A)Corporate form B) Fiscal status a) companies tax liabilities - corporate income tax - municipal business tax - net worth tax - withholding tax c) Luxembourg's Double tax treaty network Addendum: The law of December 22, 1993, relating to mitigation of double taxationThe 1990 "SOPARFI" Holding Company ("Societe de participation financiere")
The traditional holding company is excluded from the benefit of Double Tax Treaties. This fact was considered as a lack of flexibility and competitiveness.
In order to overcome this, and to avoid the multiple taxation of profits derived from subsidiaries, the Grand-Duchy's authorities amended Article 166 of the income tax law ("Loi concernant l'impot sur le Revenu des collectivites" LIR), which refers to arrangements for parent and subsidiary companies, the so-called "Schachtelprivileg". As a consequence, both dividends accruing to normal taxable companies, and the profits derived from share transfer may, under certain conditions, be exempt from taxation.
This amendment can be considered as a major step for the consolidation of Luxembourg's position as a location for control, co-ordination and management of holdings.
A) Corporate form
The Grand-Ducal decree of December 24, 1990 amending art. 166 of the income tax law (LIR) did not create a new corporate form.
According to article 1 of the 1990 decree, the new provisions are applicable to joint stock companies ("Societe de capitaux").
Thus, a SOPARFI may take the form of :
- a "societe anonyme" S.A. (public limited company); - a "societe a responsibilite limitee" S.A.R.L. ( private limited company); - a "societe en commandite par actions" S.E.C.A (partnership limited by shares).
B) Fiscal status
Unlike holding companies, a SOPARFI is not subject to a special (tax) law treatment, but a normal commercial company subject to the common tax law principles.
Thus, a SOPARFI does not profit from any subjective tax exemption.
However, under the provisions of the Grand-Ducal decree of December 24, 1990, SOPARFI may, under certain conditions, be exempt from taxation on dividends and profits on transfer of shares.
a) Companies' tax liability
The main taxes to which Luxembourg companies are liable are:
Corporate income tax
Luxembourg resident companies are liable to Luxembourg tax on their world-wide income.
The actual maximum tax rate is 33%.If taxable income does not exceed LUF 1.312.000.- reduced tax rates (minimum 20% ) apply.
The aforementioned rates are increased by a temporary tax surcharge in favour of the national solidarity fund which from July 1, 1994 is 4%.
Municipal business tax ("impot commercial communal").
This tax is levied on behalf of municipal authorities on "trade income" and "trade capital", the basic rate being of 4% on trade income and 0,2% on trade capital.
Municipal authorities will apply their specific multipliers which may vary between 200% and 300% of the above rates (e.g. 250% for Luxembourg city).
The municipal business tax is deductible for corporate income purposes.
The tax administration normally requests quarterly advance payments based on the expected amount of taxes due.
Net worth tax ("Impot sur la fortune")
Net worth tax is an annual tax levied on the net worth of the company adjusted for certain items; especially real estate for which only the unitary value is considered and for securities held for which the market value is considered. The net worth tax rate is 0,5%.
Withholding tax
A withholding tax of 25% is levied since January 1, 1994 (formerly 15%),on dividends, profit-sharing loans and royalty payments. Double tax treaties may provide for lower rates. Interest payments and liquidation surplus are not subject to withholding tax.
It should be noted that from January 1991, subscription tax ("taxe d'abonnement") has been abolished for commercial companies (as well as for credit institutions) and is now only payable by investment funds and holding companies.
b) Special tax provisions regarding SOPARFI
Tax exemption is granted to SOPARFI under certain circumstances for the following revenues:
- dividends received from resident and non-resident subsidiaries;
- gains on share transfer;
- dividends paid to resident or non resident companies.
1. Exemption on dividends:
Following Article 166 of the income tax law (LIR) full tax exemption is granted on dividends received by a Luxembourg resident company fully liable to tax in the Grand-Duchy under the following conditions:
1.1. Minimum participation
The parent company must hold at least 10% of the subscribed capital of its subsidiary or - in case where such participation is inferior to 10% - a participation of a cost of at least LUF 50 million.
As regards groups of companies, full tax exemption will also be granted if several resident companies hold participations in a non-resident subsidiary provided:
- such combined participations are of at least 10% of the share capital of the non-resident subsidiary; and that
- one of the resident companies holds more than 50% of the capital of each of the other resident companies.
It should be pointed out that the term "capital" means first of all the subscribed and paid-up capital of a company.
Thus, capital which is not paid-up and not called-up will be excluded from the parent/subsidiary privilege.
Also, authorised capital is not treated as a participation.
1.2. Minimum duration of the participation
The Luxembourg parent company must have held the participation continuously since the beginning of the financial year, i.e. a period of 12 months preceding the moment of distribution of the dividends.
Generally, a financial year corresponds to a calendar year. A company may however choose for departures of this principle. In this case, revenue is liable to tax for the year in which the financial year was closed.
If a parent company which holds a qualified minimum participation at the beginning of the financial year increases this participation by acquisition of additional shares, dividends received with respect to these additional shares are not exempt from tax.
1.3. Full tax liability of parent and subsidiary company
Following article 166 § 1, the resident parent company must be fully liable to tax in Luxembourg. Accordingly, companies with 1929 holding status are excluded from the parent/subsidiary privilege, as well as permanent establishments of non-resident corporations.
Where dividends are paid by a Luxembourg resident subsidiary, the law provides that this subsidiary must also be fully liable to tax in Luxembourg. In case where the subsidiary is a non-resident company, the condition is that this company must be liable, in its State of residence to a tax comparable to Luxembourg corporate income tax. Luxembourg authorities require that in order to be comparable to Luxembourg income tax, the foreign tax must be of at least 15%.
Addendum:
If the aforementioned conditions are fulfilled, the law grants tax exemption on any "income derived from participations".
According to article 97 § 1.1 of the income tax law (LIR) this includes "distribution of any kind", e.g. dividends, but also winding-up profit and revenue from profit-sharing bonds.
2. Tax exemption on profits on share transfer
The Grand-Ducal decree of December 24, 1990 has extended the scope of the parent/subsidiary privilege to profits on transfer of shares.
Whereas most foreign legislations only provide for temporary tax immunity, this tax exemption is a definitive exemption.
Besides that, the law does not contain any requirements with respect to re-investment of the profits realised on transfer of shares as a condition for the parent/subsidiary privilege.
The benefit of tax exemption will be granted if the following cumulative conditions are fulfilled:
2.1. Minimum participation
The parent company's participation must represent at least 25% of the capital of the affiliated company or - if this condition is not fulfilled - the cost of this participation must be of at least LUF 250 million.
2.2. Minimum duration of the participation
The transferred shares must have been held by the parent company for a period of at least 12 months preceding the beginning of the financial year.
In practice, and depending on the time of the transfer, profit on share transfer may only be exempt if the shares were held for a period up to 24 months.
2.3. Full tax liability of parent and subsidiary company
Both, parent company and resident subsidiary must be fully liable to tax in Luxembourg.
If the subsidiary is a non-resident company it must be liable in its State of residence to a tax comparable to Luxembourg income tax. Luxembourg tax authorities require that in order to be comparable to Luxembourg income tax, the foreign tax rate must be of at least 15%.
3. Deductible expenses relating to SOPARFI's tax exempt income
Tax deduction of expenses relating to SOPARFI's tax exempt income is restricted in two ways:
First, deduction of such expenses is only possible for a company which does not only receive income covered by the parent/subsidiary privilege (mixed holding companies).
Second, legal provisions may restrict the scope of deductible expenses.
4. Withholding tax exemption
Dividends are, according to articles 146 and 97 of the income tax law, subject to a withholding tax of a rate of 25% (since January 1st, 1994). However, tax exemption on dividends will be granted in three cases:
4.1. Fulfilment of parent/subsidiary requirements.
Article 146 § 1.1. in connection with article 97 §3.b of the income tax law permits exemption from withholding tax, if the resident parent company fulfils the requirements for the application of the parent/subsidiary privilege, with the exception however, that it is not necessary that the dividends paid relate to shares held continuously for a period of 12 months preceding the distribution.
4.2. Exemption from withholding tax in accordance with EU directive of July 23, 1990
The Grand-Duchy of Luxembourg was the first member State to implement EU directive of July 23, 1990 relating to exemption from withholding tax.
As a consequence, no withholding tax is levied on dividends paid to a EU parent company if:
- the subsidiary is a Luxembourg resident company which is fully liable to tax in the Grand-Duchy;
- the parent company fulfils the conditions of the definition contained in article 2 of the EU parent/subsidiary directive (e.g. corporate form) and is subject to one of the taxes mentioned in the directive;
- the parent company must - at the time of payment of the dividends - directly have held
4.3. Exemption from withholding tax with respect to double tax treaties
Dividends paid by a Luxembourg resident subsidiary to a parent company in a State with whom the Grand-Duchy has signed a treaty for the avoidance of double taxation will be subject to a reduced withholding tax of 2.5% to 10%. Should no such treaty exist, domestic Luxembourg law prescribes a withholding tax of 25%.
c) Luxembourg's double tax treaty network
SOPARFI are covered by double tax treaties of which the Grand-Duchy is a party. Double tax treaties exist with the following countries:
AUSTRIA (1962) BELGIUM (1970) BRAZIL (1978) BULGARIA (1993) CANADA (1991) CZECH REPUBLIC (1993) - (initially Luxembourg/Czechoslovakia) DENMARK (1980) FINLAND (1982) FRANCE (1970) GERMANY (1973) GREECE (1993) HUNGARY (1990) INDONESIA (1993) IRELAND (1981) ITALY ( 1991) JAPAN (1993) REPUBLIC OF KOREA (1984) MOROCCO (1980) NETHERLANDS (1968) NORWAY (1983) SLOVAK REPUBLIC (1993) (initially Luxembourg/Czechoslovakia) SPAIN (1986) SWEDEN (1983) SWITZERLAND (1993) UNITED KINGDOM (1983) UNITED STATES (1962)Addendum:
The law of December 22, 1993 relating to mitigation of double taxation
The scope of instruments for the avoidance of double taxation was extended by a law of December 22, 1993, to those shareholders who do not benefit from the parent/subsidiary privilege.
The new law introduced a nbr. 15a to article 115 of the income tax law regarding exemptions. According to this new provision are exempt from income tax "half of the revenues specified in article 146 § 1.2 and 3 and § 2 paid by resident companies fully liable to tax if such revenues are taxable by virtue of one of the categories foreseen in article 10 §1 to 3 and 6". The main purpose of this new provision is to lighten the fiscal burden of physical persons and to arrange that the maximum taxation of the individual may never exceed the rate of 50%.
However, resident corporations may benefit from the provisions of the 1993 law.
The new law also modifies article 157 of the income tax law extending the exemption to dividends received by non-residents if such revenues are subject to income tax return in Luxembourg.
Corporations will benefit from mitigation of double taxation on dividends in so far as they are excluded from the benefit of the parent/subsidiary privilege.
Following revenues will be subject to partial exemption:
As regards the company paying the dividend, the law requires that such company must be a resident corporation fully liable to tax.
- - dividends or any other revenue derived from participations in corporations;
- - back interest and interest as well as similar security, if an additional allotment right is granted for this security with respect to the profits distributed by the debtor;
- - special allowances and advantages granted in the place of the pre-mentioned revenues.
The new law did not change the fiscal regime of interest which is not subject to withholding tax, and of winding-up profit, which is not considered as a dividend.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
