Switzerland or Luxembourg? How to best minimize your taxes
Tax comparison: Swiss holding company versus Luxembourg Soparfi holding company
Switzerland and Luxembourg offer various tax advantages to holding companies incorporated there, but which is the best choice for your company? This tax comparison offers the answer which depends largely on what financial activity your company carries out, which are then taxed at the end of the year at different rates depending on if you are in Switzerland or Luxembourg.
In this tax comparison we examine a French company owned half by a Swiss holding company and the other half by a Luxembourg holding company to see exactly how Swiss taxation compares to Luxembourg taxation in the same situations.
We examine Swiss taxation versus Luxembourg taxation in three different situations:
- distribution of dividends
- revenues from holding management services to its affiliate
- capital gains from the sale of an affiliate
Example number 1
Switzerland or Luxembourg: Distribution of dividends
Case study
The French affiliate pays out the same amount in dividends to its two parent companies (owning equal parts): a Swiss holding company and a Luxembourg holding company.
Data
- This affiliate has a total dividend distribution of 1,000,000 €.
- The value of the affiliate company represents 70% of the total assets of each of the two parent companies.
- The cost of financing the assets is 100,000 € during the financial year by each of the two parent companies.
Withholding tax
These dividends are not subject to France's withholding tax because:
- Switzerland: due to the France/Swiss tax treaty
- Luxembourg: due to Luxembourg's article 119 of the CGI which exempts dividends paid out to a parent company within the EU from withholding taxes.
Tax
| Switzerland | Luxembourg | |
|---|---|---|
| Dividends received (gross income from holdings) | 500,000 | 500,000 |
| Quote-part of financing costs (70% of 100.000) | 70,000 | 0 |
| Flat rate administration costs (5% of the dividend) | 25,000 | 0 |
| Untaxed Dividends (net income from holdings) | 405,000 | 500,000 |
| Taxed dividends | 95,000 | 0 |
| Swiss federal tax (8.5%) | 8,075 | 0 |
| Luxembourg tax | 0 | 0 |
| Total tax | 8,075 | 0 |
Luxembourg taxation on a Luxembourg Soparfi allows total exemption from dividends received compared to Swiss taxation of a Swiss holding where the dividend is taxable up to 5% of the estimated administration costs of the sum of the dividend and also the cost of financing the affiliate.
Example number 2
Switzerland or Luxembourg: Revenue for holding management services
Case study
Let us now imagine that the French company also pays 100,000 euros in management services to both the Swiss holding company on the one hand and to the Luxembourg Soparfi company on the other. If the services are real, they will be deductible for the French company.
Tax
| Switzerland | Luxembourg | |
|---|---|---|
| Management services | 100,000 | 100,000 |
| Luxembourg tax (28%) | 0 | 28,000 |
| Swiss federal taxl (8.5%) | 8,500 | 0 |
The Swiss holding company offers a favorable tax environment for accessory administrative services (federal tax rate of 8.5%) while there is no specific tax discount for the Luxembourg Soparfi, meaning that the Luxembourg taxation of holding management services is at the regular rate (about 28%).
Example number 3:
Switzerland or Luxembourg: Capital gains earned from the resale of an affiliate
Case study
Again, the French affiliate is held 50% by the Swiss holding company and 50% by the Luxembourg Soparfi holding company.
Data:
- The affiliate was acquired from both holding companies at a price of 1,000,000 euros each.
- The holding company has the opportunity to sell their shares at a total price of 2,000,000 euros.
Tax
| Swizterland | Luxembourg | |
|---|---|---|
| Capital gains received | 500,000 | 500,000 |
| Quote-part of financing costs (70% of 100.000,00) | -70,000 | |
| Untaxed capital gains | 500,000 | 430,000 |
| Taxed capital gains | 70,000 | |
| Luxembourg tax (28%) | 19,600 |
Switzerland taxation allows capital gains to be completely tax exempt, whereas in Luxembourg taxation, the financing before deductions of the holding is still taxable (to prevent double tax exemption).
