What special regimes exist (eg, for fund entities, enterprise zones, free trade zones, investment in particular sectors such as oil and gas or other natural resources, shipping, insurance, securitisation, real estate or intellectual property)?
Answer ... Luxembourg offers a wide range of investment vehicles, some of which benefit from a tax regime which differs from that applicable to fully taxable corporate entities.
The following regulated investment funds are exempt from any taxation on their income, but are subject to a so-called ‘subscription tax’ on the value of their net assets:
- undertakings for collective investment in transferable securities (UCITS) within the meaning of the UCITS Directive;
- alternative investment funds (AIFs) (ie, undertakings for collective investment which are not UCITS); and
- specialised investment funds (SIFs), which are multi-purpose investment funds dedicated to so-called ‘sophisticated investors’.
While the income exemption applies in the same way to all investment fund types listed above, the rate of subscription tax varies depending on the type of fund, from 0.01% to 0.05%. Some subscription tax exemptions apply in certain cases.
Securitisation vehicles (SVs) set up as a securitisation fund (which acquires or assumes, directly or through another undertaking, risks relating to claims, other assets or obligations assumed by third parties or inherent to all or part of the activities of third parties and issues securities whose value or yield depends on such risks) are exempt from taxation on their income and are subject to the tax provisions applicable to UCIs. However, they are not subject to subscription tax.
Some other types of investment vehicles are fully subject to tax on their income as any other fully taxable Luxembourg corporate entity, but either benefit from certain exemptions on certain income categories (sociétés d'investissement en capital à risque (SICARs)) or are subject to specific rules when computing their tax base (SVs in corporate form):
- An investment company in risk capital (SICAR), designed for private equity and venture capital investments, must invest its assets in securities representing risk capital; and
- An SV set up as a corporation (same activity as a securitisation fund) is fully subject to tax on its income like any other fully taxable Luxembourg corporate entity, but is subject to specific rules (specific deductions) when determining its taxable income.
Finally, the reserved alternative investment fund (RAIF) combines the characteristics and structuring flexibilities of both the Luxembourg regulated SIF and the SICAR qualifying as an AIF managed by an authorised AIF manager (AIFM), except that RAIFs are not subject to prior authorisation from the Luxembourg financial regulator as they must be managed by a fully authorised AIFM. For tax purposes, depending on the activity they perform, RAIFs are subject to either the same income tax exemption regime as SIFs (and subscription tax) or the same tax regime as SICARs.
Answer ... Under certain conditions, Luxembourg provides a rollover relief regime for certain exchange operations, such as the transformation (change of legal form) of one company into another. Share for share exchanges (ie, asset contribution or merger), by which the new shares received by the shareholders of the companies involved in the transaction are considered to replace the former shares held, may be carried out in a tax-neutral way when the ultimate taxation of the ‘exchanged’ assets is ensured.
The rollover relief on capital gains realised by a resident company whose assets and liabilities are transferred (transferor company) to another resident company, or to another EU or European Economic Area resident company (transferee company), as a consequence of a merger or a division is allowed if the transfer:
- is carried out in exchange for shares in the transferee company or by cancelling a participating interest held by the transferee company in the transferor company. The payment of a balancing cash adjustment not exceeding 10% of the nominal value of the shares handed over is allowed; and
- takes place under conditions exposing the unrealised capital gains existing on the date of the transaction to subsequent taxation (ie, transfer at book value and, if the transferee is not a Luxembourg resident, provided that the assets of the transferor remain attached to a Luxembourg permanent establishment).
Capital gains realised by a Luxembourg corporate entity or permanent establishment deriving from a sale of shares in a subsidiary are tax exempt provided that, at the date the capital gain is realised, the beneficiary has held or commits to hold for an uninterrupted period of at least 12 months a direct and continuous shareholding of at least either 10% in the capital of the subsidiary or a minimum acquisition price of €6 million.
The subsidiary must be either an undertaking resident of the European Union covered by the EU Parent-Subsidiary Directive, a Luxembourg resident capital company fully liable to Luxembourg tax or a non-resident company liable to a tax corresponding to Luxembourg corporate income tax. For that purpose, a tax of at least 8.5% (ie, half of the corporate income tax (CIT) rate) on a basis comparable to the Luxembourg basis is usually required by the Luxembourg tax authorities. Based on the recapture rule, capital gains will remain subject to tax up to the sum of all related expenses that were deducted for tax purposes in the year of disposal or in previous tax years. Expenses include, for instance, interest expenses on loans used to purchase the shares or any write-downs of the participations.
Answer ... No, there is no option for a Luxembourg corporate entity to elect for alternative taxation regimes.
Answer ... A company may have a share capital denominated in a currency other than euros, provided that its financial accounts are prepared in the same currency. However, the tax balance sheet required for its annual tax returns must be denominated in euros. To avoid the risk of recognition of exchange gains and losses, expressed solely in the tax balance sheet, a circular of the Luxembourg tax authorities provides for a set of rules for companies preparing their annual commercial accounts in a foreign currency that also wish to use that foreign functional currency for tax purposes. The reporting will be done using amounts denominated in the functional currency, but converted into euros by using the closing foreign exchange rate or the average foreign exchange rate for the period covered by the tax return, as published by the European Central Bank.
To apply the foreign functional currency for tax purposes, a written request must be submitted at the latest three months before the end of the first accounting year for which the application of the foreign currency is requested. The choice to apply the functional currency is irrevocable and must be applied as long as the financial accounts of the company are expressed in such foreign currency.
Answer ... Acquired goodwill is a depreciable asset which can be amortised over its useful economic life. If the useful economic life cannot be established, the tax authorities generally accept an amortisation period of at least 10 years. Self-created goodwill may be neither capitalised nor amortised. Only acquired goodwill may be valued. It must constitute a separate entry on both the commercial and the tax balance sheets. When the goodwill is ‘hidden’ in the acquisition cost of an existing business, its value is computed as the amount by which the value of the business exceeds the going-concern value of its net assets.
Research and development expenses are generally tax deductible. In addition, on 1 January 2018 a new IP regime came into force in Luxembourg, which is compliant with the so-called ‘modified nexus’ approach agreed at Organisation for Economic Co-operation and Development and EU level in the course of the Base Erosion and Profit Shifting project. In accordance with this new regime, a CIT and MBT exemption of 80% applies to the net revenue derived from certain rights on patents and copyrighted software, to the extent that they are not marketing-related IP assets and were created, developed or enhanced after 31 December 2007 (the former IP regime provided the same limitation in time) as a result of research and development activities.
Answer ... Employers must pay employers’ social security contributions, including pension insurance, and withhold employees’ social security contributions on behalf of their employees. Employers’ contributions to pensions are, in principle, deductible for CIT purposes. While contributions to qualifying supplementary pension plans are tax deductible up to 20% of the annual income of the beneficiary, contributions to non-qualifying pension plans are not tax deductible.
Answer ... An annual subscription tax, which is a state registration duty, is levied on the net asset value of UCIs (please see question 2.1), which are in principle exempt from CIT, municipal business tax (MBT) and net wealth tax (NWT). The rate is 0.05% per annum on the net assets of UCIs and 0.01% per annum on the net assets of UCIs investing in specific categories of assets. The rate is also 0.01% per annum on the net assets of SIFs and RAIFs. The tax is levied quarterly on the net asset value as of the last day of each quarter. An exemption from the tax is available for certain money market funds, pension funds, microfinance funds, exchange traded funds and funds investing in other funds already subject to subscription tax.
Private wealth management companies are subject to a subscription tax of 0.25%, capped at €125,000.
Answer ... In addition to CIT, corporate taxpayers are subject to:
- a surcharge of 7% on the CIT as a contribution to the employment fund;
- MBT, which is a local tax on income levied by the municipalities at a rate that depends on the municipality in which the corporate entity is established (eg, 6.75% in Luxembourg City);
- NWT, which is a state tax levied on the net wealth of companies, charged on their worldwide so-called ‘unitary value’ (generally equal to the net asset value of the company or branch – subject to certain exemptions and adjustments). The NWT rate is 0.5% on that part of the net wealth which is lower or equal to €500 million and 0.05% on that part of the net wealth exceeding €500 million. A reduction of the NWT can be requested by an entity in its CIT tax return, provided that it undertakes to enter, before the end of the following year, an amount equivalent to five times the reduction requested in a reserve account and to maintain this reserve in its balance sheet for a five-year period. Since 1 January 2017, Luxembourg companies are subject to the higher of either the NWT as per the unitary value or a minimum NWT varying between €535 and €32,100. The annual minimum NWT amounts to €4,815 if the financial assets, transferable securities, bank deposits and receivables against related parties of the corporate entity represent more than 90% of its balance sheet and exceed €350,000. Where the entity does not meet these requirements, the minimum NWT varies between €535 and €32,100, depending on the level of its total balance sheet. The amount of the minimum NWT is to be reduced by the amount of corporate income tax (including the solidarity surcharge) of the preceding tax year; and
- real estate tax, which is a local tax on the value of real estate situated in Luxembourg.
Answer ... No, Luxembourg does not have deemed deductions against corporate tax for equity such as a notional interest deduction.