Corporate Income Tax
Corporate income tax applies to all resident companies and to Luxembourg permanent establishments of foreign companies. Resident taxpayers are liable to tax on their world-wide income, unless income is exempted under the provisions of applicable double tax treaties. Non-resident taxpayers are liable to tax only on their Luxembourg sourced income. A company is considered to be a resident tax payer if its place of management is located in Luxembourg.
Corporate income tax includes two taxes applicable to the profits of a company:
Corporate income tax (l’impôt sur le revenue des collectivités)
Municipal business tax (l’impôt commercial communal)
Since 1 January 2006, companies incorporated in Luxembourg are subject to progressive corporation income tax (including municipal tax) with rates rising from 0% to a maximum 29.63%.
A withholding tax of 15% is levied on dividend payments, unless the double tax treaties provide for lower rates or the Luxembourg participation exemption is applicable (see below). Interest, royalties and liquidation proceeds are not subject to withholding tax.
Net wealth tax
Net wealth tax is levied annually on total gross assets reduced by the debts of the companies. The actual net worth tax rate is 0.5%.
When a company is formed, the subscription of its capital is subject to a duty tax equal to 1% of the capital. The same is true for capital increase, whether in cash, in kind or for share premium.
However, if a company is formed in another European Country and can show that a similar tax has been paid in that country, the Luxembourg duty tax does not apply. This structure is used when a company requires large amounts of capital subscription.
Some transactions are exempt of capital duty in Luxembourg in cases of:
Debt or advance by third party (debenture loan issued by the Luxembourg company, other debts, …)
Contribution of the majority of shares of a company having its head office in the EU (>65%) in a Luxembourg holding company
Head office transfer (redomiciliation) from an EU member state to Luxembourg, if a similar duty has been past during its incorporation
Transformation of a capital company in Luxembourg in Private Assets Management company, Holding 1929, Soparfi established in Luxembourg
Incorporation of reserves or profits carried forward to the capital of a Luxembourg company
Other transactions listed in the frame of the merger/split or exchange involving a Luxembourg holding company (Directive 69/335)
Double Tax Treaties
Up until now, Luxembourg has signed bilateral taxation treaties with more than 50 countries. This tax treaties’ network is constantly expanded. The complete list of the double tax treaties signed by Luxembourg is attached to this brochure.
|Corporate Income Tax||29.63% (Corporation Tax of 22.88% + Municipal business tax on profit of 6.75%)|
|Interests & Royalties||0%|
|Net wealth tax||0.5%|
There are two types of Luxembourg Holding Companies:
Luxembourg companies qualifying for the participation exemption regime that are usually referred to as SOPARFI (Société de Participation Financière)
Tax-exempt holding companies – 1929 Holding
Both holding companies are not special legal entities. They can be formed as SA, SARL, SCA and even as cooperatives SC (SOPARFI, however, may not take the last form). In practice, the large majority of Luxembourg holding companies are constituted as a SA or a SARL.
SPF – Private Asset Management Company
The regime “SPF” can be chosen by a company whose form must be:
SARL: capital 12,500 Euro, one associate, one director
SA: capital 3,000 Euro (including at least 1/4 paid in), at least one shareholder and one director, one auditor
SCA: capital 31,000 Euro (including at least 1/4 paid in), at least two shareholders and three directors, one auditor
COOPSA: Co-operative Company having adopted the Form of a Limited company, at least three associates, 3 directors
Advantage: Variable Capital
The shares of a SPF can be nominative or at the bearer but cannot be quoted.
The activity is strictly limited to acquisition, detention, management and realisation of financial assets such as:
Shares, obligations, shares of quoted companies or private companies, securitisation funds, Soparfi shares, variable capital companies, Holding 1929 (within the limits of the Law – 19/07/06), deposit accounts, SICAV, Luxembourg or foreign investment funds, structured products, hedge funds, precious metals, options, warrants, indices, currencies… to guarantee or make non bearing interest loan to its subsidiaries.
The SPF cannot carry out commercial deals, hold building, intellectual rights or carry on an activity of management, trade or financial services.
It can obviously hold a subsidiary company which carries out such operations.
According to the type of company chosen, the “SPF” can issue securities, contract debts with its shareholders, with third parties like banks, natural persons, legal entities or other entities – resident or non-resident. There is no maximum debt equity ratio; the subscription tax is only due on the debts part which exceeds 8 times the increased paid-up capital of the capital premiums.
The shareholders of this SPF must be:
Individuals (other than company) resident or non-resident
A family group
A family office
An investment club
A group of investors managing their private savings
Entities known as managing patrimonial assets, resident or non-resident:
Similar entities with or without the legal personality acting within the management individuals’ assets
Any type of nominee agreement by intermediaries holding the shares of the SPF as fiduciary (banks acting within a fiduciary contract, mandate)
Fiscal Regime of the “SPF”
Taxation at the Constitution
Contribution Duty of 1% at the constitution with possibilities of exemption:
On the part of the debt or the advance towards the shareholders or the third parties – max 8 x the subscribed capital (for subscription tax)
When the contribution is the majority of the shares of a company having its registered office in the European Union (>65%)
When there is a transfer of registered office from a Member State of the EU towards Luxembourg in so far as a Similar duty was charged at the constitution
Shen there is a change in the form of a Luxembourg Company into a SPF form (Holding 1929, Soparfi…);
when there is the incorporation of reserves or deferred results to the capital
Taxation of products, benefits, dividends or other profits perceived or carried out by the SPF because of its social object.
Total Exemption of income tax, communal tax but exclusion of all tax treaties.
Withholding at source on the interests paid on the advances and debts of the SPF towards the individuals:
If Luxembourg resident: either final withholding at the source = 10% (see article on law RELIBI) – or global taxation
If not a Luxembourg resident: final withholding tax at the source = 15% (saving directive)
Withholding tax at source
No withholding at source on the interests is to be paid on the advances and debts of the SPF towards the legal entities or other entities.
Mother Subsidiary Treaty or Interests Royalties Directive
Interdiction of perception of more than 5% of its dividends coming from non-resident and non-quoted companies (ex EU) whose rate of taxation is lower than 11% (this measure only applies to dividends coming from these companies – so does not apply to capital gains, repurchases of capital stock, profit of liquidation, security lending, etc.).
Withholding at the source on wages paid to employees or directors
According to scales with reduction and exemption following the situation of the Beneficiary.
Withholding at the source on directors’ fees
No registration possible.
Taxable basis = paid-up capital (CL) + capital premium (CP) + debts exceeding 8 times (CL+CP) (existing at January first).
Rate = 0.25% per annum with a minimum of 100 Euro and a maximum of 125,000 Euro.
The tax is payable per quarter (and pro-rata by day for the first and last exercise).
The Profit/Loss or the reserves are not taken into account in this calculation.
Tax on the capital gain realized on SPF’s shares.
Taxation for Luxembourg resident.
Exemption for non-resident person.
Tax on the profit of liquidation.
Taxation for Luxembourg resident.
Exemption for non-resident person.
Control Ad Supervision of the SPF
Only the Administration de l’Enregistrement is qualified. This administration is different from the Tax authorities. Control is strictly limited to the respect of the conditions of the SPF Regime. No spontaneous or no information communication can be carried out by this administration except in the event of non-respect of the obligations of the SPF itself.
Each year, the domiciliation agent (a chartered accountant, an Auditor) must Certify that:
The SPF is held only by qualified investors (the name of these people is covered by its professional secrecy and he cannot reveal it)
The SPF does not perceive more than 5% of its dividends coming from companies ex EU taxable at less than 11%
The SPF respected its obligations as a paying agent following the law “relibi” and the directive on the savings taxation
It is indeed a certificate of non-objection from the paying agent to the attention of the Registry Administration. If this administration does not receive the certificate of non-objection, it informs the Tax Authorities of it and the withdrawal of the benefit of the SPF Regime can be declared (applicable starting from the reception of the registered letter).
The SPF must keep a proper account and publish its annual statements once a year, respect the provisions of the company law and the law on Domiciliation of companies if applicable.
The SOPARFI is on the contrary a normal and fully taxable commercial company and it can perform activities other than holding shares, including commercial, industrial or financial activities. However, the Luxembourg tax code provides SOPARFI for some special tax regime, referred to as the participation exemption. Under this regime, the following tax advantages are available for SOPARFI:
Tax exemption on dividends, capital gains and liquidation proceeds
Net wealth tax exemption on investments
No withholding tax or reduced rates under double tax treaties on distribution of dividends
The conditions, which must be met in order to qualify for the exemption, are summarised below.
Dividends, Capital Gains and Liquidation Proceeds
Dividends, capital gains and liquidation proceeds received by the SOPARFI from any non-resident company are fully exempt from income tax if the following conditions are fulfilled:
If SOPARFI owns at least 10% of the share capital of the distributing company or the acquisition cost of the shareholding is at least € 1,2 millions (€ 6 millions for capital gains exemption)
The shareholding is held for a straight 12 month period. This period does not need to be completed at the time of the distribution of the dividends if the SOPARFI commits itself to eventually hold the participation for the required period
The distributing company must be subject to a tax similar to Luxembourg corporate income tax (at least 11%); OR
The distributing company must be resident in one of the EU member states and covered by the article 2 of the EU Parent-Subsidiary Directive
The distributing company is a permanent establishment of a capital company resident in a state with which Luxembourg concluded a tax treaty
Net Wealth Tax
If the participation meets the conditions mentioned above it is also exempt from net wealth tax in Luxembourg.
Dividends distributed by the SOPARFI to its shareholder are exempt from withholding tax in Luxembourg if the shareholders himself meets the conditions provided for SOPARFI (see above).
The SICAR (Société d’Investissement en Capital à Risque) is a regulated entity whose sole objective is to invest in private equity or risk capital. It can achieve the same results as the Channel Islands and Delaware structures being more effective in jurisdictions such as France or Italy.
A SICAR is fully subject to tax and benefits from Luxembourg’s extensive treaty network. There are no restrictions on the type of investment, payment of dividends or redemption of shares as well as risk diversification.
There is a minimum share capital of €1 million that must be reached within 1 year period after the approval of the SICAR, which may be fixed or variable, but only 5% of it must be actually paid-up.
Income from securities and gains from the sale, redemption or liquidation of assets are exempt from tax. Nevertheless, all non-investment income generated by the SICAR is taxable. Instead of the generally applicable 1% capital duty, the SICAR is subject to a maximum fixed duty of €1,250. No wealth tax or annual subscription tax is levied.
Non-resident investors are not subject to tax on capital gains from disposal of shares in the SICAR. Also, no withholding tax is applied on payment of dividends or interest by the SICAR, even in case where no tax treaty applies. Distributions on liquidation procedures are made free of tax.
Due to the high degree of risk, investment is reserved by law to institutional or “well informed” investors.
In accordance with the law, the following investors may be regarded as well-informed:
Institutional investors, which under certain guidance would include banks, insurance companies, pension funds, commercial companies, investment funds and certain holding companies
Professional investors defined as “a client who possesses the experience, knowledge and expertise to make its own investment decisions and properly assess the risks that it incurs”
Any other investor who cumulatively a) has confirmed in writing that he adheres to the status of well-informed investor AND b) invests a minimum of Euro 125,000 in the company
The registered office and administration of the SICAR must be located in Luxembourg. Nevertheless, there are no residency restrictions regarding the management function.
Personal Income Tax
Resident taxpayers of Luxembourg are liable to personal income tax on their worldwide income while non-residents are subject to tax on their Luxembourg-source income only.
Luxembourg income tax law takes into account only 8 categories of income for the determination of total taxable income, including income from trading and business, employment, pensions and annuities, capital and investment, rentals and leases and sundry net income.
Personal income tax rates are progressive varying from 0% to 38%. Income taxation is based on the personal situation of the taxpayer (e.g. family status, number of children, etc). Married couples are taxed jointly.
Dividends and interests received by a resident taxpayer from a resident or non-resident company are also subject to progressive income rate. However, a 50% tax exemption can be obtained on dividends received from a taxable resident company, a company resident in an EU Member state or a State that has concluded a tax treaty with Luxembourg.
Capital gains on the sale of the taxpayer’s main residence are tax exempt while the capital gains received from the sale of other real estate are normally taxable at the progressive tax rate. Capital gains from shares and other securities are taxed depending on the holding period (6 months or more) and shareholding percentage.
Under Savings Directive implemented into Luxembourg tax legislation, effective from 1 July 2005 Luxembourg paying agent is required to withhold tax on interest paid to individuals in other EU Member States unless these individuals opt for the exchange of information or provide the paying agent with certificate issued by the tax authorities of their home country.
Effective from 1 January 2006, Luxembourg residents are subject to a 10% withholding tax on interest. This is considered a final tax.
Regular Social Security Contributions
Mandatory social security contributions consist of an employers and an employee’s portion. These contributions cover pension and health insurance. Contributions for pension, illness, accident and health are computed based on the annual gross remuneration of the employee and result in the total of 10.8% for the employee and 11.52% – 16.91% for the employer.
The rate of the social contributions for self-employed individuals is approximately the same as for employers and employee combined.
Inheritance and Gift Taxes
The inheritance tax is calculated based on the market value of the entire net estate of a deceased at the time of his death. The tax rate varies from 0% to 40% depending on the degree of parentage.
Gifts and donations are subject gift tax payable at the rate ranging from 1.8% to 14.4%, depending on the relation between the donor and the donee.
- 1 Luxembourg
- 1.1 Corporate Income Tax
- 1.2 Withholding Tax
- 1.3 Net wealth tax
- 1.4 Capital duty
- 1.5 Double Tax Treaties
- 1.6 Holding Companies
- 1.7 SPF – Private Asset Management Company
- 1.8 Advantage: Variable Capital
- 1.9 Debt
- 1.10 Fiscal Regime of the “SPF” Taxation at the Constitution
- 1.11 Withholding tax at source
- 1.12 Wealth tax
- 1.13 Mother Subsidiary Treaty or Interests Royalties Directive
- 1.14 Anti-abuse measure
- 1.15 Withholding at the source on wages paid to employees or directors
- 1.16 Withholding at the source on directors’ fees
- 1.17 VAT
- 1.18 Subscription Tax
- 1.19 Control Ad Supervision of the SPF
- 1.20 SOPARFI
- 1.21 Net Wealth Tax
- 1.22 Withholding Tax
- 1.23 SICAR
- 1.24 Personal Income Tax
- 1.25 Regular Social Security Contributions
- 1.26 Inheritance and Gift Taxes
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