In the era of Pillar Two and global tax changes, more Israelis are choosing to structure their European activity through Luxembourg and Spain. But what is the difference between the two, when is it advisable to combine them, and how can this be done correctly?
When Israelis look for a European base for business activity or investments, two names come up repeatedly: Luxembourg and Spain. Each offers unique advantages, but the reason they work so well lies precisely in combining them.
Luxembourg is one of the world’s leading holding jurisdictions. Although it is a country of fewer than 700,000 residents, it is ranked second globally in terms of assets under management in investment funds and serves as the base for thousands of international holding companies. Spain, by contrast, is a large and significant market in its own right – the fourth-largest economy in the eurozone – and serves as a natural bridge for business activity in Latin America.
Criterion | Luxembourg | Spain |
Effective Corporate Income Tax (CIT) (2025) | 23.87% | 25% |
Key feature | Financial / holding center | Large market / bridge to Latin America |
Dividend Withholding Tax (WHT) → Israel | 0% / 5% / 15% | 10% |
Dividend exemption | Participation Exemption | 95% exemption |
Tax treaty with Israel | Exists | Exists |
How do global tax changes affect holding structures in Luxembourg and Spain?
In the past, establishing a European structure was mainly reserved for large corporations. In recent years, however, we have seen a sharp increase in interest from mid-sized Israeli business owners and investors. The reasons are clear: rising real estate prices in Europe, expansion of business activity into Europe, and the desire to improve tax efficiency in a lawful and legitimate manner.
At the same time, two significant regulatory developments are changing the landscape: the entry into force of Pillar Two rules – a 15% global minimum tax enacted in both Luxembourg (2024) and Spain (2024) – and domestic tax updates in both countries.
For anyone who already holds a European structure, this is a good opportunity to make sure it is optimized under the new rules. Anyone who is only considering such a structure must understand the new rules before getting started
Luxembourg: why it remains the preferred jurisdiction for global holding structures
The main structure in Luxembourg is the Société de Participations Financières (SOPARFI) – a standard Luxembourg holding company that is subject to regular corporate income tax but benefits from a particularly broad Participation Exemption regime.
What does this mean in practice? A full exemption on dividends and capital gains from subsidiaries, provided two main conditions are met:
- Holding at least 10% of the share capital of the distributing company, or an acquisition value of at least €1.2 million
- A holding period of at least 12 months
In addition, Luxembourg offers 0% WHT on interest and royalties paid to non-residents – a significant advantage in intra-group financing structures. In relation to Israel, under the 2004 tax treaty, WHT on dividends may be 0% where the Participation Exemption conditions are met, 5% for a direct holding of 10% or more, and 15% in all other cases.
Spain: not only sun and sea – also an attractive tax regime for international holdings
The equivalent regime in Spain is the Entidad de Tenencia de Valores Extranjeros (ETVE) – a special regime for Spanish holding companies with international activity. However, even outside the special regime, general Spanish law grants an almost full exemption on dividends and capital gains from the sale of shares in foreign companies, making Spain one of the most efficient jurisdictions for the taxation of international holdings within the European Union.
The conditions for the Spanish exemption:
- Holding at least 5% in the foreign company for a period of at least one year
- The foreign company must be subject to tax of at least 10% in its jurisdiction, or Spain must have a tax treaty with that jurisdiction that includes exchange of information provisions
It is important to note: under the Israel-Spain tax treaty of 2001, WHT on dividends from Spain to Israel is 10% – higher than Luxembourg. At the same time, Spain has an extensive network of tax treaties with Latin American countries, making it an ideal starting point for business activity there.
How to build a smart European structure and save hundreds of thousands of euros
An Israeli entrepreneur holds three commercial real estate properties in Europe – one in Berlin and two in Madrid – generating approximately €800,000 in annual rental income in total. Until recently, the entrepreneur distributed dividends directly from a Spanish company to Israel and paid 10% WHT under the treaty.
Following professional advice, the entrepreneur established a SOPARFI in Luxembourg, which holds the Spanish companies. The structure is now:
Israel ← Luxembourg SOPARFI ← SpainCo ← assets
- Dividend from Spain to Luxembourg: 0% WHT under the EU Parent-Subsidiary Directive
- Dividend from Luxembourg to Israel: 0% WHT, as the Participation Exemption conditions are met
- Effective saving: WHT decreased from 10% to 0%. On €800,000 of income, this represents savings of up to €80,000 per year
Pillar Two: a 15% global minimum tax – what does it mean for your structure?
Pillar Two is a quiet revolution in international taxation. As of 2024, multinational groups with revenue exceeding €750 million in two of the last four years are required to pay a minimum tax of 15% in each jurisdiction in which they operate.
What this means in practice:
- Most mid-sized Israeli investors are not directly affected – the €750 million threshold is high
- Large groups must reassess every existing structure
- Even those below the threshold should be familiar with the rules, as they affect business partners and investors
Both Luxembourg and Spain have enacted the European directive and are implementing a Qualified Domestic Minimum Top-Up Tax (QDMTT). Structures planned before 2023 may require reassessment.
What does Israeli law say about structures through Luxembourg and Spain?
Building a proper European structure requires an understanding of both sides of the equation – not only foreign law, but also what Israel says about it:
- Controlled Foreign Company (CFC) rules: if a foreign company is held by Israelis and does not distribute dividends, the Israel Tax Authority may attribute its income to Israel and tax it there
- Business substance requirements: a structure that is to be recognized by the tax authorities must reflect genuine management – board meetings in the relevant jurisdiction, local employees, and decisions actually being made outside Israel
- Principal Purpose Test (PPT): an anti-avoidance tool that allows tax authorities to deny treaty benefits if the principal purpose of the structure is tax reduction rather than a genuine business purpose
- Reporting to the Israel Tax Authority: holding a foreign company requires reporting in Israel. Failure to report is an offense
Five things to check before setting up a European structure
- Check whether there is a tax treaty between Israel and the planned holding jurisdiction
- Make sure the structure meets business substance requirements – local directors and genuine management
- Examine the impact of the Israeli CFC rules on profit distributions
- Check whether you fall within the scope of Pillar Two based on the group’s total revenue
- Do not set up a structure without combined professional advice – both Israeli and European
From our professional experience: what works and what does not when setting up a European tax structure
Luxembourg and Spain are effective and legitimate tools for international tax planning, but their success depends on building a solid structure with real business substance. The most common mistake we see is clients who establish a structure “on paper” without business substance: a company registered in Luxembourg while all decisions are made in Tel Aviv is a structure that may be challenged. The rules have changed – reassessing existing structures has become a necessity that cannot be postponed.
Nimrod Yaron & Co. specializes in Israeli and international taxation. Our team is made up of professionals with years of experience at the Israel Tax Authority, alongside experience at leading accounting firms and law firms, and brings together legal and economic insight. We advise private and public companies, Israeli and foreign, global venture capital funds, as well as clients seeking focused advice in clear, accessible language. We also work with a professional network of accounting firms and law firms around the world in order to provide comprehensive support in cross-border matters.
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FAQ
What is the difference between a Luxembourg SOPARFI and a Spanish ETVE?
A SOPARFI is a Luxembourg holding company that benefits from the Participation Exemption regime – a full exemption on dividends and capital gains under certain conditions. An ETVE is a special Spanish regime for companies with international activity, allowing a 95% exemption on foreign-source income.
Can any Israeli establish a company in Luxembourg?
Legally, yes. In practice, however, establishing a structure in Luxembourg involves significant setup and annual operating costs. As a rule of thumb, the structure is economically worthwhile when the expected income justifies the costs – generally from €200,000–€300,000 of annual income and above.
What is Pillar Two and how does it affect me?
Pillar Two is a 15% global minimum tax mechanism that applies to international groups with revenue exceeding €750 million. Most mid-sized Israeli investors are not directly affected, but it is important to understand the rules – both because they may affect business partners and because the threshold may decrease in the future.
What happens if the Israel Tax Authority does not recognize the structure?
If the structure is disallowed, Israel may tax the foreign company’s income directly in the hands of the Israeli shareholders, together with penalties and interest. In serious cases, reportable tax positions may also apply.
Do I need to report a company in Luxembourg to the Israel Tax Authority?
Yes, absolutely. Holding a foreign company must be reported in the Israeli annual tax return. In addition, in certain cases there is a reporting obligation for international transactions (Form 150), as well as Common Reporting Standard (CRS) and Foreign Account Tax Compliance Act (FATCA) requirements. Failure to report is a tax offense.
