Luxembourg has a policy of maintaining relatively low income taxes and social insurance costs. The total corporate tax is moderate, in comparison with other European countries.
Companies that are doing business in Luxembourg are subject to corporate income tax, municipal business tax, minimum tax, net worth tax, Chamber of Commerce contribution and VAT. However, there is no branch tax and no excess profits tax.
Luxembourg has implemented the EU parent – subsidiary directive, as well as the interest and royalties and the savings directive. The latter requires the exchange of information between tax administrations when interests payments are made in EU countries to an individual resident in another EU country.
There are no specific transfer pricing on thin capitalization regimes, however transactions between related parties must be on arm’s length terms. Foreign companies are not subject or a special control regime.
Taxable income and rates
Resident companies are subject to tax on their worldwide income. Non – resident companies are subject to tax only on the Luxembourg – source income. Branches in Luxembourg are taxed on Luxembourg – source income and no withholding tax is applied to profit remittances.
A corporate income tax rate of 21% is applied to companies that have a taxable income larger than 15,000 euros. Companies who have a lower income are taxed at 20%. A minimum income tax applies to collective entities that are in tax loss position or that are paying less then the minimum income tax. These taxes are increased by a 7% contribution to the unemployment fund.
The corporate income tax rate in Luxembourg includes the statutory rate of 22.4% and the municipal business tax. Thus, the effective tax rate for a company registered in Luxembourg City, for example is 29.22%
Taxable income is calculated based on the profits stated in the commercial balance sheet and certain adjustments provided for under the tax law. The taxable income of companies resident in Luxembourg includes income from all sources. Foreign – source income, whether distributed or undistributed is included in the taxable income, subject to any specific exemptions. A certain number of tax credits are available which may be used to reduce the corporate income tax.
Dividends received by a Luxembourg company are included in the taxable income unless the participation exemption if certain requirements are met. Dividends received from participations that do not qualify for the participation exemption can still benefit from a 50% exemption if the dividends are paid by a fully taxable Luxembourg resident company, a EU company falling under the parent – subsidiary company or a capital company resident in a country that has a double tax treaty with Luxembourg.
Luxembourg has a special regime regarding intellectual property. 80% of the income derived from intellectual property rights acquired or created by a Luxembourg company and gains from the disposal of such rights are exempt from income tax. The regime applies to all income received in consideration for the use of, or the right to use, directly or indirectly, any domain names, patents, trademarks, software copyrights, models and designs. Qualifying assets also benefit from full exemption from the net worth tax.
Capital gains taxation
Luxembourg generally does not make a distinction between income and capital gains. Both types of income are subject of corporate tax. A participation exemption applies for gains derived from the sale of shares, if the Luxembourg company holds at least 10% of the shares and if the participation has been held for at least 12 months.
Other types of corporate tax
- Municipal business tax, ranging from 6% to 10.5% on profits derived from carrying out business activities in Luxembourg.
- Net worth tax of 0.5%, levied annually from the total net assets of resident companies in Luxembourg. This tax may be reduced fully or partially if the company creates and maintains for 5 years a specific reserve of five times the amount of net worth tax reduced.
- Chamber of Commerce contribution, ranging from 0.025% to 0.2% is levied annually for any person or legal entity carrying out commercial, industrial or financial activities in Luxembourg. The contribution is levied on taxable profits. In the case of a tax loss year, a minimum contribution of maximum 140 euros will be levied.
- Minimum income tax, of 3,210 euros flat rate for collective entities that have qualifying holding and financial assets exceeding 90% of their balance sheet and varying between 535 euros and 21,400 euros, depending on the total assets on their balance sheet, for companies that hold mainly financial items.