| Direct
Corporate Taxation |
In
Luxembourg there are three main taxes impinging on businesses:
Corporate Income Tax, the Municipal Business Tax on Profits,
and the Fortune Tax (a wealth tax). Of course there is also
VAT, and there are withholding taxes.
Presenting
the government's budget for 2010, Finance Minister Luc Frieden
categorically ruled out any increases or reductions in taxes
for companies or individuals for the following year, adamant
that there was no scope to implement tax cuts, and that any
rise in taxes would merely prove damaging to the economy.
Then,
In April 2010, Frieden unveiled details of the government’s
ambitious proposals to reduce spending and to increase tax
revenue, in a bid to achieve a balanced budget by 2014, and
to maintain public debt at a manageable level.
Eager
to generate additional tax revenue of around EUR200m, the
government has outlined the following proposals, including
increases to the top personal income tax rates, a ceiling
on tax deductions for businesses electing to issue bonus payments
or “golden handshakes," a 1% increase to the 4%
solidarity tax on businesses and the introduction of a 0.8%
'crisis tax.' Frieden also announced the introduction at some
future date of a tax on financial activities, following an
agreement at European level.
The
government has confirmed that a review will take place in
2012 to evaluate the measures taken in light of the general
development of the country’s economic and financial
situation.
Luxembourg Scope of Income Tax
Corporate Income Tax, or Impot sur le Revenu des Collectivites
(IRC), was introduced during the German occupation in 1940/41
as Korperschaftssteure. In accordance with the general rule
that a tax once introduced never dies, the Luxembourg tax
authorities decided to keep this interesting German innovation
after the war, although it was substantially modified by the
Loi du 4 decembre 1967 portant sur l'impot sur le revenu.
Resident
companies are taxed on their world-wide income. Residence
for this purpose means that the business has its main establishment
in Luxembourg, that is, the place from which it is managed,
where it holds its general meetings, and where it performs
central administrative functions. Non-resident companies having
a 'permanent establishment' in Luxembourg (defined as a place
of business or fixed equipment, which would normally include
branches) pay income tax on their income originating in Luxembourg.
IRC
applies to corporate entities, which includes SAs, SARLs,
and Partnerships Limited by Shares (Societes en Commandites
par Actions). Other types of partnership are considered fiscally
transparent, here as elsewhere, so that tax is assessed directly
on the partners rather than the partnership as such.
There
are some tax incentives available for investors who are considered
to be supporting the economic development of the country under
the laws of 28th July 1923, 27th July 1972, and the Tax Reform
Law of 6th December 1990. These apply to specified industries
and investment situations, and apply equally to Luxembougeouis
and foreign investors.
NB:
A Luxembourg 'holding' company, which until 2007 was the form
normally used for offshore operations, is not subject to IRC.
See Offshore Legal and Tax Regimes
for details of the taxes payable by 'holding' companies. See
Forms Of Company for details
of changes to the holding company regime in 2007.
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Luxembourg
Income Tax Rates
The rate of tax for income lower than EUR15,000 is 20%, and
21% for income beyond EUR15,000.
There
is a 4% employment fund surcharge and a charge of between
6% and 12% in respect of municipal services (see below). This
latter component varies according to location.
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Luxembourg Calculation of Taxable
Base
For companies, IRC is normally assessed for income arising
in the previous fiscal year, which is the calendar year unless
a company has chosen otherwise.
For
resident Luxembourg companies 'income' for the purposes
of the IRC is calculated by comparing the net worth (net balance
sheet assets) of the taxable entity at the beginning and end
of the period concerned. Businesses with very low turnover
may be able to use a simplified 'receipts and expenses' method
of calculation, but this is not pursued further here.
NB:
Although for general information some very brief details are
given below about the calculation of IRC, this is not a full
treatment of what is a complex subject and requires appropriate
professional advice.
Allowable
expenditure needs to be incurred exclusively and directly
for the business; certain types of expense are not deductible,
of which the most important are directors' fees, self-insurance
provisions, foreign taxes and expenses connected with 'exempt'
income. The 'foreign taxes' rule would seldom operate in practice,
either because of a Double Taxation
Treaty, or because of Luxembourg unilateral tax credit
provisions.
'Exempt
income' is income qualifying under the Luxembourg Participation-Exemption
system, meaning dividends, interest, capital gains or royalties
income received from another company in which the receiving
company has a share interest greater than 10%, providing the
paying company is in a jurisdiction levying at least 15% (at
the time of writing) tax on such payments. Note that the interest
costs on debt finance of such a exempt share interest would
only be deductible up to the level of the exempt income received.
Profit
distributions in the course of a year (widely defined) are
added back to net worth at the end of the year prior to calculation
of IRC.
Evidently,
rules for asset valuation are particularly crucial in a 'net
worth' income tax system. In Luxembourg there are rules dealing
with what assets are to be included, their valuation, and
permitted depreciation. The rules cover land and buildings,
leased assets, goodwill, participation in other companies,
inventory etc. The treatment of provisions is likewise important
and is covered by a set of rules. Foreign exchange gains and
losses can also have a major impact on valuation of foreign
assets, and are dealt with under rules that provide for their
'neutralisation' (deferral) in many circumstances.
There
are some tax credits available for certain types of investment
into assets for use inside Luxembourg itself.
Losses
at the taxable income level can be carried forward, but not
back. Group relief exists under 'fiscal integration' provisions,
applying subject to permission from the Minister of Finance
with some differences to 99% and 75% participation. The rules
for valuation of 'substantial participation in other companies'
would have the same effect as group relief up to a point since
a reduction in the net worth of a subsidiary would be reflected
in a reduced valuation in the parent balance sheet.
For
non-resident corporate entities, IRC applies to:
- Income attributable
to a Luxembourg permanent establishment (but see Double
Taxation Treaties regarding the definition of such);
- Passive
Luxembourg-sourced income such as dividends, interest,
royalties and capital gains (see Withholding Taxes below
as regards the taxability of income under this heading);
- Income from
immovable property in Luxembourg;
- Interest
on loans secured by immovable property in Luxembourg.
The
calculation of taxable income is the same as it is for a Luxembourg-resident
corporation. It follows that any foreign company doing business
in Luxembourg should be extremely careful not to create a
permanent establishment in the country. With exceptions under
Double Taxation Treaties,
'permanent establishment' is defined to include 'branches,
factories, warehouses, place of purchase and sale, landing
areas, offices or any other place of business which the entrepreneur
uses to carry out its business'. The definition is looser
under OECD-model Double Tax Treaties, which would for instance
not count warehouses as constituting permanent establishment.
E-commerce servers used for sales purposes would however probably
amount to permanent establishment in either case, and this
might be the case whether or not the server was owned by the
company doing the selling. It's not a risk to take.
In
July, 2006, the
European Commission called on Luxembourg to comply with the
judgement of the European Court of Justice in the case of
Commission v. Grand-Duché de Luxembourg, delivered
on 8 December 2005.
In
this Judgment, the European Court of Justice declared that
Luxembourg had failed to fulfil its obligations to transpose
Directive 2001/65/EC on accounting rules into its national
legal order.
Directive
2001/65/EC amended Directives 78/660/EEC, 83/349/EEC and 86/635/EEC.
These Directives defined which types of companies have to
produce accounts, establish which format should be used for
the profit and loss account and the balance sheet and lay
down which valuation principles should be applied. The Directives
also impose requirements to disclose the accounts.
Directive
2001/65/EC brought EU accounting requirements into line with
modern accounting theory and practice. It allows for certain
financial assets and liabilities to be valued at fair value.
This will enable European companies to report in conformity
with current international developments.
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Luxembourg Municipal
Business Tax on Profits
The legislative origins of the Municipal Business Tax on Profits
(MBTP) are similar to those of the IRC. However it applies
to all types of partnership engaged in commercial activity
as well as to companies, whether resident or non-resident.
The
calculation of taxable income for the MBTP is identical to
that for the IRC, with certain specified additions and deductions
which are mostly but not entirely concerned to remove the
activities of foreign permanent representations (ie those
outside Luxembourg), this being a tax paid to the municipality
for its services.
The
rate of the MBTP varies depending on the municipality from
6% to 12%; in Luxembourg City it was 6.75% in 2009. The tax
is payable on taxable income over EUR17,500 for companies
which are liable to corporate income tax and EUR40,000 for
other businesses. The MBTP is no longer, as it used to be,
counted as an expense in its own calculation.
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Luxembourg The Fortune Tax
The Fortune Tax (Net Worth Tax) is levied on resident and
non-resident corporate entities (so excluding fiscally-transparent
partnerships). For businesses, the two main components of
Net Worth are Real Estate Unitary Value (in effect, the value
of buildings in 1941 when the Germans imposed the tax!) and
Business Net Worth which is an adjusted version of net worth
as calculated for the Corporate Income Tax.
The
rate of tax is 0.5%. However, for most companies the amount
of Fortune Tax payable is offsettable against Corporate Income
Tax, subject to some balance sheet reserve requirements.
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Luxembourg Taxation
of Partnerships
For
all partnerships engaged in commercial activity, the Municipal
Business Tax on Profits is payable. For Societes en
commandites par actions only among partnerships (Partnership
Limited by Shares), the Corporate Income
Tax (IRC) and the Fortune Tax are payable in addition.
For
fiscally transparent partnerships, see Personal
Taxation as regards the taxation of individual Luxembourg-resident
partners.
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Luxembourg Filing Requirements
and Payment of Tax
Entities subject to Corporate Income Tax or the Municipal
Business Tax on Profits should submit corporate tax returns
by 31st May of the year following the end of the financial
year, and the tax is due for payment within one month of the
receipt of the resulting tax assessment. However, advance
tax payments have to be made on a quarterly basis (10th March,
10th June etc) and these are based on the tax assessment of
the preceding tax year, with adjustments in either direction
made at the time of final assessment. Fortune Tax payments
also have to be made quarterly, but on 10th February, 10th
May etc.
Luxembourg
Withholding Tax
Until 2004, the withholding tax regime required companies
to deduct withholding tax from payments made in respect of
dividends (25%), profit shares (variable), royalties (10%
to 12%), directors' remuneration (20%), management fees (28.2%)
and auditors fees (39.7%). However the rate of withholding
on interest payments is nil.
Under
the EU participation exemption rules, dividends paid to a
company having at least a 10% share in the paying company
are exempt from withholding tax (the stake must have been
held for 12 months before the end of the accounting period
in respect of which the dividend is being paid; and the paying
company must be subject to a 'high-tax' corporation tax regime,
which of course includes Luxembourg).
Changes
to the parent/subsidiary directive in 2004 reduced the
holding requirement to 20% for 2005-06; to 15% for 2007-08;
and to 10% for 2009 onward. Under the EU's Directive on Interest
and Royalties, also in effect from 2004, both types of payment
are exempt from withholding tax if they are between associated
companies (rules as for the participation exemption).
Luxembourg
has actually gone even further, meaning that there is no withholding
tax on royalties paid to non-resident companies, and Luxembourg
holding companies incorporated according to the terms of the
law of 1929 are not subject to such withholding tax either.
In line with the directive, the laws came into force retrospectively,
with effect from January 1st 2004.
From
January 2009, the withholding tax on dividends paid to treaty
country “corporate” shareholders was reduced to
0%.
It
wasn't all good news, however. Luxembourg was forced to comply
with the EU's Code of Conduct Committee's campaign against
'harmful tax practices' by modifying the dividend taxation
regime for 1929 holding companies. However, the 1929 holding
company regime was abolished as from 1st January 2007, along
with Milliardaire companies and financial holding companies,
with pre-existing companies being entitled to continue benefiting
from their current tax regime until December 31, 2010.
The
replacement for the 1929 holding company is the Family Private
Assets Management Company, or SPF. These new vehicles are
prohibited from commercial activity, and are limited to private
wealth management activity, for example the holding of financial
instruments such as shares, bonds and other debt instruments,
in addition to cash and other types of bankable asset. If
the SPF is used to hold voting rights in other companies,
it must ensure that it does not involve itself in the running
of those companies, and it is prohibited from providing any
kind of service.
The
new vehicle is designed to be exempt from corporate income
tax, municipal business tax and net-worth tax, and from withholding
tax on distributions.
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LAWANDTAX-NEWS.COM
13/07 
