Watch the video with Alain Steichen and Pol Mellina:BSP Tax - Is a Luxembourg holding company suitable for personal investments?
Our lawyers will be discussing the question whether it is a good idea to hold personal or family investments through a Luxembourg holding company.
The reason why we are doing this video in English is mainly because we will be focusing on the perspective of a non-Luxembourg resident individual or family.
Luxembourg is particularly known in the world for its important financial centre, located in the heart of Europe and featuring a fund industry with assets under management of over 5 trillion euros in the beginning of 2023. It however also has a strong history as a jurisdiction for holding companies through which shareholders from all over the world invest in various types of assets. So, there sure must be something that makes Luxembourg interesting as a holding jurisdiction and most of you certainly immediately think about taxes.
Most marketing material you find on the internet will describe the Luxembourg holding company as being ‘tax efficient’. This is however only true if you hold the right type of assets through your Luxembourg entity. And that is essentially – in a personal or family wealth management context – what we would call ‘strategic participations’. These are participations in which you hold a substantial, at least 10%, stake in the share capital and which are held for period of more than 12 months.
Dividends distributed from these shareholdings and also capital gains realised upon disposal of shares forming part of these participations would typically be exempt from all corporate taxes – under the condition however that the subsidiary is subject to appropriate taxation in the jurisdiction where it is established. The Luxembourg holding company would also be exempt from wealth tax on these strategic participations.
This effectively allows an investor to reallocate funds distributed by one subsidiary or derived from a full or partial exit of one investment to another strategic participation without incurring any taxation in Luxembourg. In other words, there is a tax deferral effect, which leaves you with more money to work with and possibly – if things go well – realise additional returns on investment.
The tax deferral effect ends only once the cash is actually distributed out of the holding company to the individual shareholders. At that point in time, Luxembourg would levy a withholding tax of 15%, unless the shareholders are resident in a country with which Luxembourg has concluded a double tax treaty which provides for a reduced withholding tax rate. One example here is the brand new double tax treaty signed with the UK, which provides for 0% withholding tax on dividends paid to UK resident shareholders. This treaty is currently going through the ratification process and will enter into force shortly.
And what if the individual shareholders sell their shares in the Luxembourg holding company?
There is in principle no Luxembourg capital gains taxation for non-resident shareholders, if they sell their shares after a holding period of at least 6 months. Since we are talking about holding companies for strategic participations here, we can safely assume that this condition will in practice always be met.
What about investments in other assets, which are not strategic participations? Are you implying that a Luxembourg holding company is not the right type of entity for liquid assets like stocks or bonds bought on the stock exchange?
To a certain extent, yes. Any income derived from these types of assets, which do not meet the conditions for the participation exemption, would generally be taxable if it was realised by a Luxembourg holding company. The aggregate applicable tax rate – including corporate income tax and municipal business tax – can go up to roughly 25%. On top of that, these assets would also be subject to an annual net wealth tax payable by the holding company.
Only certain large equity positions with an acquisition cost of at least 1.2 million euros may benefit from exemptions covering dividends and net wealth tax. For the capital gains exemption, the acquisition cost threshold goes up to 6 million euros.
That’s the bad news. But the good news is that Luxembourg has introduced fifteen years ago a specific family wealth management company regime, the so-called société de patrimoine familial, which is designed to hold bankable investments in an almost tax neutral manner. Contrary to the ordinary holding company, the family wealth management company is exempt from all corporate taxes, including net wealth tax. Dividend distributions made by it are free of withholding tax and capital gains realised by non-resident shareholders upon disposal of shares are not subject to tax in Luxembourg either. It only pays a small annual subscription tax calculated on the amount of its share capital and share premium.
With the family wealth management company, the non-Luxembourg resident individual investor can thus make use of a tool that basically allows for a similar tax deferral for liquid investments than the one we previously identified as the main advantage of an ordinary holding company when it comes to strategic participations.
What about the recent changes in the international tax environment at the level of the OECD and the EU? Do they have any major impact on how you look at Luxembourg holding companies nowadays?
The key words are ‘substance’ and ‘anti-abuse rules’. It would of course go way too far to deal with these aspects in detail today, but we can say that the age of letterbox companies – whether they are in Luxembourg or anywhere in the world by the way – belongs to the past.
Today, a holding company needs to have adequate substance within the jurisdiction where it is established. That means that a Luxembourg holding company needs to have a properly functioning board of managers that regularly convenes, discusses and takes all important decisions on Luxembourg soil. Generally, a majority of managers is actually resident in Luxembourg or in the border region. The managers also need to have appropriate qualification or experience and actually exercise their decision-making powers. The company also typically needs to have an operating bank account, either in Luxembourg or at least in the EU. And some may want to have dedicated office space and employees as well, if the volume of investments and transactions requires them to.
Beyond these more general guidelines, binding and precise rules on substance may be enacted in the very near future, since a proposed directive on this topic is being discussed at the level of the European Union while we speak. But more on that another time.