What are holding companies?
Holding companies are legal entities created to own and manage participation in other companies, either by maintaining ownership of shares or holding other assets. Holding companies, instead of carrying out their own business activities, simply exercise control and management of the companies in which they have a shareholding, benefiting from the income generated by these companies.
Opening a holding company in Luxembourg is very common and there are a large number of such companies in Luxembourg as they offer many advantages to their owners. The following are some of the main uses and advantages of holding companies in Luxembourg:
Uses and advantages of holding companies in Luxembourg
Tax optimization
Holding companies in Luxembourg can have multiple tax advantages such as tax exemption on dividends and capital gains derived from their participation in subsidiary companies if they meet certain requirements.
- Tax exemption on dividends. One of the most popular investment vehicles in Luxembourg is the Société de Participations Financières (Soparfi) which is often used as a holding company to structure international investments. One of Soparfi's main tax advantages is the tax exemption of dividends from its subsidiaries if certain conditions are met.
- Exemption from capital gains tax. Soparfi companies also benefit from tax exemption on capital gains realized on the sale of units under conditions similar to those applicable to dividends.
- Tax exemption on liquidation proceeds. Liquidation proceeds, such as dividends paid on the liquidation of a subsidiary, are also tax-exempt.
Control and management
Holding companies allow the ownership of several subsidiaries to be concentrated in a single entity. This facilitates the supervision and control of strategic decisions, asset management and the implementation of unified corporate policies throughout the business group.
In addition, this type of company usually does not need its own premises and as it does not carry out any commercial activities, it does not usually need an establishment permit and can therefore resort to domiciliation.
Asset protection
Holding companies make it possible to isolate strategic or valuable assets such as property, patents or intellectual property rights from the operational risk faced by subsidiary companies.
Succession planning
Holding companies provide an efficient way to structure the transfer of assets from one generation to the next and to minimize inheritance taxes. In cases of family ownership, holding companies allow the founders to retain control over the assets even when they transfer part of the ownership to successors or heirs. These types of companies are therefore frequently used by high-net-worth families to organize their wealth and plan for succession.
Legal framework for holding companies in Luxembourg
Let us now take a look at the legal framework by examining the legal forms available for holding companies in Luxembourg and the requirements for opening such a company.
Available legal forms
A holding company can have one of the following legal forms to operate in Luxembourg:
- Limited company (SA): this is a common legal form for large companies in Luxembourg and is ideal for holding companies that require flexibility in the issuance of shares and the ability to be listed on the stock exchange.
- Limited Liability Company (SARL): this is a legal form widely used by small and medium-sized companies and may be suitable for a medium-sized holding company or a family group.
- Limited partnership by shares (SCA): this type of company is a hybrid form between a limited partnership and a limited liability company, it is ideal for structures where specialized management is needed, generally carried out by a managing partner, and where additional capital is to be raised from investors.
- Cooperative company (SC): Although this type of structure is less common for holding companies, it can also be used and can be useful for business groups seeking a cooperative or collaborative structure.
- Société de Participations Financières (Soparfi): A Soparfi is a special purpose company used for the management of participations in other companies characterized by benefiting from a special tax status created on December 24, 1990, by a Grand-Ducal regulation concerning the tax provisions applicable to parent companies and subsidiaries. A Soparfi is not a separate legal form but an investment vehicle that can take any of the above legal forms. What makes these companies Soparfi special is the fact that they adopt the activity of a financial holding company as their main purpose and that they qualify for the tax regime applicable to holding companies in Luxembourg.
Requirements
As we have seen a holding company in Luxembourg can take different legal forms, so the requirements for establishing such a company vary according to the type of legal form adopted. However, some requirements are common to all of them:
- To have a bank account: it is necessary to open a bank account in Luxembourg where the share capital is deposited.
- To have a place of business: When incorporating a company it must have a registered office in Luxembourg, this place constitutes its principal place of business and must be mentioned when the company is registered in the Luxembourg Trade and Companies Register (RCS).
- Having a trading name: the company must have a trading name which must be reserved in the Commercial Register.
- Registration: the company must be registered in the Trade and Companies Register (RCS).
In addition, depending on the type of company, there are specific requirements regarding the minimum capital, the number of associates and the governance of the company. The following table provides a summary of the requirements for the different types of legal structures that holding companies can have.
| Company | Minimum Capital | Nº of Shareholders | Liability | Governance |
| SA | 30,000 €(25% must be paid at incorporation) | Unlimited | Limited to capital contribution | Board of Directors (at least 3 members or single administrator in certain cases) |
| SARL | 12,000 €(fully paid at incorporation) | 1 to 100 | Limited to capital contribution | Managed by one or more managers |
| SCA | 30,000 € | Unlimited for general partners and variable for limited partners | Limited for limited partners and unlimited for general partners | Managed by general partners |
| SC | No minimum capital required | Variable based on cooperative membership | Limited or unlimited, depending on statutes | Administered by a board or a cooperative committee |
In addition, it is also important to take into account the requirements for the company to benefit from the Soparfi regime:
Main purpose of holding and management of participations.
Soparfi is defined as any company whose main purpose is the acquisition of shares in other Luxembourg or foreign companies and the management of such shares. This means that the company's activities must be oriented towards holding shares and participation in other entities without actively engaging in regular business activities.
Limitation on commercial activities
The holding of participations must be the main activity of a Soparfi, however, this type of company can exercise a commercial activity but only for the provision of services to its subsidiaries. If the commercial activity goes beyond this, the company will have to comply with the legislation on the exercise of commercial activity, that is, to have its own premises and establishment authorization, which will cause it to lose its special tax status.
Participation in subsidiaries
For a company to be considered a Soparfi and have the tax advantages of the participation regime, the company must meet the following criteria:
- The company must own at least 10% participation in a subsidiary company or have an investment in that entity of at least 1.2 million euros.
- Participation must be maintained for at least 12 months or the company must commit to maintain it for that period.
Taxation of subsidiaries
Subsidiary companies must be companies with fully taxable Luxembourg capital, or companies with non-Luxembourg capital fully taxable at a rate corresponding to corporate income tax or companies resident in a member state of the European Union.
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Learn moreProcess to set up a holding company in Luxembourg
Let's see now how to open a holding company in Luxembourg. Registering a company in Luxembourg, holding or not, requires multiple steps and can take some time so it is important to plan and above all to have a good understanding of the process.
Choosing the legal structure
Before starting the formalities, it is essential to choose the most suitable type of company for the business. In the previous sections, we mentioned some of the most common types of companies for holding purposes.
Reserving the company name
Before creating a holding company, it is necessary to check that the business name or is available. This is done by applying for a certificate of name availability electronically with the Luxembourg Business Registers (LBR).
Opening a Bank Account
In the case of companies such as SARL or SA, a bank account must be opened in the name of the company being formed to deposit the minimum share capital required. Once the capital has been deposited, the bank issues a certificate to be used for the official registration of the company.
Drafting the Articles of Incorporation
The company's bylaws are the documents that define the internal functioning of the company, the rights and obligations of the partners, and the management structure. For some structures, the bylaws must be formalized before a notary. The bylaws must include:
- Name and type of company.
- Registered office (domicile).
- Corporate purpose (business activity).
- Share capital and the distribution of shares among the partners.
- Management structure (administrators, boards, etc.).
Sign the bylaws before a notary (if applicable).
If the legal structure requires a notarial formalization as is the case of a SARL or SA, the founding partners must go to a notary to sign the company's bylaws.
It is also important to note that if the holding company does not engage in any activity other than holding shares, it will not need an establishment permit nor will it have to register for VAT purposes. However, if it conducts business operations, including with its subsidiaries or affiliates, it will be obliged to register for VAT purposes and apply for an establishment permit for the services it provides.
Taxation
Taxes that holding companies in Luxembourg are subject to are the same as for other companies: corporate income tax, municipal business tax and net wealth tax.
Corporate income tax
The corporate income tax rate in Luxembourg depends on the taxable income according to the following schedule:
- If less than €175,000: the applicable rate is 15%.
- Between 175,000 and 200,000 euros: Flat amount of 26,250 euros plus the application of a rate of 31% on the taxable income between 175,000 and 200,000 euros.
- Over 200,000 euros: the applicable rate is 17%.
In addition, all legal entities based in Luxembourg must contribute to the employment fund, so this rate must be increased by 7% in favor of this fund. This increases the normal tax rate from 17% to 18.19%.
Municipal business tax
Another tax that must be paid by holding companies in Luxembourg is the municipal business tax or MBT. The value of this tax depends on the municipality, in the municipality of Luxembourg it amounts to 6.75%. However, a tax allowance of 17,500 euros on taxable profits must be taken into account.
Net wealth tax
Finally, a third tax to be paid by holding companies in Luxembourg is the net wealth tax, which is levied on the net wealth of the company and its rate is as follows:
- 0.5% on the part of the net wealth less than or equal to 500,000,000 euros.
- 0.05% on the part of the net assets exceeding 500,000,000 euros.
However, if the company meets the requirements to benefit from the Soparfi regime, it has several tax advantages:
- No taxation on dividends from subsidiaries.
- No taxation on capital gains from the sale of subsidiaries.
- No taxation of liquidation surpluses.
- Taxation of about 5.2% on net income from certain intellectual property assets such as patents, utility models, software copyrights or plant breeders' rights.
