Luxembourg Private Companies

Private companies are formed by notarial deed. They are referred to as Société à Responsibilité Limitée (or SARLs). Luxembourg private companies pay a high rate of tax in most cases and are generally expensive to form and operate however they benefit from Luxembourg’s reputation as a long-standing EU member state and afford certain benefits such as the favourable holding regime (explained below).

Share Capital
Luxembourg private companies must have a share capital of at least 12,500 EUR which must be fully paid up whereas public companies must have a share capital of 31,000 EUR which must be 25% paid up meaning that there is a de facto higher capitalization for a private company than for a public company. Although in the case of a public company a liability on the shareholders exists for the remaining 75% of the capital (however in the case of close companies this requirement is unlikely ever to be enforced). This property makes formation fairly expensive by comparison with the United Kingdom (where there is no capital requirement) and Malta where the requirement is around 250 EURs)

Luxembourg has a complex taxation system which varies depending on the type of company formed, which taxation regime is chosen and which area the company is registered in. There are numerous taxes and tax regimes to consider and advice should be sought before commencing trading. The most relevant tax is the corporation rate which is approximately 30% making it one of the higher rates in the EU (compared to 20% in the UK, 5% in Malta). Of all the regimes the most relevant to international planning is the favourable holding regime explained below.

The holding tax regime is called the Société de Participations Financières (or SOPARFI). Companies under this scheme must be primarily used for holding but may derive income secondarily. The main benefits of this holding regime is that dividend income received from subsidiaries is likely to be exempt from tax and payments of dividends is likely to be exempt from withholding tax. The system by which income qualifies as exempt from income tax is complicated and is outlined below: Dividends are exempt from tax if the Luxembourg company 1) holds more than 10% of the subsidiary; 2) has done so for more than 12 months; and, 3) the subsidiary has paid at least 10% tax. In cases where less than 10% is held an exemption from tax on dividends can be obtained if the investment is at least 1.2m and the other criteria are satisfied.

Luxembourg private companies may have one or more shareholders subject to a maximum 40 (if more than 40 is desired then the appropriate vehicle is a public company). These may be individuals or a legal person (such as companies) and there is no requirement for them to be resident in Luxembourg. Shareholders must meet once a year at an Annual General Meeting.

Accounts must be prepared in all cases but the requirement for audit only applies to large companies. The criteria for audit exemption roughly applies to companies not having either a balance sheet of 4m EUR, a turnover of 8m EUR or over 50 employees.