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The SOPARFI, Financial Holdings Corporation

Luxembourg SOPARFI Incorporartion Companies and officesSOPARFI regime was introduced on 24 December 1990 by a Grand Ducal regulation regarding the tax benefits of parent companies and subsidiaries, as defined by the Law of 10 August 1915 (Section 12). Its purpose is to take advantage of international agreements on double taxation.
Thus, the SOPARFI falls within the Parent-Subsidiary Directive regime.

The concept of the SOPARFI, an acronym created by professionals in the field, but not one which appears in any text, combines a tax notion (Parent-Subsidiary regime) and an economic one (activity mainly but not exclusively devoted to the holdings management).
Thus, the SOPARFI may have a holding activity and a business activity subject to income tax and VAT. It is therefore a mixed holding company.
In relation to the holding activity (pure SOPARFI), the tax measures are as follows:

Exemption of dividends received:
Dividends paid out by a corporation, whether a resident or not (the subsidiary), are tax exempt for the SOPARFI (parent company), provided that:
1. the parent is a corporation domiciled is in Luxembourg and holding a stake of at least 10% stake in the subsidiary (or an investment of 1.2 million euros);
2. the subsidiary is a fully taxable domestic or foreign company, subject to income tax comparable to that which applies in Luxembourg (at least 11%);
3. the parent company holds (or is committed to holding) a stake of 10% (or 0.6 million euros) for at least 12 months.

Exemption of capital gains on share sales:
Under the Grand Ducal Regulation of 21 December 2001, the portion of exempted revenues obtained by a SOPARFI was extended to capital gains made on the sale of shares.
Capital gains are tax exempt for the SOPARFI, provided that:
1. the stake in the subsidiary’s capital is at least 10%, or the purchase price is at least 6 million euros;
2. the subsidiary is a fully-taxable company, subject to a tax equal to the communal income tax (IRC), of at least 11%;
3. the parent company has held a continuous 10% stake in the subsidiary for at least 12 months.

Important Observations
Note that operating expenses which are directly related to the management or administration of investments are deductible so long as they do not exceed the exempted revenue: financing, study, management, revision, audit costs…
Impairments are allowable, provided they meet the usual legitimate conditions.
Dividends paid by the SOPARFI to its shareholder are exempt from the tax withholding (15%), so long as:
1. the SOPARFI’s parent company is domiciled in Europe and is fully taxable in its country of residence;
2. the SOPARFI’s parent company has held, for a period of at least 12 months, a 10% stake (or equivalent to 1.2 million euros).
International tax treaties may reduce the impact of the withholding tax levied by the SOPARFI when it distributes dividends to its shareholders.
Liquidating dividends paid to SOPARFI shareholders are fully exempt in Luxembourg, regardless of the shareholder.

Interested in Luxembourg SOPARFI incorporation? Contact us for further information.

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Abroad fiduciaire is a member of the Order of Chartered Accountants of Luxembourg