Luxembourg Holdings: Advantages for Tax Planning
Luxembourg has long been a focal point for entrepreneurs and major corporations worldwide, particularly when it comes to holding companies. Since the early 1990s, global multinationals have been attracted to Luxembourg, especially its 1929 Holdings. A holding company, by definition, is a firm whose primary function is to own other companies. Their use is often tied to achieving a more favorable tax burden.
Over the years, Luxembourg has consistently offered a highly advantageous tax framework for holdings of companies from all over the world that are based within its borders. While Luxembourg is no longer a pure tax haven, it is part of the so-called White List countries, which allow adequate exchange of tax-related information. Even the 1929 holdings, which were excluded from the White List for years, joined this list in 2014. The country is now fully compliant with the exchange of tax information. However, this doesn't mean there aren't benefits to establishing a Participation Holding in Luxembourg.
This article delves into the types of holdings in Luxembourg, focusing on the 1929 Holding and the "Societé de Participations Financieres" (So.Par.Fi.). We'll explore the differences between these two types of holdings and their respective advantages.
1929 Holdings in Luxembourg
The Luxembourgish holding companies, commonly referred to as "1929 Holdings", are governed by the Grand Duchy's law of July 31, 1929. This legislation allows these corporate structures to enjoy an extremely favorable tax regime, including tax exemptions on:
- Dividends from investments or shares held in the portfolio.
- Royalties from the exploitation of copyright.
- Capital gains and interest from bonds, bank deposits, and loans made to subsidiary companies.
Furthermore, there's no withholding tax on payments made by the Holding in the form of interest and dividends. In essence, a 1929 Luxembourg holding that receives a dividend from a controlled company doesn't have to tax it. Similarly, the distribution of its dividend won't be subject to any withholding tax.
What Can a 1929 Holding Do?
While it might seem straightforward, operating a 1929 Holding in Luxembourg isn't that simple. The activities a 1929 Holding can undertake are mostly limited to:
- Buying, holding, and selling shares of foreign or Luxembourgish companies.
- Holding bank accounts in any currency.
- Granting loans to controlled companies or companies in which there's a direct participation of at least 25% of the capital.
- Holding patents and granting licenses.
- Obtaining financing, but only up to an amount not exceeding three times the subscribed capital.
On the other hand, a 1929 Holding cannot:
- Hold shares in partnerships.
- Engage in commercial or industrial activities.
- Own real estate, except for its own offices, though it can hold shares in real estate companies.
- Grant loans to companies that aren't its subsidiaries.
- Engage in banking or brokerage activities.
Taxation of 1929 Holdings in Luxembourg
Previously, due to their favorable taxation, 1929 Holdings were excluded from international treaties and EU directives. However, the taxation of 1929 Holdings includes a capital tax (droit d'apport) of 1% and an annual subscription tax (tax d'abonnement) of 0.2% based on the average value of the previous year's shares.
So.Par.Fi. Holdings in Luxembourg
The "Societé de Participations Financieres" (So.Par.Fi.) differ from the 1929 Holdings in that they are regular commercial companies. These companies can benefit from the double taxation treaties signed by Luxembourg. They are subject to a 15% withholding tax on dividend distribution. However, this tax is nullified for EU-based companies if the conditions of the "Mother-Daughter" Directive are met.
Tax Benefits of So.Par.Fi.
While So.Par.Fi. presents itself as a commercial company, it can benefit from a significant "participation exemption" regime. Dividends and Capital Gains from managing participations that meet specific criteria are exempt from taxation at the company level.
Conclusion and Tax Consultation
For an international business group, establishing a holding in Luxembourg can offer undeniable tax advantages. While the So.Par.Fi. has been used as an alternative to the 1929 Holdings for many years, the ability of the latter to distribute tax-free dividends remains an undeniable advantage. If you're considering tax planning operations, Luxembourg should be on your radar.
If you're interested in diving deeper into the world of holdings and how they can assist in your group's tax planning, it's essential to understand the economic rationale behind establishing an overseas holding. It's crucial to identify a valid economic reason beyond mere tax savings. Not doing so can expose you to tax assessments aimed at redefining the tax level. Establishing a company in Luxembourg should be motivated by specific entrepreneurial reasons, not just the desire to reduce tax on an evidently evasive operation.
Disclaimer: Always speak directly to an attorney; blog posts are not a sufficient source of information to make decisions, may not be appropriate for your situation, may not be well researched, and may not be current at the time you read them, always speak directly with an attorney.
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