The Luxembourg tax administration is divided into direct tax, indirect tax and custom and excise duties. The direct tax administration deals with corporate income tax, individual income tax, net wealth tax and municipal business tax, while the indirect tax administration deals with registration duties and VAT.
Corporate tax rates in Luxembourg
In general, corporate taxes are applied in Luxembourg on the worldwide taxable profit of any company incorporated in Luxembourg and are subject to provisions of tax treaties. The taxable profit is determined based on a company’s commercial accounts.
The corporate tax rates in Luxembourg are the corporate income tax at 22.4% and the municipal business tax, which varies depending on the municipality. For example, the municipal business tax in Luxembourg City is 6.75%.
The minimum flat tax for a SOPARFI (société de participation financière) was increased in 2013 to 3,210 euros, including the Solidarity Surtax. Regulated financing and holding entities, such as SICARs are also a subject to the minimum flat corporate income tax rate since 2013.
All other Luxembourg-based companies are liable to a minimum flat tax, which can vary depending on the total balance sheet of the company. Some income can be excluded from taxation, depending on the provisions of applicable double taxation avoidance treaties. Depending on the activities of unlimited companies, tax exemptions to the municipal business tax may be requested.
Regarding tax rates in Luxembourg, dividend income is exempt from taxation in Luxembourg if certain conditions are fulfilled:
- The company distributing the dividends is a fully taxable Luxembourg resident corporation, a non-Luxembourg resident limited company subject to an income tax similar to Luxembourg or an EU-resident company covered by the Parent-Subsidiary Directive;
- The company receiving the dividends is a fully taxable Luxembourg resident corporation, a Luxembourg subsidiary of a limited company resident in a stated that has concluded tax treaties with Luxembourg, a subsidiary of an EU-resident company or a permanent establishment of a cooperative company or stock company resident in an EEE country;
- The receiving company holds the dividends for a period of 12 months starting with the moment of distribution and the participation doesn’t fall below 10% or the acquisition price doesn’t fall below 1,200,000 euros during this time.
Under certain conditions, if a company doesn’t benefit from full exemption on the dividends received, there is still the possibility to benefit from a tax reduction of 50%.
A participation exemption applies for capital gains if certain conditions are fulfilled, especially regarding companies that are incorporated in Luxembourg, companies incorporated in EU-member states and provisions of applicable double taxation avoidance treaties.
Intellectual Property revenues
One of the greatest advantages of applicable tax rates in Luxembourg is that the income derived from intellectual property can benefit from a tax exemption of 80%. Capital gains from the sale of intellectual property rights can also benefit from this tax exemption. The tax exemption is granted under the following conditions:
- The intellectual property was created or acquired after 31st December 2007;
- Expensed, depreciations and tax deductions in relation with the intellectual property must be recorded as an asset and accounted as income;
- The intellectual property can’t be acquired from a related company.
Companies are considered related if the intellectual property transferor holds at least 10% of the shares in the Luxembourg company that generates the intellectual property revenue, the Luxembourg company that generates the intellectual property revenue holds at least 10% of the share capital of the intellectual property transferor or a company holds at least 10% of the shares of the intellectual property transferor and at least 10% of the shares of the company generating the intellectual property revenue.
Net wealth tax
Luxembourg resident companies are subject of a net wealth tax calculated on their worldwide net assets. The tax rates in Luxembourg for the net wealth tax vary depending on the type of company, but they are very low and may be reduced to 1/5 of the sum.
Considering that Luxembourg’s economy is dynamic, just like its legal framework, any Luxembourg-based company must consider having a solid tax planning strategy and acquire the services of tax experts.