Tax residence and fiscal domicilei Corporate residence
Collective entities are considered resident in Luxembourg for tax purposes if they have their legal seat or their central administration therein. Therefore, for domestic tax law purposes, both collective entities incorporated in Luxembourg, and collective entities incorporated abroad but having their central administration in Luxembourg or having their registered office in Luxembourg, are considered resident therein for tax purposes.
The central administration of an entity is deemed to be located in Luxembourg if the direction of the entity's affairs is therein concentrated. The central administration should be determined on the basis of facts through a substance-over-form analysis; in this respect, the place where the central accounting and archives of an entity, as well as the place where the shareholders' and board meetings are held, are generally considered relevant.ii Branch or permanent establishment
A definition of PE is provided by domestic law to determine the minimum threshold of business activity a foreign taxpayer must reach in Luxembourg in order to be taxed therein on the income 'directly or indirectly realised' by the PE. The domestic definition of PE is broader than the Organisation for Economic Co-operation and Development (OECD) Model Convention definition, last updated in 2017, as it generally includes a 'place which serves for the operation of an established business', and therefore does not require that the business is realised 'through' such place. Further, the domestic definition includes places of purchase and sale of goods.
In the absence of specific provisions in domestic law regarding the allocation of profit to a PE (and thus the determination of taxable basis in Luxembourg), a PE should be considered as an entity separate from the foreign head office. OECD guidelines may serve as a source of interpretation there, such that, in a nutshell, the profits attributable to the PE are the profits that the PE would have derived if it were a separate and independent enterprise engaged in the same or similar activities under the same or similar conditions, taking into account the functions performed, assets used and risks assumed by the enterprise through the PE and through other parts of the enterprise.
Tax treaties signed by Luxembourg mainly follow the OECD Model Convention and limit the Luxembourg taxing rights of business income derived in Luxembourg by foreign taxpayers to income derived through a local PE. The income taxable in Luxembourg is only the income that is attributable to the PE (i.e., no force of attraction applies) net of the expenses that are thereto allocable. The majority of tax treaties signed by Luxembourg provide for the prohibition of discrimination in the tax treatment of local PEs of foreign taxpayers as compared with domestic companies.
A bill of law proposal is currently pending with the Luxembourg legislator, which, if implemented, could impact the recognition of a PE where a tax treaty is in force between Luxembourg and a foreign country. If the draft law is implemented without changes, the recognition of a taxable presence under the form of a PE in Luxembourg will not require its prior recognition under the domestic criteria. Furhtermore, the Luxembourg tax authorities would be entitled to request proof that the source country recognises a PE as well (tax returns, ruling, etc.). The impact of this provision is unclear at this stage.