Corporate tax in Luxembourg

Summary

Corporate Income Tax Rate (%) 21 (a)
Capital Gains Tax Rate (%) 21 (a)
Branch Tax Rate (%) 21 (a)
Withholding Tax (%)
Dividends 0 / 15 (b)
Interest 0 / 10 (c)
Royalties 0
Branch Remittance Tax 0
Net Operating Losses (Years)
Carryback 0
Carryforward Unlimited

a) This is the maximum rate. In addition, a municipal business tax and an addi­tional employment fund con tribution (employment fund surcharge) are levied on income (see Section B). A new minimum tax regime took effect on 1 Jan­uary 2013 (see Section B).

b) A 15% dividend withholding tax is imposed on payments to resident and nonresidents. Under Luxembourg domestic law, a full withholding tax ex­emption applies to dividends if they are paid to qualifying entities established in European Union (EU)/European Economic Area (EEA) member states, Switzer land or a country with which Luxembourg has entered into a double tax treaty and if certain conditions are met (see Sections B and F).

c) For details, see Interest in Section B.

Taxes on corporate income and gains

Corporate income tax. Resident companies are subject to tax on their worldwide income. Companies whose registered office or central administration is in Luxembourg are considered resident companies.

Taxation in Luxembourg of foreign-source income is mitigated through several double tax treaties. In addition, if no tax treaty applies, a foreign tax credit is available under domestic law.

Nonresident companies whose registered office and place of management are located outside Luxembourg are subject to cor­porate income tax only on their income derived from Luxembourg sources.

A new minimum tax regime applicable to all taxpayers took effect in Luxembourg on 1 January 2013.

Tax rates. Corporate income tax rates range from 20% to 21%, depending on the income level. In addition, a surcharge of 7% is payable to the employment fund. A local income tax (municipal business tax) is also levied by the different municipalities. The rate varies depending on the municipality, with an average rate of 7.5%. The municipal business tax for Luxembourg City is 6.75% and the maximum effective overall tax rate for companies in Luxembourg City is 29.22%. The following is a sample 2016 tax calculation for a company in Luxembourg City.

Profit EUR100.00
Corporate income tax at 21% (21.00)
Employment fund surcharge at 7% (1.47)
Municipal business tax (6.75)
EUR70.78
Total income taxes EUR29.22
As percentage of profit 29.22%

A new general minimum tax for all taxpayers subject to corporate income tax (except certain holding companies; see next para­graph) took effect in Luxembourg on 1 January 2013. The tax ranges from EUR500 to EUR20,000 (plus contribution to the employment fund), depending on the balance-sheet total as of the closing date of the financial year. Assets that generate income (or are likely to generate income) for which the taxation right belongs to another country based on a double tax treaty concluded with Luxembourg (for example, immovable property, or assets allo­cated to a permanent establishment) must be excluded from the balance-sheet total for the purpose of determining the minimum tax. As a result, the new minimum tax does not significantly af­fect, among others, Luxembourg real estate vehicles holding di­rectly foreign real estate property. It is not possible to reduce the minimum tax by applying certain available domestic tax credits (see Tax Credits in Section C), except with respect to local with­holding tax. The minimum tax applies only to corporate entities that have their statutory seat or place of central administration in Luxembourg. Consequently, nonresident corporate entities deriv­ing Luxembourg-source income, such as foreign entities with a permanent establishment in Luxembourg or holding a real estate property in Luxembourg, are out of the scope of the minimum tax. Companies that are part of a tax-consolidation group suffer this minimum tax at the level of each entity, but the consolidated amount of minimum tax is capped at an amount of EUR20,000. The minimum tax (plus the contribution to the employment fund) levied for a given year is regarded as an advance payment of cor­porate income tax for subsequent years, to the extent that it ex­ceeds the amount of minimum tax (plus contribution to the em­ployment fund) determined for that subsequent year. However, the minimum tax is never refunded to the taxpayer.

The minimum tax for certain holding companies was increased, effective from 1 January 2013. All corporate entities having their statutory seat or central administration in Luxembourg are in the scope of the amended minimum tax regime and subject to a EUR3,000 minimum tax if the sum of fixed financial assets, trans­ferable securities, cash, and receivables owed to affiliated compa­nies exceeds 90% of their balance-sheet total and EUR350,000. Consequent ly, a regulated entity (such as a venture capital com­pany [société d’investissement en capital à risque, or SICAR] and a securitization vehicle) are in the scope of the minimum tax for holding companies to the extent that the above threshold re­quirements are met. The provision under prior law restricting the minimum tax regime to entities whose activities do not require a business license or the approval of a supervisory authority was abolished. The rules mentioned in the preceding paragraph with respect to tax consolidation (cap of EUR20,000), the unavailabil­ity of domestic tax credits and the treatment as an advance corpo­rate income tax payment also apply.

Draft Law No. 6891, published on 14 October 2015, proposes to abolish the minimum tax as described above and to replace it with a minimum net worth tax, which would essentially be identical in terms of the amounts and computation method currently applied for minimum corporate income tax. These new measures would apply from 2016.

Luxembourg investment vehicles. Luxembourg offers a large num­ber of investment vehicles (companies and funds) that can be used for tax-efficient structuring.

Luxembourg Undertakings for Collective Investment in Trans­ferable Securities (UCITs) are subject to an annual subscription tax (taxe d’abonnement) of 0.05%, levied on their total net asset value, unless a reduced rate or an exemption applies. For the rates of the subscription tax, see Section D. Distributions made by UCITs are not subject to withholding tax.

Investment vehicles offered in Luxembourg are described below.

Specialized Investment Funds. Specialized Investment Funds (SIFs) are lightly regulated investment funds for “informed inves­tors.” In this context, an “informed investor” is one of the follow­ing:

  • An institutional investor
  • A professional investor
  • Any other type of investor who has declared in writing that he or she is an “informed investor” and either invests a minimum of EUR125,000 or has an appraisal from a bank, an investment firm or a management company (all of these with a European passport), certifying that he or she has the appropriate exper­tise, experience and knowledge to adequately understand the investment made in the fund

SIFs are subject to significantly simplified rules for setting up fund structures such as hedge funds, real estate funds and private equity funds. Amendments to the SIF Law covering items, such as the authorization process, delegation, risk management, con­flict of interest and cross investment between compartments of SIFs, took effect on 1 April 2012. The Law of 12 July 2013 on alternative investment fund managers (AIFMs) further amended the SIF regime.

An exemption for corporate income tax, municipal business tax and net worth tax applies to investment funds in the form of an SIF. These funds are subject only to a subscription tax at an an­nual rate of 0.01% calculated on the quarterly net asset value of the fund, unless an exemption regime applies (for example, in­vestments in funds already subject to the subscription tax, certain money market funds and pension pooling vehicle funds). Distri­butions by SIFs are not subject to withholding tax.

Certain double tax treaties signed by Luxembourg apply to an SIF incorporated as an investment company with variable capital (société d’investissement à capital variable, or SICAV) or an in­vestment company with fixed capital (société d’investissement à capital fixe, or SICAF). In general, an SIF constituted as a com­mon fund (fonds commun de placement, or FCP) does not benefit from double tax treaties; however, certain exceptions exist (Ger­many, Guernsey, Isle of Man, Jersey, Saudi Arabia, Seychelles and Tajikistan).

Venture capital companies. A venture capital company (société d’investissement en capital à risque, or SICAR) can be set up under a transparent tax regime as a limited partnership or under a nontransparent tax regime as a corporate company. SICARs are approved and supervised by the Commission for the Supervision of the Financial Sector, but they are subject to few restrictions. They may have a flexible investment policy with no diversifica­tion rules or leverage restrictions. SICARs in the form of a cor­poration benefit from a partial objective exemption regime for income from securities under which losses on disposals and value adjustments made against such investments are not deductible from taxable profits. In addition, SICARs are exempt from sub­scription tax and net worth tax. For corporations, a dividend with­holding tax exemption regime applies. SICARs may be in scope of the minimum tax regime, effective from 1 January 2013, to the extent that the threshold requirements are met (see Tax rates). As mentioned above, Draft Law No. 6891 proposes to replace the minimum tax regime with a minimum net worth tax regime, effec­tive from 2016. Although, in principle, SICARS will still benefit from a net worth tax exemption, they would be subject to this new minimum net worth tax regime and, accordingly, would have to pay annual net worth tax under the new regime.

Securitization companies. A securitization company can take the form of a regulated investment fund or a company (which, de­pending on its activities, may or may not be regulated). Securiti-zation companies are available for securitization transactions in the broadest sense and are not subject to net worth tax. They are subject to corporate income tax and municipal business tax. How­ever, commitments to investors (dividend and interest payments)

are deductible from the tax base. Nevertheless, securitization com­panies may be in scope of the minimum tax regime, effective from 1 January 2013, to the extent that the threshold requirements are met (see Tax rates). Distributions of proceeds are qualified as interest payments for Luxembourg income tax purposes and are consequently not subject to withholding tax. As mentioned above, Draft Law No. 6891 proposes to replace the minimum tax regime with a minimum net worth tax regime, effective from 2016. Although, in principle, securitization companies will still benefit from a net worth tax exemption, they would be subject to this new minimum net worth tax regime and, accordingly, would have to pay annual net worth tax under the new regime.

Private Asset Management Companies. The purpose of a Private Asset Management Company (Société de Gestion de Patrimoine Familial, or SPF) is the management of private wealth of indi­viduals without carrying out an economic activity. SPFs are sub­ject to subscription tax levied at a rate of 0.25% with a minimum amount of EUR100 and a maximum amount of EUR125,000. An exemption for corporate income tax, municipal business tax and net worth tax applies.

SPFs may not benefit from double tax treaties entered into by Luxembourg or from the EU Parent-Subsidiary Directive. Divi­dend and interest income arising from financial assets may be subject to withholding tax in the state of source in accordance with the domestic tax law of that state. Until 31 December 2011, the favorable tax status for SPFs was lost for any year in which the vehicle received 5% or more of its dividend income from partici­pations in unlisted and nonresident companies that were not sub­ject to a tax similar to Luxembourg corporate income tax. Under the amended law, effective from 1 January 2012, this restriction is removed. Dividend distributions to shareholders are not subject to Luxembourg withholding tax. Interest payments are exempt from withholding tax unless the recipient is a Luxembourg resident individual (see Interest).

Patrimonial foundations. To further enhance the attractiveness of Luxembourg as a location for the management and administration of private wealth, the Minister of Finance issued on 22 July 2013 a draft Law No. 6595 on patrimonial foundations. The patrimo­nial foundation manages and administers assets for the benefit of one or more beneficiaries or for the benefit of one or more pur­poses other than those exclusively reserved to foundations gov­erned by the modified law dated 21 April 1928 on nonprofit as­sociations and foundations. It may not engage in any commercial, industrial, agricultural or self-employed activities. In contrast to a trust, the patrimonial foundation benefits from a legal personality.

The patrimonial foundation is an autonomous taxpayer subject to corporate income tax. The income generated by the foundation is treated as commercial income from a tax perspective. Conse­quently, it is also subject to municipal business tax. However, the patrimonial foundation is exempt from net wealth tax.

The following types of income are exempt from tax at the level of the patrimonial foundation:

  • Any income derived from capital
  • Capital gains realized on the sale of assets generating income from capital
  • Capital gains realized on the sale of movable assets if the sale takes place more than six months after the acquisition
  • Capital and the redemption value received under an individual long-term savings, disability or life insurance policy

Realized and unrealized losses, as well as foreign-exchange loss­es, on the above assets are not deductible for tax purposes.

Holding companies. Holding companies (sociétés de participa­tions financières, or SOPARFI) are fully taxable Luxembourg resident companies that take advantage of the participation ex­emption regime. They may benefit from double tax treaties sign­ed by Luxembourg as well as the provisions of the EU Parent-Subsidiary Directive. For information regarding debt-to-equity rules, see Section E. A SOPARFI can be set up as a public com­pany limited by shares (société anonyme), limited company ( société à responsabilité limitée) or a partnership limited by shares (société en commandite par actions, or SCA). Loss-making qualifying holding companies are subject to a minimum tax of EUR3,000 plus employment fund; see Tax rates).

Capital gains. The capital gains taxation rules described below apply to a fully taxable resident company.

Capital gains are generally regarded as ordinary business income and are taxed at the standard rates. However, capital gains on the sale of shares may be exempt from tax if all of the following conditions apply:

  • The recipient is one of the following:

— A resident capital company or a qualifying entity fully sub­ject to tax in Luxembourg.

— A Luxembourg permanent establishment of an entity that is resident in another EU state and is covered by Article 2 of the EU Parent-Subsidiary Directive.

— A Luxembourg permanent establishment of a capital com­pany resident in a state with which Luxembourg has entered into a tax treaty.

— A Luxembourg permanent establishment of a capital com­pany or cooperative company resident in an EEA state other than an EU state.

  • The shares have been held for 12 months or the shareholder commits itself to hold its remaining minimum shareholding in order to fulfill the minimum shareholding requirement for an uninterrupted period of at least 12 months.
  • The holding represents at least 10% of the capital of the subsid­iary throughout that period, or the acquisition cost is at least EUR6 million.
  • The subsidiary is a resident capital company or other qualifying entity fully subject to tax, a nonresident capital company fully subject to a tax comparable to Luxembourg corporate income tax or an entity resident in an EU member state that is covered by Article 2 of the EU Parent-Subsidiary Directive.

However, capital gains qualifying for the above exemption are taxable to the extent that related expenses deducted in the current year and in prior years exceed the dividends received. These re­lated expenses include interest on loans used to finance the pur­chase of such shares and write-offs.

Administration. In general, the tax year coincides with the calen­dar year unless otherwise provided in the articles of incorporation. Tax returns must be filed before 31 May in the year following the fiscal year. The date may be extended on request by the taxpayer. Late filing may be subject to a penalty of up to 10% of the tax due.

Taxes are payable within one month after receipt of the tax assess­ment notice. However, advance payments must be made quarterly by 10 March, 10 June, 10 September and 10 December for cor­porate income tax, and by 10 February, 10 May, 10 August and 10 November for municipal business tax and net worth tax. In general, every payment is equal to one-quarter of the tax assessed for the preceding year. If payments are not made within these time limits, an interest charge of 0.6% per month may be assessed.

Luxembourg has introduced a partial self-assessment procedure that is optional for the authorities. This procedure allows the authorities to release tax assessments without verifying the filed tax returns, while keeping a right of verification within a statute of limitations period of five years. In practice, the self-assessment primarily applies to companies having a holding activity.

Dividends. Dividends received by resident companies are gener­ally taxable. However, dividends received from resident taxable companies are fully exempt from corporate income tax if the following conditions are fulfilled:

  • The recipient is one of the following:

— A resident capital company or a qualifying entity fully sub­ject to tax in Luxembourg.

— A Luxembourg permanent establishment of an entity that is resident in another EU state and is covered by Article 2 of the EU Parent-Subsidiary Directive.

— A Luxembourg permanent establishment of a capital com­pany resident in a state with which Luxembourg has entered into a tax treaty.

— A Luxembourg permanent establishment of a capital com­pany or cooperative company resident in an EEA state other than an EU state.

  • The recipient owns at least 10% of the share capital of the dis­tributing company or the acquisition cost of the shareholding is at least EUR1,200,000.
  • The recipient holds the minimum participation in the distribut­ing company for at least 12 months. The 12-month period does not need to be completed at the time of the distribution of the dividends if the recipient commits itself to hold the minimum participation for the required period.

Dividends received from nonresident companies are fully exempt from tax if the above conditions are met and if either of the fol­lowing applies:

  • The distributing entity is a capital company subject to a tax com­parable to Luxembourg corporate income tax of at least 10.5%.
  • The distributing entity is resident in another EU member state and is covered by Article 2 of the EU Parent-Subsidiary Directive.

The exemption for dividends also applies to dividends on partic­ipations held through qualifying fiscally transparent entities.

Expenses (for example, interest expenses or write-downs with re spect to participations that generate exempt income) that are directly economically related to exempt income (for example, dividends) are deductible only to the extent that they exceed the amount of exempt income.

If the minimum holding period or the minimum shareholding re quired for the dividend exemption granted under Luxembourg domestic law is not met, the recipient can still benefit from an exemption for 50% of the dividends under certain conditions.

On the distribution of dividends, as a general rule, 15% of the gross amount must be withheld at source; 17.65% of the net divi­dend must be withheld if the withholding tax is not charged to the recipient. No dividend withholding tax is due if one of the fol­lowing conditions is met:

  • The recipient holds directly, or through a qualifying fiscally transparent entity, for at least 12 months (the holding period re quirement does not need to be completed at the time of the distribution if the recipient commits itself to eventually hold the minimum participation for the required 12-month period) at least 10% of the share capital of the payer, which must be a fully taxable resident capital company or other qualifying entity, or shares of the payer that had an acquisition cost of at least EUR1,200,000, and the recipient satisfies one of the following additional requirements:

— It is a fully taxable resident capital company or other quali­fying entity or a permanent establishment of such company or entity.

— It is an entity resident in another EU member state and is covered by Article 2 of the EU Parent-Subsidiary Directive.

— It is a capital company resident in Switzerland that is fully subject to tax in Switzerland without the possibility of being exempt.

— It is a Luxembourg permanent establishment of an entity that is resident in another EU member state and that is covered by Article 2 of the EU Parent-Subsidiary Directive.

— It is a company resident in a state with which Luxembourg has entered into a tax treaty and is subject to a tax compa­rable to the Luxembourg corporate income tax of at least 10.5%, or it is a Luxembourg permanent establishment of such a company.

— It is a company resident in an EEA member state and is sub­ject to a tax comparable to the Luxembourg corporate in­come tax of at least 10.5%, or it is a Luxembourg permanent establishment of such a company.

  • A more favorable rate is provided by a tax treaty.
  • The distributing company is an investment fund, an SIF, an SPF, an SICAR or a securitization company.

On 5 August 2015, Luxembourg published a draft law which, if adopted, would enact the anti-hybrid clause and the anti-abuse clause as adopted by the European Commission through Direc­tives 2014/86/EU and 2015/121/EU, respectively. Under the pro­posed amendments, the Luxembourg tax exemption for dividends derived from an otherwise qualifying EU subsidiary (see above) would not apply to the extent that this income is deductible by the EU subsidiary. In addition, the participation exemption for divi­dends from qualifying EU subsidiaries and the exemption from Luxembourg dividend withholding tax for income (dividend) distributions to qualifying EU parent companies of Luxembourg companies would not apply if the income is allocated in the con­text of “an arrangement or a series of arrangements which, having been put into place for the main purpose or one of the main pur­poses of obtaining a tax advantage that defeats the object or pur­pose of the PSD (Parent-Subsidiary Directive), are not genuine having regard to all relevant facts and circumstances.” In line with the European Council’s resolution, the draft law continues by stating that “an arrangement, which may comprise more than one step or part, or a series of arrangements, shall be regarded as not genuine to the extent that they are not put into place for valid commercial reasons which reflect economic reality.”

Under the above draft law, these clauses would apply only with­in the intra-EU context for income allocated after 31 December 2015.

Interest. Except for the cases discussed below, no withholding tax is imposed on interest payments. For interest linked to a profit-sharing investment, dividend withholding tax may apply.

Interest payments made by Luxembourg payers to beneficial owners who are individuals resident in other EU member states or to certain residual entities (defined as paying agents on receipt in the directive) were subject to withholding tax, unless the recipient elected that information regarding the interest payment be ex­changed with the tax authorities of his or her state of residence. The withholding tax rate was 35%.

The law of 25 November 2014 abolished the withholding tax described above. Since 1 January 2015, the option to deduct with­holding tax from interest payments to EU-resident individuals is no longer applicable in Luxembourg.

Withholding tax at a rate of 10% is imposed on interest payments made to individuals resident in Luxembourg by the following:

  • Luxembourg paying agents
  • Paying agents established in the EEA or in a state with which Luxembourg has concluded an agreement containing measures equivalent to those in the EU Savings Directive, if a specific form is filed by 31 March of the calendar year following the year of receipt of the interest

The withholding tax is final if the interest income is derived from assets held as part of the private wealth of the individual. The 10% final tax has been extended to interest payments made by paying agents residing in other EU and EEA countries.

Foreign tax relief. A tax credit is available to Luxembourg resident companies for foreign-source income (derived from a country with which no double tax treaty is in place) that has been subject to an equivalent income tax abroad. The same applies to with­holding tax that would have been levied in the country of source of the income, according to the provisions of the applicable dou­ble tax treaty and Luxembourg tax law. The maximum tax credit corresponds to the Luxembourg corporate income tax that is pay­able on the net foreign-source income.

Determination of trading income

General. The taxable income of corporations is based on the a n-nual financial statements prepared in accordance with generally accepted accounting principles. Profits disclosed are adjusted for exempt profits, nondeductible expenses, special deductions and loss carryforwards.

Expenses incurred exclusively for the purposes of the business are deductible. Expenses incurred with respect to exempt income are disallowed (see Section B for a description of the tax treatment of expenses related to tax-exempt dividends).

Accounting rules. International Financial Reporting Standards (IFRS), as adopted by the EU, were introduced in Luxembourg in 2010. Undertakings may apply the IFRS provisions to financial years that remained open on the date of entry into force of this law. However, a tax balance sheet is required to avoid the taxation of unrealized gains. In addition, companies that prepare their ac­counts under the Luxembourg generally accepted accounting principles’ standards may also opt for the use of fair value ac­counting for financial instruments.

A new chart of accounts and an electronic filing requirement for the trial balance for statistical purposes became mandatory in Luxembourg for certain entities for fiscal years beginning after December 2010.

Inventories. Inventory must be valued at the lower of acquisition (or production) cost or fair market value. The cost may be calculated either on the basis of weighted-average prices, first-in, first-out (FIFO), last-in, first-out (LIFO) or a similar method, provided the business situation justifies such a method. The method chosen should be applied consistently.

Provisions. Provisions for losses and uncertain liabilities may be de ductible for tax purposes if they are based on objective facts and if the corresponding charge is deductible and economically con­nected to the relevant tax year.

Tax depreciation. The straight-line depreciation method and, under certain conditions, the declining-balance method (except for build­ings) are allowed.

Commercial buildings are depreciated at straight-line rates rang­ing from 1.5% to 4%. The straight-line rate for industrial build­ings is 4%. Land may not be depreciated.

The depreciation rates under the straight-line method are 10% for plant and machinery, 20% for office equipment and 25% for motor vehicles. The declining-balance depreciation rates may be as high as 3 times the straight-line depreciation rate without ex­ceeding 30% (4 times and 40% for equipment exclusively used for research and development).

Depreciable assets with a useful life of one year or less and those with a value not exceeding EUR870 may be deducted in full from business income in the year of acquisition.

Special tax depreciation for investments in clean technology. Busi­nesses making eligible investments aimed at protecting the envi­ronment and providing for rational use of energy may elect an accelerated tax amortization of 80% of the depreciation base.

Intellectual property. Income, royalties and capital gains derived by resident corporate entities or Luxembourg permanent estab­lishments of nonresident companies from certain intellectual prop­erty (IP) rights acquired or developed after 31 December 2007, except those acquired from an associated company, benefit from a partial tax exemption of 80% of the net income arising from the use of, or the right to use, the IP rights. A loss remains fully de­ductible for tax purposes but it is recaptured in the year in which a gain is derived on the sale of IP. A notional deduction of 80% for the use of a self-developed patent by a company for its own activity is also granted. Capital gains derived from the disposal of qualifying IP rights also benefit from the exemption regime. In addition to the partial exemption from income taxes, qualify­ing IP rights also benefit from a full net worth tax exemption in Luxembourg.

The draft 2016 Budget Law, published on 14 October 2015, pro­vides for the abolition of the existing IP regime, effective from 1 July 2016, with the possibility of benefits under certain condi­tions during a five-year transitional period. It is anticipated that the government will propose a new regime, which complies with the nexus approach, as agreed at the Organisation for Economic Co-operation and Development (OECD) (Action 5 of the Base Erosion and Profit Shifting [BEPS] plan on Countering Harmful Tax Practices More Effectively, Taking into Account Transparency and Substance) and EU levels.

Tax credits

General investment tax credit. A tax credit of 12% is granted for additional investments in qualifying assets. Qualifying assets consist of depreciable tangible fixed assets other than buildings physically used in EU member states, Iceland, Liechtenstein and Norway (EEA). Certain assets are excluded from the additional tax credit in the year of their acquisition, such as motor vehicles, assets that have a useful life of less than three years and second­hand assets. In addition, a 7% credit is granted for qualifying new investments up to EUR150,000, and a 2% credit is granted for investments over that amount. If investments are made to create jobs for disabled persons, these rates are increased to 8% and 4%, respectively. Invest ments may qualify for both credits.

Tax credit for ecological equipment. The rates for the general in­vestment tax credit (see General investment tax credit) are in­creased from 7% to 8% and from 2% to 4% for certain investments intended to protect the environment.

The above credits reduce corporate income tax and may be car­ried forward for 10 years.

Tax credit for professional training. Currently, 14% of training costs can be offset against corporate income tax under certain conditions. However, a draft law submitted to parliament would reduce the tax credit rate and reduce the eligible costs and cap them, depending on the number of employees of the enterprise.

Tax credit for hiring of unemployed. Fifteen percent of the annual gross salary paid to persons who were unemployed can be offset against corporate income tax under certain conditions.

Tax credit for venture capital investments. Eligible projects may qualify for a corporate income tax credit of 30% of the nominal amount of so-called venture capital certificates, limited to a maxi­mum credit of 30% of taxable income.

Relief for losses. Trading losses, adjusted for tax purposes, incurred in or after 1991 may be carried forward without a time limitation. Losses may not be carried back.

Groups of companies. A Luxembourg company and its wholly owned (at least 95% of the capital, which may be reduced to 75% in exceptional situations) Luxembourg subsidiaries may form a “vertical fiscal unity.” The fiscal unity allows the affiliated sub­sidiaries to combine their respective tax results with the tax result of the parent company of the consolidated group. To qualify for tax con solidation, both the parent and its wholly owned subsid­iaries must be resident capital companies that are fully subject to tax. A permanent establishment of a nonresident capital company fully sub ject to a tax comparable to Luxembourg corporate in­come tax also qualifies as a parent company of the group. The tax consolidation rules also allow consolidation between a Luxem­bourg parent company and its in directly held Luxembourg sub­sidiary through a non resident qualifying company or a tax-transparent entity.

Companies that are part of a tax-consolidation group suffer the minimum tax at the level of each entity, but the consolidated amount of minimum tax is capped at the amount of EUR20,000 (see Tax rates in Section B). The net worth tax reduction is not granted up to the amount of minimum corporate income tax due from corporate entities, either on a stand-alone basis or within a tax-consolidation group (see Section D).

A draft law pending before parliament proposes the possibility of a “horizontal tax consolidation.” The horizontal tax consolidation would be a consolidation between two or more Luxembourg-resident companies owned by the same nonresident parent, pro­vided that the parent company is resident in an EEA state. The draft law also provides that Luxembourg permanent establish­ments of companies resident in a EEA member states that are fully liable to a tax corresponding to Luxembourg corporate in­come tax could enter into a tax consolidation. As mentioned above, under the existing law, only Luxembourg-resident capital companies can be part of a tax-consolidation group.

Other significant taxes

The following table summarizes other significant taxes.

Nature of tax Rate (%)
Value-added tax, on the supply of goods and
services within Luxembourg and on the import
of goods and services into Luxembourg
General rate 17
Other rates 3 / 8 / 14
Net worth tax, on net asset value as of
1 January, reduced by the value of qualifying
participations (at least 10% of the capital of
qualifying domestic or foreign subsidiaries)
that are held directly or through a qualifying
fiscally transparent entity; net worth tax may
be reduced up to the amount of corporate
income tax for the preceding year (including
the contribution to the employment fund and
before deduction of tax credits) by creation of
a net worth tax reserve that must be maintained
for five years in the accounts; this net worth
tax reduction is not granted up to the amount
of minimum corporate income tax due from
corporate entities, either on a stand-alone
basis or within a tax-consolidation group
0.5
Subscription tax (taxe d’abonnement), annual
tax on the value of a company’s shares; rate
depends on type of company
Société de Gestion de Patrimoine Familial (SPFs) 0.25
Investment funds
Certain funds of funds, certain institutional
monetary funds, Pension Fund Pooling
Vehicles (PFPVs), microfinance UCIs
and Exchange Traded Funds
0
Specialized Investment Funds (SIFs), dedicated
funds (funds owned exclusively by institutional
investors), institutional compartments of funds,
monetary funds and cash funds, on the condition
that the exemption regime does not apply
0.01
Other funds 0.05
Social security contributions on salaries (2016
rates); paid by
Employer (including health at work contribution and accident insurance but excluding mutual
insurance)
12.26
Employee (including care insurance and
temporary budget balancing tax)
12.95
Payroll taxes, for accident insurance; paid by
employer (2016 rate)
1
Health at work contribution, on salaries; paid
by employer (2016 rate)
0.11
Care insurance on gross employment income;
paid by employee (2016 rate)
1.4
Mutual insurance (2016 rates); paid by
employer
0.51 to 3.04

Miscellaneous matters

Foreign-exchange controls. Luxembourg does not impose transfer restrictions. The Banque Centrale de Luxembourg (BCL) and the Service Central de la Statistique et des Etudes Économiques (the national statistical institute of Luxembourg) monitor the transfer of funds. Effective from 1 January 2012, this obligation was trans­ferred to the companies themselves on a monthly basis. The re­porting obligation also applies to selected companies in the non­financial sector that, based on previous activity, are expected to realize large volumes of transactions, mainly services, with for­eign counterparts.

Debt-to-equity rules. The Luxembourg tax law does not contain any specific thin-capitalization rules. In principle, borrowed money that is necessary for financing an operation is not limited to a percentage of paid-in capital. However, based on the abuse-of-law doctrine, the authorities tend to challenge debt-to-equity ratios of companies engaged in holding activities that are greater than 85:15. Under the abuse-of-law doctrine, the tax authorities may challenge fictitious or abnormal transactions and schemes that are entered into for the sole purpose of avoiding taxes.

Anti-avoidance legislation. No specific anti-avoidance rules are contained in the law, except for the application of the Parent-Subsidiary Directive (see Section B for a description of the gen­eral anti-abuse rule to be introduced into Luxembourg law regard­ing the participation exemption). The 2015 Budget Law replaced the wording of the existing transfer-pricing rule contained in Article 56 of the Income Tax Law by a nearly literal reproduction of the arm’s-length principle set forth in Article 9, Paragraph 1 of the OECD Model Tax Convention on Income and on Capital (the version dated 22 July 2010). Under this measure, if associated enterprises enter into transactions that do not meet the arm’s-length principle, any profits that would have been realized by one of the enterprises under normal conditions are included in the profits of that enterprise and taxed accordingly. Based on this measure and on the general anti-abuse provision, the tax authori­ties can substitute an arm’s-length price if transactions with a related party are entered into at an artificial price or if transac­tions are entered into in an abnormal manner and are solely tax-motivated.

Since 2011, guidance formalizing transfer-pricing rules for intra-group financing activities applies in Luxembourg. To obtain a binding tax clearance from the authorities, it is required that such companies have a minimum equity of at least 1% of the loans granted, with a cap of EUR2 million, and that they have avail­able a transfer-pricing study incorporating OECD standards. The companies must further meet the required substance criteria in Luxembourg.

Chamber of Commerce fee. Membership in the Chamber of Com­merce, which requires an annual membership fee, is mandatory for all commercial companies having their legal seat in Luxem­bourg and for Luxembourg branches of foreign companies. The fee ranges from 0.025% to 0.20%, depending on the taxable profit of the company, before loss carry forwards, as provided by the Luxembourg income tax law. The fee is assessed on the basis of the taxable profit realized two years before the year the contri­bution is due. For companies in a loss situation, partnerships and limited companies (société à responsabilité limitée) must make a minimum contribution of EUR70, while other corporations must make a minimum annual contribution of EUR140. Companies that mainly perform a holding activity and that are listed as such in the Statistical Classification of Economic Activities in the European Community (Nomenclature statistique des activités économiques dans la communité européene, or NACE) Code must pay a lump-sum fee of EUR350.

Special tax regime for expatriate highly skilled employees. The provisions of the beneficial income tax regime for expatriates apply to assignments or recruitments made after 1 January 2011. If the employer meets certain conditions, the tax regime can apply to employees who are sent to work temporarily in Luxembourg on an assignment between intragroup entities and to employees who are directly recruited abroad by a company to work temporarily in Luxembourg. Under the tax regime, tax relief is provided for certain costs related to expatriation if several conditions are met.

Special tax regime for carried interest. The Law on Alternative Investment Fund Managers (AIFMs), dated 12 July 2013, defines “carried interest” as a share in the profits of the Alternative Investment Fund (AIF) accrued to the AIFM as compensation for the management of the AIF, excluding any share in the profits of the AIF accrued to the AIFM as a return on any investment by the AIFM in the AIF. The AIFM law allows the taxation of carried interest realized by certain natural persons that are employees of the AIF or their management company as “speculative income” under Luxembourg’s income tax law. The tax rate is 25% of the marginal tax rate applicable to the adjusted income.

To benefit from the tax regime, natural persons must not have been Luxembourg tax residents, nor have been subject to tax in Luxembourg on their professional revenues, during the five years preceding the year of implementation of the AIFM law. Natural persons must establish their tax domicile in Luxembourg during the year of implementation of the AIFM law or during the follow­ing five years. The favorable tax treatment is limited to the 10-year period beginning with the year in which the individual persons begin their activity entitling them to the above income.

Limitation of corporate tax deductibility of “golden handshakes.” To limit excessive “golden handshakes” to departing employees, voluntary departure indemnities or dismissal indemnities above EUR300,000 are not tax-deductible for employers. Tax rules at the level of the employee remain fully applicable. A fractioned payment that is made over several years is deemed to be a single payment.

Islamic finance. The Luxembourg tax administration provides guidance covering the Luxembourg tax treatment of some contracts and transactions with respect to Islamic finance. This clarifies the revenue repatriation mechanism of Luxembourg’s Sharia-compliant financing instruments as well as structuring capacities.

VAT free zone. In 2011, Luxembourg introduced a temporary ex­emption regime for VAT purposes. This regime provides a VAT suspension system for transactions concerning goods stored in specific locations.

Treaty withholding tax rates

The rates reflect the lower of the treaty rate and the rate under Luxembourg domestic tax law. Dividend distributions to compa­nies resident in a treaty country are covered by the Luxembourg participation exemption regime. As a result, a full exemption from Luxembourg dividend withholding tax may apply if certain con­ditions are met (see Section B).

Dividends (%) Interest (m) (%) Royalties (%)
Armenia 0/5/15 (s) 0 0
Austria 0/5/15 (a)(d) 0 0
Azerbaijan 0/5/10 (n) 0 0
Bahrain 0/10 (z) 0 0
Barbados 0/15 (l) 0 0
Belgium 0/10/15 (c)(d) 0 0
Brazil 0/15 (g) 0 0
Bulgaria 0/5/15 (a)(d) 0 0
Canada 0/5/15 (h) 0 0
China 0/5/10 (a) 0 0
Czech Republic 0/10 (aa)(d) 0 0
Denmark 0/5/15 (a)(d) 0 0
Estonia 0/5/15 (a)(d)(bb) 0 0
Finland 0/5/15 (a)(d) 0 0
France 0/5/15 (a)(d) 0 0
Georgia 0/5/10 (o) 0 0
Germany 0/5/15 (d)(w) 0 0
Greece 0/7.5 (d) 0 0
Guernsey 0/5/15 (g) 0 0
Hong Kong SAR 0/10 (q) 0 0
Hungary 0/5/15 (a)(d) 0 0
Iceland 0/5/15 (a) 0 0
India 0/10 0 0
Indonesia 0/10/15 (a) 0 0
Ireland 0/5/15 (a)(d) 0 0
Isle of Man 0/5/15 (g) 0 0
Israel 0/5/10/15 (u) 0 0
Italy 0/15 (d) 0 0
Japan 0/5/15 (g) 0 0
Jersey 0/5/15 (g) 0 0
Kazakhstan 0/5/15 (y) 0 0
Korea (South) 0/10/15 (g) 0 0
Laos 0/5/15 (s) 0 0
Latvia 0/5/10 (a)(d) 0 0
Liechtenstein 0/5/15 (r) 0 0
Lithuania 0/5/15 (a)(d) 0 0
Macedonia 0/5/15 (a) 0 0
Malaysia 0/5/10 (g) 0 0
Malta 0/5/15 (a)(d) 0 0
Mauritius 0/5/10 (g) 0 0
Mexico 0/5/15 (g) 0 0
Moldova 0/5/10 (t) 0 0
Monaco 0/5/15 (s) 0 0
Morocco 0/10/15 (a) 0 0
Netherlands 0/2.5/15 (a)(d) 0 0
Norway 0/5/15 (a) 0 0
Panama 0/5/15 (s) 0 0
Poland 0/15 (d)(x) 0 0
Portugal 0/15 (d) 0 0
Qatar 0/5/10 (p) 0 0
Romania 0/5/15 (a)(d) 0 0
Russian Federation 0/5/15 (j) 0 0
San Marino 0/15 (l) 0 0
Saudi Arabia 0/5 0 0

 

Dividends

%

Interest (m)

%

Royalties

%

Seychelles 0/10 (z) 0 0
Singapore 0/5/10 (g) 0 0
Slovak Republic 0/5/15 (a)(d) 0 0
Slovenia 0/5/15 (a)(d) 0 0
South Africa 0/5/15 (a) 0 0
Spain 0/5/15 (a)(d) 0 0
Sri Lanka 0/7.5/10 (k) 0 0
Sweden 0/15 (d) 0 0
Switzerland 0/5/15 (f) 0 0
Taiwan 0/10/15 (e) 0 0
Tajikistan 0/15 0 0
Thailand 0/5/15 (a) 0 0
Trinidad and Tobago 0/5/10 (g) 0 0
Tunisia 0/10 0 0
Turkey 0/5/15 (a) 0 0
United Arab Emirates 0/5/10 (g) 0 0
United Kingdom 0/5/15 (a)(d) 0 0
United States 0/5/15 (b) 0 0
Uzbekistan 0/5/15 (a) 0 0
Vietnam 0/5/10/15 (i) 0 0
Non-treaty countries 0/15 (d) 0 0

 

a) The 5% rate (Netherlands, 2.5%; Indonesia, Korea (South), Morocco and Thailand, 10%) applies if the beneficial owner is a company that holds directly at least 25% of the capital of the payer of the dividends.

b) The 0% rate applies if the beneficial owner is a company that, on the date of payment of the dividends, has owned directly at least 25% of the voting shares of the payer for an uninterrupted period of at least two years and if such dividends are derived from an industrial or commercial activity effec­tively operated in Luxembourg. The 5% rate applies if the beneficial owner of the dividends is a company that owns directly at least 10% of the voting shares of the payer. The 15% rate applies to other dividends.

c) The 10% rate applies if the recipient is a company that, since the beginning of the fiscal year, has a direct holding in the capital of the company paying the dividends of at least 25% or paid a purchase price for its holding of at least EUR6,197,338.

d) Under an EU directive, withholding tax is not imposed on dividends distrib­uted to a parent company resident in another EU state if the recipient of the dividends holds directly at least 10% of the payer or shares in the payer that it acquired for a price of at least EUR1,200,000 for at least one year. This holding period does not need to be completed at the time of the distribution if the recipient commits itself to eventually holding the participation for the required period.

e) The 15% rate applies if the beneficial owner of the dividends is a collective-investment vehicle established in the other jurisdiction and treated as a body corporate for tax purposes in that other jurisdiction. The 10% rate applies to other dividends.

f) The 0% rate applies if, at the time of the distribution, the beneficial owner is a company that has held at least 25% of the share capital of the payer for an uninterrupted period of at least two years. The 5% rate applies if the benefi­cial owner is a company that holds directly at least 25% of the share capital of the payer. The 15% rate applies to other dividends.

g) The second listed rate applies if the beneficial owner is a company that holds directly at least 10% of the capital of the payer.

h) The 5% rate applies if the beneficial owner is a company that controls directly or indirectly at least 10% of the voting power in the company paying the dividends. The 15% rate applies to other dividends.

i) The 5% rate applies if the beneficial owner of the dividends is a company that meets either of the following conditions:

  • It holds directly or indirectly at least 50% of the capital of the payer.
  • It has invested in the payer more than USD10 million or the equivalent in Luxembourg or Vietnamese currency.

The 10% rate applies if the beneficial owner of the dividends is a company that holds directly or indirectly at least 25%, but less than 50%, of the capital of the payer and if such beneficial owner’s investment in the payer does not exceed USD10 million or the equivalent in Luxembourg or Vietnamese cur­rency. The 15% rate applies to other dividends.

j) The lower rate of 5% applies if the beneficial owner is a company that holds directly at least 10% of the capital in the distributing company and that has invested at least EUR80,000 (or equivalent in rubles) in such company.

k) The 7.5% rate applies if the beneficial owner of the dividends is a company that holds directly at least 25% of the shares of the payer. The 10% rate applies to other dividends.

l) The 0% rate applies if the beneficial owner is a company that holds at least 10% of the payer for a continuous period of 12 months before the decision to distribute the dividend. The 15% rate applies to other dividends.

m) Interest payments may be subject to withholding tax in certain circumstances. For details, see Section B.

n) The 5% rate applies if the beneficial owner is a company that holds directly or indirectly at least 30% of the paying company’s capital and if the value of its investment in the paying company is at least USD300,000 at the payment date.

o) The 0% rate applies if the beneficial owner of the dividends is a company that holds directly or indirectly at least 50% of the capital of the payer and that has invested more than EUR2 million or its equivalent in the currency of Georgia. The 5% rate applies if the beneficial owner of the dividends is a company that holds directly or indirectly at least 10% of the capital of the payer and that has invested more than EUR100,000 or its equivalent in the currency of Georgia. The 10% rate applies to other dividends.

p) The 0% rate applies if the beneficial owner is a company that holds directly at least 10% of the capital of the payer. The 5% rate applies to individuals who own directly at least 10% of the capital of the company paying the divi­dends and who have been residents of the other contracting state for at least 48 months preceding the year in which the dividends are paid. The 10% rate applies to other dividends.

q) The lower rate applies if the beneficial owner of the dividends is a company that holds directly at least 10% of the shares in the payer or if it acquired the shares in the payer for a price of at least EUR1,200,000. The 10% rate applies to other dividends.

r) Withholding tax is not imposed on dividends distributed to a parent company if the beneficial owner of the dividends is a company that, at the time of the payment of dividends, has held directly for an uninterrupted period of 12 months at least 10% of the capital of the company paying the dividends or that has a capital participation with an acquisition cost of at least EUR1,200,000 in the company paying the dividends. The 5% rate applies if the beneficial owner is a company that holds directly at least 10% of the capital of the payer of the dividends. The 15% rate applies to other dividends.

s) The 5% rate applies if the beneficial owner is a company that holds directly at least 10% of the payer. The 15% rate applies to other dividends.

t) The 5% rate applies if the beneficial owner is a company that holds directly at least 20% of the capital of the payer. The 10% rate applies to other divi­dends.

u) The 5% rate applies if the beneficial owner is a company that holds directly at least 10% of the capital of the payer. The 10% rate applies if the beneficial owner is a company that holds directly at least 10% of the capital of the company paying the dividends and if the payer company is a resident of Israel and the dividends are paid out of profits that are subject to tax in Israel at a rate lower than the normal rate of Israeli company tax. The 15% rate applies to other dividends.

v) The 5% rate applies if the beneficial owner is a company that holds at least 25% of the voting shares of the payer of the dividends during the period of six months immediately before the end of the accounting period for which the distribution of profits takes place.

w) The 5% rate applies if the beneficial owner is a company that holds directly at least 10% of the capital in the distributing company. In other cases, the 15% rate applies, including dividends arising from real estate companies that benefit from a full or partial tax exemption or that treat distributions as tax deductible. SICAVs, SICAFs, SICARs and qualifying FCPs are in the scope of the new double tax treaty with Germany and may benefit from the with­holding tax regime.

x) The 0% rate applies if the beneficial owner is a company that directly holds at least 10% of the capital of the company paying the dividends for an unin­terrupted period of 24 months. The 15% rate applies to other dividends.

y) The 5% rate applies if the beneficial owner of the dividends is a company that holds directly at least 15% of the shares of the payer. The 15% rate applies to other dividends.

z) The 0% rate applies if the beneficial owner of the dividends is a company that holds directly at least 10% of the shares of the payer. The 10% rate applies to other dividends.

(aa) The 0% rate applies if the beneficial owner is a company (other than a partnership) that holds for an uninterrupted period of at least one year directly at least 10% of the capital of the company paying the dividends. The 10% rate applies to other dividends.

(bb) On 7 July 2014, Luxembourg and Estonia signed a new treaty that is intended to replace the current 2006 treaty. Under the new treaty, a 0% rate will apply if the beneficial owner is a company that holds directly at least 10% of the capital of the company paying the dividends. A 10% rate will apply to other dividends.

Mongolia repealed its treaty with Luxembourg, effective from 1 January 2014.

Luxembourg has signed and enacted new tax treaties or amend­ments to existing tax treaties with Argentina, Ukraine and the United States, but these treaties and amendments are not yet in force. The withholding tax rates under these new treaties and amendments are not reflected in the table above.

Following treaty negotiations, treaty drafts have been initialed with Botswana, Cyprus, Kyrgyzstan, Oman and Serbia. New treaties or amendments to existing treaties have been signed with Albania, Andorra, Austria, Brunei Darussalam, Croatia, Estonia, France, Hungary, Ireland, Kuwait, Lithuania, Mauritius, Singa­pore, Tunisia, the United Arab Emirates and Uruguay.

Tax treaty negotiations with Egypt, Lebanon, Montenegro, New Zealand, Pakistan, Senegal, Syria and the United Kingdom are under way.

Since 2009, Luxembourg has signed numerous new treaties or treaty amendments with other countries. As a result, Luxembourg complies with OECD standards with respect to information ex­change between tax authorities and reinforces international fiscal cooperation against tax fraud.