Starting up a Luxembourg subsidiary or branch office

This page was last modified on 14-11-2017

Companies can decide to develop their business by opening a new business entity.

The type of entity can be freely chosen (e.g. representative office, coordination centre, subsidiary, branch office, etc.).

A subsidiary is a company with local nationality that is legally independent of the parent company that has a majority holding in the subsidiary. This implies:

  • the parent company has limited liability;
  • administrative procedures with regard to the formation and registration of the new company;
  • more burdensome administrative and operational procedures as compared to those required for a branch office.

A branch office is an establishment which enjoys a certain degree of independence vis-à-vis the founding company or firm, while not being legally separate from it. This implies:

  • fewer administrative procedures with regard to the formation and registration as compared to a subsidiary;
  • fewer administrative and operational procedures;
  • full responsibility and liability of the parent company.

The parent company must take into account the tax differences between subsidiaries and branch offices.

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Who is concerned

Each entrepreneur established in Luxembourg or abroad who intends to grow his business geographically can start up a subsidiary or branch office.

Subsidiary

A subsidiary is a company whose capital was formed by more than half through financial contributions from another company, known as the parent company. The parent company is usually responsible for the direction, management and control of the subsidiary through the intermediary of one or more persons (managers or managing directors) appointed by the parent company.

It enables the parent company to broaden its economic activities under a separate legal entity while:

  • opening up the subsidiary's capital to other investors;
  • maintaining control over the separate entity;
  • optimising the allocation of profits and losses between itself and the subsidiary from a tax point of view.

The subsidiary's activity may be identical or different to that from its parent company.

Subsidiary

Advantages

Disadvantages

  • the subsidiary has the nationality of the country of establishment which allows for a better integration and adaptation to customers;
  • the parent company's legal liability is limited to the amount of its contribution;
  • as a local company, the subsidiary is entitled to public aid, if any.
  • its capital may be opened up to new investors;
  • it can freely chose whether or not to distribute its profits;
  • the parent company may benefit from tax exemptions with regard to the dividends distributed by its subsidiary;
  • parent companies and their subsidiaries can improve their fiscal management at the level of their intra-group contractual relations;
  • the subsidiary and its parent company may benefit, under certain conditions, from the tax consolidation scheme.
  • a subsidiary requires certain formation formalities (company formation, equity (own) capital, etc.);
  • its daily management is subject to administrative procedures which do not apply to a branch office;
  • some sectors of activity require a special authorisation (banking, finance, insurance, real estate, etc.);
  • setting up a subsidiary implies a medium to long term commitment;
  • the initial investment and the fixed set up costs are relatively high.

Branch office

A branch office is a secondary establishment of a main establishment and is defined by a permanent and stable commercial set up or place of operation. The branch office is represented by a representative agent who interacts with the clients in its name.

A branch office must have:

  • a physical installation and organisation which are completely separate from the central administration;
  • a management headed by an agent representing the central administration but who has sufficient power to benefit from a certain degree of operational independence;
  • its own customer base who knows the branch office and undertakes commercial transactions with it without going through the central administration.

The activities of a branch office are necessarily incidental to the activities carried out by the main establishment.

Branch office

Advantages

Disadvantages

  • the set up procedures are simplified;
  • the daily management of a branch office involves very few legal formalities;
  • the branch office does not need to have its own capital, the endowment capital can be zero. Where it exists, it is provided by the parent company.
  • the branch office must communicate financial, sometimes even confidential, data concerning the parent company to the Luxembourg Inland Revenue;
  • in the event of financial difficulties, the parent company is jointly and severally liable for the payment of all debts;
  • a branch office is not really in a position to conclude agreements (transfer or franchising of a patent, operating licence, procedures, etc.) with the parent company as they are one and the same legal entity. For this reason, it can not benefit from related tax advantages;
  • the company's results, whether profit or loss, are immediately taken by the head office;
  • in the event of a tax audit, the country of establishment of the branch office can review the accounts of the whole company.

Prerequisites

If the entrepreneur decides to set up in a country other than Luxembourg, he will need to take the following into account:

  • the tax regime (rate and base) which will apply to the branch office in the country of establishment;
  • the 'transfer pricing' and the proper application of bilateral tax treaties in conjunction with the applicable EU Directives;
  • possible sanctions (applicable to the Luxembourg parent company) in the case of legal structures used for tax optimisation purposes (abuse of rights, tax evasion, 'anti-treaty shopping' provisions, etc.).

How to proceed

Subsidiary

Creation and registration of a Luxembourg subsidiary

In order to set up a subsidiary, the parent company must:

Liability of parent companies

Subsidiaries have a separate legal personality from their parent company.

They can go bankrupt but the parent company is only liable for the subsidiary's commitments up to the amount of its capital contribution.

However, as a result of sureties which are often required from the parent company, the commitments may extend beyond the initial capital.

Daily management of a subsidiary

As a separate legal entity from the parent company, the subsidiary is required to:

Branch office

Starting up a Luxembourg branch office

In order to set up a branch office, the parent company has to:

Liability of parent companies

A branch office does not have a separate legal personality from the parent company.

A branch office can not be made bankrupt and the parent company is fully liable for all of its actions.

Daily management of a branch office

The branch office manager must have been given power of attorney from the parent company in order to act on behalf of the parent company.

A branch office is not a separate legal entity from the parent company and its results are immediately taken by the head office which is responsible for complying with all the legal and fiscal obligations.

However, a branch office of a foreign company must provide the Luxembourg Inland Revenue with financial data on its parent company on a yearly basis.

Who to contact

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Luxembourg
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Email info@houseofentrepreneurship.lu

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