Luxembourg

Tax residency – Companies registered in Luxembourg or its place of effective management in Luxembourg are deemed to be residents for tax purposes.

Basis – Corporate income tax is levied on worldwide income.

Corporate Income Tax rate – Companies with taxable income lower than EUR 175,000 are subject to corporate income tax at a rate of 15%. Companies with taxable income between EUR 175,000 and EUR 200,001 are subject to CIT computed as follows: EUR 26,250 plus 31% of the tax base above EUR 175,000.

The Corporate Income Tax rate is 17% for companies with taxable income in excess of EUR 200,001.

A 7% solidarity surtax is imposed on the corporate tax amount.

A municipal business tax also applies. The rate in Luxembourg city is 6.75%.

Therefore, for companies domiciled in Luxembourg City whose taxable income exceeds EUR 200,001, the overall effective tax rate is 24.94%.

Capital gains – Capital gains are treated as ordinary income and taxed at the standard rate. However, capital gains derived from the sale of shares may be tax-exempt provided that the shareholding constitutes at least 10% of total ownership in the share capital or an acquisition price of at least EUR 6 million and the disposing company has held or intends to hold a qualifying shareholding for at least 12 months.

Dividends – Dividends received are subject to Corporate Income Tax.

A participation exemption may apply if the following conditions are met:

The distributing company is a collective entity falling within the scope of the EU Parent-Subsidiary Directive; or a Luxembourg resident corporation, which is fully taxable and does not take one of the forms listed in the LITL; or a non-resident corporation that is liable to at least 9% tax.

The beneficiary entity is a Luxembourg resident collective entity, which is fully taxable and takes one of the forms listed in the LITL; or a Luxembourg resident corporation, which is fully taxable and does not take one of the forms listed in the LITL; or a domestic PE of a collective entity falling within the scope of the EU Parent-Subsidiary Directive; or a domestic PE of a corporation that is resident in a country with which Luxembourg has concluded a DTT; or a domestic PE of a corporation or of a cooperative company, which is a resident of a European Economic Area (EEA) member state (other than an EU member state).

At the date on which the income is made available, the beneficiary has been holding or undertakes to hold for an uninterrupted period of at least 12 months, participation in the share capital of the subsidiary of at least 10% or with an acquisition price of at least EUR 1.2 million.

Interests – Interests are subject to corporate income tax.

Royalties – Royalties are generally subject to corporate income tax.

Withholding Taxes – Dividends paid to non-residents are subject to a 15% withholding tax unless the tax rate is reduced or exempted under a tax treaty. Generally, there are no withholding taxes on interest, royalties, and fees paid to non-residents.

Foreign-source income – Foreign-source income is taxable at standard rates unless is exempt by means of a DTA.

Profits of a foreign branch that are not exempt by means of a DTA may benefit from a foreign tax credit.

Losses – Losses arising from taxable income may be carried forward for 17 years. Carryback of losses is not allowed.

Inventory - Inventory may be valued at the lower of acquisition/production costs or market value. First in first out (FIFO), Last in first out (LIFO) or average cost methods are generally permitted.

Anti-avoidance rules – There is transfer pricing legislation in Luxembourg. Transactions between related entities have to be governed by OECD’s arm's-length principle.

There is no specific thin capitalization legislation. However, usually an 85:15 debt-to-equity ratio for the intra-group financing of participations applies. If the 85:15 ratio has not complied, the surplus of interest can be re-qualified as a hidden distribution of profits that would be non-deductible and potentially subject to a 15% withholding tax.

Luxembourg approved legislation that conscripts the EU Anti-Tax Avoidance Directive (ATAD 1) into domestic law in December 2018, and in force since January 1, 2019. Anti-avoidance measures adopted include a limitation of the deductibility of interests, controlled foreign company rules (CFC), among other measures such as adapting the general anti-abuse rules (GAAR) to EU standards.

The interest limitation rule provides that a given company is only able to deduct net interest expenses up to 30% of its EBITDA or up to EUR 3 mil, whichever is higher. This rule covers any financing transactions, regardless of whether is conducted with affiliates or with a third-party. Non-deductible interests can be carried forward.

Financial institutions, insurance companies, investment funds, and certain securitization vehicles, among others, are not subject to the interest limitation rule.

With respect to controlled foreign company (CFC) rules, Luxembourg taxes CFC undistributed income arising from ‘non-genuine’ arrangements to create a tax advantage. A CFC could be deemed to conduct a non-genuine arrangement if it would not own the assets or undertake the risks that generate its income if it were not controlled by the parent company which people is instrumental to generate CFC income.

CFC are foreign permanent establishments (PE) or subsidiaries which are taxed lower than 9% (50% of Luxembourg corporate tax), and where the Luxembourg parent entity together with any of its associate enterprises holds 50% or more interest (capital, right to receive income or voting rights). An associated enterprise is a company where the Luxembourg entity holds 25% or more interest.

CFC rules do not apply to subsidiaries or PE those with accounting profits of EUR 750,000 or less, or with profits that amount to no more than 10% of their operating costs.

Operating costs arising from goods sold out of the country where the subsidiary is resident and payments to associated enterprises are specifically excluded.

Labor taxes – Employers and employees are required to make contributions to several social security insurance funds.

Employers’ contribution is between 12% to 15% on resident employees’ salaries. Resident employees contributions range between 12.20% and 15%. Contributions are capped at certain amounts and must be withheld by the employer.

Tax credits and incentives – There are tax incentives for capital investments. A tax credit is available that amounts to 13% of the increase in investments in tangible depreciable assets made during the tax year.

Additionally, a company may benefit from an 8% tax credit on the first EUR 150,000 of qualifying new investments and a 2% tax credit on the amount of new investments exceeding EUR 150,000 in tangible depreciable assets.

There is also an 80% income tax exemption on income derived from IP assets such as:

Inventions protected under patents, utility models, and other IP rights that are functionally equivalent to patents such as supplementary protection certificates for patents on pharmaceutical or phytopharmaceutical products, extensions to supplementary protection certificates to pediatric medicines, plant variety certificates, and orphan drug designations. Software protected by copyright under national or international norms.

Trademarks and other market-related IP are not eligible.

Companies innovating and involved in R&D activities can benefit from government loans and to the specific IP tax regime and general tax incentives.

Investment funds are usually exempt from corporate tax, municipal business tax and withholding tax.

Personal income tax – An individual is deemed to be tax resident in Luxembourg if he or she is domiciled in Luxembourg or his or her place of abode is in Luxembourg.

Resident individuals are taxed on their worldwide income.

Tax rates are progressive up to 42%. Income tax may be increased with a contribution of 7% to employment fund (9% for income exceeding EUR 100,000) and 1.4% on dependency contribution.

Short-term Capital Gains are considered ordinary income. Long-term gains (10 years) may benefit from exemptions of EUR 50,000 and a 50% exemption. Real estate gains are considered long-term if the property was held for at least 2 years. Gains derived from the sales of shares may be considered long-term capital gains if shares were held for more than 6 months, and are only taxable if the shareholding exceeds 10%.

Other taxes – There is a municipal business tax from 6% to 12%, depending on the location. There is also a net wealth tax of 0.5% on net assets up to EUR 500M and 0.05% over EUR 500M.

Transfer of immovable property is usually taxed at 6% plus 1% transcription tax. There is a land tax of 0.7% to 1% levied on real property.

The sale of goods and services are subject to V.A.T. at a standard rate of 17%. Reduced rates and exemptions may apply.