Legal reserve in Luxembourg: 5 % up to a 10 % cap

Legal reserve in Luxembourg: how much must be set aside?

The legal reserve in Luxembourg requires every capital company to allocate at least one twentieth of its net profit each year to an unavailable reserve, until that reserve reaches one tenth of the subscribed share capital; the allocation then ceases to be mandatory, and it resumes if that tenth is encroached upon.

The rule sits in the amended law of 10 August 1915 on commercial companies. It does not depend on the size of the business, on its sector, or on whether it distributes a dividend. A company that carries its entire profit forward must fund the legal reserve exactly like one that pays a dividend: the allocation comes before the choice between distribution and free reserves, it is not an alternative to it.

Three reserves are routinely confused in practice, and they do not follow the same rules. The legal reserve has its source in the law and its ceiling in the capital. Statutory reserves have their source in the articles of association, which set both the allocation and the ceiling. The reserve attached to the net wealth tax reduction, finally, has its source in a tax decision, for an amount of five times the reduction obtained and a holding period of five years. Only the first is due whatever happens.

We regularly see annual accounts whose legal reserve has stood still for several years although the capital was increased in the meantime: the ceiling went up, the allocation had become mandatory again, and nobody noticed because no schedule was being kept. The correction goes through the following year's profit allocation, but it leaves a trace in the accounts already filed. The order of magnitude of our fees for an annual accounts engagement is set out in our fee schedule.

How far to go: the ceiling of one tenth of subscribed capital

The ceiling of the legal reserve in Luxembourg is one tenth of the subscribed share capital, that is EUR 1,200 for a SARL at the minimum capital of EUR 12,000 and EUR 3,000 for a SA at the minimum capital of EUR 30,000.

The mechanism therefore has two levels: a pace, one twentieth of the year's net profit, and a target, one tenth of the capital. The pace depends on the result, the target depends only on the capital. A SARL at minimum capital earning EUR 20,000 of net profit sets aside EUR 1,000 in the first year, then EUR 200 in the second, and the question no longer arises. The same company, if it raises its capital to EUR 100,000, sees its ceiling move to EUR 10,000 and the allocation become mandatory again for the missing EUR 8,800.

The movement works both ways. A capital reduction lowers the ceiling, and the legal reserve may end up above target without any new allocation being due. A loss that eats into equity, conversely, may encroach on that tenth and restart the obligation. It is this automatic resumption that justifies a schedule kept year by year, alongside the trial balance rather than reconstructed on the day of the meeting.

The official sources consulted set the pace and the target, but they do not say whether the base of the one twentieth is the net profit of the year alone or that profit reduced by earlier losses. We therefore do not settle that point here, and it arises concretely for a company returning to profit after several loss-making years, whose tax treatment is a separate matter covered by loss carry-forward.

When the allocation is decided: with the profit allocation

The allocation to the legal reserve in Luxembourg is decided together with the allocation of the result, which the general meeting approves within six months of the close of the financial year; the annual accounts are then filed within the month following that approval.

The two deadlines run on from each other and give the limit everyone remembers: seven months at most after the close for filing with the trade and companies register. Approval rests with the general meeting of members in a SARL or a SARL-S, and with the general meeting of shareholders in a SA. The proposed allocation itself comes from the management body, and that is the stage at which the allocation to the legal reserve has to be quantified: a meeting approving an allocation silent on the legal reserve approves an incomplete allocation.

The allocation is not an expense. It does not affect the result of the year, it splits the after-tax balance between legal reserve, free reserves, profit carried forward and dividend. It is therefore neutral for the taxable base, and that is exactly what makes it easy to forget: no tax return calls for it, only the allocation table of the annual accounts carries it.

The drafting of the minutes deserves an explicit line. An allocation that merely refers to the profit and the dividend leaves the reader of the filed accounts to reconstruct the allocation by difference, and the filer with no record of the decision. We therefore write out the amount allocated to the legal reserve, the balance of the account after allocation and the ceiling applicable at the date of the meeting: three figures that are enough to show, years later, that the obligation was followed year by year.

The control we apply is a simple one: before drafting the minutes, compare the balance of the legal reserve account with one tenth of the subscribed capital shown in the most recent deed, not with the capital one believes to know. Capital increases carried out during the year are the first cause of discrepancy.

Where the legal reserve sits in the accounts and the chart

On a Luxembourg balance sheet, the legal reserve sits under item A.IV.1 of equity, within the « Reserves » heading; in the standard chart of accounts it carries account 131, inside heading 13 devoted to reserves in class 1.

Item A.IV of the balance sheet layout, which transposes Directive 2013/34/EU, reads in four lines: the legal reserve, the reserve for own shares or own units, statutory reserves, then other reserves including the fair value reserve. That last line is itself split between other available reserves and other unavailable reserves. Available or not is no cosmetic distinction: it is what feeds the distribution test examined below.

The standard chart of accounts applicable to financial years beginning on or after 1 January 2020 was determined by the grand-ducal regulation of 12 September 2019. The allocation entry involves no cash: the balance to be allocated is debited and account 131 credited, up to the twentieth retained. Nothing leaves the company, and that is precisely the point of the mechanism — locking a fraction of the profit into equity instead of letting it join the distributable amount.

One point worth noting for analytical review: the legal reserve remains an equity line until dissolution. In liquidation, general accounting law ceases to apply in favour of the specific provisions of the Commercial Code, and it is the liquidator who distributes the remaining corporate assets after payment or escrow of the sums owed to creditors.

What the legal reserve blocks: the net asset test

The legal reserve in Luxembourg is unavailable: no distribution may be made where the net assets are, or would become following that distribution, lower than the subscribed capital increased by the reserves that the law or the articles do not allow to be distributed.

That test is an equity floor, and the legal reserve already funded adds to the subscribed capital to raise it. A second lock operates upstream, on the very amount the meeting may decide to distribute: the result realised since the end of the last financial year whose accounts were approved, increased by profits carried forward and by withdrawals from available reserves, reduced by losses carried forward and by sums to be placed in reserve under a legal or statutory obligation. It is in that last term that an allocation not yet made resurfaces.

The practical consequence deserves to be stated plainly: a company whose legal reserve has not reached its ceiling cannot distribute the whole of its profit, even where its cash position would allow it. The twentieth must leave the distributable amount before the balance is arbitrated. The same reasoning applies during the year to an interim dividend, whose cap repeats that mandatory reserve term word for word.

The textbook case is a holding company that pushes its entire result up every year. Where its capital is significant and its legal reserve still incomplete, the twentieth retained locks away part of the flow the shareholder was expecting, year after year, until one tenth of the capital is reached. The amount is rarely an economic obstacle; forgetting it, by contrast, weakens the distribution itself, since the distributable amount was computed without the mandatory reserve term.

By contrast, the official sources consulted do not state the conditions under which a legal reserve already funded could be released, incorporated into the capital or applied against losses. We therefore do not assert it, and no more do we deny it: the absence of the point from the extracts read proves nothing. It is a question to ask before putting the transaction on the agenda, not after.

The SARL-S adds a second reserve, up to EUR 12,000

The SARL-S carries two reserves in Luxembourg: the legal reserve of one tenth of the capital, and a reserve of its own funded each year by one twentieth of the net profit until that reserve, added to the subscribed and paid-up capital, reaches EUR 12,000.

The interaction becomes clear through the amounts. The capital of a SARL-S lies between EUR 1 and EUR 12,000: for a capital of EUR 1,000, the legal reserve is capped at EUR 100, an amount reached in the first profitable year. The reserve specific to the simplified form, by contrast, runs until capital plus reserve reaches EUR 12,000, which is the minimum capital of a classic SARL. It is that reserve, not the legal one, that shapes the early years.

The logic is one of gradual capitalisation: the simplified form allows a start with token capital, and the reserve rebuilds over time the cushion that the minimum capital of a classic SARL provides at once. The two allocations are taken from the same net profit and are tracked in two separate accounts, failing which the ceiling of the second becomes impossible to evidence.

What the sources consulted do not specify: the fate of the SARL-S reserve when the company converts into a classic SARL, nor whether that allocation resumes if capital plus reserve falls back below EUR 12,000 after a loss. Both cases occur, and they are handled on the file, not by analogy with the legal reserve.

Sources and verification

Written for Financial Services Luxembourg and reviewed before publication by Mickaël LOC, licensed accountant (authorisation 10077274). The documentary review dated 7 October 2026 relies on the accessible sources identified below. Points not confirmed against primary texts are explicitly identified in this section.

The sources consulted, all read on 7 October 2026, are the following. The amended law of 10 August 1915 on commercial companies gives the annual allocation of at least one twentieth of net profit, the ceiling of one tenth of the share capital, the resumption of the obligation where that tenth is encroached upon, the net asset test before any distribution and the five terms of the distributable amount. It also carries the reserve obligation specific to the simplified private limited company.

On Guichet.lu: the pages on the SARL, the SARL-S and the SA for the minimum share capital of EUR 12,000 and EUR 30,000 and for the competent bodies; the page on filing annual accounts with the register for approval of the accounts and of the profit allocation within six months of the close and filing within the month following that approval; the pages on dissolution and voluntary liquidation for the distribution of remaining assets by the liquidator.

The remaining sources concern accounting presentation. Question and answer 16/010 of the Accounting Standards Commission, on the balance sheet and profit and loss account layouts, gives item A.IV of equity and its four lines, including the legal reserve at A.IV.1, and the split of other reserves between available and unavailable.

The standard chart of accounts determined by the grand-ducal regulation of 12 September 2019, applicable to financial years beginning on or after 1 January 2020, gives account 131 for the legal reserve in heading 13 of class 1. The Chamber of Commerce brochure on the simplified private limited company gives the one twentieth allocation and its EUR 12,000 ceiling, subscribed and paid-up capital included.

Six points could not be verified in their primary source and are therefore not asserted here. The full text first: the domains guichet.public.lu, legilux.public.lu, impotsdirects.public.lu, cnc.lu and cc.lu are blocked by the network proxy of our editorial environment, and these pages were read through indexed extracts using a search restricted to official domains. Next comes the numbering of the articles of the coordinated 1915 law: two extracts attach different content to the same number 720-4, so no number is quoted, only the law itself.

Then come the exact base of the allocation where earlier losses remain, the conditions for releasing a legal reserve or incorporating it into the capital, the fate of the SARL-S reserve after conversion into a classic SARL, and the form-by-form list of companies concerned beyond the SA, the SARL and the SARL-S. These points can be checked in the coordinated text of the law of 10 August 1915 on legilux.public.lu, in the publications of the Accounting Standards Commission on cnc.lu, and with the trade and companies register on lbr.lu.

This article sets out the state of the law at the date of publication and does not constitute personalised legal or tax advice: the applicable ceiling, the base of the allocation, the distributable amount and any overlap with a statutory or tax reserve depend on the form of the company, its articles of association, the state of its equity and its history of results. Report an error to contact@financialservices.lu: the correction is dated in the article.