Direct taxation of businessesi Tax on profits
Business income is subject to corporate income tax and to municipal business tax. Since the taxable basis of the municipal business tax is to a very large extent derived from the corporate income tax basis, the rules for their determination are examined together, and the main differences are highlighted where relevant.Determination of taxable profit
Resident taxpayers are taxed on their worldwide income on a yearly basis, whereas non-resident taxpayers are taxed in Luxembourg only on certain categories of income sourced therein. In principle, income is determined and taxed separately for each category of income, but all of the income derived by corporate entities and deemed commercial partnerships is considered to be of a business nature. In general, the business profit of an entity is defined as the increase in value of its net assets over the fiscal year, adjusted for capital contributions, capital repayments and profits distributed. The determination of the net assets' value is based on the accounts of the entity. Therefore, the taxable profit in principle coincides with the financial result and is determined on an accruals basis, unless specific tax rules expressly deviate from the accounting rules or a special tax regime is in place. For this purpose, a 'fiscal balance sheet' is prepared, where the accounting values of the assets and liabilities are replaced by the values of the same that should be used for tax purposes where different.
In broad terms, all the expenses derived by a company that carries on a commercial activity that are related to its business are deductible unless they relate to exempt income. Some expenses are explicitly classified as deductible (e.g., non-creditable foreign taxes and VAT, real estate tax and capital duty, depreciation and amortisation), whereas some expenses are explicitly classified as non-deductible (e.g., corporate income tax, municipal business tax, net wealth tax, directors' fees referred to supervisory services, fines, non-qualifying gifts, profits distributions).
For municipal business tax purposes, profits and losses derived through a foreign permanent establishment (PE) are not taken into account and nor are profits and losses that have already been taxed at the level of a (deemed) commercial partnership of which the taxpayer is a member.Capital and income
Capital gains are included in the taxable basis for corporate income tax and municipal business tax, and taxed at the ordinary rates.Losses
Losses can be carried forward and offset against the taxable income of the same taxpayer that generated them (on the condition that they result from acceptable accounts) for 17 consecutive years. The losses generated before 2017 can be carried forward indefinitely.
When a corporate reorganisation takes place (e.g., merger), the losses generated by an entity that disappears as a consequence of the reorganisation (e.g., the merged company) cannot be carried forward by the company resulting from it (e.g., the merging company).
According to case law from 2013, a change in the 'economic owner' of the losses (e.g., change in the ownership of the loss-making company) is of no prejudice to the carry-forward of losses unless the abusive intent of the reorganisation that led to a major change in the ownership of the company is demonstrated (in particular when the company's activities change after the change in ownership). Following the aforementioned case law, an administrative circular was issued by the Luxembourg tax authorities, confirming this analysis. No carry-back of losses is allowed.RatesCorporate income tax
The fiscal reform of 2017 reduced the corporate income tax rates. For the fiscal year 2018, the rate is 15 per cent for income not exceeding €25,000, 33 per cent for income between €25,001 and €30,000 and 18 per cent for income exceeding €30,001. For 2019, these rates are expected to stay the same.
A 7 per cent solidarity surcharge applies to the aforementioned rates, leading to an aggregate corporate income tax rate of 19.26 per cent (2018).Municipal business tax
The tax rate is determined every year by each municipality. For Luxembourg City, the rate for 2018 is equal to 6.75 per cent, resulting in a combined corporate income tax and municipal business tax rate of 26.01 per cent (expectedly also for 2019).Administration
As a general rule, the fiscal year coincides with the calendar year. In such a case, companies have to electronically file the annual corporate income tax, municipal business tax and net wealth tax returns, along with the commercial and fiscal balance sheets, by 31 May of the next year. Under certain conditions and at the request of the taxpayer, this deadline can be postponed.
After a preliminary review of the tax returns, the tax authorities can request further documents and information, or invite the taxpayer to discuss potential adjustments of the returns submitted. A final assessment is then issued: the amounts due, net of the quarterly advance payments made, have to be paid within one month. Alternatively, and at the option of the tax authorities, a self-assessment procedure can apply, whereby an assessment is issued by the Luxembourg tax administration based on the tax returns submitted by the taxpayer requesting the immediate payment of the corporate taxes computed on such basis. The assessment can be reviewed later by the tax administration before the ordinary statute of limitation expires, potentially giving rise to a higher corporate tax liability.
The taxpayer can file an appeal against the final assessment within three months of its receipt, provided that such assessment leads to an actual claim from the tax administration (i.e., following the assessment, the taxpayer is not in a loss position). The taxpayer can lodge an appeal against the decision of the head of the tax authorities with the Administrative Tribunal within three months, while the decision of the Administrative Tribunal can be appealed before the Administrative Court.
The risk of a litigation procedure can be limited by asking for clarification by the tax authorities where there is uncertainty as to a correct interpretation of the tax law applied to specific circumstances (see Section IX.iv).Tax grouping
If an option thereto is made before the end of the respective calendar year, a fiscal unity regime is available for corporate income tax and municipal business tax purposes to a Luxembourg parent company or to a Luxembourg PE of a foreign company fully subject to a tax comparable to the domestic corporate tax (group parent), as well as to qualified subsidiaries (group subsidiaries, together with the group parent, the group). As of 2016, the fiscal unity regime is also available to the Luxembourg subsidiaries of an EEA country fully subject to a tax comparable to the domestic corporate tax, or to a PE of such corporation in the EEA. Subsidiaries can be included when they are controlled, directly or indirectly, by the group parent for at least 95 per cent of their capital since the beginning of the fiscal year for which the option is exercised; and have a fiscal year coinciding with the fiscal year of the group parent.
Taxable income and losses of each company pertaining to the group are determined on a stand-alone basis and then aggregated at the level of the group parent, and adjusted to eliminate double taxation and double deduction of the same items of income. As the requirements for the application of the participation exemption regime are less strict than the requirements for the application of the tax unity, inter-corporate dividends paid under a tax unity regime are already fully exempt and do not need to be adjusted when determining the profit of the group. Losses generated prior to the tax unity can be used to offset the income of the group up to the taxable income of the group subsidiary that generated them. Once the regime ends, losses generated during the tax unity have to be left at the level of the group parent.
The tax unity regime lasts for at least five years; termination prior to this five-year period ending leads to a full retroactive denial of the tax unity regime. If after the five-year period the requirements for the application of the fiscal unity regime are no longer met, the benefits obtained during the tax unity are recaptured and the tax liability of each company participating in the consolidation is assessed on a stand-alone basis from the beginning of the fiscal year in which the termination took place.ii Other relevant taxesNet wealth tax
Net wealth tax is levied at a 0.5 per cent rate on the estimated net realisable value (unitary value) of the assets of businesses as of the beginning of the fiscal year. A reduced rate of 0.05 per cent applies to taxable net wealth in excess of €500 million. An independent expert's appraisal is not required for the determination of the unitary value, which is generally determined using the accounting book values, adjusted where necessary. With regard to real estate located in Luxembourg, the unitary value is determined on the basis of cadastral values assessed in 1941,which derives from a law of 1934.
Assets giving rise to exempt or partially exempt income (i.e., exempt participations and qualifying intellectual property rights) are generally also exempt for net wealth tax purposes, and assets allocated to a foreign PE and foreign real estate are generally exempt by virtue of tax treaties signed by Luxembourg. Liabilities are generally deductible if they do not relate to exempt assets. Provisions for liabilities, the existence of which is not certain (e.g., provisions for risks), are not deductible.
Net wealth tax is not deductible for income tax purposes and is generally not creditable in foreign jurisdictions. Net wealth tax is not due for the first year of existence of the company (as the assets as of 1 January are deemed to be nil).
In 2016, a minimum net wealth tax was introduced (to replace the minimum corporate income tax applicable until then). The minimum net wealth tax can be fixed (€4,815) if the financial assets of the resident corporate taxpayer in a given year exceed (1) 90 per cent of the total balance sheet and (2) €350,000, which is the case for most holding and financing companies. In all other cases, the minimum tax is contingent on the balance sheet total of the resident corporate taxpayer, and varies from €535 to €21,400 (for a balance sheet total exceeding €20 million).Capital duty or registration tax
The proportional capital duty, previously levied on contributions to newly incorporated companies, or upon transfer of the legal seat or of the effective management of a foreign company to Luxembourg or upon the setup of a local branch of a foreign company, was abolished as of 1 January 2009 and replaced by a €75 fixed duty.
Other ad valorem or fixed registration duties may apply depending on the assets or documents registered.Real estate taxation
A real estate tax is levied annually on the unitary value of real estate properties located in Luxembourg at a rate that depends on the classification and on the location of the property. The unitary value is, as described above, determined by the Luxembourg tax administration, and generally does not exceed 10 per cent of the market value of the property.Value added tax (VAT)
Being an EU Member State, Luxembourg applies EU VAT Directive 2006/112/EC. Luxembourg's standard VAT rate is the lowest in the EU (17 per cent). Luxembourg also applies reduced rates (3, 8 and 14 per cent) to various goods and services.
Contrary to other Member States, Luxembourg has not implemented the 'use and enjoyment' rule that obliges non-registered holding companies to pay the VAT on services received from non-EU suppliers without being allowed to recover it.
Following decisions of the European Court of Justice, Luxembourg strictly limited the use of the VAT exemption for 'independent group of persons' (cost sharing) to taxable persons performing activities of public interest. As a counterpart to the virtual disappearance of the cost-sharing exemption for the financial, fund and insurance sectors, Luxembourg implemented the VAT grouping mechanism, relying on Article 11 of the EU VAT Directive.
Luxembourg also has an extensive definition of regulated funds qualifying for the VAT exemption on the management of regulated funds.