LUXEMBOURG SPF HOLDING: THE LUXEMBOURG PRIVATE WEALTH MANAGEMENT COMPANY
Luxembourg private wealth management companies (called SPFs in Luxembourg, a form of holding company) are exempt from all taxes on income (corporate income tax, municipal income tax) and from net wealth tax.
Luxembourg private wealth management holding companies are only subject to an annual subscription tax of 0.25% on share capital and certain debts.
Due to the fact that withholding taxes aim at taxing the beneficiary of an income and not the debtor of the income, private wealth management companies may have to pay withholding taxes for certain expenses paid by the holding despite its special tax status.
The withholding tax applies to :
- Wages and salaries if the holding has employees. In our opinion, there is no restriction on a Luxembourg holding employing personnel, provided that the personnel do not interfere in the management of the affiliates1
- Director's fees.
Share capital: the risk of under-capitalization
The share capital can be anything over the minimum set by corporate law (minimum 31,000 EUR for a Luxembourg PLC (S.A.) or 12,500 EUR for a Luxembourg LLC (SARL)).
However, the rules for calculating the annual subscription tax heavily sanction under-capitalization, as this 0.25% tax on Luxembourg holdings (private wealth management companies/Luxembourg SPF) is levied on the paid up share capital (plus the share premiums) and on debts in excess of 8 times the share capital3.
A Luxembourg holding company incorporated in the form of an SPF (private wealth management company) with 100,000 EUR capital and a loan of 69,900,000 EUR from its associates, manages a portfolio of 70,000,000 EUR and has an annual income of 4,000,000 EUR.
We will calculate the tax due by the company and compare it to the sum which would be due if the liability were structured differently, with share capital totaling 8,000,000 EUR and debts to shareholders of 62,000,000 EUR to finance assets of a value equivalent to 70,000,000 EUR.
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It is important first to note that the profit of a Luxembourg SPF (private wealth management company) is not taxed.
A Luxembourg SPF is subject only to an annual subscription tax.
In the first scenario (100,000 EUR in capital and 69,900,000 EUR in debt), the amount due for subscription tax is equal to 0.25% of 100,000 + (69,900,000 – (8 x 100,000 EUR)), or 173,000 EUR. However the subscription tax is capped at 125,000 EUR4.
In the second scenario (8,000,000 EUR in capital and 62,000,000 EUR in debt), the total amount due for the subscription tax is equal to 0.25% of 8,000,000 EUR or 20,000 EUR. In this scenario, the debt does not exceed eight times the share capital (8 x 8,000,000 EUR).
The Luxembourg Trade Register is in charge of controlling SPFs. It oversees compliance with the conditions for the special fiscal treatment:
- Activities strictly limited to finance activities
- Exclusive possession by qualified investors
- Respect of conditions related to taxation on savings
When the administration observes that a SPF does not comply with applicable conditions of the special fiscal treatment, it transfers its conclusions to the Direct tax Administration for the company to be taxed under Ordinary Law.
SPFs with bearer shares outstanding must prove to the administratioin before 30th June 20175 that they are in compliance with the obligation to appoint a professional depositary for the bearer shares and that all bearer shares have either been deposited or cancelled.
1Law of May 11, 2007 related to the creation of a Luxembourg private wealth management holding company (SPF), article 2(2): the Luxembourg SPF is allowed to hold stake in a company under the condition that it does not interfere with the management of that company.
2Law of June 21, 2017
3Law of May 11, 2007 related to the creation of a Luxembourg private wealth management holding company (SPF), article 5(2): The Luxembourg SPF is allowed to have stake in a company under the condition that it does not interfere with the management of the company : The subscription tax for the SPF is based on:
- The amount of paid up share capital,
- Additionally, if relevant, (i) share premiums and (ii) debts, if they exceed 8 times the amount of paid up share capital and share premiums as of January 1, or, if it has been incorporated the same year, from the date of its incorporation.
4The Law of May 11, 2007 related to the creation of a Luxembourg private wealth management holding company (SPF), article 5(1): The SPF is subject to an annual subscription tax at a rate of 0.25% with a minimum of 100 euros and a maximum of 125 000 euros per year.
5Art. 22 of the Law of December 23, 2016 related to the enactment of the fiscal reform. Memorial A:274 of 27th December 2016.