Company Formation in Luxembourg

The first question most people ask about setting up a company in Luxembourg is which form to choose. The question that has to be answered before it is what the company will actually do. Is this a trading company selling goods or services, or a holding company that will hold shares in other companies? Permits, office requirements, tax planning and annual running costs all follow from that distinction. For investors coming from Turkey, three Turkish tax rules then decide the outcome: the participation exemption for foreign subsidiaries, the controlled foreign company rules, and the business centre test.

What a SOPARFI Is, and Why It Is So Widely Used

A SOPARFI is not a separate company form. It is the name given to an ordinary taxable private limited or public limited company whose main activity is holding participations. No ministerial authorisation or financial supervision is required; registration with the trade registry and tax registration are enough. Because it is subject to corporate income tax, it can rely on Luxembourg’s double tax treaties and on European Union directives. That is what makes it a common intermediate structure both for investment from Turkey into Europe and for investment from Europe into Turkey.

What makes the structure attractive is the exemption granted to income from participations:

Meeting either the holding test or the cost threshold is sufficient. The subsidiary must also be subject to a tax comparable to Luxembourg corporate income tax. Participations that meet the conditions are also left out of the net wealth tax base.

How to Set Up a Company in Luxembourg

Main types of business entities

Only individuals may be partners in the simplified private limited company, and one person may hold an interest in only one such company. It is designed for trading activity and is not used for holding structures. Where a holding is being set up, the private limited company is used in practice, and the public limited company in larger multi-shareholder structures.

Trading company or holding company

On paper both can be private limited companies formed the same way. What creates the difference is what the company does, and the conditions the state attaches to that.

The office question is where trading companies most often run into trouble. Many founders assume they can start with a domiciliation address, while on the business permit application the ministry looks for premises that are actually in use.

Establishment Process

1. Name checkAvailability of the company name is confirmed with the trade registry. A rejected name means redrafting the articles, so this step comes first.
2. Articles and payment of capitalThe articles are drawn up, a bank account is opened, the capital is paid in and a blocking certificate is issued. For limited and public limited companies the formation is executed before a notary.
3. RegistrationsThe company is entered in the trade registry and in the register of beneficial owners. That register is not open to the public; authorities and banks have access to it.
4. Tax and VAT registrationA tax file is opened, and value added tax registration is added where the activity requires it. A holding buying services from abroad may need a simplified registration.
5. Business permitTrading companies obtain a business permit from the ministry. The manager’s professional qualification and the actual premises are examined at this stage.

Documents Required for Company Formation

Owners and managers are generally asked for:

• Apostilled or certified passport copy and a current proof of address
• A curriculum vitae, and for some activities evidence of professional qualification
• Criminal record extract, sworn translated where a business permit is sought
• Documents evidencing the source of the capital and of the funds
• For a corporate owner, a current registry extract and the articles of association
• Beneficial owner details and evidence of the ownership chain

The time needed for apostille and sworn translation of documents sent from Turkey is routinely underestimated. Those two steps take one to three weeks of the formation timetable and should be started before the others.

Is a Local Partner or Local Manager Required?

No. The company may be wholly owned from Turkey; there is no local partner requirement, and forming a company does not require residence in Luxembourg.

Two separate matters do call for a local presence. The first is the business permit: for trading activity the manager’s professional qualification and the actual premises are examined. The second is tax: the company is expected to be able to show that it is genuinely managed from Luxembourg. For that reason most structures appoint a manager resident there.

Luxembourg Tax System and Comparison with Turkey

Corporate tax and dividends

The Luxembourg combined burden is reached by adding the solidarity surcharge and the municipal business tax to corporate income tax, and it varies by municipality; the rate above is for Luxembourg City. Net wealth tax is charged on net assets, with a minimum amount graduated by the size of the balance sheet.

Withholding on payments abroad

Dividends distributed by a holding to its own shareholders carry 15 per cent withholding. Where the shareholder is a company meeting the conditions of the participation exemption, the withholding can be reduced to nil; otherwise treaty rates apply. Liquidation proceeds and interest payments generally carry no withholding. A double tax treaty is in force between Turkey and Luxembourg; a certificate of tax residence is obtained to apply treaty rates, and the company is expected to have a genuine presence in Luxembourg.

Bringing the profit back to Turkey

A company resident in Turkey may exempt a dividend received from its Luxembourg subsidiary under article 5/1-b of the Corporate Tax Law. All of the conditions must be met together:

• The subsidiary must be in the nature of a joint stock or limited liability company
• The holding must be at least 10 per cent
• It must have been held without interruption for at least one year at the date the income arises
• The profits sourcing the dividend must bear a total tax burden of at least 15 per cent
• The income must be transferred to Turkey by the date the tax return is due

Controlled foreign company rules

Article 7 of the Corporate Tax Law taxes the income of a foreign subsidiary in Turkey even where it is not distributed, if the following conditions are met together:

Holding shares and receiving dividends is passive income. As a holding relying on the participation exemption will bear a low effective tax burden, all three tests can be met at once in a structure controlled from Turkey, and the income is then declared in Turkey even though it has not been distributed. The assessment takes the nature of the participations, the composition of the income and the tax actually paid in Luxembourg together.

Transfer pricing

Group financing is a frequent component of Luxembourg structures and calls for review on both sides. In Luxembourg the arm’s length nature of the interest rate and the interest limitation rule apply; in Turkey the thin capitalisation and transfer pricing provisions do. Where a loan is made from Luxembourg to the Turkish company, interest on the part of shareholder debt exceeding three times the opening equity is not deductible and is deemed a distributed dividend.

Accounting System and Operational Compliance with Turkey

Books are kept under Luxembourg accounting standards. The annual obligations are:

• Approval of the annual accounts by the general meeting within six months of the year end
• Filing of the approved accounts with the trade registry electronically by the end of the seventh month
• Corporate income tax, municipal business tax and net wealth tax returns
• Monthly, quarterly or annual value added tax returns where registered
• Allocation of 5 per cent of the profit to the legal reserve until it reaches 10 per cent of capital
• Updating the registry and beneficial owner records on each change of ownership or management

Where the accounts are consolidated with a parent in Turkey, two timetables have to be aligned: Luxembourg allows six months for approval and seven for filing, while the Turkish corporate tax return falls due earlier. Since the participation exemption requires the income to have been transferred to Turkey by the date the return is due, the dividend decision has to follow the Turkish timetable rather than the Luxembourg one.

Bank Account Opening and Turkey-Related Companies

The least predictable part of the timetable is the bank account. Banks review investors from outside the European Union in detail, and this stage takes between two and eight weeks. Because the notarial step cannot be completed before the capital is paid in, the bank process sits in front of the formation.

• Ownership chain traced to the ultimate beneficial owner
• Written description of the business model and the expected flows
• Evidence of the source of the capital
• Financial statements of the group companies in Turkey
• Identity and address documents for the managers

A file prepared properly from the outset shortens the stage noticeably. Some service providers can obtain a blocking certificate without a bank account being opened first, which brings the formation forward.

Tax Residency and Permanent Establishment Assessment

Where the company is managed from

Under article 3 of the Corporate Tax Law, companies whose legal seat or business centre is in Turkey are resident taxpayers. The business centre is the centre at which the operations are in fact concentrated and managed. If the decisions of a company formed in Luxembourg are taken in Istanbul, the company may be treated as resident in Turkey despite being registered in Luxembourg, and taxed in Turkey on its worldwide income.

That risk points in the same direction as the substance the Luxembourg side expects. Both sides want the same thing: board meetings held there, decisions taken there, records kept there and a resident manager in place. We cover the subject separately on our page on effective management and control.

Social Security and Labour Legislation

Employment is governed by Luxembourg labour law, and contributions are declared through the joint social security centre as employer and employee shares. Because a substantial part of the workforce commutes from across the border, the applicable social security legislation is determined separately for staff resident in a neighbouring country and working in Luxembourg.

A social security agreement is in force between Turkey and Luxembourg. Where staff are seconded from Turkey, the certificate allowing Turkish coverage to continue must be obtained before the assignment starts; obtaining it afterwards is materially harder and in some cases not possible.

Company Formation Timeframe in Luxembourg

The total is generally four to eight weeks where the documents are complete. Some stages run in parallel; what sets the pace is the bank process and, for trading companies, the business permit.

Common Mistakes Made by Investors

• Assuming that forming a company grants residence. If you are not a European Union national and will work there yourself, a residence permit is needed separately.
• Treating treaty access as given on formation. Relying on the double tax treaty requires the company to have a genuine presence in Luxembourg.
• Expecting a business permit on a domiciliation address. For trading activity the ministry looks for premises actually in use.
• Buying services from an unlicensed provider. Domiciliation, accounting and audit may be provided only by licensed professionals.
• Neglecting the beneficial owner filing. Every change in the ownership structure must be notified to the register within the deadline.
• Leaving the Turkish side until after formation. Run the participation exemption and controlled foreign company tests before the structure is fixed, while options remain.
• Timing the dividend decision to the Luxembourg calendar. The exemption requires the income to reach Turkey by the date the Turkish return is due.

Frequently Asked Questions