The European Commission (EC) announced, on 19 July 2006, that the Holding 1929 Company regime violated EC state aid rules (article 87 EC Treaty) and distorted competition. In response, Luxembourg’s government created, with the Law of 11 May 2007 relating to the creation of a private wealth management company(SPF law), an investment vehicle for private wealth management (société de gestion de patrimoine familial, also referred to as SPF) to replace the Holding 1929 Company, the tax-exempt Luxembourg holding company.

Pursuant to article 1 of the SPF law, an SPF can be set up in the form of any capital company existing under Luxembourg law. Therefore, an SPF can adopt one of the following forms: (i) a public limited liability company (société anonyme), (ii) a private limited liability company (société à responsabilité limitée), (iii) a partnership limited by shares (société en commandite par actions), or (iv) a cooperative in the form of a public limited company (société coopérative organisée comme société anonyme). However, an SPF cannot be a transparent entity, such as a partnership.

‘Any financial asset typically encountered in private wealth management may be held by a private wealth management company’

The SPF’s articles of association shall explicitly state it is subject to the provisions of the SPF law and the name of the company shall always be supplemented, after the indication of the legal form of the company, by SPF. The minimum share capital of an SPF depends on the choice of legal structure.

Article 1 of the SPF law limits the SPF’s object to the acquisition, holding and management of financial assets, as defined by the SPF law, and excludes any business activity. Article 2(1) of the SPF law defines financial assets as financial instruments, as stated in the Law of 5 August 2005. These include, among others, any form of shares, securities, derivatives and related instruments, as well as deposits and cash held on bank accounts. The scope of the financial assets’ definition is that any financial asset typically encountered in private wealth management may be held by an SPF.

Article 2(2) of the SPF law provides that an SPF can hold a participation in a company provided it is not involved in the management of that company. As the SPF must remain a passive investor, it may not provide remunerated services to any of its participations, such as bookkeeping, back-office functions and interest-bearing loans.

Pursuant to article 1 of the SPF law, the shares in an SPF can only be held by private investors, as defined by article 3(1) of the SPF law. These comprise:

As the objective of the SPF is to act as a family holding, it may not be held by the wider public. Shares issued by the SPF can be bearer shares but cannot be publicly quoted on a stock exchange.

There is no need to have the approval of the Luxembourg regulatory authority, Commission de Surveillance du Secteur Financier (CSSF). The competent authority to exercise the tax control over the SPF is the Administration for Registrations and State Property (Administration de l’enregistrement et des domaines). The right of control and investigation is limited to searching and examining the facts and information regarding the SPF’s tax status and the details required to ensure and verify the fair and accurate collection of taxes and duties payable by the SPF.

Every year (no later than 31 July) the domiciliary agent, a chartered accountant or an auditor must issue a certificate confirming that:

The SPF must publish its accounts every year.

‘Authorities may withdraw beneficial tax treatment from any private wealth management company that infringes any provision relating to its status’

Provided that the annual dividends paid to an SPF by companies that are either not subject to a tax deemed equivalent to Luxembourg income tax (i.e. in practice, the relevant company must be effectively taxed at a rate of at least 11 per cent) or not covered by the EC Parent Subsidiary Directive (Council Directive 90/435) represent less than 5 per cent of the overall dividend payments made to an SPF during the relevant year, the following rules apply:

• No debt equity ratio needs to be maintained. However, a tax of 0.25 per cent (taxe d’abonnement) is due for the part of the debts that exceed eight times the paid-up capital increased by the issue premium.
• No corporate income tax.
• No municipal business tax.
• No VAT.
• ‘Taxe d’abonnement’: a tax of 0.25 per cent (with a minimum tax amount of 100 euros and a maximum of EUR125,000 per year) on the amount of the paid-up capital increased by the issue premium (if any). The taxe d’abonnement is declared quarterly. During the year of its incorporation and liquidation, the SPF pays the taxe d’abonnement pro rata to the number of days it has existed during the quarter in question.
• Withholding tax on interests: interests paid to Luxembourg-resident persons are taxed at 10 per cent and those to non-resident natural persons at 20 per cent under the regime of the EU Savings Directive.
• No withholding tax on distributions: no withholding tax is due on dividends paid to Luxembourg or foreign residents.
• No wealth tax: SPFs are exempt from wealth tax, whereas Luxembourg companies (Soparfi) are subject to a wealth tax of 0.5 per cent on their net assets.
• Excluded from the Parent-Subsidiary Directive (Council Directive 90/435/EEC of 23 July 1990, as amended).
• SPFs will not qualify for treaty protection under most of the tax treaties concluded by the Grand Duchy of Luxembourg.

The administrative authorities described above may withdraw the benefit of the specific tax treatment from any SPF that infringes any provision relating to its status.

On 17 June 2011, the government council approved a draft law proposing a more attractive tax regime for the SPF. The draft law, which will enter into force on 1 January 2012, aims to abolish the criteria for the non-application of the tax exemption to the SPF. Indeed, an SPF may, under current law, lose the benefit of its tax exemption for a given year if it receives at least 5 per cent of the total amount of dividends from non-resident companies and unlisted companies that are not subject to a tax comparable to Luxembourg corporate income tax.

The EC noticed that an SPF may currently invest in any Luxembourg company (whether tax-exempted or not) while maintaining all the benefits related to the tax exemption. However, in case of investments in foreign companies, the SPF may lose the benefit of its tax exemption. This anti-abuse provision may prevent the investment of Luxembourg entities in similar foreign vehicles.

Upon its entry into force, the new law will allow an SPF to receive dividends from foreign companies located in low-tax jurisdictions. This novelty will no doubt enhance the interest of families in this type of vehicle.