The Grand-Duchy of Luxembourg is a small independent country of about 493.000 inhabitants located in the heart of Europe. Luxembourg is a founding member of the European Union and is the host country of several EU institutions, such as the European Court of Justice, the European Investment Bank, the European Investment Fund, Euratom, the European Communities Publication office and the European Court of Auditors.
Luxembourg is a constitutional monarchy. Members of Luxembourg parliament are elected every five years. The government is in most of the cases the result of a coalition between the two most representative political parties. Over the years, successive Luxembourg governments have shown a constant commitment to the development of financial activities in Luxembourg by creating a flexible and innovative legal framework that takes into consideration the needs and expectations of both the local and more importantly, the international financial markets.
SPF stands for “Société de Gestion de Patrimoine Familial”. The law of May 11th, 2007 created a specific tax regime for companies whose sole purpose is the management of private wealth of individuals. The company may therefore be seen as an extension of the private wealth of individuals. However, as the SPF is a company with a legal personality different from those of its shareholders, the responsibility of one investor/ shareholder is limited to the assets he has contributed to the company.
The SPF is not subject to corporate income tax, municipal business tax and net worth tax. However, income derived by the SPF will be subject to taxation at the level of the shareholder in his country of residence. The aim of the SPF tax regime is therefore only to avoid that the same income be taxed twice, i.e. both at the level of the legal entity, the SPF, and at the level of the investor. The reasoning behind this is that the SPF acts as a common vehicle for its investors, without carrying on its own economic activity. As a result, investing through an SPF or investing directly, should be largely tax neutral. Dispensing with an additional level of taxation at the level of the SPF achieves this goal.
The SPF is exclusively designed for investors managing their private wealth. The SPF should be considered as an extension of the private wealth of one or more individuals. This explains why the shares of the SPF cannot be used for public placement and cannot be quoted on a stock exchange.
The benefit of the SPF regime is not open to corporate investors nor to be used within a corporate group. Eligible investors within the meaning of the law are :
a) individuals managing their private wealth, or
b) private wealth management entities acting for one or several individuals (trust etc.), or
c) intermediaries acting on behalf of a. or b.
As the SPF is an extension of the private wealth of its investors, its activities are limited to those generally expected from individuals managing their financial assets. Based on the law, the SPF is able to perform the following activities :
- Holding of financial assets : the sole activity of the SPF should be the acquisition, holding, management and disposal of financial assets excluding any type of commercial activity.
- Holding of participations : the SPF can also hold participations in the share capital or the voting rights of other companies, but only to the extent the SPF does not involve itself in the management of these companies. The SPF will therefore not be allowed to exercise any management role in its subsidiary. There are no restrictions as regards the activity of the company in which the SPF may hold a participation.
Corporate Tax Rate
The SPF is not subject to Luxembourg corporate income tax, municipal business tax and net worth tax. Due to its specific tax regime, the SPF is not entitled to benefit neither from the double tax treaties concluded by Luxembourg nor the EU Parent- Subsidiary Directive 90/435/EEC4 : As a result, any dividend and interest payments on financial assets received by a SPF might be subject to withholding tax, if any, in the State of source in accordance with the domestic tax rules of that State.
The SPF is excluded from the beneficial tax regime, for the current financial year, during which it has derived at least 5% of its total dividend income from non resident and unlisted companies which are not subject to a tax equivalent to the Luxembourg corporate income tax. Thus, at least 95% of the foreign source dividends received by the company from non-listed companies must originate from subsidiaries which are liable to a tax that is similar to Luxembourg corporate income tax.
A company is considered as liable to a tax corresponding to Luxembourg corporate income tax if :
- the foreign subsidiary is subject to a mandatory tax at an effective rate that is not lower than half of the Luxembourg corporate income tax and whose tax base is computed in a way similar to that applicable in Luxembourg. As the current Luxembourg corporate income tax rate is 21%, the foreign tax rate should be at least 10,5%; or
- it is a company limited by shares, which is resident in another EU member state and falls within the scope of Article 2 of the EU Parent-Subsidiary Directive.
It is worth mentioning that the 5% test only deals with dividends from foreign sources received by a SPF. This implies that other income than dividends as well as dividends from domestic source (i.e. Luxembourg) may be received without limitation. Finally, the SPF is not restricted as to the number of investments held in low taxed jurisdictions as long as it ensures that, for each accounting year, dividends from these companies do not represent more than 5% of the total dividend income of the SPF.
The full cost of incorporating a Luxembourg SPF company in 4,500 EUR
The annual maintenance costs of a Luxembourg SPF company is 14,500 Euro. The maintenance includes government fees and duties.