A Luxembourg branch remains part of the foreign company. A subsidiary is a separate Luxembourg company controlled by its parent. The choice determines who enters local contracts, which assets support the business and how an investor could later acquire an interest. Neither route removes the need to examine local tax, accounting and operating requirements.
This comparison concerns an ordinary foreign company opening a Luxembourg branch or forming a subsidiary with limited shareholder liability, such as a private limited company (SARL). Partnerships, regulated financial businesses and special fund regimes need their own analysis.
The contracts determine which company carries the risk
A branch acts through representatives of the foreign company. Customer contracts, leases and borrowing entered into through that branch are commitments of the foreign company. A Luxembourg registration number does not create a separate person or separate the branch’s debts from the company’s other obligations.
A subsidiary owns its assets and enters its own contracts. Under the Companies Act, an SARL is legally distinct from its shareholders, whose liability is limited to their contributions. The foreign parent is therefore not automatically responsible for every debt of its subsidiary.
That separation has practical limits. A parent that guarantees a bank facility or lease assumes the commitment given in the guarantee. The official comparison of branches and subsidiaries expressly identifies this extension of exposure. Separate legal personality also does not exclude liability arising on another legal basis. The contracts and guarantees matter alongside the chosen form.
Registration and incorporation serve different purposes
Opening a branch requires the foreign company and its representatives to be identified. The Trade and Companies Register rules require information about the company, its Luxembourg establishment and the permanent representatives’ powers. The filing documents depend on the foreign company’s form and country of origin.
The branch has no separate share capital. The foreign company must nevertheless provide the funding and resources needed for its operations. An absence of branch capital does not answer how leases, salaries or customer commitments will be financed.
A subsidiary follows the incorporation and capital rules of its chosen form. A classic SARL is formed by notarial deed and can have a corporate shareholder. Its articles and appointment decisions establish management and signature powers. It also needs an assessment of the natural persons who ultimately own or control it, as explained in the guide to beneficial-owner identification.
Tax follows residence and the local business
The Income Tax Law treats a company as Luxembourg resident where its statutory seat or central administration is in Luxembourg. An ordinary resident subsidiary is generally taxable on its worldwide income, subject to applicable exemptions and treaties. The guide to corporate taxation explains that ordinary resident-company framework.
A foreign company can instead be taxable on Luxembourg business income through a permanent establishment. This means a business presence meeting the relevant tax definition. For a branch, domestic law and the treaty with the company’s country must be examined together. Registering the branch does not, by itself, settle the full tax analysis.
For example, Article 5 of the UK-Luxembourg convention includes a branch within its permanent-establishment framework, while also providing exclusions and rules for agents. Article 7 attributes profit by reference to the functions performed, assets used and risks assumed. That example concerns the UK treaty. Another country’s treaty may have different terms.
The same convention also states that control of a subsidiary does not, of itself, make either company a permanent establishment of the other. A subsidiary’s legal separation and the foreign parent’s possible taxable presence remain different questions. The actual activities and decision-making arrangements need to be understood, rather than inferred from the group chart. The holding substance analysis develops the related residence and evidence questions.
Head-office allocations differ from intragroup charges
The branch’s Luxembourg result needs records that connect income and expenses with the local business. It is not an arbitrary share of worldwide profit. A common head-office expense may need to be allocated, but the nature of the work and the basis of allocation still need to be explained. Treating the branch as part of one company does not remove the profit-attribution exercise.
A parent and its subsidiary are separate parties. Loans, services and licences between them must be analysed as transactions between companies. Articles 56 and 56bis of the Income Tax Law require the terms that independent companies would agree. The analysis of intragroup management fees explains how services, their benefit and the allocation of shared expenses support a charge.
Cash movements also need the correct description. Moving cash from a branch to its head office is an internal movement within the same company. A subsidiary distributing profit to its parent makes a separate company distribution, whose dividend withholding and exemption conditions must be examined. This distinction does not establish the tax treatment in the parent’s country or guarantee immediate use of local losses there.
Local accounts and public accounts are different obligations
An ordinary SARL subsidiary normally prepares and files its own annual accounts. A group reporting package does not automatically replace this obligation. Any group exemption requires its own assessment under the Accounting Act. The annual-accounts filing guide explains the normal cycle for a Luxembourg company.
The subsidiary’s SARL accounting process also connects its own transaction records and any required PCN correspondence to the local year-end close.
A branch also needs local bookkeeping and accounts. The Commercial Code applies accounting requirements to the Luxembourg activity of foreign undertakings. These records support local tax calculations even though the activity belongs to the foreign company.
The LBR guide to branch accounting documents distinguishes the local accounts from the foreign company’s accounts. In its ordinary framework, local branch accounts are filed administratively and are not available to third parties. Filing the foreign company’s qualifying accounting documents for public consultation is a separate matter.
The Companies Act distinguishes companies covered by the relevant company-law framework in another EU or European Economic Area (EEA) state from comparable company forms in other countries. For the latter, if the foreign accounting documents do not comply with the EU accounting directive or an equivalent framework, accounts for the branch activity must be prepared and published under Luxembourg rules. LBR’s guide states that the non-equivalent foreign accounts are then not filed.
The foreign legal form and accounting framework therefore need to be checked before opening the branch. Assuming that only local profit figures will be published can miss the requirement to disclose the foreign company’s accounts. Assuming that foreign accounts replace all local accounting can miss the branch’s own filing.
Permits and VAT depend on the activity
The Business Permit Act applies according to the activity carried on. Choosing a branch or an SARL does not answer whether a permit is required. Relevant exemptions also depend on the activity, including the statutory exemption for services to other undertakings in the same group. That exemption does not determine VAT or profit taxation.
Where a Luxembourg permit is required, the premises, resources and effective management must meet the applicable conditions. Mere domiciliation is insufficient. Permission held in the foreign company’s home country does not replace the Luxembourg permit for its first local operational establishment. The business-permit guide explains these requirements separately from incorporation.
VAT also has its own establishment test. Article 11 of Implementing Regulation 282/2011 looks at permanence and the human and technical resources needed to receive and use services, or to provide them, for the relevant VAT rules. A VAT identification number alone does not establish a fixed establishment. The corporate-tax permanent-establishment analysis cannot simply be copied into the VAT assessment.
If the project includes employees, the identity of the employer and the team’s actual place of work must also be settled. A branch can operate with employees of the foreign company. Staffing does not, by itself, require a separate subsidiary.
Financing and a future sale affect the choice
The legal separation matters when a new investor or a future transfer is already part of the plan.
| Decision | Branch | Subsidiary with limited shareholder liability |
|---|---|---|
| Who enters the contracts? | The foreign company through its branch representatives | The Luxembourg company through its own representatives |
| Where does ordinary debt exposure sit? | In the foreign company | In the subsidiary, with parent guarantees and other liability assessed separately |
| Can an investor buy a local shareholding? | No separate branch shares exist | Shares in the subsidiary can be issued or transferred, subject to the applicable rules |
| How can the activity be transferred? | Transfer of the business, assets and contracts requires its own assessment | A share sale or business transfer can be considered, each with its own rules |
In a hypothetical project, a foreign group plans a Luxembourg team serving third-party customers. A branch may fit a decision to retain customer contracts and the resulting exposure within the foreign company. A separate subsidiary offers a local shareholding if a co-investor is expected to participate in that business. Guarantees, finance terms and the planned work still need to match the arrangement chosen.
Closing a branch does not dissolve the foreign company or extinguish its remaining obligations. A subsidiary can be sold through its shares, subject to transfer rules, or transfer its business under the applicable conditions. Contracts, employees, tax consequences and closing filings need to be considered for either route. The initial choice is stronger when it anticipates how the business will operate and how it may eventually change hands.
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Explore company formation supportFrequently Asked Questions
Does a Luxembourg branch avoid corporate income tax?
No. Profits attributable to a Luxembourg permanent establishment can be taxable there even though the branch is not a separate company. Domestic law, the applicable treaty and the activities actually carried on determine the result. The treatment in the foreign company's country must also be checked.
Does a foreign company's branch publish only local accounts?
Not necessarily. Local branch accounts and publication of the foreign company's accounts are separate matters. The ordinary framework includes an administrative filing of branch accounts and public filing of qualifying foreign-company accounts. For comparable companies outside the EU and EEA with non-equivalent accounts, local branch accounts are published instead. The company's form and accounting framework need to be checked.
