Trading Company vs Holding Company in Luxembourg

Even though the Luxembourg holding company is constituted in the same manner as a trading company, its main objective is to control other companies foreign or local by acquiring their shares and not specifically perform any commercial activities. The exercise of a commercial activity, however, is subject to an authorization issued by the Ministry of Middle Classes, based on the reputation and professional qualifications of the head of the company.

Constituted on various share capitals, the minimum share capital of trading and holding companies is 12,500 EUR (if constituted as Luxembourg SARL) and 31,000 EUR (if constituted as a Luxembourg SA). In the case of a holding company only two forms of shares are permissible: nominal shares and bearer shares and a shares registry is not required.

Both types of entities are established in the same manner: the articles of association are drafted in front of a notary in front of the Registry of the Court the District. Our lawyers in Luxembourg can assist with the registration of both types of companies.

 Types of holding companies in Luxembourg

The holding company in Luxembourg falls under special separated regimes, which is why they can be divided into several categories. These are:

• -       the operative holding (head office holding);
• -       the financial holding (the SOPARFI);
• -       the management holding (strategy holding);
• -       the organizational holding (structural holding).

The most advantageous type of holding structure is the SOPARFI because it enjoys a special taxation system. However, in 2007 the Luxembourg Commercial Law also included wealth management companies in the special tax status for holding companies, and now family businesses can also be deemed SOPARFIs.

One of the main reasons for creating a holding company in Luxembourg and registering is as a public company is the fact that the Grand Duchy allows single ownership; therefore, the SA may have one shareholder no matter if it is set up a holding company or as a trading company in Luxembourg.

Our law firm in Luxembourg can offer more information on the laws governing holding companies in this country. The two main regions of Luxembourg are Oesling or Eisléck in the north and the Guttland ( Good Country in translation) in the south. The largest city in the nation is Luxembourg City. However, given that there are around 100,000 people living here, as an expat this is most likely the region you will also want to move to if you are interested in immigration to Luxembourg.

The trading company in Luxembourg

The Commercial Law distinguishes between two types of trading companies:

• -       the trading and service company which is governed by the Trading Company Law of 1915;
• -       the commercial association.

The trading and service company is designated for enterprisers who want to carry out commercial, trading or skill-related activities, while the commercial associations are not legal entities themselves. The trading company can be registered under any type of structure, just like the Luxembourg holding company, however it can employ other types of forms such as partnerships, cooperative societies and even European companies.

One of the greatest advantages of the trading company is the low to no redtape involved when registering this type of company in Luxembourg. The legislation also favors the establishment of trading and service companies in Luxembourg, especially considering the use of the European company structure which is recognized in other EU states. The administration of a trading company is simpler than in the case of other companies in Luxembourg. Trading companies are required to obtain Luxembourg EORI numbers.

The management of trading vs. holding company

The system of management in both trading and holding companies in Luxembourg are the same. The main body in a trading company and in a SOPARFI is the general meeting of shareholders which have powers to make or ratify acts concerning the company. It must be held each year, at least one general meeting in the common society, the day and time specified in the articles of association. The corporation is administered either by a board of directors composed of at least three members in case of a public limited company or one member in case of private limited company. The directors are appointed for a term not exceeding six years. The corporation can also be managed by a board consisting of a management board and a supervisory board. Depending on the size of the company, the general meeting shall appoint an auditor or an auditor responsible for auditing the financial statements for a period may not exceed six years.

The annual accounts of both trading and holding companies are submitted annually to shareholders and filed with the Registrar of the District Court. The notice of filing is published in the Grand Duchy of Luxembourg Gazette.

Unlike the trading companies, SOPARFI must submit the consolidated annual accounts if it holds the majority of voting rights in another company, if it has a minority of stakes but still controls another company under an agreement with other shareholders or if the company that owns a minority stake in another company has right to appoint or remove the majority of the Board.

We can also assist with VAT registration procedures in Luxembourg.

Withholding tax

The main advantage in front of the SOPARFI companies is that many taxes are exempt or minimized by the various double tax treaties signed by Luxembourg all over the years. Usually the dividends distributed by a Luxembourg company are in principle subject to withholding tax at a rate of 15%, but this may be reduced by the provisions of a double tax treaty.

Due to the participation exemption regime dividends paid by a Luxembourg company are not subject to withholding tax in Luxembourg if one of the below conditions is met: SOPARFI owns at least 10% of the capital of the subsidiary or the acquisition price of which amounted to at least1.2 million EUR, for a period of time of at least 12 months; if the recipient of the dividends is a fully taxable entity of Luxembourg which is resident in a state with which the Grand Duchy has a double tax agreement and which is subject to the income tax comparable to the Luxembourg corporate income tax, a joint stock company that it is taxed and resides in Switzerland, an EEA or EU country  resident which is fully subject to income tax comparable to the Luxembourg income tax.

For more information on the creation and management of Luxembourg trading companies as well as Luxembourg holding companies, please contact us via email or phone.