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Luxembourg

General Information

Country Name: Luxembourg
Currency: Euro (EUR, €)
Primary Tax Authority: Administration des Contributions Directes (ACD)

Key Legislation:

  • Luxembourg Constitution (Constitution du Grand-Duché de Luxembourg): Establishes the framework for governance and taxation.
  • Income Tax Law (Loi concernant l’impôt sur le revenu): Governs personal and corporate income taxes.
  • VAT Law (Loi du 12 février 1979 concernant la taxe sur la valeur ajoutée): Provides the rules for Value Added Tax (VAT).
  • General Tax Law (Loi générale des impôts): Covers tax procedures, obligations, and penalties.

Fiscal Authority Allocation

Centralized System:
Taxation in Luxembourg is highly centralized, with the national government responsible for most tax collection.

Taxes Collected by Central Authorities:
Key taxes like corporate income tax (CIT), personal income tax (PIT), VAT, and customs duties are collected at the national level by the ACD.

Corporate Income Tax (CIT)

  • Standard CIT Rate: 24.94% (including a 7% municipal business tax in Luxembourg City). The base CIT rate is 17%.
  • Small and Medium-Sized Enterprises (SMEs): A reduced rate of 15% applies to taxable income up to €175,000. Income above this amount is taxed at the standard rate.
  • Taxable Income: Worldwide income of resident companies is subject to tax. Non-residents are taxed on Luxembourg-sourced income.
  • Loss Carryforward/Carryback: Losses can be carried forward indefinitely but cannot be carried back.
  • Tax Incentives: Luxembourg offers various incentives, particularly for investments in intellectual property, financial services, and research & development.

Value-Added Tax (VAT)

  • Standard VAT Rate: 17% (the lowest in the European Union).
  • Reduced VAT Rates: 8%, 3%, and 14%, depending on the type of goods and services (e.g., 3% for essential goods like food and books).
  • Exemptions: Common VAT exemptions include healthcare, education, and financial services.
  • VAT Scope: Applies to the supply of goods and services within Luxembourg and certain imports. Specific rules govern intra-EU transactions.

Personal Income Tax (PIT)

  • Progressive PIT Rates:
    • Up to €11,265: 0%
    • €11,265 – €13,173: 8%
    • €13,173 – €15,009: 9%
    • €15,009 – €16,881: 10%
    • €16,881 – €18,742: 11%
    • €18,742 – €20,615: 12%
    • Over €200,004: 42%
  • Taxable Income: Residents are taxed on worldwide income, whereas non-residents are taxed only on Luxembourg-sourced income. Taxable categories include employment income, business profits, and investment income.
  • Deductions and Credits: Various deductions apply for items like mortgage interest, insurance premiums, and childcare expenses. There are also tax credits for low-income earners.
  • Foreign Income: Luxembourg residents are taxed on their worldwide income, but relief from double taxation may apply through tax treaties or unilateral measures.

Additional Mandatory Contributions

Social Security Contributions:
In addition to income taxes, employees and employers in Luxembourg contribute to the social security system, which covers healthcare, pensions, and other social benefits.

  • Employer Contributions: Around 12.77% of gross salary.
  • Employee Contributions: Around 11.05% of gross salary.

Withholding Taxes

  • Dividends: 15% withholding tax, which may be reduced by tax treaties.
  • Interest: Generally no withholding tax on interest payments to non-residents, except under specific circumstances.
  • Royalties: No withholding tax on royalties in most cases, but tax treaties may reduce rates where applicable.
  • Tax Treaty Benefits: Luxembourg has an extensive network of tax treaties aimed at preventing double taxation and reducing withholding tax rates.

Transfer Pricing Rules

  • Documentation Requirements: Luxembourg follows OECD guidelines and requires comprehensive documentation for transactions between related parties.
  • Penalties: Transfer pricing non-compliance can result in significant tax adjustments and penalties.

Special Tax Regimes

  • Intellectual Property (IP) Box: Luxembourg provides a favorable tax regime for income derived from qualifying intellectual property, with a reduced effective tax rate of around 5%.
  • Investment Funds: Luxembourg is a global hub for investment funds, which benefit from tax neutrality on fund-level income and gains.
  • Private Wealth Management Companies (Société de Gestion de Patrimoine Familial – SPF): These entities benefit from a specific regime that exempts them from corporate income tax, municipal business tax, and net wealth tax.

Other Taxes

  • Net Wealth Tax: Corporate entities are subject to a net wealth tax at a rate of 0.5% on taxable net wealth up to €500 million, and 0.05% for amounts above €500 million. Individuals are exempt.
  • Inheritance and Gift Tax: Inheritance taxes apply to non-resident individuals inheriting Luxembourg-sourced assets. The rates vary based on the degree of relationship and the size of the inheritance.
  • Real Estate Transfer Tax: Property transactions are subject to registration duties, typically ranging from 6% to 10%, depending on the location and nature of the transaction.

Double Taxation Agreements (DTAs)

Key Partner Countries:
Luxembourg has tax treaties with over 80 countries, including the United States, France, and Germany, which help reduce withholding taxes and avoid double taxation.

Local Taxes

Municipal Business Tax:
Luxembourg City applies a municipal business tax of 6.75%, which is included in the overall corporate tax rate calculation.

Compliance and Reporting

  • Corporate Tax Filing Deadlines: Corporate tax returns must generally be filed by March 31 of the year following the tax year.
  • VAT Filing Requirements: Monthly or quarterly VAT returns are required, depending on the level of annual turnover.
  • Penalties: Penalties for late filing or underpayment can include interest charges and fines.

Recent Developments

Recent Tax Law Changes:
Luxembourg continues to adapt its tax laws in response to international developments, such as the OECD’s Base Erosion and Profit Shifting (BEPS) initiative and the European Union’s Anti-Tax Avoidance Directive (ATAD).

Tax Rulings and Transparency:
Luxembourg has increased transparency in tax rulings, aligning with EU and OECD standards to avoid harmful tax practices and promote fair competition.

Sustainability Initiatives:
Luxembourg is positioning itself as a hub for green finance and has introduced incentives for sustainable investment projects and funds.

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