Comparing SPFs and Soparfis as investment vehicles

Luxembourg offers a range of company structures – public and private limited companies, partnerships and co-operatives, for example. It also has a number of holding vehicles to be used with these structures that provide both specific tax regimes and administrative specificities. Two of the main ones are the Société de Participations Financières or Soparfi, and the Société de gestion de Patrimoine Familial, SPF for short.

These two vehicles are suited to different kinds of investor. Each regime has its advantages, but the right choice will depend on the investors’ needs, their residency, and financial and family circumstances.

Soparfis: fully taxable companies

Soparfis, which are more common, are fully taxable companies that are not subject to supervision by the CSSF, Luxembourg’s financial regulatory authority. This means in theory that a Soparfi can be incorporated quickly, sometimes in as little as one or two weeks, and creating one requires only the drafting of articles of association to be signed during a meeting before a public notary.

Soparfis can hold investments and may engage in normal commercial or industrial business activities, although this may require separate authorisation; it would also need approval to become a listed company. Being fully taxable, Soparfis can benefit from Luxembourg’s double taxation treaty network as well as the EU’s parent-subsidiary directive.

Says Banque Internationale à Luxembourg Wealth Planner Team Leader Audrey Lesperoy: “The Soparfi provides full exemption from tax on dividends, capital gains and liquidation proceeds if it holds or has committed to hold for more than a year more than 10% of the share capital of a fully taxable company in Europe, or shares acquired for at least €1.2m for dividends and €6m for capital gains. This is interesting, because it means the company can take assets from companies it owns and pass them on without it being taxed twice. If an investor needs to receive money out from the company, this can be a good option.”

Soparfis are often used as holding companies that own all or part of multiple subsidiary companies, and they may also be used to hold cross-border investments.

Soparfis are often used as holding companies that own all or part of multiple subsidiary companies, and they may also be used to hold cross-border investments. The company is subject to standard reporting rules, including the submission of corporate income tax returns.

Private wealth management companies (SPF)

SPFs were created as a successor to the 1929 holding company, so called after the year the regime was introduced, and are usually established in the form of a private limited-liability company (société à responsabilité limitée) or public limited-liability company (société anonyme).

They are designed to hold financial assets as part of the management of private assets rather than undertake commercial activity, and are subject to significant restrictions on the assets they can hold – SPFs cannot hold any form of real estate or intellectual property, for example. They are also not allowed to grant interest-bearing loans. However, the SPF may, on an ancillary basis and purely free of charge, make an advance or guarantee the commitments of its affiliated companies. In general, they hold shares, bonds, derivatives, bank deposits and precious metals.

Assets held within an SPF are exempt from corporate income tax, municipal business tax and net worth tax.

SPFs are designed to operate as a cash box, says Ms Lesperoy, and while assets remain within them, they offer a preferential tax treatment. Assets held within an SPF are exempt from corporate income tax, municipal business tax and net worth tax. They are not subject to withholding tax on dividends, nor on capital gains following the disposal of assets. The company pays an annual subscription tax of 0.25% on the value of the paid-up share capital, any share premium and debts, in whatever form, that exceed eight times the paid-up share capital).

However, when an SPF pays a dividend, the Luxembourgish resident investor is liable to pay full taxation, which makes it unsuitable for investors that want to receive regular income from their investments. Ms Lesperoy adds: “taxation on distributions made by the company to its investor depends on the country of residence of the investor. Hence, it is only suitable for residents of those countries where there is no legislation penalising this kind of company.” Belgium and France are two countries that do have such legislation. And as a counterpoint to its tax-related upsides, an SPF cannot claim any exemptions under double taxation treaties.

Investors are restricted to private individuals, trusts and foundations, or nominees. In practice, they are most commonly used by families to ring-fence assets.

Restricted application

Ms Lesperoy says SPFs can be useful for the right investor, but their application is more limited than for a Soparfi: “It’s usually residents in Luxembourg that use them to hold assets that eventually will be passed to their heirs. They are also used by residents of other countries that do not have controlled foreign company rules and look-through taxation that penalises investors in such structures.”

An investor considering using an SPF to preserve assets for subsequent inheritance also needs to consider their country of residence and those of their heirs.

An investor considering using an SPF to preserve assets for subsequent inheritance also needs to consider their country of residence and those of their heirs.

Investors considering which option to use should weigh a number of factors, Ms Lesperoy says: “Where are they resident? What are their needs? What are their goals? Where will their heirs be located? What kind of investments do they want in there? Investors are undoubtedly more constrained with an SPF, and a Soparfi can conduct commercial activities. They also need to consider whether they want to retain any capital from the company.”

Each structure has its advantages and disadvantages, and their appropriateness needs to be considered on a case-by-case basis – it will depend on an investor’s circumstances and aims. However, SPFs and Soparfis provide both specific tax regimes and administrative specificities that are to be considered carefully by interested investors. We strongly recommend that you seek expert advice before making your decision.