As far as taxation goes, Luxembourg has an overall moderate tax rate in comparison with other European countries. There are 4 main categories of taxes: corporate taxes, withholding taxes, indirect taxes and taxes on individuals as they are regulated by the current tax legislation.
Corporate taxes in Luxembourg
The corporate income tax rate varies between 20% and 21%. Companies who have a higher taxable income than 15,000 euros must pay an income tax of 21%, while companies who have a lower taxable income than 15,000 euros must pay an income tax of 20%. Both these taxes are increased by a 7% contribution to the unemployment fund.
Dividends are included in the taxable income, unless certain requirements are met for the participation exemption. However, companies can still benefit from a 50% exemption if the dividends are paid by a fully taxable Luxembourg company, if the dividends all under the parent – subsidiary EU directive or if the capital company is resident in a country that has a double tax treaty with Luxembourg.
Capital gains are subject of corporate income tax, unless the gains are derived from the sale of shares and the Luxembourg company holds at least 10% of the shares for minimum 12 months.
Other corporate taxes are the municipal business tax, the net worth tax, the minimum income tax and the contribution to the Chamber of Commerce.
Luxembourg levies a 15% withholding tax on dividends. However, no tax is withheld if dividends are paid to a qualifying company under the EU parent – subsidiary directive. Dividends distributed by a subsidiary in Luxembourg to a qualifying company are exempt from withholding tax, if the recipient of the dividends has one of the company forms listed in the EU directive, it holds or commits to hold for a minimum period of 12 months at least 10% of the capital of the payer company or the shares have an acquision value of at least 1.2 million euros. This regime benefits EU companies, EEA capital companies and corporations located in a treaty country that are subject to a tax similar to the Luxembourg corporate income tax and Swiss capital companies subject to corporate tax without exemption possibility.
Luxembourg does not impose withholding tax on interests that are paid to foreigners, except for interests that represent a right to a profit participation. These are taxed at the domestic rate applicable to dividends.
No withholding tax is levied on royalty payments, due to the special intellectual property regime in Luxembourg. Also, no branch remittance tax is applied.
The standard VAT rate in Luxembourg is 17%, the lowest in the EU. A rate of 12% applies to a range of financial sector services and wine. A reduced rate of 6% VAT applies to gas and electricity and a 3% VAT rate to printed materials, water, ebooks, pharmaceuticals, basic food products, radio and television broadcasting services. Credit, deposits and loans are exempt from VAT, although granting a loan may result in a VAT obligation. Exempt from VAT are also transactions concerning currency, services related to shares and security, medical and health services, certain bank activities and exports.
Municipalities in Luxembourg impose a land tax varying between 0.7% and 1% on the unitary value of real property, including industrial plants. This is multiplied by various coefficients established by each municipality and depending on the type of property. In addition to the land tax, the transfer of real estate is subject to a transfer tax.
Other indirect taxes in Luxembourg include stamp duty, custom and excise duties and environmental taxes on packaging materials and on electronic and electrical equipment.
Taxes on individuals
Residents are taxed on their worldwide income, while non –residents are taxed on their Luxembourg – source income. Taxable income includes income from a business or profession, income from employment, benefits from rentals and royalties, while interest is taxed as investment income.
An inheritance and gift tax is levied in Luxembourg if the deceased was resident in the country at the time of their death. The tax base is the market value of the entire net estate inheritance at the time of death. The rates range from 0% to 48%, depending on the proximity of the relationship before the deceased and the heir and the amount of assets bequeathed to each beneficiary. In come cases, exemptions are applicable. Certain gifts and donations must be registered. The rates in this case range from 1.8% to 14.4%, depending on the relationship between the donor and the donee.