Luxembourg: Luxembourg Budget 2013 - Tax Measures Impacting The Private Equity Industry

Last Updated: 18 December 2012
Article by Alain Steichen and Christine Beernaerts


Today the Luxembourg Parliament approved the bill n° 6497 modifying the Luxembourg Income Tax Act ("LIR") in certain areas, some of which will impact the private equity industry. This legal alert will focus on certain specific points impacting this industry.

Avoiding the retirement cliff

Public deficit or surplus is the difference between government receipts and government spending in a single year. Running a country with a constant public deficit is almost universal in the 21st century. The 2007-2009 financial crisis led to a dramatic increase in the public deficits of many advanced economies, with many of them experiencing their highest levels of debt since World War II. Presented as a percent of gross domestic product (GDP), total deficit for OECD countries went from -1.2% of total OECD GDP in 2006 to -6.6% in 2011. Some countries have had rather severe deficits over the last few years, including, for 2011, a -10% deficit in the United States and -9.4% in the UK. Economic powerhouses such as the United States and the UK may well be able to deal with the additional government debt resulting from those deficits. Even so, the recent ongoing discussions regarding the risks of the U.S. economy tumbling off the fiscal cliff - with $600 billion in tax increases and spending cuts - show that even the largest economies may not continuously run public deficits without getting punished at some moment in time.

Luxembourg, as a tiny country, though seen as punching above its weight, has always considered it necessary to avoid putting itself into positions similar to those of competitors such as Ireland and Cyprus who run a -10.3% deficit and -6.3% respectively, seemingly without really attempting to address the state of their public finances. With an expected public deficit of -1.5% for 2013, and an expected public debt of broadly 20% of GDP (compared to the Irish public debt of 120% and the Cyprus debt of 60.8%), Luxembourg appears to be top of the class. Nonetheless, the government has decided to cut back on expenses by some €538 million and to increase the tax receipts by €414 million approximately, in order to reduce the public deficit to approximately 0.8% of GDP.

The reason for these policy measures has nothing to do with concerns such as those encountered in Ireland where the cost of servicing public debt is moving towards 20% of tax revenues. That cost in Luxembourg is well below 1%. However, as is the case for any other country, Luxembourg needs to solve the pension puzzle. Indeed, reforming pensions is one of the biggest challenges of the 21st century. All OECD countries have to adjust to the ageing of their populations and re-balance retirement income provision to keep it adequate and ensure that the system is financially sustainable. Luxembourg has decided to tackle this issue in its 2052 Agenda by trying to ensure that the presently healthy State pension system remains in good shape throughout that period. This has led to several changes to the State pension system taking effect in 2013. Ensuring, through a careful running of the annual budgets, that surpluses rather than deficits are being generated, the Luxembourg government further seeks to prevent public debt from ever becoming a burden for the next generation. Quite simply, it does not seem right to the Luxembourg policy makers for the government to use debt to provide extra consumption for the older generation, and then subsequently tax the younger generation to repay the debt. By scaling back expenses for 2012, by temporarily increasing the tax rates for individuals, by introducing a new minimum tax for all the businesses, and by increasing the already existing minimum tax for certain businesses, the Luxembourg government seeks to place Luxembourg public finances on a healthy footing for years to come.

The alternative minimum tax constrained by international law

In 2011, Luxembourg Parliament introduced a minimum corporate tax (the "alternative minimum tax" or "AMT") for certain Luxembourg corporations ("Financial Luxcos"), being those entities whose assets consist almost entirely (> 90% of the total balance-sheet) of financial assets (loans, participations, cash at bank etc.). This amount has now been increased with effect for 2013 to 3,000 €. At the same time, Luxembourg Parliament has decided to also introduce for the other corporate taxpayers ("Other Luxcos") an AMT ranging from 500 € to 20,000 € depending upon the total balance-sheet of the respective Luxco (the cap of 20,000 € will be reached as of a total balance-sheet of 20,000,000 €).

Applying the above rules to private equity Luxcos, the expected tax liability (assuming the actual taxable income does not already lead to a higher tax) would normally be as follows:

1. Luxcos holding targets for a future sale: 3,000 €

2. Luxcos providing debt financing to group companies: 3,000 € (although the margin taxation would in most cases anyway lead to a higher amount of tax)

3. Luxcos holding real estate: 20,000 € (since the acquisition cost of most real estate assets would exceed 20,000,000 €).

The above rules may however lead to unintended consequences which may be illustrated with two examples.

Let us take the example of a Financial Luxco essentially holding financial assets. The Financial Luxco was subject, as of 2011, to an annual tax of 1,500 €. In its 2011 version, the minimum tax of 1,500 € was still viewed as a toll charge aiming at compensating the enrolment and annual administrative costs incurred by the tax authorities when dealing with companies not paying any income tax in Luxembourg, mainly because all of their income was exempt under the participation exemption regime. By doubling the minimum tax to 3,000 € however, it would no longer be possible to consider the AMT as mere compensation for costs incurred by the Luxembourg tax authorities when processing the file. The AMT essentially turns into an alternative minimum income tax. However, in doing so, new issues consequently arise. Indeed, a Financial Luxco may generate only dividend income which is tax-exempt under a specific tax treaty or under the EU Parent-Subsidiary Directive. By levying the AMT, Luxembourg in fact taxes income that should be tax-exempt under a tax treaty or EU law. It hence commits a treaty override, which is not possible under Luxembourg law, or an EU override, which is equally prohibited under EU law, if it levies the AMT in those circumstances.

A similar comment may be made as regards certain Other Luxcos, being those that mainly hold real estate in a tax treaty jurisdiction. With sixty-four tax treaties presently in force, and some twenty pending, the bulk of real estate investments any Other Luxco would conceivably wish to consider buying would be located in tax treaty countries. Under any tax treaty entered into by Luxembourg, the net rental income as well as the capital gain upon disposal of the real estate may only be taxed in the source country, hence by the tax authorities of the treaty partner. Subjecting these entities as Other Luxcos to an alternative minimum income tax of 20,000 € effectively leads to a taxation of real estate income in situations where the relevant tax treaty does not grant any taxing rights to Luxembourg.

The alternative minimum tax should only apply to income over which Luxembourg has retained the right to tax, though in reality it does also tax Luxco, even if its income is exempt as a result of international law

The COFIBU (the Commission of Finance and Budget of the Parliament), which is the special commission of Parliament dealing with budget matters, when reviewing the draft bill, expressly stated that the AMT should not be due in circumstances where Luxembourg no longer has the right to tax the income under tax treaty law or EU law.

However, this position does not appear to be reflected under applicable statute provisions. Indeed, an additional paragraph was added by the COFIBU to article 2 of the final version of the draft bill amending paragraph 6 of article 174 LIR, ostensibly in order to deal with this point. This additional paragraph however only states that "the minimum tax is to be viewed as an advance corporation income tax payment for future years, to the extent it exceeds the tax calculated for the year. As an exception to article 154 § 7 LIR (which provides the condition under which an excess tax is to be repaid to the taxpayer), the minimum tax may not get reimbursed to the taxpayer". The apparent consequence of this provision, which has been copied from the Austrian Income Tax Code, is to reserve the right of the tax authorities to levy the AMT, even in those circumstances where all of the income is exempt from tax under international law. Indeed, the AMT would not directly tax income that is exempt under international law; it would rather constitute an advance payment on Luxco's future tax liability. That tax liability may not be known yet, but is expected according to the Income Tax Act to arise sooner or later as a result of future taxable income. Since the income that is exempt under international law is not taxable, either this year, or in any subsequent year, the advance payment of income tax implicitly but necessarily refers to other sources of income that Luxco may have in due course.

In reality, this is nothing but a disguised though very real taxation of income Luxembourg simply cannot tax. Take for instance the example of a Luxco property company which holds one single asset in a treaty country. Any income Luxco would realise, be it the initial rental income or the subsequent capital upon disposal of the real estate, may only be taxed under the treaty in the source country. As the Luxco has no other taxable income, and, for the sake of argument, is being liquidated upon sale of the real estate, there is simply no room for levying the AMT. Doing so should be seen in due course as being a breach of the relevant provisions of the tax treaty and hence should lead the tax courts to rule in favor of a refund of the AMT. There, of course, exists no guarantee on the matter, since being in court is always a little like being in open sea, without a rudder or compass, but at the very least the chances of success in case of litigation are real and not just purely hypothetical.


The AMT is an unfortunate step taken by the government which appears to have been ill advised, not only on what is at stake, but also as regards its technical merits. Given the international nature of Luxco's activities, the levying of the AMT would more often than not lead to treaty and EU law overrides. It would have been far better, had the Luxembourg Parliament given itself further time to reflect rather than rushing ill-drafted legislation through the approval process.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

*** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.