Establishing a Luxembourg Subsidiary: Legal, Tax, and Compliance Essentials for Global Businesses

Setting up a subsidiary in Luxembourg has become the go to for companies looking to enter the European market. With its location, business friendly environment and tax benefits Luxembourg is the perfect base for companies big and small looking to go global. This guide will take you through the process of setting up a Luxembourg subsidiary, we’ll cover the legal, financial and operational aspects. ColombiaRecruiter will also cover the best practices and common pitfalls.

Why Luxembourg? Luxembourg is a business hub for many reasons:

  • Location: In the heart of Europe, close to Germany, France and Belgium.
  • Tax: Attractive corporate tax regime, exemptions for certain income and many double taxation treaties.
  • Business friendly: The government actively encourages foreign investment, incentives and support programs for companies.
  • Stability: Financial sector, high standard of living and politically stable, a safe long term investment.

Step-by-Step Process to Establish a Luxembourg Subsidiary

1. Define Your Objectives

Before we get started, define your business objectives. Ask yourself:

  • Are you looking to access the European market?
  • Will the subsidiary be for production, sales or other business activities?
  • How will the Luxembourg subsidiary fit into your overall corporate strategy?

Having objectives will help you to tailor your approach and decide on the best structure for your subsidiary.

Setting up a subsidiary in Luxembourg colombia recruiter

2. Choose the Right Form

Luxembourg has several forms of companies but the most common ones for subsidiaries are:

  • Société à Responsabilité Limitée (Sàrl): Like a limited liability company (LLC), this is the most common structure for small and medium-sized enterprises. Minimum share capital is €12,000.
  • Société Anonyme (SA): Like a public limited company, minimum share capital is €30,000. Used by bigger corporations.
  • Société en Commandite Simple (SCS): A limited partnership, offers flexibility, often used in investment funds and real estate transactions.

Your choice of form will depend on the size of your company, industry and long term objectives. It’s recommended to consult a local lawyer or business advisor to choose the right one.

3. Register your subsidiary

Once you have chosen the form, the next step is to register your subsidiary with the Luxembourg business registry. The process will involve:

  • Choose a Company Name: The name must be unique and compliant with local regulations. You can check the availability of your desired name through the Luxembourg Trade and Companies Register (RCS).
  • Draft and Notarize the Articles of Association: The Articles of Association will describe the purpose, structure and internal rules of the company. These documents must be notarized by a public notary.
  • Deposit Share Capital: Depending on the form, you will need to deposit the minimum share capital in a Luxembourg based bank account. The bank will issue a certificate confirming the deposit which must be included in the registration process.
  • Register with the RCS: Once all documents are ready, you must submit them to the Luxembourg Trade and Companies Register. This will include the notarized Articles of Association, share capital certificate and identification documents for the directors and shareholders of the company.

4. Get the Right Permits and Licenses

Depending on your industry and what you do, you may need to get specific permits or licenses for your subsidiary to be legal. Here are some common ones:

  • Business License (Autorisation de Commerce): Required for most businesses, this license checks that your subsidiary meets regulatory and operational standards.
  • Sector-Specific Licenses: Some industries like finance, telecoms and healthcare require additional licenses or approvals from relevant authorities.

Don’t forget to get the permits or you’ll face delays or penalties, so make sure you know what’s required for your industry.

5. Corporate Governance

Corporate governance refers to the internal management and decision making of your subsidiary. You will need to set up:

  • Board of Directors: The board is responsible for the management of the subsidiary. Depending on the legal structure, you may need to have a minimum number of directors. In Luxembourg, there is no nationality or residency requirement for directors, so you can appoint international personnel.
  • Corporate Secretary: Not mandatory but many companies appoint a corporate secretary to handle administrative tasks such as keeping company records and ensuring compliance with regulatory requirements.

6. Open a Bank Account

Opening a bank account in Luxembourg is a simple process but may take some time due to the country’s anti-money laundering regulations. To open an account you will need to provide:

  • Certificate of Incorporation: Proof that your subsidiary has been registered with the RCS.
  • Articles of Association: A copy of the subsidiary’s governing documents.
  • Identification of Directors and Shareholders: Passports or other identification documents for all relevant parties.

Luxembourg has many international banks with a global presence so it’s easy to manage your subsidiary’s financial transactions.

7. Tax and Accounting Compliance

Luxembourg’s favourable tax regime is one of the main reasons why companies choose to set up a subsidiary here. However tax compliance is crucial.

  • Corporate Income Tax: Luxembourg’s corporate income tax rate is 24.94%. Subsidiaries are taxed on their worldwide income but certain types of income such as dividends from foreign subsidiaries may be exempt under Luxembourg’s participation exemption regime.
  • Value Added Tax (VAT): Luxembourg has a standard VAT rate of 17% with reduced rates for certain goods and services. Your subsidiary must register for VAT if its turnover exceeds a certain threshold.
  • Annual Financial Statements: Luxembourg subsidiaries must prepare and file annual financial statements in accordance with local accounting standards (Lux GAAP or IFRS). These statements must be audited if the subsidiary exceeds certain size thresholds.

8. Staff and Payroll

If you plan to hire local staff, you need to get to know Luxembourg’s labour laws and payroll requirements. Key points to consider:

  • Employment Contracts: Luxembourg requires written employment contracts outlining the terms of employment, salary, working hours and job duties.
  • Social Security Contributions: Both employer and employee must contribute to Luxembourg’s social security system which covers healthcare, pensions and unemployment insurance.
  • Payroll Taxes: Employer must withhold income tax and social security contributions from employees’ salaries.

Luxembourg labour laws are employee friendly so make sure your subsidiary complies with all the regulations to avoid any disputes.

9. Ongoing Compliance and Reporting

Once your subsidiary is set up, ongoing compliance with Luxembourg’s laws and regulations is key. This includes:

  • Filing Annual Returns: Your subsidiary must file an annual return with the RCS, including details of the company’s directors, shareholders and financial situation.
  • Keeping Corporate Records: Accurate and up to date records must be kept, including minutes of board meetings, shareholder resolutions and financial statements.
  • Renewing Permits: Certain permits and licenses need to be renewed from time to time depending on your industry.

10. Use a Professional Services Firm

Given the complexity of setting up and running a Luxembourg subsidiary, many companies choose to use a professional services firm to handle administrative, legal and financial tasks. They can help with:

  • Company Formation: Registering and legal requirements.
  • Tax Advisory: Tax planning and compliance.
  • Payroll Management: Payroll and social security for local staff.

Best Practices for Establishing a Luxembourg Subsidiary

  • Use Local Experts: Work with local legal, financial and business advisors to ensure your subsidiary complies with Luxembourg regulations and runs smoothly.
  • Plan for Tax Optimisation: Luxembourg has many tax incentives but the tax system can be complex. A tax advisor will help you optimise your subsidiary’s tax structure and benefit from the exemptions.
  • Follow Regulatory Changes: Luxembourg’s legal and tax landscape is changing all the time. Stay up to date with changes that may impact your subsidiary’s operations or tax obligations.

Issues

  • Language: Although Luxembourg is multilingual, some legal documents and processes require French or German. Consider hiring local translators or bilingual staff to communicate.
  • Strict Compliance: Luxembourg has strict compliance and reporting requirements, especially in tax and anti-money laundering. Failure to comply can result in penalties.

Conclusion

Setting up a subsidiary in Luxembourg is a good move for companies looking to enter Europe. With its business friendly environment, tax advantages and central location, Luxembourg has a lot to offer. Follow this guide and use local expertise to get it right.

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