What main taxes are businesses subject to in your jurisdiction?
Companies established in Luxembourg are subject to corporate income tax and municipal business tax (hereinafter referred as “CIT”).
CIT is broadly calculated on the basis of the profit as set out in the commercial balance sheet and adjusted by adding non-deductible items such as income that is tax exempt under a double tax treaty and subtracting losses carried forward. Losses can be carried forward either indefinitely if generated prior to 1 January 2017, or for an limited period of 17 years if generated after 1 January 2017.
The income derived by a resident company from all sources worldwide is included in its taxable income for the purposes of the CIT. Indeed, Luxembourg taxes its corporate residents on their worldwide income and the non-residents companies only on their Luxembourg sourced income.
From 1 January 2017, the effective CIT rate on the profits of a company exceeding of EUR 30,000 has been reduced from 29.22% to 27.08% for companies established in Luxembourg City.
Luxembourg companies are also subject to net worth tax (“NWT”) which is levied annually on their taxable wealth being the difference between their assets and liabilities.
As from 1 January 2016, the NWT rate applies on a digressive scale as follows:
- On taxable wealth up to EUR 500 million – 0.5%
- On taxable wealth above EUR 500 million – EUR 2.5 million plus 0.05% on the taxable wealth exceeding EUR 2.5 million.
The tax year for a company is, in principle, the calendar year. Alternatively, it may be an accounting year which is different from the calendar year. Companies must file their tax returns by 31 May of each year following the calendar year during which the income was earned. As from 2017, the tax returns for companies liable to corporate income tax have to be mandatorily filed electronically.
The tax authorities can assess the tax due on the basis of the tax return filed by these taxpayers without verifying their tax return. Subsequently, the tax position becomes final after the five-year statute of limitation period expires.
Companies are required to make four quarterly advance payments of tax based on the latest assessment.
As regards to the 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%, which is one of the lowest standard VAT rate in the European Union or, on certain transactions, at 14%, 8%, or 3%.
Corporations whose activities are subject to VAT are entitled to offset against their VAT payable the amount of such tax charged to them by their suppliers or reverse charged (i.e. self-accounted) by them on import or acquisitions of goods or services from abroad.
Banking, financial, insurance, and reinsurance transactions are generally VAT exempt activities.
Finally, there is no stamp duty in Luxembourg.
What are the circumstances under which a business becomes liable to pay tax in your jurisdiction?
Tax resident / Non-tax resident
Based on Luxembourg’s domestic law, a company is considered to be resident in Luxembourg if either its registered office or place of central administration is located in Luxembourg. The registered office is designated to be in Luxembourg as set out in the Company’s articles of incorporation.
It is to be noted that the place of central administration is generally understood to mean the place where the company is managed or controlled. While this term is not legally defined, the location of the company’s major place of management and control is determined by facts and circumstances, including the following:
The place where meetings of the board of directors are held;
The place where the shareholders meetings are held;
The place where the company’s officers make their decisions;
The place where the company’s books and records are kept; and / or
The place where other, similar factors evidencing management control occur.
A non-resident company having neither a fixed place of business, a permanent establishment nor a permanent representative in Luxembourg is not liable to any Luxembourg tax.
Luxembourg non-resident companies are taxable on their Luxembourg sourced income only. However, this taxation is generally alleviated or mitigated through the application of the tax treaties for avoidance of double taxation.
The provisions on permanent establishments included in the tax treaties concluded by Luxembourg, currently 81, generally follow the principles of the OECD model.
Likewise, under Luxembourg domestic tax law, a similar permanent establishment concept exist but is defined in a broader way and is to be understood as every fixed piece of equipment or place that serves for the operation of an established business.
What is the tax position when profits are remitted abroad?
Profits remitted abroad to Luxembourg non-residents are taxable in principle in Luxembourg which is the territory where the income is sourced. However, this taxation is generally alleviated or mitigated through the application of the tax treaties for avoidance of double taxation, (currently 81 treaties are inforce).
To this extent, the Luxembourg sourced income refers mainly to the categories as referred below:
Dividends include any distributions of corporate profit to holders of shares or participating certificates or similar claims, whether paid in cash or in any other form. Dividends are taxed as investment income. Distributions of profits by fully taxable Luxembourg tax resident companies are subject to a 15% withholding tax.
However, dividend distribution shall not be subject to any Luxembourg withholding tax, provided that the Luxembourg entity distributing dividends complies with the requirements set out in Article 147 of the amended Income Tax Act of 4 December 1967 (“Tax Act”), as follows:
The distributing entity is a fully taxable Luxembourg joint-stock company;
The recipient of the dividends is an entity which is subject to corporate tax rate similar to the Luxembourg corporate income tax rate or at least 10.5%; and
At the date on which the income is made available, the recipient entity has been holding or undertakes to hold directly, a participation of at least 10%, or with an acquisition price of at least EUR 1.2 million in the share capital of the Luxembourg entity for an uninterrupted period of at least 12 months.
As a consequence, any dividend distributions shall not be subject to any Luxembourg withholding tax, provided that the company complies with threshold and holding period requirement set out in Article 147 of the Tax Act.
Nevertheless, the withholding tax exemption granted pursuant to the article 147 of the Tax Act shall not apply in case of artificial arrangements between companies which do not reflect the economic reality, even if the recipient would be regarded as a participation to which this specific exemption should apply.
Interest income means any revenue from fixed-income investment. Interest paid by a Luxembourg company is in principle not subject to any Luxembourg withholding tax. The law provides for a final withholding tax of 20% on interest income paid by a paying agent established in Luxembourg to the beneficial owners residing in Luxembourg.
Royalty payments to both residents and non-resident are not subject to any Luxembourg withholding tax.
Capital gains realised upon speculative transactions are taxable in Luxembourg. A transaction is deemed speculative when:
Immovable property is sold within 2 years from the date of purchase; or
Movable property is sold within 6 months from the date of purchase; or
The sale precedes the purchase.
A speculative gain is calculated as the sales proceeds minus the purchase price and minus incidental costs i.e. notary’s fees, transfer tax, agents’ commission, advertising, improvement costs, etc.
What thin-capitalisation rules and transfer pricing rules apply?
Luxembourg does not have specific thin capitalization rules but the arm’s length principle applies. If a Luxembourg resident obtains a loan from a related party on terms that differ from those which an independent party would have provided, the tax authorities can recharacterize all or part of the debt as capital. Consequently, interest payments may be regarded as hidden profit distributions.
In practice, the tax authorities use a debt to equity ratio of 85:15 for the holding of participations. Where this ratio is exceeded, the surplus may be considered as a contribution to capital. Interest on this surplus may be deemed non-deductible and treated as a dividend distribution potentially subject to a withholding tax of 15% which may be deducted or exempt under a tax treaty.
As regards to the transfer pricing, Luxembourg largely follows the transfer pricing guidelines issued by the Organisation for Economic Co-operation and Development (“OECD”).
As far as transfer pricing documentation is concerned, the taxpayers are required to disclose their transactions with related parties and evidence by adequate documentation their compliance with arm’s-length principles.
No specific guidelines are provided on the nature and extent of the documentation required, which should depend on the circumstances of the case under consideration. However, as Luxembourg is an OECD country, these documentation requirements will be aligned with the OECD guidelines on the transfer pricing documentation requirements.
Similarly, the transfer pricing methods to determine the arm’s-length nature of an intercompany transaction should follow the general guidelines set for by the Luxembourg tax law which are based on the transfer pricing methods provided for in the OECD transfer pricing guidelines.
The remuneration of the Luxembourg company should be determined based on the functions performed, assets employed, and risks assumed. A written clearance from the Luxembourg tax authorities on the set criteria for the determination of the transfer pricing for the financial on-lending transactions can be obtained assuming that the Luxembourg company meets certain substance and equity at risk requirements.
It is worth to note that if the remuneration earned by a Luxembourg company that acts as an intermediary is not supported by a transfer pricing report, the tax authorities will consider, for simplification purposes, that the relevant financing transactions shall sufficiently comply with the arm’s length principles if they generate a minimum return on the financed assets. Currently, a return of 2% (two percent) after taxes is considered as the minimum acceptable return by the Luxembourg tax authorities.
The intermediary company benefits from this simplification measure only if the Luxembourg company has a majority of its board members with the capacity to bind the company (a) residing in Luxembourg or if not (b) are taxable in Luxembourg for more than 50% of their income, and key decisions are being taken in Luxembourg. In addition, where this simplification rule applies, the transaction will be subject to the automatic exchange of information.