Luxembourg Vehicles

The Soparfi

1. Introduction

SOPARFI is the acronym for « Société de Participations Financières »  i.e. « Financial Shareholding Company » and refers to holding companies with the purpose of holding and managing participating interest in affiliated undertakings. Besides these holding activities, the SOPARFI might as well carry out any other object be it commercial, real estate or industrial providing that it has the corresponding business license for such other activity.

The SOPARFI is therefore subject to the standard tax and legal framework.

2. Eligible Investors

The shares of a SOPARFI are not restricted to any particular type of shareholder. The shares maybe subscribed by an individual, a group of individuals or any type of corporate shareholders.

3. Capital requirement

  • Upon incorporation, the SOPARFI set up as SA (“Société Anonyme”) or SCA (“Société en Commandite par Actions”) must have a minimum capital of EUR 30,000 whereas a SOPARFI set up with the form of SARL (“Société à Responsabilité Limitée”) must have a minimum capital of EUR 12,000. No minimum applies to COOP SA (“Société Coopérative organisée comme une Société Anonyme”).
  • SOPARFI’s are subject to the Company Law and accordingly SA, SCA and SàRL must constitute in their balance sheet a legal reserve by allocating every year to that reserve account an amount equal to 5% of the profit after deduction of losses carried over from previous years. Such obligation remains until the legal reserve reaches 10% of the share capital.

4. Legal forms

A SOPARFI may elect for any of the below legal form, i.e.:

  • Public Limited Company (Société Anonyme)
  • Limited Company (SARL)
  • Simplified Public Limited Company (SAS)
  • Partnership Limited by Shares (SCA)
  • Cooperative Company organized as a Public Limited Company (COOPSA)

In practice, most  common legal forms preferred are the SA or Sàrl (see our comparative table).

5. Authorization and supervision

  • There is no need for a SOPARFI to apply for any authorization of establishment as long as it does not carry out commercial or financial activities, nor make a public offering of its shares. Accordingly, the SOPARFI will limit its scope of activities to holdingparticipation, receiving and granting loans to affiliated entities, or provide management services to controlled subsidiaries
  • SOPARFI does not as such fall in the scope of any supervisory authority

6. Investment policy and corporate purpose

A SOPARFI is not subject to any diversification requirement. A SOPARFI may invest in any type of assets with no limitation.

7. Legal and regulatory framework

  •  A SOPARFI must maintain its registered office within the territory of the Grand Duchy of Luxembourg. It may however happen in specific situations that the registered office of the company would remain abroad, like when transferring the company to Luxembourg from a foreign country that considers the place of incorporation as registered office (for instance like the Netherlands). The SOPARFI is subject to the common legal and tax framework.

8. Tax regime

  • As mentioned above, the SOPARFI is subject to general legal and tax framework. As from 2020, they are subject to a corporate tax rate of 24,94 %, with a minimum of Net Worth Tax of 4.815,- EUR (for financial companies)
  • Dividends collected from qualified participation and capital gains derived from the sale of such qualified participation by a SOPARFI are tax exempt in Luxembourg. In such context, qualified participation means a stable and important participation held in another corporation subject to a normal tax regime (comparable to the Luxembourg tax regime). In the previous sentence, stable holding means a continuous 12 months holding period, and important holding means either a 10 % participation. In case the threshold of 10 % participation is not reached,the law provides for an alternative reference to consider the participation held at a percentage lower that 10 % is however important, ie:
    • in case of a dividend collected, the participation will be regarded as important if its acquisition price reaches EUR 1.200.000
    • in case of a gain realized upon sale, the participation will be regarded as important if its acquisition price reaches EUR 6.000.000
  • The SOPARFI tax exemption is subject to recapture rules in case of previously made depreciation on the participation or on a loan granted to that same participation.
  • Liquidation proceeds is deemed to be a dividend and are exempted under the same above mentioned condition
  • Dividends paid are exempt from withholding tax providing that
    • They are paid to a fully taxable company residing in the EU or a Treaty country(lien vers liste of Double tax Treaties)
    • At the time of the distribution, the shareholding in the SOPARFI represents 10% or the acquisition is at least 1.200.000 EUR
    • Such threshold of shareholding is maintained or will be maintained for an uninterrupted period of 12 months
  • Capital gain derived from the sale of the shares held in the SOPARFI are not subject to any tax if it is realized after more that 6 months of holding by non residents
  • Liquidation proceeds are not subject to any withholding tax without any condition
  • The SOPAFI may have to register for VAT purposes depending on the activities carried out

9. Amendment of the share capital

  • Issue of new shares by the SPF is ruled by the Law and the statutes, and is reserved to eligible investors only (individuals or assimilated). The legal form adopted by teh SPF and the possible existence of pre emptive rights or restriction on transfer of shares provided for in the statutes are thus the limitations to be considered.
  • At the occasion of a share capital increase, newly issued shares may be paid in either in cash or in kind. Contribution of industry is not allowed.

Contribution to the share capital without issuance of shares is also possible. No notarial deed is required and the documentation may be signed under private seal.

10. Financial statements – Net Asset valuation

  • Annual accounts must be submitted to the approval by the shareholders within 6 months from the closing date and filed with the Registry of Trade and Companies in Luxembourg within a month after such approval by the shareholders. (check out our key dates calendar= lien vers key dates calendar)
  • SOPARFIs do not have to issue a Net Asset Valuation like investment vehicles offered to public investors have to provide.
  • For the annual accounts, the valuation method is the lowest of acquisition price or market value at the date of the closing of the social year.
  • Accounting law also allows the fair market value method for the valuation of financial instruments.

11. Dividends payments

  • Dividend payments are subject to a decision to be adopted by the shareholders during a meeting to which annual accounts are submitted for approval.
  • Interim dividends may also be decided through a board of directors (S.A.) or a board of managers (S.à.r.l), subject to specific conditions laid out in a law issued in 2009.

12. Central administration / domiciliation

  • A SOPARFI is not required to appoint a central administrative agent.
  • It needs to occupy adequate offices when it carries out activities subject to a business licence

13. Compartments

  • There is no such segregation in an SPF like in a SICAR or a SIF that have compartments to separate investments from each other.
  • SOPARFI may issue tracking shares (each class of shares would then correspond to a specific investment / asset) in order to allocate specific income to a given investor.

14. Depositary bank

There is no such obligation imposed to a SOPARFI to have its assets deposited with a custodian bank.

The private wealth management company

1. Introduction

Luxembourg has introduced thePrivate Wealth Management Company (hereafter “SPF”) by the law of May 8, 2007.

The SPF is designed to be a portfolio management vehicle dedicated to individuals, and offering a tax exempt regime deferring taxation to the time the profits realized by the SPF are distributed to the shareholders.

2. Eligible Investors

Only individuals or entities acting on behalf of individuals (fiduciary estate, trusts and the like) may hold shares in a SPF.

Accordingly, most SPF are set up either by individuals for their own purpose, or by vehicles like  a trust, foundation or “stichting administratie kantoor”, or sometimes a group of individuals gathered as an investment club.  Shares of a SPF may not be listed on a stock market.

3. Capital requirement

  • Upon incorporation, the SPF set up as a Société Anonyme (Public Limited Corporation) or as a Société en Commandite par Actions (Limited Partnership by Shares) must have a minimum capital of EUR 30.000 whereas SPF set up with the form of a Société à Responsabilité Limitée (Limited Liability Corporation) must have a minimum capital of EUR 12.000.
  • SPF are subject to the Company Law and accordingly must constitute in their annual accounts a legal reserve by allocating every year to that reserve account an amount equal to 5% of the profit after deduction of losses carried over from previous years. Such obligation remains until the legal reserve reaches 10% of the share capital.

4. Legal forms

Three legal forms which can be adopted by the SPF, i.e.:

  • Public Limited Company (SA)
  • Limited Liability Company (SARL)
  • Partnership Limited by Shares (SCA)

5. Authorization and supervision

  • The set up of an SPF is not subject to any prior authorization and the supervisory administration of SPF is the Indirect Tax Administration (i.e. “Administration de l’Enregistrement et des Domaines”).
  • The domiciliation agent of the SPF must ensure that the shares of the SPF are duly held by eligible investors.
  • The SPF acts as paying agent when held by Luxembourg resident individual should it pay interest

6. Investment policy and corporate purpose

  • Activities of the SPF are strictly limited to the management of private wealth as defined by law, which excludes:
    • any commercial activities
    • holding of real estate
    • grant a loan, even to a participated or controlled company.
  • On the other hand, SPF may
    • hold a participation, without interfering in the conduct of the activities of such participation
    • invest in almost any kind of financial assets (metal, currencies, securities such as bonds or shares, …)

7. Legal and regulatory constraints

SPF must maintain its registered office within the territory of the Grand Duchy of Luxembourg. It may however happen in specific situations that the registered office of the company would remain abroad, like when transferring the company to Luxembourg from a foreign country that considers the place of incorporation as registered office (for instance like the Netherlands).

8. Tax regime

  • A SPF is tax exempt, and therefore not subject to corporate income tax, municipal business tax and net wealth tax.
  • A SPF is subject to an annual subscription duty calculated at a rate of 0,25% on the aggregate share capital and share premium and increased by the amount exceeding 8 times of the total of the share capital + the share premium. Such annual tax has a minimum of EUR 100 and is limited to a maximum of EUR 125.000 per year.
  • For the first year of existence of the SPF as well as for the year during which it is liquidated, a pro rata basis applies.
  • No withholding tax is levied on dividends paid by a SPF
  • Dividends collected by a SPF do not enjoy the benefit of treaties for the avoidance of double taxation, and are therefore subject to a withholding levied at source at a rate depending on the tax legislation of the country from which such dividend payment arises.
  • Dividend distributed by the SPF to resident shareholder do not benefit from tax reduction in the hands of the recipient as provided for in the Luxembourg Income Tax Law. Such dividends are therefore fully taxable in the hands of Luxembourg residents.
  • Capital gains at the occasion of the sale of shares held in a SPF by non-resident individuals are exempt from taxation in Luxembourg subject to certain conditions.

9. Amendment of the share capital

  • Issue of new shares by the SPF is ruled by the Law and the statutes, and is reserved to eligible investorsonly (individuals or assimilated). Thelegal form adopted by the SPFand thepossibleexistence of pre emptive rights or restriction on transfer of shares provided for in the statutes are thus the limitations to be considered.
  • At the occasion of a share capital increase, newly issued shares may be paid in either in cash or in kind.
  • Contribution to equity accounts of the SPF without issuance of shares is also possible. In such operation no notarial deed will be necessary and the documentation may be signed under private seal.

10. Financial statements – Net Asset valuation

  • Annual accounts must be submitted to the approval by the shareholders within 6 months from the closing date and filed with the Registry of Trade and Companies in Luxembourg within a month after such approval by the shareholders. (check out our key dates calendar= lien vers key dates calendar)
  • SPF do not have to issue a Net Asset Valuation like investment vehicles offered to public investors have to provide.
  • For the annual accounts, the valuation method is the lowest of acquisition price or market value at the date of the closing of the social year.
  • Accounting law also allows the fair market value method for the valuation of financial instruments.

11. Dividends payments

  • Dividend payments are subject to a decision to be adopted by the shareholders during a meeting to which annual accounts are submitted for approval.
  • Interim dividends may also be decided through a board of directors (S.A.) or a board of managers (S.à.r.l), subject to specific conditions laid down in a law issued in 2009.

12. Central administration / domiciliation

Being subject to a light regulation, SPF do not know the concept of centraladministration meaning that the administration of an SPF mainly consists in providing a registered address, accounting services and tax services.

13. Compartments

  • There is no such segregation in an SPF like in a SICAR or a SIF that have compartments to separate investments from each other.

SPF may issue tracking shares (each class of shares would then correspond to a specific investment / asset) in order to allocate specific income to a given investor.

14. Depositary bank

There is no such obligation imposed to an SPF to have its assets deposited with a custodian bank.

Securitization in Luxembourg

1. Introduction

The main purpose of the Luxembourg Securitization Law is to offer a strong legal and a tax neutral environment for securitization transactions. Securitization is a technical scheme by which a company can remove a risky asset from its balance sheet. This company is called the initiator or the originator. In that transaction, another party to the deal will be the securitization vehicle which will acquire the risky asset and will finance such acquisition by the issue of securities (shares or bonds) to be placed with investors.

The Securitization Vehicle (hereinafter referred to as “SV”) will acquire the risky asset most of the time with a discount which will be part of the return or risk (the so-called «r») of the investor.

A securitization transaction can be depicted as follows :

The securitization has been introduced by the law of March 22, 2004, and has been amended several times since then.

An SV may be either regulated and supervised by the controller of the Financial Sector in Luxembourg (so-called CSSF) or not (for details see below under “5. Authorization and supervision”).

2. Eligible Investors

As is the case for the SOPARFI, investment in the shares or other securities issued by the SV is not limited to any particular type of investor. Shares and other securities can be subscribed by an individual, a group of individuals or any type of corporate entity.

3. Capital requirement

Upon incorporation, capital requirement will depend on the legal form of corporation adopted, ie:

  • As a Société Anonyme, or Société en Commandite par Actions the SV must have a minimum capital of EUR 30.000
  • As a Société à Responsabilité Limitée, the SV must have a minimum capital of EUR 12.000
  • No minimum capital applies for Cooperative Company organized as a Public Limited Company

SV must allocate to a legal reserve an amount equal to 5% of the annual profit until such legal reserve reaches 10% of the share capital.

4. Legal forms

An SV may be incorporated either under the form of a mutual fund (FCP) or as a corporate vehicle one out of the following legal forms, i.e.:

  • Public Limited Company (SA)
  • Limited Company (SARL)
  • Partnership Limited by Shares (SCA)
  • Cooperative Company organized as a Public Limited Company (SCoSA)

The most usual legal forms preferred are the SA or Sàrl (see our comparative table) due to the flexibility of those legal forms.

5. Authorization and supervision

As a basic principle, the SV is not subject to a prior authorization or to any supervision unless it issues securities offer to the public on a continuous basis. The meaning of « continuous basis » is not defined by law, and according to CSSF (“Commission de Surveillance du Secteur Financier”), which is the Luxembourg supervisory authority in charge of the Financial Sector activities, more than 3 issues per year would qualify as issuing on a continuous basis. Regarding the « offer to the public», the Securitization Law makes a distinction between institutional or qualified investors and non-professional customers.

In case, the SV cumulates both of issuing on a continuous basis and offering to public, it becomes a “regulated” entity and falls under the supervision of CSSF.

As a consequence of such supervision, the SV will have to file with CSSF an application for license before the SV may be active, and will have to elect a custodian bank where to deposit its assets.

For such regulated SVs, all people involved in the management of the entity will also have to be approved by CSSF.

6. Investment policy and corporate purpose

The scope of securitization is very broad, and in fact, almost any asset is eligible for investment by the SV; It can be commercial claims, portfolio of securities, real estate, intellectual property, commitments, etc.

There is no diversification requirement, so that an SV may invest in any type of assets without limitation. It however may not involve itself in the activities of the underlying entities; this rule is meant to avoid that the SV would itself be at risk.

7. Legal and regulatory constraints

In principle, the SV is immune from insolvency proceedings since Luxembourg Securitization Law promotes the validity of clauses by which the investors and creditors waive their right to submit a petition for the opening of an insolvency procedure against the securitization vehicle. Such legislation also provides for statutory limited recourse provisions on top of those limited recourse clauses that may be part of agreements concluded with investors.

A subordination clause may also complete the above mentioned provisions. As a result of this subordination clause, rights of investors and creditors may be subordinated to the prior payments of debts and other securities of the SV
The head office of the registered office of the management company must be situated in Luxembourg.

8. Tax regime

Transparent entities

  • SV’s incorporated as mutual fund are transparent for tax purposes and have no tax personality. Any income received by such SV would then be deemed to be allocated to the investors in proportion of their participation in the SV.
  • Taxation at the level of the investors will depend on the tax rules of their country of residence.
  • Distributions of profit made by the SVs to its investors are not subject to any withholding tax.

Corporations

  • SVs incorporated as share capital company are subject to the Corporate Income Tax (CIT) and Municipal Business Tax (MBT). They are exempt from Net Wealth Tax (NWT).
  • SV’s know no thin capitalization rules, nor any re-characterization of profit sharing interest as dividend.
  • Any commitment taken by the SV towards any debtor or investors are deductible from the tax base of the SVs. That is to say, interest, profit participating interest, or dividend distributions are commonly regarded as a commitment and are accordingly tax deductible at the level of the SV.
  • Dividends and liquidation proceeds distributed by the SV are not subject to any withholding tax.

9. Amendment of the share capital

  • Unless otherwise provided by the statutes or in some special cases by law, a SV may issue new shares freely. The type of legal form and the existence of pre emptive rights or restriction on transfer of shares may influence the increase of the share capital.
  • The contribution can either be in cash or in kind, and formalities connected thereto will depend on the legal form of the SV.

10. Financial statements – Net Asset valuation

  • There is no asset valuation required for SVs incorporated as a corporation, unless statutes provide for it. A Net Asset Value is calculated for mutual funds.
  • Lux GAAP applies for the valuation of the assets in the annual accounts, i.e. the valuation method is the lowest of acquisition price or market value at the date of the closing of the social year. Accordingly, a decrease of value on any asset, and even when not realized, is booked whereas gains must be realized before they may be booked as a profit.
  • Accounting law also allows the fair market value method for the valuation of financial instruments.

11. Dividends payments

  • Most of the time, clauses in the statutes of the SV already provide for a predefined allocation of the results. In the absence of such clauses, dividend distributions are decided by the annual general meeting of shareholders and / or investors as provided for in the law applicable to the legal form adopted by the SV.
  • Interim dividends may also be decided through a board of directors (S.A.) or a board of managers (S.à.r.l), subject to specific conditions laid out in the law on Trading Companies.

12. Central administration / domiciliation

  • Non-regulated SV’s do not need to appoint a central administrative agent.
  • Any SV must have at disposal adequate office and ressources for the purpose of its activities. A registered address with accounting and tax services located in Luxembourg will most of the time be sufficient provided that the location of the actual management of the company is in Luxembourg (place where management meetings are held and decisions are adopted).

13. Compartments

  • An SV may create segregated compartments like a SICAR or a SIF would do.
  • Each compartment will have its own investment policy, characteristics and rules.
  • Each compartment is deemed to be a separate entity from the others unless otherwise provided in the articles of association. Accordingly, the liquidation of a compartment will not affect other compartments of the same SV, unless specific provisions in the SV rules provide for a different treatment.
  • Rights of investors and of creditors are defined by law and the statutes which by default provide for a strict limitation of such rights to be linked to the assets held by the compartment in which such investors and creditors are connected.

14. Depositary bank

The use of a custodian bank is only required for regulated SVs.