There are generally three types of Luxembourg companies that are used for international business:

The 1929 "Traditional" Style Holding Company

The 1929 style holding company is an exempt style company which is virtually tax free. T is excluded from Luxembourg’s tax treaties which is often an advantage and it can e converted into a normal Luxembourg Company with SOARFI provisions at a later date.

The Normal Luxembourg Company with "SOPARFI" Provisions (Sometimes know as the SPOARFI 990 Holding)

A SOPARF is a normal taxable company with a restrictive holding company objectives clause. Subject to certain rules this is a holding company where dividends and capital gains can be exempt taxation but because the company is subject to tax (e.g. on interest) the company can benefit from Luxembourg’s tax treaties and benefits from the EU parent/subsidiary directive on tax free dividends and capital gains.

The Trading And Commercial Company

This is a company which in many respects is similar to a SOPARFI in that it does have SOPARFI advantages The difference lies in the objects of the company where the objects go further than just holding shares in other companies where it is usual to have to apply for a trading permit. This is not hard to obtain where there is a qualified or experienced manager or director available to take responsibility for running the company.
Both the 1929 style holding company and the normal Luxembourg company with SPARFI provisions have become suitable for private investors and multi-national business alike seeking to minimize administrative burden and cost while maximizing efficiency of their operations. The particular attractions of these Luxembourg companies include:

 

• bearer or registered shares, the former permitting easy transfer and anonymity
• the denomination of its capital in any currency
• the wide range of its permitted activities
• the complete freedom from exchange control
• access to the Luxembourg stock exchange for listing of its shares or bonds
• its directors may be of any nationality and residence thus allowing control of the company to be exercised anywhere in the world

A 1929 style holding company is a company domiciled in Luxembourg most commonly in the form of a Societe Anonyme (90% of all cases) or of a Societe A Responsabilite Limite. Its legal status is governed by the companies laws of the 10th August 1915 and the 24th April 1983. Its special fiscal status is defined in the law of 31st July 1929 which also specifies certain limitations of its activities.

It May

• Acquire, hold and dispose of shares and bonds of Luxembourg or foreign companies
• Hold cash and foreign currencies, gold, negotiable securities and place funds on deposit with financial institutions
• Finance subsidiaries or companies in which the holding company has a direct shareholding
• Hold and license patents and receive income from the granting of licenses
• Issue bonds by public or private subscription of up to ten times the amount of its paid up capital and in addition borrow up to three times its issued capital
• Buy back up to 10% of its own shares where permitted by its status and agreed by a general meeting of shareholders

• Be an active member of a general partnership or partnerships limited by shares
• Carry on any industrial or commercial activity
• Carry on brokerage or banking activities
• Grant loans to companies which are not direct subsidiaries, unless it is a financial holding company
• Own real estate, except the premises used for its own offices, through it my hold shares in real estate companies

· Investments

The special fiscal status of the Luxembourg 1929 style holding Company enables the investor, whether as a private individual, family or institution, to manage an investment portfolio without incurring income or capital gains taxes on its profits. In addition, the absence of any withholding taxes and freedom from exchange control allow profits in the form of dividend income or capital gains to be freely transferred to other jurisdictions.

· Management

The most common form of a holding company is that which centralizes and controls the business and/or financial management of groups of companies in a convenient European location. The freedom of capital flows enables a holding company to centralize financial resources of the group and use this finance raised on the Euro-currency markets to lend to its subsidiaries at favorable rates. This is of particular interest where local credit restrictions exist or local interest rates are high.

· Patents

A 1929 style holding company may hold patents and licenses and earn royalties from granting licenses and sub-licenses to affiliated or non-affiliated companies. In addition, patents can be registered and protected in Luxembourg. Trademarks can only be licensed to subsidiaries. With the 1929 style holding Company there is no corporation, income, capital gains, liquidation taxes or stamp duties payable. There are no withholding taxes levied by the government on dividends or bond interest paid to non-resident individuals or corporations. The only taxes payable by the 1929 style holding company is the 1% Capital Registration Duty (Droit d’Apport) on incorporation and subsequent increases of capital and the Annual Capital Tax (Taxe d’Atonement) of 0.2% per annum (payable in quarterly installments). Where dividends of more than 10% of the paid up share capital are paid out in any one year then the tax d’atonement for that year will be calculated on ten times the value of the dividend.

Normal Luxembourg Companies with SOPARFI Provisions: - SOPARFI means "Societe de Participation Financier". The main advantage of the normal Luxembourg company with SOPARFI provisions is that by investing in the shares it can benefit from the affilition privilege; which means that while the company is fully subject to corporate tax, exemptions to corporate tax are granted by law for:

 
• Dividends received from shareholding
• Liquidation gains on liquidation of companies in which shares are held
• Capital gains on sale of shareholding

· Dividend and Liquidation Gains Exemption On:

Shareholdings of at least 10% (or cost of at least flux 50 million); and have been held uninterrupted since the start of the financial year prior to receipt of the dividend from its shareholding in the subsidiary.

· Capital Gains Exemption On: 

Shareholdings of at least 25% (or cost of at least flux 250 million); and have been held uninterrupted since the start of the financial year prior to receipt of the dividend from its shareholding in the subsidiary.

· Withholding taxes on dividends paid by a normal Luxembourg Company with SOPAFRI provisions to:

EU Parent : Zero withholding tax is levied EU directive 23rd July 1990).

Other Parent : 25% or reduced tax treaty tax rate is levied.

Thus normal Luxembourg Company with SOPAFRI provisions can benefit from full double tax treaty protection. No special tax authority ruling is required. Also these companies combine shareholding with commercial, industrial or other financial activity.
 

Formation Requirements for a Luxembourg Company

 
1. The name must be cleared by the local Companies registry.
2. The Company must have a minimum capital of flux 1,250,000 or its foreign currency equivalent, fully paid-up. A local bank or well established foreign bank (recognized by a notaire) will be asked to certify to the notaire drawing up the deed of incorporation that funds are held for the company in a blocked account for the formation of the company.
3. Shares may be in registered or bearer form (in which case they must be fully paid-up) and may be with or without par value. Our nominee shareholders are often used for formation of companies.
4. There are a minimum of two shareholders who may be individuals or companies and of any nationality or residence. Subscribers must supply full particulars of their names, occupations, and residence or registered office (in the case of corporations).
5. There are a minimum of three Directors who may be individuals or companies and need not be resident in Luxembourg.
6. An auditor who is either a "Commesaire aux Competes" or a "Reviseur d’Enterprise", depending on the size of the company, must be appointed.
7. The statutes correspond to the Anglo-Saxon Memorandum and Articles of Association. They may be English, but must be published with a French or German translation. Among other things, they specify the objects of the company, the capital and shareholders, directors, year end and details of the annual general meeting.
8. The registered office must be in the Grand Duchy of Luxembourg.

Accounting records must be kept for all Luxembourg companies. These are usually maintained in Luxembourg, but may be kept outside the country. Extracts of the Balance Sheet and Profit and Loss Account are required for registration each year after being audited by the "Commissaire" and approved by the Annual General Meeting.

Five per cent of the Company’s net profits must be paid into a legal reserve until the reserve reaches ten per cent of the issued capital.

An Annual General Meeting of shareholders must be held in the Grand Duchy to approve the Company’s accounts and give discharge to the directors and auditor. The time, and place of the meeting are specified in the statutes of the Company. If all the shares are registered, the meeting can be convened by registered letter containing the agenda of the meeting, otherwise, notice must be published in the Mcmorial and a Luxembourg Journal at eight day intervals, the second notice appearing not less than eight days before the meeting.

A Luxembourg 1929 style holding Company must produce quarterly taxe d’abonnement returns.

A normal Luxembourg Company with SOPARFI provisions must produce annual (calendar year end) corporation tax returns.
 

Other Specific Areas of Advantage in Luxembourg

· Captive Reinsurance Companies
A Luxembourg captive insurance Company benefits from the tax advantages and responsibilities that a normal trading Luxembourg Company with SOPAFRI provisions has and are mentioned above. However, it also has an extra advantage in that there is a special deduction from taxable income that can be as much as 20 times the average net premium income (depending on the category of risks insured). There are special regulatory and registration requirements concerning Reinsurance Companies in Luxembourg, which must be registered with the Commissariat of Insurance. A Luxembourg reinsurance Company must have a minimum capital of flux 50 million.

· Insurance Companies
A Luxembourg insurance company benefits from the tax advantages and responsibilities that normal trading Luxembourg Company SOPARFI provisions has and are mentioned above. Also be being registered in Luxembourg under the 3rd EU Life Insurance Directive it can sell insurance throughout the EU to high net worth, high income people who want currency diversification and confidentiality.

· Shipping Companies
Luxembourg apparently has the 5th largest shipping fleet of Europe. This is due not only to reasonable social security costs for the crew but also to reasonable rates of taxation on crew salaries and accelerated depreciation from taxable income for ships. Luxembourg is not a flag of convenience and in that respect is very competitive with other non flags of convenience. 
There are special regulatory requirements concerning shipping Companies in Luxembourg, which must be registered with the Luxembourg Ministry of Transport.

· Luxembourg Listing
The Luxembourg stock exchange opened in 1929. Since then, due partly to the absence of any withholding tax on interest payments from Luxembourg, it has become a major international market for issue of bonds denominated in a wide variety of currencies including the ECU.