Answer ... The Luxembourg corporate tax regime is a multi-level tax regime: corporate entities are subject to corporate income tax (CIT) at state level and to municipal business tax (MBT) at city level.
Answer ... The CIT rate is currently:
- 15% for companies with taxable income not exceeding €175,000;
- an intermediary rate varying between 15 and 17% for companies with taxable income above EUR 175,000 but not exceeding EUR 200,000, and
- 17% for companies with taxable income in excess of €200,000.
- Luxembourg corporate entities are also subject to a surcharge (contribution to the employment fund) corresponding to 7% of the CIT (ie, 1.19% as of 2020 if we take the 17% CIT rate into account). Finally, they are subject to MBT on their income (at a rate of 6.75% for Luxembourg City). This brings the 2020 global corporate tax rate to 24.94% (17% + 1.19% + 6.75%) for companies located in Luxembourg City with a taxable income exceeding €200,000.
Since 2016, Luxembourg corporate entities are subject to a minimum net wealth tax, the quantum of which varies depending on the activity and total balance sheet of the concerned entity (see question 2.8).
Answer ... The Luxembourg corporate tax system is a classical tax system: in principle, corporate income is taxable when effectively realised. However, based on either transfer pricing rules or some anti-avoidance rules, such as controlled foreign company rules, income may be taxed even though it has not been effectively realised.
CIT is levied on profits, as determined based on the commercial balance sheet, to which adjustments must be made each time the valuation rules for tax purposes deviate from the accounting valuation rules. The profit so determined must be adjusted for tax purposes by:
- adding all non-deductible expenses (eg, excessive depreciations, directors’ fees, expenses in connection with exempt income and non-deductible taxes); and
- deducting exempt income (eg, as per a double taxation treaty, the participation exemption or the Luxembourg IP partial exemption regime), as well tax losses carried forward.
Answer ... All income realised by a Luxembourg corporate entity is deemed to be ‘commercial’ within the meaning of Article 14 of the Luxembourg Income Tax Law and not segregated into different income categories. Therefore, the same tax treatment applies to corporate income, without making any distinction based on the nature of the income or gain. However, special exemption regimes apply under certain conditions to certain types of income (eg, dividends, capital gains and liquidation proceeds based on the participation exemption regime, IP income and gains on the sale of qualifying IP rights based on the partial exemption regime).
Answer ... Companies with their seat or place of effective management in Luxembourg are, in principle, subject to CIT and MBT on their worldwide income.
Subject to double tax treaty provisions (which may not authorise Luxembourg to tax the income if they allocate the exclusive taxing right to the other contracting state), non-resident corporate entities are taxable on certain Luxembourg source income, such as:
- commercial profits realised by a Luxembourg permanent establishment or permanent representative in Luxembourg;
- rental income from immovable property located in Luxembourg;
- gains from the sale of immovable property located in Luxembourg; and
- some short-term gains (ie, derived within six months of the acquisition) derived from the sale of a substantial participation (ie, a participation of more than 10%).
Answer ... In principle, tax losses can be deducted as special expenses. Tax losses incurred by a Luxembourg company may offset any Luxembourg taxable income, and not just income deriving from the same activity. Tax losses must derive from proper accounting records. They may be deducted only by the Luxembourg taxpayer that actually incurred them. Therefore, the transfer of tax losses to a shareholder is not possible and, following the acquisition of a company, the losses of the acquired company might not be carried forward after the acquisition if the acquired company was a shelf company and if the activities that triggered such losses are ceased or changed.
While tax losses incurred up to the fiscal year ending 31 December 2016 may be carried forward indefinitely, the carry-forward of losses incurred as from 2017 is restricted to a period of 17 tax years. The carry-back of losses is not allowed.
Special rules apply for companies that opt to be fiscally integrated. The carry-forward of tax losses realised before tax consolidation is limited to the aggregate amount of positive income realised during the tax consolidation by the company that originally incurred the losses. Following termination of the tax consolidation, tax losses generated during the tax consolidation can be used only by the integrating entity.
Tax losses incurred abroad by a domestic company are generally deductible in Luxembourg as a consequence of the worldwide taxation principle, but only to the extent that they are not incurred by a foreign permanent establishment located in a double tax treaty country (subject to European Court of Justice case law) or related to foreign immovable property.
Answer ... Yes, in Luxembourg, the substance over form approach applies. Therefore, income is to be attributed to the economic owner. In practice, in most cases, the Luxembourg taxpayer is both the legal and the economic owner. However, should this not be the case, economic ownership prevails.
Answer ... Yes (please see question 1.2).
Answer ... CIT applies only to corporate entities listed in Article 159 of the Income Tax Law and does not apply to tax-transparent entities (eg, general or limited partnerships or European economic interest groupings). The latter are not subject to CIT, but their partners are taxed according to their share in the partnership’s income.
However, as far as MBT is concerned, it also applies to partnerships, as it is levied on any income generated on a Luxembourg commercial activity. Sociétés en Commandite Simple (SCSs) and Sociétés en Commandite Spéciale (SCSps) are not considered to be commercial by nature and thus MBT does not arise if their activities are not of a commercial nature. However, income of an SCS or SCSp is considered to constitute commercial profits if at least one of its general partners is a capital company holding at least 5% of its interests or the SCS/SCSP undertakes a commercial activity. When SCSs or SCSps are alternative investment funds, they are nevertheless deemed not to realise commercial activities (unless their general partner owns more than 5% of the interests).