Last May the Luxembourg Prime Minister announced several measures aimed at increasing the country's competitiveness, i.e. the abolition of capital duty and a progressive reduction of corporate income tax rates. A draft bill concerning the abolition of capital duty is already circulating. Further to the Prime Minister's announcement, a bill (the "Bill") implementing the tax rate reduction and other attractive new tax measures was introduced on 1 October 2008. The changes provided for in the Bill are the following:

  • Abolition of withholding tax on dividends for treaty countries

Most of Luxembourg's double tax treaties currently provide for a minimum withholding tax rate of 5% on dividends. The proposal before the Luxembourg Parliament is to exempt from withholding tax dividends paid to a parent company ("organisme à caractère collectif") resident in a country with which Luxembourg has concluded a double tax treaty. This exemption is subject to the condition that the parent company is subject in its country of residence to an income tax comparable to the Luxembourg corporate income tax. Moreover, at the time of the distribution, the parent must have held (or committed to continue to hold), for an uninterrupted period of at least 12 months, (i) a participation of at least 10% in the subsidiary or (ii) a participation with an acquisition cost of at least EUR 1.2 million. 

  • Reduction of corporate income tax rate

Companies established in Luxembourg City are currently subject to corporate income tax at an aggregate rate of 29.63%, which represents a combination of (i) the national corporate income tax (22%) increased by a solidarity surcharge (4%) and (ii) the municipal business tax (6.75% for Luxembourg City). The Bill aims to reduce the national corporate income tax to 21%. As a result, the aggregate corporate income tax rate for companies established in Luxembourg City will be reduced from 29.63% to 28.59%. It is expected that the corporate income tax rate will gradually be reduced further in the future.

  • Net wealth tax exemption for IP

Luxembourg tax law provides certain exemptions from net wealth tax, such as the exemption for the value of a substantial shareholding. The Bill will entirely exempt intellectual property rights from net wealth tax. The measure will complement a recent law of 21 December 2007 introducing an 80% exemption from corporate income tax income for income derived from intellectual property and capital gains realized on the disposal of such property.

  • Adaption of the Luxembourg tax law to the IFRS

The bill aims to ensure fiscal neutrality for companies opting to apply the IFRS.

Once enacted the new tax measures will make Luxembourg an even more attractive jurisdiction for certain types of investors and investments. In particular, non EU investors such as US and Asian corporate entities will become entitled to a zero withholding tax on dividends received from their Luxembourg subsidiaries.