Luxembourg: Holding Companies and Soparfi - The 1929 Holding Company

Last Updated: 10 March 1995
The 1929 Holding Company Table of Contents
	A. Legal Background 

	B. Definition and Field of operation 

	C. Prohibited Activities 

	D. Penalties 

	E. Different types of Holding companies

	1. Activities of a classic holding company 

	 - The ordinary controlling or management holding company 
	 - The patent holding company 
	 - The promoting holding company
	 - The family holding company 

	2. Billionaire Holding company ("Holding Milliardaire")

	3. Finance Holding companies 
	 - Activities of the finance holding companies 
	 - Conditions to be fulfilled in order to qualify for the finance 
	   holding status 

	F. Fiscal Status 

	1) exemption from tax on profits from income or capital gains 
	2) taxes due 
	- droit d'apport (contribution duty)
	- taxe d'abonnement (subscription tax) 
	3) exclusion from double tax treaty protection 
	4) the special tax regime for billionaire holding companies 
A. Legal background

A holding company is not a specific corporate form, and the general provisions of the commercial code and the 1915 Company Act apply to it.

Also, the basic law of July 31, 1929 only defines the fiscal status of holding companies.

The Luxembourg authorities' intention was to eliminate the double taxation of income originating from securities with respect to a lack of Double Taxation Agreements at that time.

B. Definition and field of operation

The 1929 Law defines a holding company as a company whose statutory object are the acquisition - in any form whatever - and management of participations in other Luxembourg or foreign corporations without exercising a commercial or industrial activity.

The holding company is largely exempt from tax but is subject to considerable restrictions on its activities.

Acquisition and management of participations

The holding company is permitted to acquire, manage and sell investments in Luxembourg or foreign corporations.

It may own participations in partnerships provided the following conditions are met:
	- the minimum share capital of the holding company is LUF 50 
	  million ; 
	- the holding company must take no administration or management 
	  responsibilities in the partnership; 
	- the holding company can only act as a limited partner and not 
	  as a general partner; 
	- the partnership must not have any commercial or industrial 
	- the partnership may only take investments in corporations and 
	  is not allowed to borrow funds; 

Acquisition and issuance of bonds

A holding company is also allowed to keep a portfolio of bonds issued by public or private entities of Luxembourg or foreign nationality as well as cash and foreign currencies, gold, negotiable securities and place funds on deposit with financial institutions. (No withholding tax on interest of bank deposits). It may also issue bonds by public or private subscription . In this case the authorities have limited the proportion of debt to equity by reference to the following ratios:
	Bonds/ totally paid- in capital 10:1
	Other liabilities/ subscribed capital 3:1

It should be noted that these ratios do not apply to billionaire holding companies.

Holding of trademarks and patents

The acquisition of trademarks and patents and their exploitation by granting licences thereon, is permitted.

However, the acquisition of licences to operate patents is prohibited unless such licences are related to patents that complement or supplement those owned by the holding company. Also, the holding company may not acquire copyrights or goodwill unless these rights relate to a patent of which they are a complement.

Real estate

Basically, direct ownership of real estate is prohibited. Nevertheless, a holding company may hold 100% participation in a real estate company which owns real estate.

Also, a holding company may own building and furniture necessary for carrying on its activity. It is even allowed to rent space to third or related parties in case of surplus accommodation, but such rental activity must never become the main activity of the company.

The financing of companies

The holding company is allowed to grant short, medium and long term loans to its direct subsidiaries and to receive interest. Unlike finance holding companies (see below Section. E.3 "Finance Holding Companies") a "classic" 1929 Holding company may not grant loans to its parent company , indirect subsidiary or third parties as such activity is not considered to be related to the management of its investments.

The holding company may also grant guaranties to direct subsidiaries and invoice a commission. However, it may not advance funds to its own shareholders.

Management control

The holding company is allowed to render administrative, financial or consulting services to direct subsidiaries. The condition is that such activity must be a subordinate activity and that the holding company must not take part in the management of that subsidiary.

Also, the company must not take any profit from this activity and may only ask for reimbursement of the costs.

C. Prohibited activities

The provisions of the 1929 law restrict the activities of holding companies to the management of investments.

As a consequence, the following activities are strictly prohibited:
	- any form of commercial or industrial operations; 
	- the rendering of administrative services, except for direct 
	  subsidiaries of the holding company; 
	- the management of assets belonging to third parties; 
	- the ownership of real estate, except buildings and furniture 
	  necessary for its activity; 
	- the intervention in the management of its subsidiary; 	
	- the financing by loans or guaranties of companies which are not 
	  direct subsidiaries of the holding company. 
D. Penalties

Luxembourg holding companies are subject to the supervision of the Revenue Authorities ("Administration de l'Enregistrement"). This right of supervision is limited to the examination of all facts and figures relating to the fiscal status of the holding company.

Following article 1 of the 1929 law, if at a date subsequent to that of the deed of incorporation of a holding company, the "Administration de l'Enregistrement" finds, when checking the books without removing them, that the company is not or no longer fulfilling the conditions required for the benefit of the special tax status established by the 1929 law, the provisions of this law shall cease to apply to that company as from the date of non observance of these conditions. In addition, there shall be collected a fiscal penalty of 2 francs per 1000 francs on the actual share capital.

Any refusal to disclose the books shall be punished by a fine of 25 centimes per thousand francs of the said capital.

E. Different types of holding companies

1) Activities of a "classic" holding company

The 1929 law on holding companies offers a wide range of activities and, according to their purpose, four categories of "classic" holding companies may be distinguished:

The ordinary controlling or management holding company

The activity of this type of holding company will consist of controlling and co- ordinating the multinational subsidiaries of an industrial and/or commercial group.

The patent holding company

The object of this company will be acquisition of patents and their exploitation via its subsidiaries. A holding company may never exercise any commercial or industrial activity in relation to the patent. It may only grant licences to related or unrelated companies.

A patent holding company may also acquire a copyright or know- how, but only in relation to a patent owned by the company.

The promoting holding company

As such, a holding company may subscribe shares in companies which are in the course of formation, in order to provide the start- up capital required by companies which are unable to drain these funds from other sources.

The family holding company

As a family company, a holding company can prevent the dispersal of family assets and facilitate the management of family interest.

2) Billionaire Holding Companies ("Holding Milliardaire")

Under a Grand- Ducal decree of December 17th, 1938, a special tax treatment is granted to so- called Billionaire Holding companies, i.e. holding companies whose only funds are of at least LUF 1 billion.

Once a billionaire holding company has opted for this special tax status, such tax treatment is mandatory for the remaining life of the company, unless the minimum conditions for a billionaire holding company cease to exist.

Where the specific conditions for finance holding companies are met, a billionaire holding company may also exercise the activities of a finance holding company.

3) Finance holding companies

The 1929 law only allows holding companies to grant loans to direct subsidiaries. By circular 11/5020 dated September 9, 1965 the Luxembourg authorities extended the beneficial tax treatment of holding companies and allowed companies which acquire the status of a finance holding company ( "Holding de financement") to provide a wider range of services to group companies, even if they do not control them directly, provided they invest at least 10% of their subscribed capital in shares issued by group companies.

Are considered as group companies on the one hand all companies grouped under the same name which constitutes their logo of reciprocal dependence, and on the other hand all companies in which the companies belonging to one group have a cumulated investment of at least 25% and with whom they have regular business relations. (Decision of the Minister of Finance of October 6, 1970, no. 46.51/5).

Activities of the finance holding company

Finance holding companies may perform for the benefit of group companies following services, without loosing the privilege of the 1929 law on holding companies.
	- the granting of loans 
	- the granting of guaranties
	- the rendering of administrative and consulting services under 
	  the condition that no profit is derived from such activity
	- the activity of a "classic" holding company besides its 
	  financing activity (decision of the Minister of Finance of 
	  October 6, 1970, No.46.51/5)
Conditions to be fulfilled in order to qualify for the finance holding status:

The holding company must be incorporated as a societe anonyme (public limited company) or a societe à responsibilite limitee (private limited company),

The parent company or the member companies of the same group must act as founders of the company in the articles of incorporation,

The shares of the company must not be transferred to persons or entities who are not members of the group until all loans are totally repaid,

The holding company's portfolio may only contain shares or bonds issued by companies which are members of the same group,

The subscribed share capital must be at least LUF 50 million (decision of the Secretary of State for Finance of September 24, 1991).

The finance holding company may use its funds only for the benefit of companies of the group to which it belongs. The articles of association must provide expressis verbis for this restriction.

F. Fiscal regime

1- Exemption from tax on profits from income or capital gains

The law of July 31, 1929 introduced a special regime exonerating holding companies of all income taxes. Accordingly, they are not taxable on profits derived from royalties, dividends or interest, nor on realised capital gains.

As regards transfer of shares, no transfer tax is levied. There are no taxes due on the proceeds of liquidation of a Luxembourg holding company.

Also, there is no withholding tax on dividends distributed to shareholders of a Luxembourg holding company and on interest paid on bonds.

2- Taxes due

Holding companies are subject only to the taxes specified in the 1929 law, namely the so-called "droit d'apport" (capital contribution tax) and "taxe d'abonnement" (subscription duty).

"Droit d'apport" (contribution duty)

At the time of incorporation , holding companies are charged a capital contribution duty at a rate of 1% of the subscribed capital.

Subsequent capital increases - except capital increases realised by incorporation of reserves or profits carried forward - will also be subject to the capital contribution duty.

"Taxe d'abonnement" (subscription tax)

The subscription tax is computed at the rate of 0,20% on the value of the shares issued by the holding company, with a minimum of LUF 2000.- per annum. The tax is payable in quarterly instalments.

If the shares are quoted, the subscription tax is levied on the basis of their stock exchange value. In the absence of a stock exchange quotation, the tax is assessed on the paid- in amount of the capital.

If a holding company distributed a dividend during any fiscal year which exceeds 10% of the value of shares, the subscription tax for the year in question is calculated on an amount equal to ten times the distributed dividend.

Profits carried forward or written into reserves are not taken into account for the assessment of the subscription tax. The base for computing the subscription tax liability may be reduced by application to the Administration de l'Enregistrement in case of losses sustained by the company.

3 - Exclusion form Double Tax Treaty Protection

Due to the special tax treatment that Luxembourg holding companies enjoy, they are not covered by treaties for the avoidance of double taxation to which the Grand- Duchy is a party. Thus, taxes withheld on income derived from domestic or foreign sources cannot be recovered.

4 - The special tax regime for "billionaire" holding companies

Under the Grand- Ducal decree of December 17, 1938 holding companies whose funds are of at least LUF 1 billion may opt for a special tax status. Where this special status is chosen, the taxes to which standard holding companies are subject are replaced by a tax on interest and dividends distributed by the company and on the remuneration and fees paid to directors, auditors and liquidators residing less than 6 months a year in Luxembourg. The following rates apply :

A ) If the total interest paid during the financial year to the holders of bonds and similar securities is equal to or greater than LUF 100 million :

a) 3% of the total interest paid to such holders of bonds and similar securities;
b) 1,8% on dividends, directors' fees and remuneration up to LUF 50 million;
c) 0,1% on remaining dividends, directors' fees and remuneration.

B ) If the total interest paid during the financial year to the holders of bonds and similar securities is less than LUF 100 million:

a) 3% on the interest paid to such holders of bonds and similar securities;
b) 3% on dividends, directors' fees and remuneration up to an amount equal to the difference
between LUF 100 million and the amount of interest paid under a);
c) 1,8% on remaining dividends, directors' fees and remuneration (i.e. on the portion of interest,
dividends and other income combined in excess of LUF 100 million up to LUF 50 million;
d) 0,1% on remaining dividends, directors' fees and remuneration (i.e. on the amount in excess
of LUF 50 million).

The special regime of billionaire holding company is not granted automatically by the Luxembourg authorities. Companies which want to be granted the billionaire holding status must apply to the Administration de l'Enregistrement, attaching their last balance sheet to the application.

Once a holding company has opted for the billionaire holding status, such decision becomes irrevocable.

Holding companies are not permitted to switch from one regime to another from one year to the next.
According to a law dated November 30, 1974, the minimum annual income tax liability of a billionaire holding company is LUF 2 million. This amount corresponds to a subscription tax payable under the ordinary fiscal regime of holding companies on a capital of LUF 1 billion.

It should be added that the debt to equity ratios mentioned in the section II.B do not apply to billionaire holding companies.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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