Answer ... Non-resident companies are subject to tax only on the following Luxembourg-source income:
- commercial profits realised by a Luxembourg permanent establishment or permanent representative in Luxembourg;
- income from movable property (including dividends and interest on profit participating bonds), if the debtor is a Luxembourg resident and the income does not benefit from a withholding tax exemption;
- rental income from immovable property located in Luxembourg;
- gains from the sale of immovable property located in Luxembourg;
- short-term gains (ie, derived within six months of the acquisition) derived from the sale of a substantial participation (ie, a shareholding of more than 10% of the share capital) in a Luxembourg company; and
- gains derived from the sale of a substantial participation in a Luxembourg company more than six months after the acquisition, if the foreign shareholder was a resident of Luxembourg for more than 15 years and became a non-resident less than 5 years prior to the sale.
These income categories and capital gains derived by non-residents are subject to CIT at the rate applicable to Luxembourg residents.
In addition, Luxembourg permanent establishments of foreign companies are subject to MBT in Luxembourg on income arising from business activities that they perform in Luxembourg.
Answer ... In principle, there is no withholding tax on the following payments/distributions made by Luxembourg corporate taxpayers to non-residents:
- ordinary interest paid at arm’s length;
- liquidation proceeds; and
- dividend distributions made by an exempt undertaking for collective investment.
A 15% withholding tax is levied, as a matter of principle, on dividends distributed by resident companies. However, subject to the General Anti-Avoidance Rule, a withholding tax exemption applies to dividends paid by a fully taxable Luxembourg resident company to:
- a non-resident collective entity within the meaning of the EU Parent-Subsidiary Directive;
- a Swiss resident corporation subject to Swiss corporate tax and not benefiting from an exemption in Switzerland;
- a corporation or a cooperative company that is resident in a European Economic Area country other than an EU member state and that is fully subject to income tax comparable to the Luxembourg CIT;
- a collective undertaking that is resident in a tax treaty country and fully subject to an income tax comparable to the Luxembourg CIT; or
- a Luxembourg permanent establishment of the aforementioned foreign qualifying entities.
The exemption applies if the foreign parent company owns, directly or indirectly (ie, through a tax transparent entity), for an uninterrupted period of at least 12 months, a participation of at least 10% or a participation with an acquisition cost of at least €1.2 million.
A withholding tax of 20% is levied on the gross amount of directors’ fees (25% if the withholding tax is borne by the company paying the fees). The withholding tax is the final tax for non-resident beneficiaries if their Luxembourg-source professional income is limited to directors’ fees that do not exceed €100,000 per fiscal year (unless the non-resident director opts for taxation by assessment).
A withholding tax of 10% is levied on income from independent literary or artistic activities and professional sports activities where these activities are or were carried out in Luxembourg. A withholding tax is finally levied, at a progressive rate, on wages.
Answer ... Unless the domestic rules result in a more favourable tax treatment, double or multilateral tax treaties prevail over domestic law. International tax treaties must be applied as long as they are valid, and only if they have not been formally terminated.
Answer ... In the absence of a double tax treaty, Luxembourg grants a tax credit equal to the tax charged in the foreign state. However, this tax credit is limited to the Luxembourg income tax due on the related net foreign income. If the Luxembourg tax is higher than the foreign tax, the full amount of the foreign tax may be offset. If the Luxembourg tax is lower than the foreign tax, the credit is limited to the amount of Luxembourg tax payable on this income. Under certain conditions, the surplus foreign tax (the un-credited portion) may nonetheless offset the Luxembourg taxable income.
Answer ... Until 31 December 2019, assets transferred upon the migration of a foreign company to Luxembourg could be booked at their historical cost (book value), but the company could also opt to perform a step-up in value in order to reflect the fair market value of the assets as at the date of migration to Luxembourg. The inbound migration is treated as the incorporation of a new company for Luxembourg tax purposes.
Since 1 January 2020 (implementation of the Anti-Tax Avoidance Directive), assets transferred upon the migration of a foreign company to Luxembourg have to be valued at the value retained in the jurisdiction of origin, unless this value does not correspond to the market value.
Answer ... A migration of assets and liabilities at fair market value out of Luxembourg is a deemed liquidation for Luxembourg tax purposes and triggers the realisation and taxation (to the extent that no exemption is available) of any latent capital gains (unless the relevant assets are maintained in a Luxembourg permanent establishment). The transfer of an autonomous part or of all of an enterprise outside of Luxembourg is in principle treated as a taxable sale. However, in case of specific restructuring operations (eg, operations falling within the scope of the EU Merger Directive), such transfers can be made at book value and any taxation deferred.
Since 1 January 2020 (following the implementation of the Anti-Tax Avoidance Directive), Luxembourg taxpayers are subject to tax at an amount equal to the market value of the transferred assets at the time of the exit, less their value for tax purposes in case of:
- a transfer of assets from the Luxembourg head office to a permanent establishment located in another country, but only to the extent that Luxembourg loses the right to tax the transferred assets;
- a transfer of assets from a Luxembourg permanent establishment to the head office or to another permanent establishment located in another country, but only to the extent that Luxembourg loses the right to tax the transferred assets;
- a transfer of tax residence to another country, except for those assets which remain connected with a Luxembourg permanent establishment; and
- a transfer of the business carried on through a Luxembourg permanent establishment to another member state or to a third country, but only to the extent that Luxembourg loses the right to tax the transferred assets.
In case of transfers within the European Economic Area, the Luxembourg taxpayer may request to defer the payment of exit tax by paying in equal instalments over five years or - if earlier - until the assets are sold or transferred to a third country, or until the taxpayer’s residence (or business carried on by its permanent establishment) is subsequently transferred to a third country.