Corporate Taxation in Luxembourg
Corporate income tax
Corporate income tax in Luxembourg is applicable to all resident companies, as well as to the Luxembourg-based permanent establishments of foreign companies. Resident entities are subject to taxation on their worldwide income, unless specific income exemptions are granted under applicable double tax treaties. Non-resident entities, on the other hand, are only taxed on income generated within Luxembourg. A company is recognized as a resident taxpayer if its central management is located within Luxembourg.
For businesses with a taxable income below 175,000 euros (EUR), the corporate income tax rate stands at 15%. Companies with a taxable income ranging from EUR 175,000 to EUR 200,000 are subject to a progressive tax rate calculated as follows: EUR 26,250 plus 31% of the tax base exceeding EUR 175,000. Meanwhile, companies with a taxable income exceeding EUR 200,000 face a corporate income tax rate of 17%, resulting in an overall tax rate of 24.94% in Luxembourg City. This comprehensive rate includes a 7% solidarity surtax imposed on top of the corporate income tax rate, as well as the municipal business tax rate of 6.75%.
It’s essential to note that corporate income tax does not apply to tax-transparent entities, such as general or limited partnerships, or European Economic Interest Groupings, unless they are subject to reverse hybrid rules. It is worth mentioning that the minimum corporate income tax for Luxembourg resident companies has been abolished since 2016 and replaced by a minimum net wealth tax.
Solidarity Surtax
The corporate income tax amount is subject to a 7% solidarity surtax. With the inclusion of the solidarity surtax, the combined corporate income tax rate becomes 18.19% for companies with taxable income exceeding EUR 200,000.
Municipal Business Tax on Income
The municipal business tax varies across municipalities. In Luxembourg City, the municipal business tax rate stands at 6.75%. As a result, the effective overall corporate tax rate (comprising corporate income tax, solidarity surtax, and municipal business tax) in Luxembourg City is 24.94%.
Withholding Tax
Dividends distributed to resident individuals are subject to a 15% withholding tax (for more details, refer to “Rates” under “Individual taxation” above). Dividends paid to nonresident entities, whether companies or individuals, generally incur a 15% withholding tax, unless a tax treaty reduces the rate.
Net Wealth Tax
An annual net wealth tax is imposed based on the total gross assets of companies, reduced by debts. The effective net wealth tax rate is 0.5%.
Capital Duty
When forming a company or increasing its capital, a capital duty tax is imposed at a rate of 1% of the capital subscribed. This also applies to capital increases, whether in cash, in-kind, or for share premium.
Value-Added Tax (VAT)
Goods and services supplied in Luxembourg are subject to VAT at the standard rate of 17%. Certain transactions are subject to reduced rates of 14%, 8%, or 3%. As of January 1, 2023, until December 31, 2023, these standard and reduced rates will decrease by 1% to 16%, 13%, and 7%, respectively.
Double Tax Treaties
Luxembourg has signed 86 Double Tax Treaties (DTTs), many of which incorporate provisions from the OECD model agreement on exchange of information between tax authorities. Foreign tax relief is granted in cases where residents receive foreign income subject to an equivalent tax to Luxembourg income tax, and it is not exempted by a DTT.
SPF (Société de Gestion de Patrimoine Familial)
Private Wealth Management Company
The SPF, a Private Wealth Management Company, introduced under the law of April 26, 2007, adopts one of the existing legal forms, namely S.A., S.à r.l., S.C.A., or S.C. structured as S.A., and operates under the same legal framework. However, it enjoys a unique tax regime, although subject to specific constraints, primarily relating to its activities and the eligibility of its shareholders.
The SPF’s activities are limited to the acquisition, ownership, management, and disposal of “financial assets.” It is expressly prohibited from engaging in commercial activities, extending interest-bearing loans, or providing remunerated services. Additionally, the SPF cannot actively participate in the management of companies in which it holds shares. The shareholders of the SPF must either be individuals, private wealth entities, or intermediaries acting on behalf of individuals or private wealth entities.
One of the main advantages of the SPF is that these companies are exempt from income tax, net wealth tax, and withholding tax on distributed dividends. Instead, they are subject to the following:
A fixed-rate registration duty of EUR 75 (capital duty is no longer applicable).
An annual subscription tax, known as “taxe d’abonnement,” levied at an annual rate of 0.25%. This tax is assessed on the paid-up capital, increased by the share premium and the amount of debts exceeding eight times the paid-up capital and share premium. The subscription tax is capped at a maximum annual amount of EUR 125,000, with a minimum of EUR 100.
It’s important to note that the SPF is not eligible to benefit from double tax treaties signed by Luxembourg or EU directives.
SIF – Specialized Investment Fund
Fonds d’Investissement Spécialisé (FIS)
The Luxembourg SIF, the Specialized Investment Fund, is a tax-exempt, lightly regulated investment fund designed for “informed investors.” It can be established in two primary forms: a contractual fund, known as a “fonds commun de placement” or FCP, or as a variable capital or fixed capital company, specifically SICAV or SICAF.
A SICAV may adopt legal forms such as S.A., SARL., S.C.A., or S.C., structured as S.A., while a SICAF can take these forms as well as the S.N.C. or Société civile forms. Compared to UCITS and Part II UCIs, the SIF faces lighter regulation, particularly in terms of reporting requirements and investment constraints. It is obliged to adhere to risk diversification and may be divided into sub-funds. The SIF must maintain net assets of at least EUR 1,250,000.
One of the key benefits of the SIF is its exemption from income tax, net wealth tax, and dividend withholding tax on distributed dividends. Instead, it is subject to the following:
A fixed-rate registration duty of EUR 75 (capital duty is no longer applicable). The transfer of movable property (e.g., shares, receivables, cash) to a Luxembourg company in exchange for consideration other than shares may be subject to proportional registration duties.
An annual subscription tax equal to 0.01% of the net asset value, payable on a quarterly basis.
The eligibility of a SIF to fall within the scope of the Luxembourg law implementing the EU Savings Directive is contingent on its specific structure, particularly whether it operates as an FCP and its investment policy.
While certain tax treaties signed by Luxembourg extend benefits to the SIF, it is excluded from others.
However, one limitation of SIFs is that they do not qualify as normally taxable companies under the EU Parent Subsidiary Directive.
Unlike the SPF, dividends distributed by the SIF are not subject to withholding tax. Additionally, there is no withholding tax on interest payments made by the SIF, except when the EU Savings Directive or Luxembourg domestic withholding tax regulations are applicable.
SOPARFI – Sociétés de Participations Financières
Financial Holding Company
The SOPARFI, Financial Holding Company, like any other entity, is fully subject to taxation and leverages available tax legislation, particularly double tax treaties and benefits under the EU Parent Subsidiary Directive. Unlike the SPF and SIF, the SOPARFI does not face any limitations on the scope of its activities.
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