What will replace the 1929 Holding Company regime?

The end of this year will see the abolition of the venerable 1929 Holding Company regime. From January 1, 2011, any 1929 holding companies that have not changed their status will become fully taxable.
Since a ruling by the European Commission in 2006, 1929 holding companies have been in a transitional period. This meant that no new 1929 holding companies could be incorporated, while existing ones created up to July 20, 2006 could benefit from the transitional regime only under certain conditions; those that did not meet those conditions lost their privileged tax status.
Up to December 31, 2010, 1929 companies currently under the transitional regime can elect to transform themselves into another kind of company, otherwise they will be automatically converted when the year-end deadline is reached.
What happens if companies do nothing?
As of January 1, existing 1929 holding companies will become Soparfis (sociétés de participations financières). The advantages of a Soparfi include access to Luxembourg’s network of double taxation treaties and to European Union directives including the Parent-Subsidiary and Interest and Royalties directives, the application of tax deductions and the possibility to carry forward losses.
However, unlike 1929 holding companies, Soparfis are fully taxable. Companies that are automatically converted will become subject to municipal business tax, corporate income tax and net wealth tax levied on the net assets of the company, although tax planning measures may be used to mitigate the impact of these taxes.
What are the other options for the conversion of 1929 holding companies?
A range of other structures is available in Luxembourg for the conversion of 1929 holding companies.
Société de Gestion de Patrimoine Familiale (SPF)
The SPF was created by the law of May 11, 2007 as an alternative option to replace the 1929 holding company. Its advantages include exemption from municipal business tax, corporate income tax and net wealth tax (although there are exceptions), the absence of Luxembourg withholding tax on dividends and interest, application of the EU Taxation of Savings Directives, and a tax-neutral regime for investors.
However, the SPF has a number of disadvantages, notably restrictions on the kind of investors that can use the structure. These are limited to individuals acting to manage their private property, wealth management companies acting exclusively to manage the private property of individuals, and intermediaries acting in the name of such private investors.
In addition, the purpose of an SPF is strictly limited to the acquisition, holding, management and realisation of financial assets. The structure does not benefit from Luxembourg’s double taxation treaties, nor from the Parent-Subsidiary Directive.
The conversion of 1929 holding companies into SPFs is tax-neutral.
Specialised Investment Fund (SIF)
Brought into being by the law of February 13, 2007, the SIF may be a suitable option for 1929 holding companies that contain a managed portfolio. SIFs offer a range of advantages including a subscription tax of only 0.01 per cent, exemption from corporate income tax and net wealth tax, and exemption from Luxembourg withholding tax on dividends.
The purpose of a SIF is the management of financial assets and real estate. It can be either fiscally transparent (as a common contractual fund, or FCP) or non-transparent (open-ended investment company, or Sicav); Sicavs benefit from certain Luxembourg double taxation treaties. A SIF offers a tax-neutral regime for investors and in addition allows for the creation of legally segregated compartments or sub-funds.
The disadvantages of a SIF are that it is an entity regulated and supervised by the Financial Services Supervisory Authority and is subject to risk diversification rules. The regime is restricted in terms of eligibility to institutional, professional and well-informed investors, and SIFs must reach the minimum capital level of €1,250,000 within one year.
In theory 1929 holding companies can also be converted into securitisation vehicles or risk capital investment companies (Sicars), but these structures are less likely to be appropriate to the purposes of 1929 holding companies.
Other solutions
As an alternative to these conversion options, a 1929 holding company can also be merged with another company, it can be liquidated, or its registered office can be transferred abroad.
Despite the abolition of the 1929 Holding Company regime, a broad range of alternative solutions is available in Luxembourg to suit your particular needs.

New investment vehicle under discussion - SOGEPAF - alternative to holding 1929

A new investment vehicle designed for private investors will most probably be introduced in the next couple of months, currently named the SOGEPAF (“société de gestion de patrimoine familial“). A draft bill is currently under discussion but not yet set before Parliament to provide this new Luxembourg investment vehicle. This investment vehicle will be introduced as a substitute for the holding 1929 companies.
As currently under discussion, this new investment vehicle will mainly have the following key features.

  • No corporate income tax;
  • No net worth tax;
  • A subscription tax of 0,25% on the capital invested with a cap (to be determined in the future);
  • Subject to debt equity ratio rules;
  • Maximum of 5% of dividends coming from companies established in countries where taxation rate is lower than 11%.

The investment vehicle set out hereabove is only a proposal at this moment and will be discussed by the Luxembourg parliament in the coming weeks and months. We will keep you updated once there is more information available.
This investment vehicle will certainly be interesting for all those who want to manage private assets.
Do not hesitate to contact us should you have any questions on the above.