Legal reserve and profit allocation in Luxembourg

In short. At the end of each financial year, the general meeting of a Luxembourg company approves the accounts, then decides how to allocate the result. Before any dividend, the law requires at least 5% of net profit to be set aside to the legal reserve, every year, until that reserve reaches 10% of the share capital. The remainder goes to retained earnings, to free reserves or to a dividend.

Every year, once the accounts are closed, the same question lands on the meeting's table: what do we do with the result? The answer is not free from end to end. Part of the profit is locked away by law before distribution is even on the table, and the order of the decisions matters as much as the amounts. Here is how the allocation of a SARL's or an SA's result is decided in Luxembourg, with the mechanics of the legal reserve and a worked example.

What is profit allocation?

Profit allocation is the decision by which the shareholders determine what becomes of the profit, or the loss, of the closed financial year. It happens after the annual accounts are approved, at the ordinary general meeting. For a profit, three destinations are possible: putting it to reserve, legal or free; leaving it in retained earnings for the following year; or distributing it to the shareholders as a dividend. A single close often combines all three.

A point of vocabulary saves a lot of mistakes. The result for the year is the profit or loss of that year. The result to be allocated, on the other hand, adds to the year's result the retained earnings carried forward from previous years and subtracts amounts already locked away. It is this second figure, not the first, that forms the basis of the decision.

The legal reserve: 5% a year up to 10% of capital

The rule is simple and long-standing. A capital company, an SA as much as a SARL, must set aside at least one twentieth, that is 5%, of its net profit each year to a legal reserve. That obligation stops once the reserve reaches one tenth, that is 10%, of the subscribed share capital. The legal reserve is not distributable: it is a safeguard set in the interest of creditors.

This obligation is set out in the amended law of 10 August 1915 on commercial companies. Two practical consequences follow. First, a young company builds up its reserve in the early years, until it hits the ceiling, then leaves it alone. Second, if later losses eat into that reserve and push it back below 10%, the annual allocation of 5% resumes until it is rebuilt.

On this example, the company sets aside 1 000 € in the first year, then only 200 € in the second to reach the ceiling of 1 200 €. From then on, the whole of net profit becomes freely allocable again. The ceiling therefore depends on the capital: a SARL at the minimum capital of 12 000 € caps its legal reserve at 1 200 €, while a company with capital of 100 000 € must build it up to 10 000 €.

Profit: reserve, retained earnings or dividend?

Once the legal reserve is served, the balance is split according to the shareholders' wishes and the company's needs.

• Retained earnings leave the profit in equity, with no definitive decision on its use. It is the prudent option, common when you want to keep some room before deciding.
• Free or statutory reserves set aside sums the shareholders can distribute later. They strengthen equity, something every bank looks at before granting credit.
• The dividend takes the profit out of the company to the shareholders. It is the only one of the three options that triggers immediate taxation, with a withholding at source and taxation in the recipient's hands, which we set out in our article on dividends from a Luxembourg SARL.

The order is not neutral: the legal reserve is funded before any dividend. A meeting that distributed the whole profit while forgetting the allocation takes an irregular decision, one a buyer or a bank will spot on reading the accounts.

And in the event of a loss?

A loss is carried to retained earnings in deficit: it stays recorded in equity, in the negative, and is cleared against future profits or by drawing on available reserves. As long as it is not absorbed, no dividend can be distributed, since there is no profit to share.

One threshold deserves a director's attention. When accumulated losses bring net assets below half the share capital, the law requires the meeting to be convened to decide whether or not to continue the business. This is not a formality: it is a governance signal, and the point where the support of an accounting firm matters most, before the situation deteriorates.

The order of operations at the close

The allocation decision does not arrive on its own. It sits within a precise sequence, the same every year.

• The management, or the board, draws up the accounts for the year.
• The ordinary general meeting approves the annual accounts, in principle within six months of the close.
• In the same breath, the meeting votes on the allocation of the result: funding the legal reserve, retained earnings, reserves, any dividend.
• The annual accounts are filed with the trade and companies register on time, or face late-filing surcharges.
• If a dividend is decided, the withholding at source and its return follow their own calendar, shorter than most people think.

The mistakes we see

A few slips come up regularly in the files we take over. The first is forgetting the legal reserve allocation in the early years: the company distributes or carries everything forward, and the reserve stays at zero when it should be climbing. The second is confusing the result for the year with the distributable result: reasoning on the year's profit without accounting for an earlier retained loss, and distributing an amount that does not really exist. The third concerns the simplified SARL (SARL-S), which follows its own regime: it allocates at least one twenty-fourth of its net profit each year to a reserve, until the total of capital and that reserve reaches the 12 000 € minimum set for an ordinary SARL.

Let us be plain: for a well-capitalised company whose legal reserve has already reached its ceiling, this mechanism becomes a simple box to tick. The real stake is mainly for young companies and for those coming out of a period of losses. That is where allocation deserves to be thought through, not just recorded.

Frequently asked questions

Is the legal reserve mandatory for a SARL?

Yes. Like the SA, the SARL must allocate at least 5% of its net profit to the legal reserve each year, until it reaches 10% of the share capital. The obligation stems from the amended law of 10 August 1915 on commercial companies.

Can the legal reserve be distributed?

No, as long as it corresponds to the legal minimum of 10% of capital. The legal reserve is a non-distributable reserve, set up in the interest of creditors. Only free reserves and retained earnings in surplus can be distributed.

Who decides on the allocation of the result?

The ordinary general meeting of shareholders, after approving the annual accounts. The decision is recorded in the minutes of the meeting and is then reflected in entries within equity.

What happens to a loss for the year?

It is carried to retained earnings in deficit and cleared against the profits of following years or by drawing on available reserves. No dividend is possible until the loss is absorbed.

Read more

• Accounting firm in Luxembourg: the complete guide for an SME
• Dividends from a Luxembourg SARL: 15% withholding, half-dividend and the real cost
• Filing annual accounts in Luxembourg: deadlines, late fees and preparing them in Odoo
• Corporate tax in Luxembourg: CIT, municipal business tax and net wealth tax
• What an accounting firm costs in Luxembourg: fixed fee, hourly rates and hidden extras

Why Advena?

We keep the books of Luxembourg SMEs with 1 to 50 employees on a flat fee, from 325 € per month, all in: day-to-day bookkeeping, VAT and eCDF filing, annual accounts and RCS filing, payroll, a monthly review with a dedicated file manager and permanent real-time access to your books. In practice, you know your distributable result and the state of your legal reserve before the meeting, while the decision can still be adjusted, not eight months later. We inform and we point you in the right direction; for a complex holding or transfer-pricing questions, we will tell you plainly that it is not our ground.

Information up to date as at August 2026, based on the amended law of 10 August 1915 on commercial companies (Legilux) and the guidance sheets of Guichet.lu. This article informs and does not constitute legal or tax advice.