Despite its strong economic credentials, doing business in Luxembourg can be a difficult task without prior knowledge of the corporate landscape. Here are some of the areas that can trip up a commercial business new to the Grand Duchy.
It might be small, but tiny Luxembourg packs a punch on the international business stage. Nestled in the heart of Europe, Luxembourg's size means it has necessarily taken on outside influences to stay relevant, and its diverse activities help make it competitive, strong and stable. It's also the easiest place in the world to trade across borders, according to the World Bank's Doing Business 2020 report.
The country is a founder member of the European Union, NATO and the UN, and the Luxembourg City is the seat of several institutions and agencies of the EU. It is a political centre as well as a financial hub for the region. However, in spite of this, doing business in Luxembourg can be a difficult task without local knowledge of the business landscape.
Here are some of the areas that can trip up companies new to the Grand Duchy:
1. Getting set up
Luxembourg is ranked 72nd in the world for 'ease of doing business' in the World Bank's Doing Business 2020 report. It is also ranked 65th out of 77 jurisdictions in TMF Group's Global Business Complexity Index 2021 – from 50th the previous year – which represents a relative decrease in complexity. Luxembourg's compact footprint makes maintaining physical links between businesses and regulators or authorities relatively simple and reduces the need for setting up potentially complex systems, such as complicated digital tools to overcome physical boundaries.
Lawyers, doctors, statutory auditors, banking and certain financial services and insurance are covered by different laws to the majority of businesses, so the nature of your commercial activity will govern how easy it is to get set up and start trading. Income tax, VAT and social security registration may also be required. If you're registering a holding company in Luxembourg, you'll need to meet the necessary requirements for share capital, shareholders, accounting and auditing, among other items.
Luxembourg company law offers a lot of flexibility to businesses. They can choose among a wide array of vehicles, from the standard joint stock company to different forms of limited partnerships. The clauses of the standard incorporation documents can be easily adapted, within the limits of the law, to meet the business's needs (eg authorised share capital, classes of shares, restrictions on transfer of shares, etc.). All in all, thanks to regulation adapted to the market and the high specialisation of the Luxembourg industry, any business can easily set up a tailor-made entity that suits its needs.
However, this does not mean that incorporating a company is a swift process: Know Your Customer-Anti Money Laundering (KYC-AML) requirements are the main cause of delays. Careful planning is therefore necessary, especially if establishing the company is needed by a certain deadline. Involving TMF Group can significantly facilitate and speed up this process.
2. Ongoing management
Focusing on the core business is not enough when managing a company. Compliance with all laws and regulations must be achieved, and this requires a 360° view. Sometimes this can only be achieved with the support of the appropriate advisors, such as TMF Group, who can provide critical compliance and administrative services.
Similarly, many businesses with an international component must review their activities not only locally, but also from a cross-border perspective, which adds complexity. In this respect, for international structures, a main concern is the substance of the company in Luxembourg, which can be challenged by foreign jurisdictions.
Each year we are seeing an increase in the number of regulations applicable to our clients and having the right partner to help you to navigate this complex regulatory environment is vital.
3. Proving your professionalism
To apply for a business permit from the Ministry of Small and Medium Sized Businesses, you will need, among other things, to provide evidence of your professional qualifications and your professional integrity.
The way you do this will depend on your profession and background – but the good news is you can provide documents in German, French or English. In general, a business permit is not required to carry out a pure holding or financing activity in Luxembourg.
4. Organised labour
Companies and individuals carrying out commercial activities must become members of the Luxembourg Chamber of Commerce, while skilled craftsmen must become members of the Chamber of Trades. This will be done automatically; the tax authorities will notify the relevant chamber on your behalf.
Luxembourg also has a strong history of workforce representation, with works councils found in most businesses. These are 'shop floor' organisations, representing workers as a local complement to trade unions, and must be kept informed and included in major business decisions. This can be a challenge for businesses used to 'at-will' labour laws.
There is a minimum statutory wage (salaire social minimum) – among the highest in the world – which applies to all employees and assures fair payment. This is set at €2,201.93 for a non-qualified worker and €2,642.32 for a qualified employee (since 1 January 2021).
It takes an average of 11 procedures and 155 days to receive construction permits in Luxembourg, and several intragovernmental departments must be consulted during the process, such as the Cadastre Administration, the Environment Department, the Urban Department (service de l'urbanisme) of the Commune and the Ministry of Works. Getting an electrical connection is somewhat quicker, taking five procedures and 56 days. Planning, as always, is essential if building or connecting new premises.
6. Physical establishment and substance
To apply for a business permit in Luxembourg, you'll need to have a fixed physical presence in the country. There are various rules about size and what constitutes 'substance' for different regulations, and there are many regulators keeping a keen eye on this aspect of international business. Having a substantial office is one way to stay on the right side of the tax authorities. Local partners such as TMF Luxembourg can help to make sure your business meets the necessary requirements.
7. Tax obligations
Individuals are taxed at source. Worldwide incomes, if any, will be considered through the personal tax return to determine the level of taxation applied on the incomes realised in Luxembourg only. You are considered as a tax resident if you are fiscally domiciled in Luxembourg, or if you reside in the country for more than six months in one year (according to most of the double tax treaties). Expats can be granted special tax exemptions (under several conditions) in an effort to attract skilled foreign workers to the country.
There are 23 tax payments to be made each year by businesses operating in Luxembourg, taking around 55 hours a year to process. Corporate tax rates are very competitive, although certain levies – such as property tax and net wealth tax – can take a bite out of personal and company earnings. There have been a number of changes to the Luxembourg tax environment to align the country to global standards.
With regard to the taxation of multinationals, Luxembourg has been an active participant in the OECD Base Erosion and Profit Shifting project since its inception. All European legislative responses that directly or indirectly address this issue have also been adopted.
8. Luxembourg accounting framework
All Luxembourg businesses are, in principle, required to prepare annual accounts in accordance with the Luxembourg standard chart of accounts, with different possible exemptions.
Luxembourgish Accounting Law allows companies to prepare their annual accounts using the fair value model for financial instruments and for certain other categories of assets, or to prepare their annual accounts in accordance with IFRS, as adopted by the EU.
Wrongdoing can mean managers incur civil, criminal and regulatory penalties. The tax authorities can also audit the company and proceed to tax adjustments.
9. Investment funds
Luxembourg is, in principle, easy for setting up funds and related entities. The Commission de Surveillance du Secteur Financier (CSSF) is fairly receptive to the fund sector and is flexible, though with high standards required from the servicing industry.
Luxembourg is the second largest fund domicile worldwide, behind the US, so high standards paired with business friendliness is a trademark. As for all entities set up in Luxembourg, the opening of bank accounts without ceding depositary services to the bank has been, and remains, a challenge.
Business is conducted in a very formal manner in Luxembourg, and there is typically a distinct separation of personal and corporate life. Small talk is important in building rapport but be sure not to ask personal questions. Luxembourgish is the national language, although French, German and English are widely spoken.
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.