Financial Holding Company SOPARFI
DEFINITION
The SOPARFI is not a new legal form for a company. The term ”SOPARFI“ (from FR: Societe de Participations Financieres) is applied to companies who have financial holdings. The SOPARFI is a typical incorporated corporation subject to the general legal and tax-related regulations set forth by corporate law, which benefits from the distinct Luxembourgian ”box privilege“.
LEGAL FORM
The SOPARFI is primarily founded as a corporation. It can also take on the form of a limited-liability company or an association limited by shares.
SHARES
Two forms of shares are permissible, nominal shares and bearer shares; a shares registry is not required. The transfer of shares takes place via simple handover.
A split of the shares into mere ownership and beneficial interest is permissible. This enables share ownership to be transferred to an individual person or a corporate entity, along with the simultaneous transfer of beneficial interest to another individual person or corporate entity.
The voting right can be exercised by the owner as well as by the beneficial owner.
This enables the development of succession plans, in order to ensure the continued operation of a company or to allocate current income.
COMPANY PURPOSE
The SOPARFI is founded primarily to facilitate the purchase of financial holdings of any kind in a Luxembourgian or foreign company, as well as for the administration and collection of these holdings.
At the same time, the SOPARFI can perform industrial and commercial activities (as its primary or secondary activity).
TAX EXEMPTION
Income tax: Dividend, sales and liquidations revenues
If a Luxembourgian holding company (Soparfi) generates dividend, sales or liquidation profits from a subsidiary, these are income-tax-exempt under the following conditions:
Status of the holding company
- Unconditionally taxable corporation based in Luxembourg, or
- Luxembourgian operation centre of an EU-based company in the context of the ”holding subsidiary” directive - or a company based in a DBA-agreement country (participant)
Status of the subsidiary
- Unconditionally taxable corporation based in Luxembourg, or
- Luxembourgian operation centre of an EU-based company in the context of the ”holding subsidiary” directive (must be subject to corporate tax – the amount of which will not always be identical to the Luxembourgian capital-gains-tax rate), or
- Other foreign-based subsidiary: must always be subject to capital-gains tax rate which – for comparable taxable income, corresponds to the Luxembourgian corporate-tax rate (in practical terms - as a rule – at least 15%)
Scope of holding
- At least 10% of the capital or purchase expenses of at least EUR
1.200.000 for dividends and/or purchase costs of at least EUR 6.000.000
for sale profits
Minimum ownership term
- Here, 12 months - on the day of the dividend payout (or day of generation of revenue) - or obligation to hold the required extent of the stake for a period of at least 12 months. These prerequisites must be fulfilled for the entire scope of the holding (no individual calculation per share).
Dividend payouts to a Luxembourgian company which cannot apply the ”box privilege” are subject, as a rule, to capital-gains taxation (29.63%: corporate tax including excise tax and contribution to unemployment.-insurance fund).
However, the dividends can be tax-exempt to the extent of up to 50% if paid out from:
- an unconditionally taxable corporation based in Luxembourg, or
- a foreign-based corporation: must always be subject to capital-gains tax rate which – for comparable taxable income, corresponds to the Luxembourgian corporate-tax rate (in practical terms .- as a rule – at least 15%) and based in a DBA-agreement state, or
- a Luxembourgian operation centre of an EU-based company in the context of the ”holding subsidiary” directive (must be subject to corporate tax – the amount of which will not always be identical to the Luxembourgian capital-gains-tax rate), or
Deduction of payables
- Payables related to a holding subject to the ”box privilege” (i.e.,
interest payables) are only deductible insofar as they exceed tax-free income generated from the holding in each year. - Partial value deductions for a holding eligible for the ”box privilege” are deductible. Any tax-exempt sale profit then becomes taxable insofar as it has been generated on holding-related payables or prior partial-value deductions which have influenced the Luxembourgian tax basis and have not, in the meantime, been neutralised by value increase.
- Applicable in correlation with payout-related partial value deductions, certain special regulations can take effect – this circumstance ultimately leads to the deduction eligibility for the partial value deduction, that the associated dividends become subject to tax and any later value increases can be realised in tax-exempt status.
- Value adjustments on claims towards subsidiaries are treated as partial-value deductions in the course of the calculation of the tax-exempt sale profit on the holding (included in the calculation of the tax-exempt sale profit).
Assets tax
- Holdings are excluded from the taxation basis for the assets tax if they correspond to at least 10% of the capital of a (resident or non-resident), unconditionally taxable corporation, or the purchase price amounts to at least € 1,200,000.00.
- If, in the balance sheet, a reserve is indicated for the next five tax years, the assets tax can be lowered by 1/5 of this reserve. This reduction is limited to the corporate tax (including the contribution to the insurance fund).
Withholding taxes
On dividend payouts
On the dividends paid out by a SOPARFI, as a rule, 20% withholding tax is levied.
However, under the following conditions, a SOPARFI is exempt from the withholding tax:
- the company issuing the payout is a resident company and subject to unconditional taxation;
- the beneficiary company s a resident corporation subject to unconditional taxation and/or a corporation based in an EU member country which falls under the area of application of the Directive 90/435/EEC; or it is a resident operation of a European company in the context of the Directive 90/435/EEC and/or it is a resident operation of a holding company based in a country with which Luxembourg has signed a double-taxation agreement;
- the beneficiary company has for at least one year maintained a holding in the SOPARFI or undertakes the obligation to hold it for at least one year, in which case the stake corresponds to at least 10% of the corporate capital and/or the purchase price amounts to at least € 1,200,000.00.
On the dividends paid out by a SOPARFI to companies from third-party countries, the withholding tax is reduced (mostly to 5%), as long as a double-taxation agreement applies.
On interest payments
In Luxembourg, interest payments are not subject to withholding tax.
On liquidation revenue
If a SOPARFI is liquidated, the payout of liquidation revenue is exempt from withholding tax – regardless of recipient tax status.
DOUBLE-TAXATION AGREEMENT
The double-taxation agreements concluded by Luxembourg also encompass SOPARFI companies, since the tax exemptions – due to the ”box privilege” no not affect the company’s general tax obligation.
PRACTICAL EXAMPLES
Example 1
On 10 February 2002 a SOPARFI acquires, for the price of EUR 1,000,000.00, 12% of the corporate capital held by an SA. On 31 March 2002, a dividend is paid out – which is exempt from corporate income tax, insofar as the SOPARFI assumes the obligation of holding at least 10% of the capital from the holding until 11 February 2003.
Example 2
On 25 January 2002, a SOPARFI acquires 28% of the capital held by a Belgian corporation. Here, 18%of the holding can be sold subject to a tax exemption on the profits generated, under the condition that the SOPARFI, as of am 25 January 2003 still holds the remaining 10% stake in the Belgian company.
Example 3
On 13 May 2000, a SOPARFI acquires 18% of the corporate capital of a Danish corporation. In 2002, it receives from this holding a dividends payout of € 100.00; the interest on the loan with which it financed the purchase of this holding amount to 120 as of 2002. Therefore, for this year, the interest payable is only subject to a tax deduction in the amount of € 20.00.
Example 4
In the year 2000, a SOPARFI purchases a holding in the amount of 30% in a French SA. In 2002, the SOPARFI sells this holding and generates a sale profit of € 2,000.00. As of 1 January 2002, it has losses of € 500.00 declared on the tax return, of which the € 400.00 were generated from interest on the loan (with which this holding was purchased), € 100.00 were applied to administrative costs. In the years in which the SOPARFI owned the holding, it generated no taxable income. From the generated sales profit (€ 2,000.00), then, the amount of € 1,600.00 is tax-free. The difference of 400 is cancelled out by the declared tax losses.
Example 5
A SOPARFI sells its stake in a German corporation and in the process, generates a profit of one million EUR. The profit is not taxable in Germany; due to the double-taxation agreement, the right to taxation is granted to Luxembourg.
In Luxembourg, the profits remain capital-gains-tax-exempt special assets (due to the ”box privilege”).
If the SOPARFI is henceforth liquidated, the distribution of liquidation revenues to the partners/shareholders (individuals or corporate entities) remains tax-exempt.
