Taxation in Luxembourg

Corporate income tax

Corporate income tax applies to all resident companies and to Luxembourg permanent establishments of foreign companies. Resident taxpayers are liable to tax on their world-wide income, unless income is exempted under the provisions of applicable double tax treaties. Non-resident taxpayers are liable to tax only on their Luxembourg sourced income. A company is considered to be a resident tax payer if its place of management is located in Luxembourg.

Businesses with taxable income lower than 175,000 euros (EUR) are subject to CIT at a rate of 15%. Businesses with taxable income between EUR 175,000 and EUR 200,001 are subject to CIT computed as follows: EUR 26,250 plus 31% of the tax base above EUR 175,000. The CIT rate is 17% for companies with taxable income in excess of EUR 200,001 leading to an overall tax rate of 24.94% in Luxembourg City (taking into account the solidarity surtax of 7% on the CIT rate, and including the 6.75% municipal business tax rate applicable).

The CIT does not apply to tax-transparent entities (e.g. general or limited partnerships or European Economic Interest Groupings) unless they are subject to the reverse hybrid rules. Although there used to be a minimum CIT for Luxembourg resident companies, no such minimum CIT is applicable as of 2016. It has been replaced by a minimum net wealth tax.

Solidarity surtax

A 7% solidarity surtax is imposed on the CIT amount. Taking into account the solidarity surtax, the aggregate CIT rate is 18.19% for companies with taxable income in excess of EUR 200,001.

Municipal business tax on income

Municipal business tax is levied by the communes and varies from municipality to municipality. The municipal business tax for Luxembourg City is 6.75%. The effective combined CIT rate (i.e. CIT, solidarity surtax, and municipal business tax) for Luxembourg City is 24.94%.

Withholding tax

Dividends paid to a resident individual are subject to a 15% withholding tax (see also “Rates” under “Individual taxation,” above). Dividends paid to a nonresident company or individual generally are subject to a 15% withholding tax, unless the rate is reduced under a tax treaty.

Net wealth tax

Net wealth tax is levied annually on total gross assets reduced by the debts of the companies. The actual net worth tax rate is 0.5%.

Capital duty

When a company is formed, the subscription of its capital is subject to a duty tax equal to 1% of the capital. The same is true for capital increase, whether in cash, in kind or for share premium.

Value-added tax (VAT)

Supplies of goods and services, which are deemed to take place in Luxembourg, are subject to VAT at the standard rate of 17% (lowest standard VAT rate in the European Union) or, on certain transactions, at 14% (e.g. certain wines, advertising pamphlets, management and safekeeping of securities), 8% (e.g. supply of gas or electricity), or 3% (e.g. food [except most alcohol beverages]; pharmaceutical products; books [including e-books since the Circular n°793 released by the Luxembourg VAT authorities of 17 May 2019]; radio and television broadcasting services [except adult entertainment]; shoes, accessories, and clothes designed for children under the age of 14). As from 1st January 2023 and until 31st December 2023, the standard rate, intermediary rate and reduced rate will decrease by 1% to respectively 16%, 13% and 7%.

Luxembourg resident taxable persons are, in principle, required to be registered for VAT. However, taxable persons carrying on exclusively VAT-exempt activities and who do not have any right to recover input VAT are not required to register for VAT unless they are liable to self-assess VAT on good/services required from abroad. If so, they may be subject to simplified VAT compliance obligations.

Double tax treaties

Luxembourg has signed 86 DTTs, most of which include provisions of article 26.5 of the Organisation for Economic and Co-operation Development (OECD) model agreement on exchange of information between tax authorities.

Foreign tax relief – Foreign income received by residents that is subject to a tax equivalent to Luxembourg income tax and is not exempted by a DTT is granted a tax credit; any non-imputable tax in excess is deductible as a tax-deductible expense.

Luxembourg specific tax efficient vehicles

Luxembourg provides a number of tax efficient vehicles for holding investments and/or organizing financing activities. There are both taxable (SoParFi) and non-taxable regimes, with respect to income and capital gains taxation.

SPF (Société de Gestion de Patrimoine Familial)

The private wealth management company

The SPF, introduced by the law of April 26, 2007, takes one of the existing forms of a S.A., S.à r.l., S.C.A. or S.C. organized as a S.A., and is governed by the same rules, but benefits from a special tax regime, subject to restrictions mainly on its activities and on who may be its shareholders.

The SPF’s activities are restricted to acquiring, holding, managing and disposing of “financial assets”. All commercial activities, the granting of interest bearing loans and the provision of any kind of remunerated services are forbidden and the SPF may not have a role in the management of companies in which it holds shares. The SPF’s shareholders must be individuals, private wealth vehicles or intermediaries acting on behalf of individuals or private wealth vehicles.

The major advantage of the SPF is that these companies are exempt from income tax, net worth tax and withholding tax on dividends distributed, and are only subject to the following:

Registration duty at the fixed rate of EUR 75 (capital duty no longer applies).

Annual subscription tax (taxe d’abonnement”) at an annual rate of 0.25% levied on the amount of paid-up capital increased by the amount of share premium and the amount of debts exceeding eight times the paid-up capital and share premium. The subscription tax is capped to a maximum annual amount of EUR 125,000 (minimum of EUR 100).

The SPF is not entitled to benefit from double tax treaties signed by Luxembourg or EU directives.

SIF (Specialised Investment Fund)
Fonds d’Investissement Spécialisé (FIS)

Luxembourg SIF is a tax-exempt lightly regulated investment fund reserved for “informed investors”. The SIF can either be set up as a contractual fund (fonds commun de placement, otherwise known as an FCP), or as a variable capital or fixed capital company (SICAV or SICAF).

A SICAV may have the legal form of a S.A., SARL., S.C.A. or S.C. organized as a S.A. A SICAF may take those forms as well as the S.N.C. or Société civile forms.

It is, however, more lightly regulated, for example in terms of reporting requirements and restrictions on its investments and leverage than UCITS and Part II UCIs. It must apply risk diversification and can be divided into sub-funds. The SIF must have net assets of at least EUR 1,250,000.

A major advantage of the SIF is that it is exempt from income tax, net worth tax and dividend withholding tax on dividends distributed, and is only subject to the following:

Registration duty at the fixed rate of EUR 75 (capital duty no longer applies). Contribution of movable property (e.g. shares, receivables, cash) to a Luxembourg company for a consideration other than shares should be subject to proportional registration duties.
Annual subscription tax of 0.01% of net asset value (payable on a quarterly basis).
A SIF may be in the scope of the Luxembourg law implementing the EU Savings Directive, but only if it is a FCP, and this will then depend on its investment policy.
A SIF is eligible for benefits under certain tax treaties signed by Luxembourg but excluded from others.
One limitation on the use of SIFs is that they do not qualify under the EU Parent Subsidiary Directive as normally taxable companies.
Dividends distributed by the SPF are not subject to withholding tax.

There is no withholding tax on interest paid by the SPF except where the EU Savings Directive or Luxembourg domestic withholding tax apply.

SOPARFI – Sociétés de Participations Financières

Taxable holding companies

The SOPARFI, which is fully taxable like any other entity, takes advantage of tax legislation available to all companies (principally double tax treaties and benefits under the EU Parent Subsidiary Directive) and does not have any restrictions on the scope of its activities.

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