A Soparfi (Société de Participations Financières) is a financial holding company, and allows the coexistence of commercial and financial activities within the same structure. While the commercial activities are subject to tax under common law, the financial operations (receipt of dividends, capital grains) are, under certain conditions, tax-exempt.

 

Conditions to be fulfilled to benefit from tax exemption on dividends and capital gains

Conditions regarding the parent company:

A SOPARFI must be domiciled in Luxembourg and fully subject to Luxembourg taxation, though rhe Soparfi regime is also applicable to the permanent Luxembourg establishments of foreign companies.

Conditions regarding the subsidiary:

A substantial holding is required, i.e. equivalent to at least 10% of the subsidiary's total capital, or the purchase price of the holding must be at least  €1,200,000 (or €6,000,000 to gain tax exemption on capital gains). When the holding consists of similar shares acquired at different prices, the acquisition price may be calculated on the basis of the weighted average price method.

The holding must be held for at least twelve months, or the SOPARFI must undertake to hold it for at least twelve months.

The subsidiary must be a Luxembourg capital company fully subject to Luxembourg taxation, or a non-Luxembourg capital company fully subject to a tax corresponding to corporation tax, or a company domiciled in an EU Member State.

The holding must actually exist: a company in possession of a confirmed purchase option is not yet the owner of a holding, even in the event of the previous holder having deposited these shares as collateral with a third party. In the same vein, the mere fact of possessing the usufruct of the subsidiary's shares is, in most cases, insufficient.

Consequences of the Soparfi regime:

Tax exemption on dividends received:

Revenues deriving from the holdings (dividends received) are exempted from tax in the parent company (Art. 166 LIR (Luxembourg income tax law)). Thus, if the taxpayer makes a profit during the fiscal year, the exemption reduces taxable income. If by contrast the fiscal year ends with a loss, the exemption increases that loss.

Tax exemption of capital gains:

The capital gains made by a Soparfi are tax-exempt (cf. the Grand Duchy regulation of 21 December 2001 on the implementation of LIR Article 166.9)

The exemption covers all operations involving transfer of ownership, including the sale, provision and exchange of stocks.

When a holding is acquired via a share exchange, only that part of the capital gain exceeding the exchange value is exempt.

The consequences of exemption on the deductibility of expenses:

Operating expenses directly related to an exempted holding are fully deductible. However, any capital gains or dividends remain taxable up to this amount.

Taxation of commercial activities:

A SOPARFI's commercial activities are taxed under common law.

Taxation of dividends distributed by a SOPARFI :

Dividends distributed by a SOPARFI to its shareholders may be taxed at source at the rate of 15%, unless:

This distribution benefits a Luxembourg company fully liable to tax or a company domiciled in an EU Member State which undertakes to hold more than 10% of the capital (or a holding with a value of at least €1,200,000) of the distributing company for 12 months as of payment of the dividend.
Or this distribution of dividends corresponds to the distribution of the proceeds of liquidation;
Or this distribution of dividends benefits a company located in a State which has signed a tax treaty with the Grand-Duchy of Luxembourg (a lower rate of withholding tax)