1 Basic framework
1.1 Is there a single tax regime or is the regime multi-level (eg, federal, state, city)?
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.
1.2 What taxes (and rates) apply to corporate entities which are tax resident in your jurisdiction?
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 €175,000 but not exceeding €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 CIT (ie, 1.19% as of 2021, 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 2021 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.
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).
1.3 Is taxation based on revenue, profits, specific trade income, deemed profits or some other tax base?
The Luxembourg corporate tax system is a classic 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 profits 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 as tax losses carried forward.
1.4 Is there a different treatment based on the nature of the taxable income (eg, gains on assets as opposed to trading income or dividend income)?
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).
1.5 Is the regime a worldwide or territorial regime, or a mixture?
In principle, companies with their seat or place of effective management in Luxembourg are 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%).
1.6 Can losses be utilised and/or carried forward for tax purposes, and must these all be intra-jurisdiction (ie, foreign losses cannot be utilised domestically and vice versa)?
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 the 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 Court of Justice of the European Union case law) or related to foreign immovable property.
1.7 Is there a concept of beneficial ownership of taxable income or is it only the named or legal owner of the income that is taxed?
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.
1.8 Do the rates change depending on the income or balance-sheet size of the taxpayer?
Yes (please see question 1.2).
1.9 Are entities other than companies subject to corporate taxes (eg, partnerships or trusts)?
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).
2 Special regimes
2.1 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)?
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.
2.2 Is relief available for corporate reorganisations or intra-group transfers of companies and other assets? Please include details of any participation regime.
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 in Luxembourg (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). However, this second requirement applies only to the extent that the gain would have been taxable in Luxembourg absent the rollover relief provision.
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.
2.3 Can a taxpayer elect for alternative taxation regimes (eg, different ways to calculate the taxable base, such as revenue-based versus profits based or cash basis versus accounts basis)?
No, there is no option for a Luxembourg corporate entity to elect for alternative taxation regimes.
2.4 What are the rules for taxing corporates with different functional or reporting currency from that of the jurisdiction in which they are resident?
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.
2.5 How are intangibles taxed?
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 (R&D) 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 municipal business tax (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 R&D activities.
2.6 Are corporate-level deductions available for contributions to pensions?
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.
2.7 Are taxpayers from different sectors (eg, banking) subject to different or additional taxes or surtaxes?
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, 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.
2.8 Are there other surtaxes (eg, solidarity surtax, education tax, corporate net wealth tax, remittance tax)?
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. 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.
2.9 Are there any deemed deductions against corporate tax for equity?
No, Luxembourg does not have deemed deductions against corporate tax for equity such as a notional interest deduction.
3 Investment in capital assets
3.1 How is investment in capital assets treated – does tax treatment follow the accounts (eg, depreciation) or are there specific rules about the write-off for tax purposes of investment in capital assets?
The values of capital assets in the tax balance sheet must correspond to the values reflected in the commercial balance sheet, unless the tax valuation rules require otherwise. For Luxembourg corporate income tax (CIT) purposes, the following various valuation bases can be applied, depending on the nature of the asset and/or the transaction:
- acquisition or production cost;
- going-concern value;
- fair market value;
- adjusted value; and
- transferred book value.
Gains arising from the sale of capital assets are treated as ordinary income and are taxed at statutory rates. Inventories, land and participations in the share capital of other companies cannot be amortised for tax purposes.
3.2 Are there research and development credits or other tax incentives for investment?
A Luxembourg company can defer the taxation of a capital gain realised on a land or a fixed non-depreciable asset if an amount corresponding to the sale proceeds is reinvested into another fixed asset, including a substantial participation. Upon the sale of such participation, the participation exemption is, however, denied.
The following investment tax credits are also available for investments in qualifying assets under certain conditions:
- Additional investment tax credit: Under certain conditions, companies may credit on the CIT due an amount equal to 13% of the increase in investments carried out during the tax year in qualifying assets that is, tangible depreciable assets, other than buildings, livestock and mineral and fossil deposits. The amount of ‘additional investments' corresponds to the difference between the net book value of the qualifying assets at the end of the financial year increased by the depreciation on those qualifying assets acquired and a reference value corresponding to the average value of qualifying assets at the end of the five preceding financial years.
- Global investment tax credit (which may be applied in addition to the first type of credit): Under certain conditions, companies may credit on the CIT due an amount equal to 8% of the total acquisition price of investments in qualifying assets acquired during the tax year. The global investment tax credit amounts to 8% for the first tranche of €150,000 and 2% for the tranche exceeding €150,000. Since 2018, the tax credit also applies to acquisitions of software and amounts to 8% for the first tranche of €150,000 and 2% for the tranche exceeding €150,000. However, the tax credit may not exceed 10% of the tax due for the tax year during which the operating year is ending during which the acquisition was made.
3.3 Are inventories subject to special tax or valuation rules?
Inventories such as land and participations in the share capital of other companies cannot be depreciated for tax purposes.
3.4 Are derivatives subject to any specific tax rules?
No, derivatives are not subject to any specific tax rules in Luxembourg.
4 Cross-border treatment
4.1 On what basis are non-resident corporate entities subject to tax in your jurisdiction?
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 five years prior to the sale.
These income categories and capital gains derived by non-residents are subject to corporate income tax (CIT) at the rate applicable to Luxembourg residents.
In addition, Luxembourg permanent establishments of foreign companies are subject to municipal business tax (MBT) in Luxembourg on income arising from business activities that they perform in Luxembourg.
4.2 What withholding or excise taxes apply to payments by corporate taxpayers to non-residents?
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 (EEA) 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.
4.3 Do double or multilateral tax treaties override domestic tax treatments?
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.
4.4 In the absence of treaties, is there unilateral relief or credits for foreign taxes?
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.
4.5 Do inbound corporate entities obtain a step-up in asset basis for tax purposes?
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 was 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 must be valued at the value retained in the jurisdiction of origin, unless this value does not correspond to the market value.
4.6 Are there exit taxes (for disposed-of assets or companies changing residence)?
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 EEA, 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.
5.1 Are there anti-avoidance rules applicable to corporate taxpayers – if so, are these case law (jurisprudence) or statutory, or both?
Anti-avoidance rules applicable to corporate taxpayers are statutory (ie, Section 6 of the Tax Adaptation Law; Articles 166 and 147 of the Income Tax Law; the principal purpose test in double tax treaties), but they must be applied in the light of Luxembourg and EU case law that specifies their interpretation and scope.
5.2 What are the main ‘general purpose' anti-avoidance rules or regimes, based on either statute or cases?
According to the Luxembourg General Anti-Avoidance Rule (GAAR) contained in Section 6 of the Tax Adaptation Law, applicable to all types of Luxembourg taxes and to all types of Luxembourg taxpayers, an abuse is considered to exist if:
- a specific legal route is selected for the main purpose or one of the main purposes of obtaining a tax advantage;
- which defeats the object or purpose of the applicable tax law; and
- which is not genuine having regard to all relevant facts and circumstances.
The legal route chosen may comprise more than one step or part, and will be regarded as non-genuine to the extent that it is not put into place for valid commercial reasons which reflect economic reality.
Where an abuse in accordance with the GAAR can be evidenced, taxes will be determined based on the legal route that is considered as the genuine route that is, based on the legal route which would have been put into place for valid commercial reasons that reflect economic reality.
In practice, the scope of the abuse of law provision should be limited to clearly abusive situations and, in an EU context, to wholly artificial arrangements considering relevant jurisprudence of the Court of Justice of the European Union.
5.3 What are the major anti-avoidance tax rules (eg, controlled foreign companies, transfer pricing (including thin capitalisation), anti-hybrid rules, limitations on losses or interest deductions)?
Special rules limiting the application of the participation exemption regime: No participation exemption applies to dividends received from or paid to EU collective entities in case of non-genuine arrangements put into place for the main purpose or one of the main purposes of obtaining a tax advantage which defeat the object or purpose of the EU Parent-Subsidiary Directive. In addition, if a dividend paid to the Luxembourg corporate entity is tax deductible in the EU member state of the subsidiary that is, in the country of source it remains taxable at the level of the Luxembourg parent company, meaning that the EU participation exemption regime is denied.
Controlled foreign corporation rule: The Luxembourg controlled foreign corporation (CFC) rule allows the taxation of a Luxembourg corporate taxpayer on undistributed income from an entity or permanent establishment which qualifies as a CFC if it is derived from non-genuine arrangement implemented with the main purpose of obtaining a tax advantage. In this case, an arrangement or a series thereof shall be regarded as non-genuine to the extent that the CFC would not own the assets which generate all or part of its income and would not have undertaken the related risks if it were not controlled by a Luxembourg taxpayer where the significant people functions linked to these assets and risks are carried out and are instrumental in generating the CFC's income. The CFC rule does not apply if the accounting profit of the CFC does not exceed €750,000 or 10% of its operating costs for the tax period.
General anti-hybrid rules: Article 168ter of the Income Tax Law implements the Second Anti-Tax Avoidance Directive (2017/952) and provides for a comprehensive framework to tackle hybrid mismatches. These rules have applied since 1 January 2020 and replaced the former hybrid mismatch rules, which were introduced as part of the 2019 tax reform when implementing the Anti-Tax Avoidance Directive (2016/1164). Hybrid mismatches typically result from a different tax treatment of an entity or financial instrument under the laws of two or more jurisdictions and may result in deduction without inclusion outcomes or double deductions. To neutralise the mismatch outcomes, according to the primary rule, the deduction of a payment is denied to the extent that it is not included in the taxable income of the recipient or is also deductible in the counterparty jurisdiction. When the primary rule is not applied, the counterparty jurisdiction may apply a defensive rule, requiring the deductible payment to be included in the income or denying the duplicate deduction, depending on the nature of the mismatch. When a hybrid mismatch involves a third state, the responsibility to neutralise the effects of hybrid mismatches is placed on the EU member state.
Article 168ter further provides for rules that target imported hybrid mismatches that shift the effect of a hybrid mismatch between parties in third countries into the jurisdiction of EU member states through the use of a non-hybrid instrument. Finally, Article 168ter provides for rules that neutralise double deduction outcomes in case of tax residence mismatches (ie, when an entity is resident for tax purposes in two or more jurisdictions).
Article 168quater also implements the Second Anti-Tax Avoidance Directive and provides a so-called reverse hybrid rule which will enter into force as from tax year 2022. A reverse hybrid is an entity that is treated as transparent under the laws of the jurisdiction where it is established, but as a separate entity (ie, opaque) under the laws of the jurisdiction(s) of the investor(s). The reverse hybrid mismatch rule aims to eliminate double non-taxation outcomes through the treatment of reverse hybrids as resident taxpayers. This provision does not apply to collective investment vehicles, which are investment funds or vehicles that are widely held and that hold a diversified portfolio of securities.
Limitation to the deduction of interest: Subject to certain conditions and limitations, ‘exceeding borrowing costs' shall be deductible only up to 30% of the corporate taxpayer's earnings before interest, tax and amortisation, or up to an amount of €3 million, whichever is higher. Taxpayers that can demonstrate that the ratio of their equity over their total assets is equal to or higher than the equivalent ratio of the group can (under certain conditions) fully deduct their exceeding borrowing costs.
Transfer pricing principles: Article 56 of the Income Tax Law provides a legal basis for transfer pricing adjustments where associated enterprises deviate from the arm's-length standard. In other words, where a Luxembourg company shifts advantages to another group company, the Luxembourg tax authorities may increase the company's taxable income (upward adjustment). Conversely, where a Luxembourg company receives an advantage from an associated company, the taxable income of the Luxembourg company may be reduced by a downward adjustment.
Furthermore, Article 164(3) of the Income Tax Law provides that hidden distributions (ie, direct or indirect advantages granted by the company to its shareholder which, absent the shareholding relationship, would otherwise not have been granted) are non-deductible from the taxable basis of the company.
Thin capitalisation rules:
Although there are no general rules on thin capitalisation, in practice the tax authorities apply a debt-to-equity ratio of 85:15 for the holding of participations (as well as for real estate assets located in Luxembourg). Excessive interest payments may be treated as hidden profit distributions.
5.4 Is a ruling process available for specific corporate tax issues or desired domestic or cross-border tax treatments?
Yes. An advance tax clearance (ATC) request must include a detailed description of:
- the taxpayer and the other parties involved;
- their activities; and
- the contemplated operation(s).
It must also include confirmation that the information provided to analyse the request is complete and accurate.
ATC requests relating to company taxation issues are first submitted for opinion to the Commission des décisions anticipées, which may hear, at its own discretion, the requesting taxpayer (or its representative/adviser) to obtain additional information, if needed. The commission will provide its opinion to the tax inspector in charge, who will take the final decision. It is not possible to appeal an ATC decision. ATC decisions are published in synthetic and anonymised form in the annual report of the direct tax authorities.
The ATC is valid for five tax years and has binding effect on the tax authorities, unless:
- the situation/operations described are inaccurate;
- the essential features of the contemplated operations change; or
- Luxembourg or international tax law, or the case law interpreting the rules based on which the ATC has been issued, changes.
The fees due per request range from €3,000 to €10,000, depending on the complexity and the amount of work needed to deal with the request. The fees are payable within one month.
ATCs which were granted prior to 1 January 2015 (which in most cases had an unlimited period of validity) lost their binding effect as from tax year 2020. If a taxpayer would like to obtain a new ATC for taxation years subsequent to 2019, it must file a new request, in accordance with the procedure in force.
5.5 Is there a transfer pricing regime?
Luxembourg has no integrated transfer pricing legislation. Instead, transfer pricing adjustments aimed at restating arm's-length conditions can be made based on different tax provisions and concepts applicable under Luxembourg domestic tax law.
The arm's-length principle is explicitly stated in Article 56 of the Income Tax Law, which serves as a legal basis for upward adjustments as well as for downward adjustments when a Luxembourg company receives an advantage from an associate enterprise. Article 56-bis of the Income Tax Law complements Article 56, formalises the authoritative nature of the Organisation for Economic Co-operation and Development Transfer Pricing Guidelines, and provides some definitions and guiding principles in relation to the application of the arm's-length principle.
In addition to Articles 56 and 56-bis of the Income Tax Law, the concepts of hidden dividend distributions (Article 164(3) of the Income Tax Law) and hidden capital contributions (Article 18(1) of the Income Tax Law) play an important role in ensuring that associated enterprises adhere to the arm's-length standard.
On 27 December 2016, the Luxembourg tax authorities released a circular on the tax treatment of intra-group financing activities. The circular follows the introduction of Article 56-bis of the Income Tax Law and provides guidance on the practical application of the arm's-length principle to intra-group financing activities. The term ‘intra-group financing transaction' is to be interpreted very broadly and includes any activity involving the granting of loans (or advancing of funds) to associated enterprises, irrespective of whether these loans are financed by internal or external debt (eg, intra-group financing, bank loans, public issuances). Under the new transfer pricing regime, Luxembourg finance companies must assume the risks in relation to their financing activities and actively manage these risks over the lifetime of the investment. This requires that a Luxembourg finance company have control over the risk and the financial capacity to assume the risk. Therefore, the amount of equity financing should be sufficient to cover the risk in relation to the financing activity (ie, the equity at risk). The amount of equity at risk should further be remunerated with an arm's-length return on equity. The amount of equity at risk and the arm's-length character of the remuneration must be substantiated in a transfer pricing study.
5.6 Are there statutory limitation periods?
Yes. The statutory limitation period is five years following the end of the relevant tax period. However, the limitation period is extended to 10 years if the tax return filed by the taxpayer is found to be incomplete or inexact, with or without the intention of fraud.
6.1 What are the deadlines for filing company tax returns and paying the relevant tax?
Based on the Luxembourg tax law, corporate taxpayers must file an annual tax return for corporate income tax (CIT), municipal business tax (MBT) and net wealth tax (NWT) before 31 March of the year following the tax year in respect of which the tax returns are being filed. In order to guarantee the continuity of the Luxembourg economy and support Luxembourg taxpayers during the COVID-19 crisis, the Ministry of Finance announced that the Luxembourg tax authorities will request that their tax offices not apply penalties for late filing provided that the 2019 CIT, MBT and NWT returns of companies are filed by 31 March 2021 at the latest. As far as individuals are concerned, the deadline for filing the 2019 income tax and MBT returns has been extended to 31 March 2021. As far as 2020 tax returns are concerned, for both individuals and corporate taxpayers, the deadline for filing income tax, CIT, MBT and NWT returns has been extended from 31 March 2021 to 30 June 2021.
Additional deadline extensions may be granted upon request. The electronic filing of the corporate tax returns has been mandatory since 2017.
Companies must pay quarterly tax advances, fixed by the tax administration based on the tax assessed for the preceding tax year or based on an estimate (for the first tax year).
The final tax assessed by the tax authorities must be paid by the corporate entity before the end of the month that follows the month of receipt of the tax assessment. The following additional tax returns may also have to be filed:
- dividend withholding tax return and directors' fees withholding tax return, which must be filed within eight days of the income being put at the disposal of the beneficiary; the tax must be paid at the same time;
- withholding tax return for interest on savings paid to resident individuals, which must be filed before the 10th of the month following payment of the income;
- withholding tax return for income from independent literary or artistic activities and professional sports activities, where these activities are or were carried out in Luxembourg. The withholding tax must be paid before the 10th of the month in which the income was paid and the tax return must be filed before the 10th of the month following the quarter in which the payment was made; and
- withholding tax return on salaries, which must be filed before the 10th of the subsequent month if done on a monthly basis; however, a quarterly or yearly filing may also be required, depending on the amounts of tax involved.
6.2 What penalties exist for non-compliance, at corporate and executive level?
In case of late filing, a 10% fine calculated based on the assessed tax may be levied. The late filing of tax returns may also trigger a penalty of up to €25,000; while the deliberate filing of incorrect or incomplete tax returns shall trigger an administrative penalty of between 5% and 25% of the unduly reimbursed or understated tax.
Omission or late payment of taxes triggers a penalty of 0.6% per month on the difference between the tax due and the advance payments made. In case an extension of the payment deadline has been granted to the taxpayer, penalties for late payment are computed as from the fifth month following the initial payment deadline as follows:
- 0.1% per month in case of payments between five months and one year overdue;
- 0.2% per month for payments between one and three years overdue; and
- 0.6% per month, for payments more than three years overdue.
A penalty of 10% (maximum €25,000) of the tax will be due in case of repeated violation.
Additional penalties and sanctions may apply in case of tax fraud.
6.3 Is there a regime for reporting information at an international or other supranational level (eg, country-by-country reporting)?
Luxembourg has implemented the EU Directive on Country-by-Country Reporting, which extends administrative cooperation in tax matters to country-by-country (CbC) reporting. Multinational (MNE) groups with a consolidated revenue exceeding €750 million are required to prepare a CbC report and file it with the Luxembourg tax authorities within 12 months of the last day of their reporting fiscal year. In addition, each Luxembourg constituent entity of an MNE group falling within the scope of the directive must notify the tax authorities of its role in the group (ie, whether it is the reporting entity of the group and if not, which entity of the group is the reporting entity), and must provide all the information required to identify the reporting entity and verify the submission of the CbC report no later than the last day of the reporting fiscal year for the MNE group.
Luxembourg financial institutions falling within the scope of mandatory reporting under the common reporting standard, EU Directive 2014/107/EU amending Directive 2011/16/EU as regards the mandatory automatic exchange of information in the field of taxation (DAC 2) ensuring that information on holders of financial accounts is reported to their EU member state of residence, and the US Foreign Account Tax Compliance Act must file their reports by the end of June of the year following the calendar year to which the reporting relates. From a practical point of view, it is possible for the financial institution to report directly through some IT applications, as Luxembourg authorities identify the official service providers each year. It is also possible to delegate this task to a third party or service provider.
Luxembourg taxpayers may also be subject to other reporting obligations which are based on tax treaty provisions on the exchange of information upon request, the Directive 2011/16/EU, as amended, or the anti-money laundering rules. ‘Fishing expeditions' by foreign authorities are precluded under Luxembourg law.
Non-compliant taxpayers may incur a fine of up to €250,000.
7.1 Is tax consolidation permitted, on either a tax liability or payment basis, or both?
Fiscal consolidation is allowed for corporate income tax (CIT) and municipal business tax purposes, but not for net wealth tax purposes. Domestic provisions allow groups of companies to opt for vertical or horizontal tax consolidation. The consolidated companies are bound for a five-year period. A company cannot simultaneously form part of more than one tax consolidated group.
Vertical tax consolidation is available where a fully taxable Luxembourg resident corporation or a Luxembourg permanent establishment of a foreign company subject to a tax comparable to the Luxembourg CIT holds, directly or indirectly, at least 95% of the share capital in one or more Luxembourg resident fully taxable corporations, or holds a Luxembourg permanent establishment of a foreign company which is subject to a tax comparable to the Luxembourg CIT. Both the integrating parent company and the integrated subsidiaries are required to begin and end their financial year on the same date.
Horizontal tax consolidation is available to subsidiaries that are held at least at 95%, directly or indirectly, by the same non-integrated parent company. The integrating subsidiary and the integrated subsidiaries can be Luxembourg resident fully taxable corporations or Luxembourg permanent establishments of a foreign company which is subject to a tax comparable to the Luxembourg CIT. The non-integrated parent company can be:
- a fully taxable Luxembourg company;
- a Luxembourg permanent establishment of a foreign company subject to a tax comparable to the Luxembourg CIT;
- a foreign company resident of another European Economic Area (EEA) country which is subject to a tax comparable to the Luxembourg CIT; or
- a permanent establishment located in a EEA country, subject to a tax comparable to the Luxembourg CIT, of a foreign company which is subject to a tax comparable to the Luxembourg CIT.
Even though the parent company is not integrated, the requirement to hold a minimum 95% shareholding in the integrated subsidiaries still applies. Both the integrating subsidiary and the integrated subsidiaries must begin and end their financial year on the same date.
When the shareholding is held indirectly, the intermediary companies through which the integrating or non-integrating parent company holds 95% of the share capital must be corporate companies fully subject to a tax comparable to the CIT.
Tax consolidation is available only upon filing a written request with the Luxembourg tax authorities. The fiscal consolidation becomes effective retrospectively as of the beginning of the fiscal year during which the consolidation was requested. The option must be exercised for at least five tax years.
8 Indirect taxes
8.1 What indirect taxes (eg, goods or service tax, consumption tax, broadcasting tax, value added tax, excise tax) could a corporate taxpayer be exposed to?
Supplies of goods and services, which are deemed to take place in Luxembourg, are subject to value added tax (VAT) at the standard rate of 17% or, on certain transactions, at 14%, 8% or 3%. Some transactions, such as exports and related transport, are zero rated.
Directors' services constitute an economic activity, whether this activity is exercised by an individual or by a company. Directors established in Luxembourg must register for VAT purposes. As a general rule, directors' services will therefore be subject to Luxembourg VAT at the rate of 17% when invoiced by a Luxembourg director to a Luxembourg company. Withholding tax applied on fees invoiced by the director is part of the taxable basis subject to VAT.
VAT returns must be filed monthly, quarterly or annually, depending on the turnover or incoming transactions subject to VAT and the level of purchases of goods and services subject to Luxembourg VAT under the reverse charge mechanism.
In addition to VAT, some products such as electricity, mineral oils, manufactured tobacco and alcohol are subject to specific excise duties. Generally, excise duties are determined based on quantity.
Based on European regulations, goods entering the territory of the European Union, notably through Luxembourg, may also be subject to customs duties/import tariffs. Rates are based on the nature, origin and quantity of the products.
8.2 Are transfer or other taxes due in relation to the transfer of interests in corporate entities?
There is no stamp duty or capital duty in Luxembourg. However, a registration duty of €75 is levied on incorporation or amendments to bylaws.
The issuance of bonds and tradeable securities is exempt from registration duties.
Registration duties are levied for deeds which must be recorded in a register by a certain deadline. The duty will be triggered on private deeds only upon their use in public deeds, such as notarial deeds or bailiff's deeds, upon their use in court or before a public authority.
The transfer of ownership of Luxembourg real estate property for consideration is subject to a proportional transfer tax of 6% of the acquisition price for Luxembourg City (ie, 5% plus a 2/10th increase), increased by 1% transcription fees. An additional 3% municipal surcharge applies in case of transfers of commercial buildings, mixed-use buildings or buildings with any other use located in Luxembourg City.
Specific rates apply where the acquirer formally declares, in the deed of purchase, that it has acquired the Luxembourg real estate property with the intent to resell it, or if the Luxembourg real estate property is transferred to a Luxembourg or foreign company in exchange for shares. In certain specific cases, the transfer of Luxembourg real estate is not subject to such duty (eg, if the contribution takes place in the context of a restructuring operation, such as a merger or a demerger, or in the event of a dissolution as the result of an insolvency procedure or other type of liquidation).
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.