A branch office and its characteristics in Luxembourg
Before starting to explain the process for opening a branch in Luxembourg or even reviewing the benefits of doing so, it is essential to be clear about what a branch is and, above all, to be clear about the difference with a subsidiary. Let us then clarify these concepts, as both entities have different characteristics, requirements and legal consequences.
With this in mind, let's look at the main characteristics of a branch to better understand how it operates:
- Legal responsibility: A branch does not assume legal responsibilities on its own, all debts, financial and legal obligations of the branch are assumed directly by the parent company.
- Incorporation and registration: It is not necessary to incorporate a new company in Luxembourg as the branch is not considered a separate legal entity, however, the branch must be registered with the Registre de Commerce et des Sociétés (RCS) and apply for an establishment authorization if the parent company is not Luxembourgish.
- Accounting and administrative obligations: Although a branch is not an independent entity, it must keep separate accounting records relating to activities carried out in Luxembourg. It is also obliged to submit financial accounts and tax reports to the Luxembourg authorities, although it is not obliged to submit separate consolidated financial statements as these form part of the overall accounts of the parent company. The profits of the branch are usually consolidated with those of the parent company to reflect the overall financial situation of the company. However, this consolidation depends on the tax laws of the parent company's country of origin and on the double taxation treaties signed between Luxembourg and that country.
- Operational flexibility: The branch is subject to the parent company's operating guidelines and has limited autonomy as all strategic and financial decisions are made by the parent company. The branch can carry out commercial or administrative tasks but must do so on behalf of the parent company. It is a simpler and less costly option in terms of time and resources than setting up a subsidiary.
- Tax implications: A branch office in Luxembourg must calculate its own local profits as if it were a separate entity, following Luxembourg tax regulations, and it is taxed exclusively on the income it generates within the country as it is not an entity independent of the parent company.
However, as Luxembourg has an extensive network of treaties to avoid double taxation, in most cases the profits of the Luxembourg branch can avoid being taxed in the parent company's country of origin. Although this is the case in most situations, it depends on the applicable tax treaty.
- Legal representative: It is mandatory to appoint a legal representative for the Luxembourg branch who will be responsible for acting on behalf of the parent company.
- Closure procedure: If it is decided to end operations in Luxembourg, the procedure is much simpler and faster than liquidating a subsidiary as it does not involve the dissolution of a legal entity.
Benefits of establishing a branch in Luxembourg
To establish a branch in Luxembourg can be an excellent strategy for foreign companies looking to expand, however, like any business decision, a branch has benefits and disadvantages that are worth analyzing.
- ➕ Simplicity in the constitution: opening a branch involves a simpler administrative process than constituting an independent legal entity such as a subsidiary. It is not necessary to draw up statutes or contribute share capital.
- ➕ Lower operating and administrative costs: unlike a subsidiary, a branch is not required to have initial share capital, and since a branch operates as an extension of the parent company, it does not require a board of directors or a complex corporate structure.
- ➕ Direct link to the parent company: the branch's operations are directly coordinated and supervised by the parent company, which facilitates alignment with the company's global objectives. In addition, the branch can directly benefit from the parent company's brand, resources and credibility.
- ➕ Fiscal attractiveness: a branch in Luxembourg allows the parent company to take advantage of the favorable tax regime and the extensive network of treaties to avoid double taxation that Luxembourg has with numerous countries. This can reduce the overall tax burden by avoiding double taxation on income generated in Luxembourg and ensuring that such income is not taxed disadvantageously when transferred to the parent company.
- ➕ Strategic presence without committing too many resources: branches allow for physical representation in a new market without the need to commit large financial or administrative resources, this is especially useful if you want to “test” the market before formalizing a larger investment.
- ➖ Lack of autonomy: as a branch is not an independent entity it cannot make important decisions autonomously. It must follow the directives of the parent company and this can slow down local decision-making. Furthermore, a branch does not have its own resources and depends entirely on the parent company to finance its operations.
- ➖ Direct responsibility of the parent company: all the legal, financial and commercial obligations contracted by the branch are assumed directly by the parent company. This can expose the parent company to greater risks since any legal or financial problems faced by the branch in Luxembourg can have a direct impact on the global reputation of the parent company.
- ➖ Local legal obligations: a branch has to comply with local rules and regulations and since there may be legal and regulatory differences with respect to the country of origin, local Luxembourg rules can complicate its operation.
- ➖ Lower local perception: in the eyes of customers, suppliers and local partners, a branch can be perceived as a “foreign extension” rather than a local entity and this could be a drawback in markets that favor contracting with local companies.
- ➖ Limited legal representation: branches do not have the same capacity as an entity with independent legal personality such as a normal company or a subsidiary to sign contracts or carry out certain activities.
- ➖ Difficulty in certain activities: not all commercial activities can be carried out by a branch due to legal restrictions in some sectors. For example, certain regulated sectors such as banking or insurance may require the incorporation of an independent entity.
Process for opening a branch office in Luxembourg
The process to open a branch in Luxembourg is relatively simple, although it varies depending on the location of the parent company. If the parent company is established in Luxembourg, it is only necessary to notify the Ministry of Economy of the opening of a branch, whereas in the opposite case, the parent company must also apply for an establishment permit. In any case, here is a step-by-step guide to the procedure.
Step 1️⃣ - Prepare the required documentation
Before registering the branch in Luxembourg, the parent company must compile various legal and administrative documents. The main documents to be submitted include the parent company's articles of association, a certificate of incorporation of the parent company, a board of directors' minutes or an official document authorizing the opening of the branch, as well as documentation appointing the branch representative in Luxembourg. In addition, if the company is required to apply for an authorization of establishment, it must prepare the documents mentioned on the government website related to this procedure.
Step 2️⃣ - Appoint a legal representative
A legal representative must be appointed to act on your behalf in Luxembourg.
Step 3️⃣ - Apply for an establishment authorization
If the parent company is located outside Luxembourg, an establishment authorization must be requested beforehand in order to open the branch in the country. This request must be submitted by the legal representative of the branch in Luxembourg.
Step 4️⃣ - Register the branch with the Trade and Companies Register (RCS)
The branch must be registered with the Luxembourg Trade and Companies Register (RCS) to formalize its presence in the country.
Step 5️⃣ - Apply for a tax identification number (NIF)
After registering with the RCS, the branch must register with the Luxembourg Inland Revenue to obtain a tax identification number (NIF). This number is essential to comply with tax obligations such as the payment of corporation tax and the declaration of income obtained in Luxembourg.
Step 6️⃣ - VAT declaration, if applicable
If the branch will be carrying out activities subject to VAT, it must register and obtain a VAT number in order to be able to present monthly, quarterly or annual VAT returns.
