a well-established corporate entity specifically created for financial investments. SOPARFI entities in Luxembourg are governed by the general legal and tax regulations applicable to trading companies. Additionally, they enjoy specific advantages linked to Luxembourg’s “inter-corporate” privilege.

Legal Structure

SOPARFI entities in Luxembourg are primarily structured as Public Limited Companies (SA). However, they can also take the form of a Limited Liability Company (Ltd/SARL) or a Partnership Limited by Shares.

Company Objectives

The primary purpose of a SOPARFI in Luxembourg is to acquire financial investments within and outside Luxembourg and manage these investments. Additionally, SOPARFIs can engage in industrial and commercial activities, either as their primary or secondary function.

Tax Benefits

Corporate income tax

Corporate income tax treatment for a parent company in Luxembourg (SOPARFI) earning profits from dividends, sales, or subsidiary liquidation is contingent upon the following conditions:

For the Parent Company:

For the Subsidiary Company:

If a company in Luxembourg does not qualify for the inter-corporate privilege, dividends distributed to it are generally subject to a corporate tax of 29.22%, encompassing municipal business tax and the solidarity surtax. Nevertheless, a 50% tax exemption may be granted for dividends if they are distributed by:

Deductions and Net Wealth Tax Exemptions

Regarding deductions and net wealth tax exemptions, the following principles apply:

Deductions
Expenses tied to an inter-corporate privilege investment (such as interest expenses) are deductible only when they surpass the tax-free income generated from the investment within a specific year.

Partial reductions in the recorded value of the inter-corporate privilege investment can also be deducted. When considering a potentially tax-exempt profit from a sale, taxation is applied in cases where it’s associated with investment-related expenses or prior partial reductions that have affected Luxembourg’s assessment basis, and haven’t been offset by an interim appreciation.

Special regulations come into play concerning partial reductions linked to distributions. These can lead to deductible partial reductions, taxable dividends, and the potential for future gains to be realized without taxation.
When assessing tax-free sale profits, adjustments to the value of claims against subsidiary companies are treated as partial reductions of the investment’s value. This adjustment is factored in when calculating the tax-free sale profit.

Net Wealth Tax

Investments are exempted from the net wealth tax calculation if they equal at least 10% of a corporation’s capital, regardless of whether it’s based within or outside Luxembourg, and is subject to unrestricted tax liability. Alternatively, the exemption applies if the purchase price of these investments is at least 1,200 EUR.

In cases where a reserve is indicated in the balance sheet for the upcoming five tax years, the net wealth tax can be reduced by one-fifth of that reserve. However, this reduction is capped at the total of the corporate income tax, including the solidarity surtax.

Withholding Tax

In the context of withholding tax, the following guidelines apply:

Dividend Distribution

Typically, SOPARFI’s dividends are subject to a 15% withholding tax. However, SOPARFI can be exempt from withholding tax if the following criteria are met:

• The distributing company maintains residence with unlimited tax liability.
• The receiving company either has residence with unlimited tax liability or is a corporation based in an EU member state eligible for the Council Directive 90/435/EC. It can also be the permanent establishment of a European Company within Luxembourg, per the Council Directive 90/435/EC, or a resident permanent establishment of a parent company located in a country that has a Double Taxation Agreement (DTA) with Luxembourg.
• The receiving company has held an investment in a SOPARFI, or there is a commitment to do so, for a minimum of one year. This investment should constitute at least 10% of the company’s capital or have a purchase price of 1,200 EUR.

If a SOPARFI in Luxembourg distributes dividends to companies outwith the EU, these will most often be liable to withholding tax at the reduced rate of 5% insofar as there exists a DTA between Luxembourg and the relevant country.

Interest Payments

Interest payments, when made in Luxembourg, are not subject to withholding tax.

Liquidation Proceeds

IIn the event of a SOPARFI’s liquidation, the distribution of liquidation proceeds is exempt from withholding tax, regardless of the recipient’s tax status

Double Taxation Agreements

Double taxation agreements (DTAs) that Luxembourg has established also extend to SOPARFI companies. These agreements apply because the inter-corporate privilege tax exemptions do not impact the overall tax liability of these companies.