On 16 December 2008, the Luxembourg Parliament enacted the Finance Bill introduced last October.
The main measures directed at Luxembourg companies are the following:
- Expansion of dividend withholding tax exemption
- Reduction of corporate income tax rates
- Improvement of the IP regime: net wealth tax exemption
Dividends paid to treaty country companies exempt from Luxembourg withholding tax
With effect from 1 January 2009, a new dividend withholding tax exemption has been introduced in Luxembourg tax law. Dividends paid to a parent company ("organisme à caractère collectif") resident in a country with which Luxembourg has concluded a double tax treaty are exempt from withholding tax. Withholding tax exemptions were already available (under certain conditions) for dividends paid to parent companies resident in an EU Member State, the other countries in the European Economic Area (Iceland, Liechtenstein and Norway) or Switzerland. The new exemption introduced in Luxembourg law will enable Luxembourg companies to pay dividends without withholding tax to parent companies resident outside the EU, the EEA and Switzerland.
This exemption is subject to the condition that the parent company is liable in its country of residence to an income tax comparable to the Luxembourg corporate income tax. This means that the foreign income tax must be levied at a rate of at least half of the Luxembourg national corporate tax rate (i.e. at least 10.5% ) and applied to a similar tax base. Moreover, at the time of the distribution, the parent company must have held (or have 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 in the subsidiary. Non EU investors such as US and Asian corporate entities should particularly benefit from this measure as they will become entitled to a zero withholding tax on dividends received from their Luxembourg subsidiaries.
Reduction of corporate income tax rates
Companies established in Luxembourg City are subject to corporate income tax at a rate which represents a combination of (i) the national corporate income tax increased by a solidarity surcharge of 4% and (ii) the municipal business tax (6.75% for Luxembourg City). With effect from 1 January 2009, the national corporate income tax has been reduced from 22% to 21%. A 20% rate will apply for companies with a taxable income below EUR 15,000. As a result, the aggregate tax rate for companies established in Luxembourg City (with a taxable result higher than EUR 15,000) 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.
Improvement of the IP regime: net wealth tax exemption
Luxembourg tax law provides for certain exemptions from net wealth tax, such as the exemption for the value of a substantial shareholding. With effect from 1 January 2009, a new exemption is available for intellectual property rights. The measure complements a law of 21 December 2007 which introduced an 80% exemption from corporate income tax for income derived from intellectual property and capital gains realized on the disposal of such property. Domain names are now expressly covered by the favourable IP regime (with effect from 1 January 2008 with respect to the corporate income tax exemption).