A new light shines on the Soparfi (Luxembourg holding), following the agreement adopted by the Council of the European Union on January 27th, 2015 amending the Parent-Subsidiary Directive and introducing an anti-abuse measure.
Soparfi Luxembourg Holding | Hance Law Firm
The amendment to the Directive has yet to be transposed into national law by all EU member-States and should come into force on January 1st, 2016.
A member-State may decide to tax dividends leaving its territory by implementing withholding taxes if the structure does not reflect an economic reality. So, is the Luxembourg Soparfi dead or dying ? Neither, we believe.
Nonetheless, now more than ever, we advise our clients to be assisted by well-experienced tax planners in the setting-up of international tax structures.
I. Parent-Subsidiary Directive : content
The new article 2 of the Directive now states that :
“Member States shall not grant the benefits of this Directive to an arrangement or a series of arrangements which, having been put into place for the main purpose or one of the main purposes of obtaining a tax advantage that defeats the object or purpose of this Directive, are not genuine having regard to all relevant facts and circumstances. An arrangement may comprise more than one step or part.
For the purposes of paragraph 2, an arrangement or a series of arrangements shall be regarded as not genuine to the extent that they are not put into place for valid commercial reasons which reflect economic reality.”
As the notion of “arrangements put into place for valid commercial reasons which reflect economic reality” is broad, it is quite sure that its interpretation will vary between member-States and that the European Court of Justice will soon have to define its scope.
II. The key “Substance” criteria
In the meantime, it has to be noted that the “substance” criteria remains the first and foremost variable to ponder. Thanks to this criteria, the distinction between an active and passive Soparfi is possible, and only the latter is targeted by the new article 2 of the Directive.
And on a practical level ?
On a practical level, our law firm recommends to focus on three points:
a real substance
a specified corporate object
an actual and demonstrable registered office
Those three points allow us from now on to offer minimal measures of “protection”. It is quite prudent to make sure that the Soparfi has:
a majority of Luxembourg residents administrators
an office in relation with the company specified object
Luxembourgish accounting services
III. Content analysis
In short, several criteria may prove the economic reality of the structure, such as:
management fees (but dangerous in France)
A Soparfi may be made active by invoicing management fees, charging loans to subsidiaries, or reinvesting money. A sole domiciliation in Luxembourg will not suffice to render the Soparfi an “active” one.
Similarly, if there are employees in the Soparfi, there must be a coherence between the number of employees, the size of the premises and the size of the company.
IV. The stakes
For the member-States, the most important role of anti-abuse measures is of course to prevent tax avoidance by companies via legal set-ups exploiting the loopholes of the legal systems.
For the clients and their counsel, the aim is to prevent Luxembourgish Soparfis from being considered as “abusive/passive” in the eyes of the Luxembourg Tax Administration, but also, first and foremost, in the eyes of the country of residency of the shareholders.
For lawyers, the aim is to take necessary measures so that clients may keep enjoying an exemption on the taxation of dividends and capital gains, by making sure the company will be considered as active.
So is the Soparfi dying ? We do not believe so. However, one certainty remains: the Directive requires that the set-up reflects an economic reality, and that the client and their counsel show professionalism. Who will complain ?