Luxembourg SOPARFI: Legal Status, Taxation, Parent-Subsidiary Regime and Substance Requirements
Legal Status and Corporate Purpose
The Société de Participations Financières (SOPARFI) is a commercial company (most often SA or S.à r.l.). It is not regulated and has no autonomous tax regime. Main purpose: holding and managing participations, with the possibility of commercial activities if sectoral rules are respected. Fully subject to corporate income tax (IRC), communal business tax (ICC) and wealth tax. “Pure” holdings do not require a business permit.
The SOPARFI is therefore a flexible tool, but subject to the ordinary law rules applicable to commercial companies in Luxembourg.
Parent-Subsidiary Regime
Conditions and Application
The exemption of dividends and, where applicable, capital gains applies when three cumulative conditions are met.
- First, the participation reaches at least 10% of the subsidiary’s capital or, alternatively, has an acquisition cost of at least EUR 1,200,000 for dividend exemption and EUR 6,000,000 for capital gains exemption.
- Second, the securities are held or there is a commitment to hold them uninterruptedly for a minimum period of twelve months, with the formal holding commitment allowing the regime to apply when this period has not yet been reached at the time of distribution or disposal.
- Third, the subsidiary is fully subject, in its state of residence, to a profit tax comparable to Luxembourg tax, without benefiting from a privileged tax regime. The exemption also remains subject to compliance with anti-abuse provisions, including the general anti-abuse clause, rules targeting hybrid mismatches and, where applicable, principal purpose clauses provided for in tax treaties.
| Condition | Minimum threshold | Detail |
|---|---|---|
| Minimum holding | 10% of capital or EUR 1.2 million (dividends) / EUR 6 million (capital gains) | Direct participation |
| Holding period | Minimum 12 months | Commitment possible if not yet reached |
| Subsidiary quality | Company fully taxable in its country of residence | No privileged regime |
Recapture Mechanism for Capital Gains
When the capital gain from the disposal of a participation is exempt, all expenses and depreciation related to this participation that have already reduced the taxable base must be added back to the taxable result, whether they did so for the disposal year or previous years.
This recapture is made up to the cumulative amount of these deductions, without exceeding the amount of the exempt capital gain. The purpose is tax neutrality: an expense that reduced tax in the past cannot also be combined with full exemption of the gain.
For example, if previous depreciation and deducted expenses total EUR 300,000 and the exempt capital gain reaches EUR 250,000, the recapture will be limited to EUR 250,000; if the capital gain amounts to EUR 400,000, the recapture will be EUR 300,000.
Opt-out from Fiscal Year 2025
The exemption can be waived when eligibility is based solely on the acquisition cost threshold, and not on the percentage holding threshold.
This concerns dividends when the acquisition cost reaches at least EUR 1,200,000, as well as capital gains when the acquisition cost reaches at least EUR 6,000,000. The taxation option can also be exercised to waive the 50% dividend exemption provided for in Article 115 15.a) of the Income Tax Law (LIR). This can also be done to use carry-forward losses approaching expiry. The choice is made on a year-by-year and participation-by-participation basis.
The practical interest appears when taxation in Luxembourg allows the imputation of a foreign tax credit or improves the overall result after taking expenses into account, where exemption would be less favorable.
Withholding Tax and Anti-Abuse
The exemption granted in Luxembourg does not eliminate withholding tax levied abroad when the Parent-Subsidiary Directive does not apply or when an anti-abuse rule is activated, for example the principal purpose test provided for in a tax treaty or the general anti-abuse clause of domestic law.
In these situations, the outcome depends on the provisions of the relevant double tax treaty, the conditions it imposes and the anti-abuse rules in force in the source state.
Substance and “Unshell”
The ATAD 3/Unshell proposal was abandoned in June 2025. The objectives of combating entities without substance are now carried by the existing arsenal (GAAR, DAC 6 and information exchange, PPT of conventions), without a new dedicated text. Consequence: requirement for demonstrable substance (effective management in Luxembourg, local expenses, resources, governance).
Transfer Pricing: Obligations and Documentation
The arm’s length principle is codified in Articles 56 and 56bis LIR; Article 164(3) deals with hidden distributions. Circular 56/1–56bis/1 frames intragroup financing (functional analysis, risk profiles, margins, documentation). In practice, OECD-type documentation (master file/local file) is expected upon request, with increased attention on intragroup loans and current accounts.
IP Regime: Article 50ter LIR
The 50ter regime applies the OECD nexus approach: 80% exemption on net income and capital gains from eligible assets (patents, equivalent certificates, copyright-protected software). Exclusions: marketing assets such as brands, designs and models. The 50ter is significantly stricter than the former 50bis (repealed), both in scope and in the traceability of R&D expenses.
Operational Points (Banking and Governance)
Since 2021, opening a bank account for a newly incorporated Luxembourg company, particularly a SOPARFI without immediate operational activity, has become a long and complex process. Banks apply enhanced KYC controls, requiring a complete file on:
- Ultimate beneficial owners
- Origin of funds
- Investment project
- Evidence of local substance
This requirement sometimes leads to delays of several weeks or even months, or to outright refusal if the profile does not match the bank’s risk policy.
Conclusion
The SOPARFI in Luxembourg remains a robust framework for international holding, combining participation exemption (dividends and capital gains with recapture), targeted opt-out since 2025, substance requirements, transfer pricing and IP regime 50ter stricter than the former 50bis.
With ATAD 3 abandoned and objectives now carried by DAC 6, the priority is documented, compliant and efficient structuring, limiting risks of withholding tax, GAAR/PPT and recharacterizations.
For a creation, reorganization or intragroup financing project, a Luxembourg SOPARFI review focused on eligibility for the parent-subsidiary regime, use of opt-out, recapture management, TP documentation and 50ter arbitrage optimizes the value chain.
