Overview of Luxembourg taxation principles
By as early as 1929, Luxembourg was already recognized as a major financial centre and gateway to the world. A status Luxembourg still holds today, not only because of its banking sector or that it is one of the world's 5 leading financial centres for UCITS, but also because it offers attractive tax advantages to corporate vehicles, such as holding or finance companies, real estate structures, etc.
Here is an introduction to the Luxembourg tax regime and the opportunities it offers companies.
Luxembourg Corporate Tax Law encompasses the following taxes:
- Company income taxes;
- Company net wealth tax;
- Value Added Tax;
- Capital duty.
Company income taxes include Corporate Income Tax and the Municipal Business Tax.
Current Corporate Income Tax rates :
- 20%, if the taxable income does not exceed EUR 10,000;
- EUR 2,000, plus 26% of income above EUR 10,000, if income is between EUR 10,000 and 15,000;
- 22%, if income is above EUR 15,000.
A surcharge of 4% is applied on final corporate income tax due, in order to finance the unemployment fund. In practice: 4% * 22* = 0, 88% rate of solidarity tax.
The Municipal Business Tax is applied at a basic rate of 3%, multiplied by a factor defined by each municipality. It therefore depends on the locality of the company's registered office or branch. For example, in Luxembourg, the applicable rate is 6.75% (i.e. 3%*225%). The basis of calculation is the same as for Corporate Income Tax, with an extra allowance of EUR 17,500.
The Net Wealth Tax applies at a rate of 0.50% of net wealth of the company. This may seem a large amount, but it is important to stress the notion of "net". There are indeed a lot of deductions on the liabilities side that reduce the taxable basis.
As in every country in Europe, Luxembourg levies Value Added Tax. The common rate applied is 15%, the lowest rate in Europe, with special rates of 6% and 3% for food and restaurants.
Capital Duty is an up-front duty of 0.5%, levied on the subscribed share capital and possible share premium. This capital duty was abolished on 1 January 2009.
In our capacity of financial engineer, we have to use the tools available to us.
The main tools are:
1. Accounting and tax techniques:
- Exemption of dividend income and capital gains
- Deduction of interest charges
- Attractive thin capitalization rules
- Exemption of liquidation proceeds and release of reserves
- Management of intellectual property rights
2. Special Purpose Vehicles ("SPV"):
- Taxable holding companies with treaty protection
- Finance companies
- Branches
3. Advanced mechanism:
- Venture capital and private equity
- Real estate