| 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.
From
January 2011, a ceiling of EUR300,000 was imposed for severance
pay and 'golden' handshakes to limit the impact of severance
pay on the corporation's taxable base, employment fund contributions
were raised by 1% to 5%.
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 Körperschaftssteuer.
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 5% employment
fund surcharge and a charge of between 6% and 10.5% 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 10.5%;
in Luxembourg City it is 6.75% in 2011. 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.
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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 the taxation of individual Luxembourg-resident
partners applies.
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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
A
withholding tax of 15% applies to dividends paid to a non-resident
company unless the rate is reduced or dividends exempted by
an applicable tax treaty. Dividends paid to a qualifying company
under the EU parent-subsidiary directive are not subject to
withholding tax. Luxembourg has extended this regime to non-EU
tax treaty country parent companies as long as similar conditions
to those laid out in the Luxembourg participation exemption
regime and the parent company is subject to a tax similar
to that applicable in Luxembourg.
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