THE SOPARFI: A LUXEMBOURG HOLDING COMPANY
The SOPARFI holding permits a company to perform business and financial activities within the same structure. While the business activities are subject to common law tax, the financial operations (receipt of dividends, capital gains) are, under certain conditions, tax exempt.
Conditions for tax exemption on the receipt of dividends or capital gains
Conditions for a parent company
A SOPARFI company must be a fully taxable resident company of Luxembourg. The SOPARFI tax regime is also applicable to foreign companies with permanent establishment in Luxembourg.
Conditions for an affiliate
1. The participation must be substantial: it must be 10% of the total share capital of the affiliate or the price of acquisition of the investment should have been at least 1,200,000 EUR (6,000,000 EUR for the exemption of capital gains). If a participation has similar securities but they are acquired at different prices, then the price of acquisition may be calculated based on the weighted average cost method
2. The participation must be held for at least 12 months
3. The affiliate must be a fully taxable resident corporation of Luxembourg, or must be a company with non-Luxembourg share capital which is fully taxable at tax which corresponds to the corporate income tax, or must be a company residing in a member state of the EU.
4. The participation must be really owned: a purchase commitment would not be sufficient, even if the previous owner has deposited the securities with a third party. Similarly, the simple fact of having usufruct rights over the securities of the affiliate is usually insufficient.
The consequences of SOPARFI holding taxes
Tax exemption from dividends
Income paid by held participations (dividends received) are tax exempt (art. 166 L.I.R.). If the taxpayer earns a profit in the course of the year, the exemption reduces the taxable revenue. If, on the other hand, the financial year ends in a loss, the exemption increases the tax loss for that year.
Non-taxable capital gains
Les plus-values réalisées par les Soparfi ne sont pas imposables (Règlement grand-ducal du 21 décembre 2001 portant exécution de l'article 166 alinéa 9 du LIR)
Capital gains earned by SOPARFI are non-taxable (Grand Duchy regulation December 21, 2001, implementing article 166, clause 9 of the L.I.R.)
Exemption covers all operations including transfer of property, notably of the sale, receipt, and exchange of securities.
If a participation is acquired through an exchange of securities, only the amount of the captial gains over the value of the exchange is exempt.
The effects of exemption on deducting expenses
Operating costs which are directly linked to exempted participations are deductible. Nevertheless, the capital gains or the dividends are taxable up to that amount.
Tax on commercial activities
The commercial activities of a SOPARFI company are subject to a common law tax. However, certain types of income, such as income from software, brands or patents, can benefit from tax breaks.
Tax on the distribution of dividends from a SOPFARI
The distribution of SOPARFI dividends profiting its shareholders can be subject to withholding taxes at a rate of 15% unless:
- The distribution of dividends does not profit a fully taxable resident company or an EU resident company which holds more than 10% of its share caplital (or a participation equivalent to at least 1,200,000 EUR) of the company distrubuting the dividends for a period of 12 months from the payment of the dividends;
- The distribution of dividends does not result from a liquidation surplus;
- the distribution of dividends does not profit a company which has signed a tax treaty with the Grand Duchy of Luxembourg (reduction of the withholding rate)
In conclusion
The Luxembourg SOPARFI holding offers a clear framework for international tax planning as SOPARFI are permitted under different international tax treaties and European directives. This fundamental characteristic frequently makes it the preferred type of holding over the SPF holding, because it is less restrictive in the possibilities of its application.
Extracts from applicable legislation on Soparfi holdings
Art. 166 of L.I.R.
1- Income from a participation by:
1. an fully taxable resident collective entity and included in one of the forms listed in paragraph 10 of the annex.
2. a fuly taxable corporation headquartered in Luxembourg not included in paragraph 10 of the annex,
3. a permanent establishment company pertaining to a collective organization referred to in article 2 of the modified EC Council directive from July 23, 1990, concerning the common system of taxation applicable to parent and affiliate companies from different member states (90/435/EC),
4. a permanent establishment company pertaining to a corporation which is headquartered in a state with which the Grand Duchy of Luxembourg has a treaty preventing double taxation.
5. a permanent establishment company pertaining to a corporation or a coooperative headquartered in a state of the EEA Agreement or a member state of the EU, is exempt when, on the date the income is available, the beneficiary holds or has steadily held an investment which does not descend below a threshold of 10% or the price of acquisition below 1,200,000 EUR for an uninterrupted period of at least 12 months (both inclusive).
2- The exemption applies to investment income described in paragraph 1, held directly in the share capital:
1. of a collective investment undertaking cited in article 2 of the modified EC Council directive of July 23, 1990 concerning the common taxation applicable to parent companies and affiliates of the different member states (90/435/EC),
2. of a fully taxable resident corporation not listed in paragraph 10 of the annex,
3. of a fully taxable non-resident corporation at a tax corresponding to the corporate income tax.
3- The holding shares from paragraph 2 through the entities described in the first paragraph of article 175 is considered a direct holding proportional to the fraction held in the net assets of this entity.
4- The product of sharing as described in article 101 is considered to be income persuant to paragraph 1.
5- Where income is exempt persuant to paragraph 1, the following are not deductible:
1. opeating costs in direct economical connection with this income;
2. the depreciation of capital loss in the investment resulting from the distrubution of this income and in the order of the list above.
6- Nevertheless if a deduction for the resulting depreciation pursuant to paragraph 5 and provided that the depreciated participation must be evaluated at a value higher than the value of the previous year, the income shown is treated as a distribution described in paragraph one; in this case, the amount to be exempt cannot exceed the amount of the previously non-deducted depreciation, persuant to paragraph 5.
7- The investment income received from a participation received in exchange of another participation pursuant to paragraph 22bis does not fall under the purview of this article, in the case where the distributions from the participation given in exchange had not been exempt, if the exchange had not taken place. The distributions carried out after the end of the 5th tax year following the exchange are not subject to this restriction.
8- If the required 12 uninterrupted months of holding the minimum required participation are not met, the exemption is cancelled and a corrective tax is levied for the year in question.
9- A Grand Duchy regulation could:
1. Extend the exemption under terms and conditions to be determined on the revenue generated on the transfer of the investment.
2. Provide, in specified conditions, that the losses from transfer are not deductible.
Grand Duchy regulation December 21, 2001 implementing article 166, paragraph 9 of the L.I.R. (extract):
Art. 1er.
(1) A taxpayer described in article 166, clause 1, numbers 1 to 4, relinquishes their direct securities held in the share capital of a company described in paragraph 2, numbers 1 to 3 of the same article, the income earned by the transfer is exempt when on the date of tranfer of the securities, the tranfering party has held or undertakes to hold said investment for an uninterrupted period of at least 12 months and so long as it never reaches the minimum threshold of 10% or a purchase price of 6,000,000 EUR. The holding shares through entities described clause 1 of article 175 is considdred a direct holding proportial to the fraction held of the net assets invested in this entity.
(2) Notwithstanding paragraph 1, the income earned from the transfer of an investment is taxable at the rate of the sum of the investment income and a possible deduction for the depreciation carried out on the investment provided that these have reduced the taxable base of the tax year or the prior year, exercising or disposing of their rights.
(3) The exemption provided for in the first paragraph is rejected insofar as the purchase price of the participation was reduced by the transfer of a capital gain stated in articles 53 and 54.
(4) The income from the sale of a participation received in exchagne for another participation persuant to article 22bis, does not fall under the purview of paragraph on such that the income from the sale of the participation given in exchange would not be exempt if the exchange did not take place. Even so, the income from a sale after the 5th tax year following the exchange is not subject to this restriction.
