Luxembourg: Domestic Corporate Taxation

In Luxembourg there are three main taxes impinging on businesses: Corporate Income Tax, the Municipal Business Tax on Profits, and the Fortune Tax (a wealth tax). Of course there is also VAT, and there are withholding taxes.

Presenting the government's budget for 2010, Finance minister Luc Frieden categorically ruled out any increases or reductions in taxes for companies or individuals for the following year, adamant that there was no scope to implement tax cuts, and that any rise in taxes would merely prove damaging to the economy.

Then, in April 2010, Frieden unveiled details of the government’s ambitious proposals to reduce spending and to increase tax revenue, in a bid to achieve a balanced budget by 2014, and to maintain public debt at a manageable level.

From January 2011, a ceiling of EUR300,000 was imposed for severance pay and 'golden' handshakes to limit the impact of severance pay on the corporation's taxable base, employment fund contributions were raised by 1% to 5%.

Luxembourg Scope of Income Tax

Corporate Income Tax, or Impot sur le Revenu des Collectivites (IRC), was introduced during the German occupation in 1940/41 as Körperschaftssteuer. In accordance with the general rule that a tax once introduced never dies, the Luxembourg tax authorities decided to keep this interesting German innovation after the war, although it was substantially modified by the Loi du 4 decembre 1967 portant sur l'impot sur le revenu.

Resident companies are taxed on their world-wide income. Residence for this purpose means that the business has its main establishment in Luxembourg, that is, the place from which it is managed, where it holds its general meetings, and where it performs central administrative functions. Non-resident companies having a 'permanent establishment' in Luxembourg (defined as a place of business or fixed equipment, which would normally include branches) pay income tax on their income originating in Luxembourg.

IRC applies to corporate entities, which includes SAs, SARLs, and Partnerships Limited by Shares (Societes en Commandites par Actions). Other types of partnership are considered fiscally transparent, here as elsewhere, so that tax is assessed directly on the partners rather than the partnership as such.

There are some tax incentives available for investors who are considered to be supporting the economic development of the country under the laws of 28th July 1923, 27th July 1972, and the Tax Reform Law of 6th December 1990. These apply to specified industries and investment situations, and apply equally to Luxembougeouis and foreign investors.

NB: A Luxembourg 'holding' company, which until 2007 was the form normally used for offshore operations, is not subject to IRC. See Offshore Legal and Tax Regimes for details of the taxes payable by 'holding' companies. See Forms Of Company for details of changes to the holding company regime in 2007.

BACK TO TOP

Luxembourg Income Tax Rates

The rate of tax for income lower than EUR15,000 is 20%, and 21% for income beyond EUR15,000.

There is a 5% employment fund surcharge and a charge of between 6% and 10.5% in respect of municipal services (see below). This latter component varies according to location.

BACK TO TOP

Luxembourg Calculation of Taxable Base

For companies, IRC is normally assessed for income arising in the previous fiscal year, which is the calendar year unless a company has chosen otherwise.

For resident Luxembourg companies 'income' for the purposes of the IRC is calculated by comparing the net worth (net balance sheet assets) of the taxable entity at the beginning and end of the period concerned. Businesses with very low turnover may be able to use a simplified 'receipts and expenses' method of calculation, but this is not pursued further here.

NB: Although for general information some very brief details are given below about the calculation of IRC, this is not a full treatment of what is a complex subject and requires appropriate professional advice.

Allowable expenditure needs to be incurred exclusively and directly for the business; certain types of expense are not deductible, of which the most important are directors' fees, self-insurance provisions, foreign taxes and expenses connected with 'exempt' income. The 'foreign taxes' rule would seldom operate in practice, either because of a Double Taxation Treaty, or because of Luxembourg unilateral tax credit provisions.

'Exempt income' is income qualifying under the Luxembourg Participation-Exemption system, meaning dividends, interest, capital gains or royalties income received from another company in which the receiving company has a share interest greater than 10%, providing the paying company is in a jurisdiction levying at least 15% (at the time of writing) tax on such payments. Note that the interest costs on debt finance of such a exempt share interest would only be deductible up to the level of the exempt income received.

Profit distributions in the course of a year (widely defined) are added back to net worth at the end of the year prior to calculation of IRC.

Evidently, rules for asset valuation are particularly crucial in a 'net worth' income tax system. In Luxembourg there are rules dealing with what assets are to be included, their valuation, and permitted depreciation. The rules cover land and buildings, leased assets, goodwill, participation in other companies, inventory etc. The treatment of provisions is likewise important and is covered by a set of rules. Foreign exchange gains and losses can also have a major impact on valuation of foreign assets, and are dealt with under rules that provide for their 'neutralisation' (deferral) in many circumstances.

There are some tax credits available for certain types of investment into assets for use inside Luxembourg itself.

Losses at the taxable income level can be carried forward, but not back. Group relief exists under 'fiscal integration' provisions, applying subject to permission from the Minister of Finance with some differences to 99% and 75% participation. The rules for valuation of 'substantial participation in other companies' would have the same effect as group relief up to a point since a reduction in the net worth of a subsidiary would be reflected in a reduced valuation in the parent balance sheet.

For non-resident corporate entities, IRC applies to:

The calculation of taxable income is the same as it is for a Luxembourg-resident corporation. It follows that any foreign company doing business in Luxembourg should be extremely careful not to create a permanent establishment in the country. With exceptions under Double Taxation Treaties, 'permanent establishment' is defined to include 'branches, factories, warehouses, place of purchase and sale, landing areas, offices or any other place of business which the entrepreneur uses to carry out its business'. The definition is looser under OECD-model Double Tax Treaties, which would for instance not count warehouses as constituting permanent establishment. E-commerce servers used for sales purposes would however probably amount to permanent establishment in either case, and this might be the case whether or not the server was owned by the company doing the selling. It's not a risk to take.

In July, 2006, the European Commission called on Luxembourg to comply with the judgement of the European Court of Justice in the case of Commission v. Grand-Duché de Luxembourg, delivered on 8 December 2005.

In this Judgment, the European Court of Justice declared that Luxembourg had failed to fulfil its obligations to transpose Directive 2001/65/EC on accounting rules into its national legal order.

Directive 2001/65/EC amended Directives 78/660/EEC, 83/349/EEC and 86/635/EEC. These Directives defined which types of companies have to produce accounts, establish which format should be used for the profit and loss account and the balance sheet and lay down which valuation principles should be applied. The Directives also impose requirements to disclose the accounts.

Directive 2001/65/EC brought EU accounting requirements into line with modern accounting theory and practice. It allows for certain financial assets and liabilities to be valued at fair value. This will enable European companies to report in conformity with current international developments.

BACK TO TOP

Luxembourg Municipal Business Tax on Profits

The legislative origins of the Municipal Business Tax on Profits (MBTP) are similar to those of the IRC. However it applies to all types of partnership engaged in commercial activity as well as to companies, whether resident or non-resident.

The calculation of taxable income for the MBTP is identical to that for the IRC, with certain specified additions and deductions which are mostly but not entirely concerned to remove the activities of foreign permanent representations (ie those outside Luxembourg), this being a tax paid to the municipality for its services.

The rate of the MBTP varies depending on the municipality from 6% to 10.5%; in Luxembourg City it is 6.75% in 2011. The tax is payable on taxable income over EUR17,500 for companies which are liable to corporate income tax and EUR40,000 for other businesses.

BACK TO TOP

Luxembourg The Fortune Tax

The Fortune Tax (Net Worth Tax) is levied on resident and non-resident corporate entities (so excluding fiscally-transparent partnerships). For businesses, the two main components of Net Worth are Real Estate Unitary Value (in effect, the value of buildings in 1941 when the Germans imposed the tax!) and Business Net Worth which is an adjusted version of net worth as calculated for the Corporate Income Tax.

The rate of tax is 0.5%. However, for most companies the amount of Fortune Tax payable is offsettable against Corporate Income Tax, subject to some balance sheet reserve requirements.

BACK TO TOP

Luxembourg Taxation of Partnerships

For all partnerships engaged in commercial activity, the Municipal Business Tax on Profits is payable. For Societes en commandites par actions only among partnerships (Partnership Limited by Shares), the Corporate Income Tax (IRC) and the Fortune Tax are payable in addition.

For fiscally transparent partnerships, see Personal Taxation as regards the taxation of individual Luxembourg-resident partners.

BACK TO TOP

Luxembourg Filing Requirements and Payment of Tax

Entities subject to Corporate Income Tax or the Municipal Business Tax on Profits should submit corporate tax returns by 31st May of the year following the end of the financial year, and the tax is due for payment within one month of the receipt of the resulting tax assessment. However, advance tax payments have to be made on a quarterly basis (10th March, 10th June etc) and these are based on the tax assessment of the preceding tax year, with adjustments in either direction made at the time of final assessment. Fortune Tax payments also have to be made quarterly, but on 10th February, 10th May etc.

Luxembourg Withholding Tax

A withholding tax of 15% applies to dividends paid to a non-resident company unless the rate is reduced or dividends exempted by an applicable tax treaty. Dividends paid to a qualifying company under the EU parent-subsidiary directive are not subject to withholding tax. Luxembourg has extended this regime to non-EU tax treaty country parent companies as long as similar conditions to those laid out in the Luxembourg participation exemption regime and the parent company is subject to a tax similar to that applicable in Luxembourg.

BACK TO TOP