With regard to tax matters, the Luxembourg legal framework is relatively stable compared to other European jurisdictions. In the course of 2023, some of the significant changes in the Luxembourg tax landscape were introduced by the so-called budget law, which, among others, provided key clarifications with respect to the reverse hybrid rules, clarified the scope of the Relibi law, extended the deadline for filing the personal income tax returns and corporate income tax (“CIT”) returns from the 31 March to the 31 December of each year, and confirmed the 1% reduction of the VAT standard, intermediary and reduced rates (valid up to the 31 December 2023), whilst the 3% super-reduced rate remained untouched. In addition, several other important tax measures were brought forward (e.g., the adoption of the law of 22 December 2023 implementing Council Directive (EU) 2022/2523 of 14 December 2022 on ensuring a global minimum level of taxation for multinational enterprise groups and large-scale domestic groups in the EU (“Pillar 2”), the ratification of the new Luxembourg – UK double tax treaty, the modification of the investment tax credit, the introduction of a draft law with additional transfer pricing documentation requirements).

Furthermore, already in 2024, there were material tax changes under discussion such as the draft law from the 23 May 2024 aiming to adapt the existing minimum net wealth tax (“NWT”) regime following a judgment of the Luxembourg Constitutional Court deeming unconstitutional certain elements of that regime and the draft law from the 17 July 2024, pursuant to which the CIT rate will decrease with 1%. If adopted, both draft law will enter into effect as from 1 January 2025.

With regard to the legislative process, usually tax law amendments are embedded in the budget law. The budget law is submitted to the Luxembourg parliament in fall or winter of each year.

Luxembourg laws may be submitted to the Parliament’s vote either

1. by way of a draft bill issued by a member of the government or
2. by a law proposal introduced by one or several members of Parliament.

In both cases, the amendment is assigned to one or more parliamentary commission(s). Further, the bill is discussed and may be amended upon request of at least five members of the Parliament. During the parliamentary process, several professional organisations and the Council of State may produce comments, which are often taken into account in the final bill. The bill must be voted twice with a 3 month interval minimum by the Parliament. The second vote may be disregarded if the Council of State gives its approval. Following the approval of the Parliament and of the Council of State, the Grand Duke signs and passes the law which enters into force 3 days after its publication in the official gazette unless the law states otherwise.

Please see below the different procedural obligations and their deadlines summarised in a table:

1) Maintenance of records

Kind of document	Deadline	Maintenance of records
Annual accounts:   To be approved and filed with the Trade and Companies Register (Registre de Commerce et des Sociétés)	Approval by the shareholders’ meeting or the partner’s meeting (if applicable) –       within 6 months after the end of the calendar year for companies, –       At the end of the financial year for natural persons; Filing with the RCS within 1 month after the approval	10 years after the end of the financial year
Indirect taxes: –       invoices and documents relating to deliveries or acquisitions of goods or services   –       VAT summary statement:	–       To be filed before the 1 May of the year following the taxable period   –       May be filed on a quarterly basis if the quarterly amount is below EUR 50,000	10 years after the end of the financial year
Direct taxes: –       Annexes to the tax returns	To be filed with the tax return (see below)	10 years after the end of the financial year

2) Taxes

Taxes	Taxpayer	Relevant tax authority	Deadlines	Frequency
Personal income tax	–       Natural persons   –       Partnerships   –       Sole proprietorships	Administration des Contributions Directes (ACD)	Before the 31 December of the following calendar year	Yearly
Corporate	Capital companies	ACD	Before the 31 December of the following financial year	Yearly
income tax
Municipal business tax Proprietorship	–    Capital companies   –    Partnerships and sole proprietorships	ACD	Before the 31 December, together with the corporate income tax return	Yearly
Net wealth tax	–       Capital companies	ACD	Before the 31 December of the current year.	Yearly
VAT	VAT taxpayers (incl. companies, individuals carrying on a business activity, landlords if they have opted for VAT). If the turnover is:	Administration de l’enregistrement et des Domaines et de la TVA (AED)
	< EUR 112,000		Before the 28 February (with the 31 October as administrative tolerance);	Yearly
	> EUR 112,000 < EUR 620,000		Before the 15 January, April, July and October (+ 2 additional months administrative tolerance) with an annual return to be filed before the 30 April (with the 31 December as administrative tolerance);	Quarterly and yearly
	> EUR 620,000		Before the 15 each month (+ 2 additional months administrative tolerance)	Monthly and yearly
	VAT taxpayers performing only VAT exempt activities not entitling to input VAT deduction right that receive non-VAT exempt services (or to some extent goods) from suppliers established outside of Luxembourg		Before the 28 February (with the 31 October as administrative tolerance);	Yearly
Subscription tax	Special Investment Funds Family wealth companies (SPFs)	AED	Before the last day of March, June, September and December	Quarterly
Extensions	An extension to the abovementioned deadlines may be granted upon request.
Forms and filing method	All tax returns can be found on https://impotsdirects.public.lu/fr/formulaires/collectivites.html and have to be filed electronically.
Penalties	Failure to submit the tax return or late submission will lead to a penalty of 10% of the tax due and fines up to EUR 25,000.

In Luxembourg, three key regulatory authorities are in charge of taxation:

• The direct tax administration (Administration des contributions directes,). The ACD deals with taxation of companies and is responsible for fixing, controlling and collecting the applicable tax, fixing tax advances, issuing tax residence certificates, etc.
• The indirect tax administration (Administration de l’enregistrement, des domaines et de la TVA).
• The Customs and Excise Administration (Administration des douanes et accises).

The direct tax administration maintains 8 tax offices dealing with the taxation of companies and being responsible for controlling and fixing the applicable tax, fixing tax advances, issuing tax residence certificates, etc. The direct tax administration is in general easy to approach and meetings with the tax inspector in charge can be requested.

In 2015, Luxembourg provided a legislative framework to its tax ruling procedure. Since then, advanced tax rulings and advanced pricing agreements can be filed with the Luxembourg direct tax administration. Each request is then processed by the so-called ruling committee consisting of between 4 and 6 tax civil servants. The ruling committee may contact the taxpayer directly, in case it requests additional information or clarification. The committee provides a final binding answer within a timeframe of generally 2 to 3 months. Rulings are binding for a period of 5 years.

Rulings which have been granted by the ACD before 1 January 2015 are no longer binding after 31 December 2019. Taxpayers who have been affected by this provision may request a new ruling in accordance with the applicable standard procedure. A waiver has been granted to taxpayers who have a financial year diverging from the calendar year as the latter may file a ruling before the end of their 2020 financial year. As rulings may only be requested in relation to one or several specific transactions, a new filing can only be approved provided that the concerned transactions still take effect at the expiry date of the ruling.

However, since the Luxleaks and other scandals (e.g., Panama papers, Openlux, etc), the number of rulings filed has significantly decreased. It appears to be a general downward trend corroborated over the years.

The rules applying to the proceedings against a tax assessment notice are embedded in the Luxembourg Abgabenordnung (the “AO”). The filing period for a complaint is very short and expires 3 months after receiving notice of the relevant tax assessment. A complaint has to be filed first with the relevant Luxembourg tax office.

The Luxembourg tax office does not need to answer to the complaint within any specific deadline. However, as per Luxembourg administrative law, if no formal decision or answer is provided by the Luxembourg tax administration after a period of 6 months, the relevant taxpayer can file a legal complaint in front of the Luxembourg administrative tribunal. Decisions of the Tribunal Administratif can also be appealed to the Cour Administrative. Concerning tax matters, the Cour Administrative is the final instance so that decisions taken cannot be further appealed.

Luxembourg administrative jurisdictions are subject to strict procedural deadlines, so that a court case is judged within a timeframe of 1 ½ to 2 years maximum.

With regard to tax matters, the filing of a complaint has no suspensive effect, so that even if a tax is challenged, it must still be paid when declared due. A payment deferral (sursis de paiement) may be granted upon request.

With regard to VAT matters, similar rules apply. Nevertheless, it should be noted that the District Court (Tribunal d’Arrondissement) (being part of the civil jurisdictions) is competent for complaints against decision of the VAT authorities.

Disputes that have arisen since 2018 relating to the interpretation and application of the EU Arbitration Convention and of intra-EU tax treaties fall under the scope of application of the Luxembourg law of 20 December 2019 implementing the EU Directive on tax dispute resolution mechanisms. Luxembourg taxpayers may submit their complaints within three years following the notification of the tax assessment, the audit report or any event triggering a tax dispute to the ACD. If the ACD does not resolve the dispute within 6 months following the receipt of the complaint; the latter must resolve such dispute by means of a mutual agreement procedure (“MAP”) within 2 years following the acceptance of the complaint.

The Luxembourg Tax Authorities (“LTA”) released the Circular L.G. – Conv D.I. n°601 dated 11 March 2021 providing for information on the articulation of MAPs with other procedures including judicial or administrative claims, and amicable procedures under different provisions like tax treaties and the EU Arbitration Convention.

Upon a delay of the procedure, Luxembourg taxpayers may have recourse to the Luxembourg administrative procedure mentioned above.

To be noted that the Luxembourg government plans a major AO reform which is currently subject to discussions.

Taxes	Taxpayer	Relevant tax authority	Deadlines	Frequency
Personal income tax	–       Natural persons   –       Partnerships   –       Sole proprietorships	Administration des Contributions Directes (ACD)	Before the 31 December of the following calendar year	Yearly
Corporate	Capital companies	ACD	Before the 31 December of the following financial year	Yearly
income tax
Municipal business tax Proprietorship	–    Capital companies   –    Partnerships and sole proprietorships	ACD	Before the 31 December, together with the corporate income tax return	Yearly
Net wealth tax	–       Capital companies	ACD	Before the 31 December of the current year.	Yearly
VAT	VAT taxpayers (incl. companies, individuals carrying on a business activity, landlords if they have opted for VAT). If the turnover is:	Administration de l’enregistrement et des Domaines et de la TVA (AED)
	< EUR 112,000		Before the 28 February (with the 31 October as administrative tolerance);	Yearly
	> EUR 112,000 < EUR 620,000		Before the 15 January, April, July and October (+ 2 additional months administrative tolerance) with an annual return to be filed before the 30 April (with the 31 December as administrative tolerance);	Quarterly and yearly
	> EUR 620,000		Before the 15 each month (+ 2 additional months administrative tolerance)	Monthly and yearly
	VAT taxpayers performing only VAT exempt activities not entitling to input VAT deduction right that receive non-VAT exempt services (or to some extent goods) from suppliers established outside of Luxembourg.		Before the 28 February (with the 31 October as administrative tolerance);	Yearly
Subscription tax	Special Investment Funds Family wealth companies (SPFs)	AED	Before the last day of March, June, September and December	Quarterly
Extensions	An extension to the above-mentioned deadlines may be granted upon request.
Forms and filing method	All tax returns can be found on https://impotsdirects.public.lu/fr/formulaires/collectivites.html and have to be filed electronically.
Penalties	Failure to submit the tax return or late submission will lead to a penalty of 10% of the tax due and fines up to EUR 25,000.

The Luxembourg tax administration is subject to professional secrecy requirements towards third parties which apply to information relating to foreign and national taxpayers.

However, the Luxembourg tax administration may disclose information to other tax administrations and judicial authorities. In that respect, in 2014, Luxembourg has approved the Paris Convention regarding the mutual administrative assistance in tax matters.

Luxembourg has also signed an intergovernmental agreement regarding the automatic exchange of information between the Luxembourg and US tax administrations within the FATCA, Model 1.

Luxembourg has transposed the Council Directive (EU) 2016/881 concerning automatic and mandatory exchange of tax information concerning the Country-by-Country reporting ( “CbCR”), with effect as of the fiscal year 2016, and the Directive (EU) 2021/2101 of the European Parliament and of the Council of 24 November 2021 amending Directive 2013/34/EU as regards disclosure of income tax information by certain undertakings and branches (“public CbCR”), with effect as of the financial years beginning on or after 22 June 2024.

Luxembourg is a signatory to the Common Reporting Standard (“CRS”) and has implemented the automatic exchange of information in tax matters as of 1 January 2016. In October 2020, the OECD Global Forum on Transparency and Exchange of Information for Tax Purposes has found the Luxembourg legislative framework on that matter in full compliance. Furthermore, in the law of 16 May 2023 amended the Luxembourg law implementing CRS to comply with the General Data Protection Regulation (EU 2016/679) (“GDPR”).

Luxembourg also transposed the Council Directive (EU) 2016/2258 regarding the automatic exchange of information relating to reportable cross-border arrangements (“DAC 5”), enabling the disclosure of beneficial ownership information to foreign European tax authorities. DAC 6 relating to mandatory disclosure rules for intermediaries and the automatic exchange of information on tax planning cross-border arrangements has been transposed into Luxembourg law with effect as of 1 July 2020. Whereas DAC 6 obliges professionals and taxpayers to disclose confidential information, the Luxembourg law implementing DAC 6 exempts lawyers, chartered accountants and auditors from such reporting obligations in conformity with their professional privilege.

Finally, as of 1 March 2019, Luxembourg has introduced its register of beneficial owners (the “RBO”) with a six-month transitional period for Luxembourg entities to identify and register their ultimate beneficial owners (“UBO”) in that said register. The information will be kept for a period of 5 years after the liquidation or winding up of the relevant entity. As from 1 September 2019 (at the end of the transitional period), information provided to the RBO is accessible to the public, except for highly private information such as the address and the national identification number of the relevant UBOs. Under limited and exceptional cases (i.e., risk of threat, fraud, kidnapping, blackmail, violence or intimidation) the public access can be limited upon request by the UBO. Such restricted access is granted for a maximum period of 3 years. Based on information communicated by the RBO, only a handful of restricted access requests have been granted until now. However, a significant number of requests rejected by the RBO have been brought to court. On 22 November 2022, the Court of Justice of the European Union (“CJEU”) decided that the public access to the Luxembourg RBO infringes inter alia the rights to private life and personal data protection provided by the Charter of Fundamental Rights of the European Union. As a consequence, the access to the RBO has been restricted and is only available for professionals subject to the Luxembourg anti money laundering (AML) law dated 12 November 2004, as amended, and journalists.

In addition to the RBO, the law of 10 July 2020 introduced a register of fiduciaries and trusts (the “RFT”) with effect as of 10 July 2020. As for the RBO, the personal information on the beneficial owners of any trusts and fiduciaries having a fiduciary agent or a trustee which (i) resides in Luxembourg or (ii) are located outside Luxembourg but established a business relationship with a professional [2] or purchased real estate located in Luxembourg must be registered in the RFT. Despite the mandatory disclosure rules listed above, the Luxembourg courts and the CJEU keep a watchful eye on fishing expeditions and protection of taxpayers’ fundamental rights (see CJEU “Berlioz” decision dated 16 May 2017). In the context of the Panama Papers however, Luxembourg case law from July 2021 waved the professional secrecy of lawyers approached as third parties in the context of a tax audit carried out by the Luxembourg tax administration. This development is closely monitored by Luxembourg practitioners as potentially harmful to fundamental rights of taxpayers.

[2] Professional within the meaning of the Luxembourg law of 12 November 2004 on the fight against money laundering and terrorist financing transposing Directive 2001/97/EC of the European Parliament and of the Council of 4 December 2001 amending Council Directive 91/308/EEC on prevention of the use of the financial system for the purpose of money laundering.

According to Article 159 of the Luxembourg income tax law (“LITL”), an entity is treated as a resident of Luxembourg for direct tax purposes if it has

1. its registered office (siège statutaire) in Luxembourg, or
2. its central administration (administration centrale, i.e. the place of effective management) located in Luxembourg.

The Luxembourg tax authorities pay attention to cross border transactions between related parties, especially on intragroup financing activities.

Since the issuance of the Circular n° 56/1-56bis/1 and the renewal of the LITL, mentioning the basic principles to be followed in conducting a transfer pricing analysis (please refer to question 11 for more details), the Luxembourg tax authorities are keen on reviewing intragroup financing activities and whether they are secured with a transfer pricing study to prove its arm´s length character.

CFC rules have been introduced into Luxembourg law as of January 2019 upon the implementation of the Council Directive (EU) 2016/1164 (“ATAD 1”) and have been detailed by a Circular issued by the Luxembourg tax administration on 4 March 2020. Under article 164ter LITL, entities may qualify as CFCs if they are permanent establishment or companies which are not subject to Luxembourg taxes or if their income is tax exempt in Luxembourg. It should be noted that also tax transparent entities which may be treated as permanent establishments of a Luxembourg company can also qualify as CFCs. Entities which qualify as CFCs but book an annual profit being lower than either (i) EUR 750,000 or (ii) 10% of their operating costs in their commercial balance sheet are excluded from the scope of the CFC rules.

Foreign entities shall qualify as CFCs when the following two conditions are cumulatively met:

• the Luxembourg taxpayer holds itself and / or with “associated enterprises” directly or indirectly more than (i) 50% of the share capital or (ii) of the voting rights in the CFC or (iii) owns the right to receive more than 50% of the profits of the CFC; and
• the taxation paid by the CFC is lower than the difference between (i) the taxation which would have been due in accordance with the LITL and (ii) the taxation actually paid by the CFC.

In accordance with article 164 (3) LITL, benefits perceived by the CFC which

1. have not been distributed to the Luxembourg taxpayer during the same financial year and
2. result from non-authentic arrangements having the purpose of obtaining a tax advantage

have to be included in the taxable income of the Luxembourg taxpayer.

There is currently no legislation concerning the thin capitalisation ratio specifically but, in practice, the tax administration uses a debt-to-equity ratio of 85:15 for the intra-group financing of participations. The LTA may requalify the surplus of interest as a hidden dividend distribution. Such requalification would result in a lack of deductibility for those payments and possible application of a 15% withholding tax (subject to applicable tax treaty or participation exemption if applicable). Back-to-back financing is not subject to the abovementioned ratio.

Luxembourg transfer pricing rules are embedded in the revised Article 56 and 56bis LITL, which incorporate the concept of the arm’s length principle based on Article 9 OECD MC. The amended provision, however, goes further and reflects the spirit set out in the BEPS Actions 8–10 such as the concept of comparability analysis and a general anti abuse rule that allows the disregarding of a transaction that has been made without any valid commercial or business justification.

On 27 December 2016, the Luxembourg tax authorities issued the Circular n° 56/1-56bis/1 which has reshaped the transfer pricing framework for companies carrying out intra-group financing activities in Luxembourg. The Circular provided additional guidance in terms of substance and transfer pricing requirements in line with the OECD Guidelines. In particular, it provided substantial details on how to conduct the comparability and functional analyses in a way consistent with the OECD principles. Furthermore, the Circular requires the performance of a comprehensive risk analysis in order to determine the adequate level of equity capital.

On 28 March 2023, a draft law was introduced, which covers, amongst others, a new procedure for bilateral and multilateral Advance Pricing Agreements (“APAs”), the concept of “Master File” and “Local File” documentation requirements, transfer pricing policies and intragroup transactions. The draft law was supposed to apply as from financial year 2024, however, given that it is not yet adopted, it is likely to be postponed for at least another year.

Luxembourg has GAAR embedded in its legislative framework (Art. 6 Steueranpassungsgesetz, “StAnpG”), which applies to any Luxembourg taxpayer (i.e., capital companies, individuals and partnerships). Specific GAAR was also introduced to implement the provisions of the Directive 2014/86/EC of 8 July 2014 amending the Parent-Subsidiary Directive introducing a GAAR on the participation exemption regime.

In December 2018, Luxembourg modified its existing GAAR under Art. 6 StAnpG to align it with the GAAR provided for by the ATAD 1. According to the amended rule, a misuse of forms and institutions of law (i.e., an “arrangement”) which has been effected for the main purpose, or one of the main purposes, of achieving a tax advantage and which is not commercially genuine should be ignored. An arrangement is considered as not genuine if it has not been put into place for valid commercial reasons which reflect economic reality.

However, one shall remember that the GAAR is still subject to EU law and its interpretation by the CJEU. In this context the CJEU Cadbury Schweppes case-law and the notion of wholly artificial arrangements should be taken into account when applying the GAAR.

Over the past years, the Luxembourg tax administration has more and more relied on the concept of abuse of law in order to challenge a taxpayer’s tax return. We also observe a clear increase in case law referring to the abuse of law. In that context, the courts have confirmed that the analysis on whether an abuse of law arises is not carried out on a case-by-case basis but can rely on a global assessment of the transaction and the group under review.

A Digital Services Tax (“DST”), as such, does not exist in Luxembourg. Corporate income tax ordinarily applies on such services if carried out by a Luxembourg resident entity or from a permanent establishment located in Luxembourg.

While other European countries have implemented, or have shown intentions for a DST, Luxembourg, along with Germany, has taken no position in that regard, since there was little need. Indeed, it is not a priority for the Luxembourg legislator.

When the second version of base erosion and profit shifting (“BEPS”) materializes, it is likely that Luxembourg will await the translation of BEPS 2.0 into a directive to implement such tax in its domestic law.

Since the release of the BEPS Action Plan by the OECD, the European legislator issued several directives to combat tax avoidance and profit shifting within the EU. Most of the EU incentives are directly inspired or make a direct reference to the BEPS Action Plan. The most relevant ones are being the ATAD 1 and Council Directive (EU) 2017/952 of 29 May 2017 amending Directive (EU) 2016/1164 as regards hybrid mismatches with third countries (“ATAD 2”) providing for five main anti avoidance measures. At a Luxembourg level, national efforts are being made to introduce such measures and comply with certain of the BEPS recommendations. In details, Luxembourg implemented the following changes to align its law with the BEPS Action Plan:

• Action 1: implementation of EU VAT directive addressing VAT on business to customer’s digital services.
• Actions 2-4: Implementation of ATAD 1, which deals with CFCs and interest limitation rules, which have been implemented into Luxembourg law as of 1 January 2019. Hybrid rules under ATAD 2 aiming to neutralize the effects of hybrid mismatch arrangements have been transposed into Luxembourg national law as of 1 January 2020. In addition, rules providing for the limitation of the deductibility of interest and royalties paid to entities located in non-cooperative jurisdictions have been implemented as of 1 March 2021.
• Action 5: Luxembourg introduced a BEPS compliant new IP box regime as of the fiscal year starting in 2018.
• Action 6: on preventing the granting of treaty benefits in inappropriate circumstances. Action 6 will include minimum standards to combat contractual abuse.
• Action 7: prevention of the artificial avoidance of permanent establishment status
• Actions 8–10: introduction of the new Article 56bis in the LITL. Action 12: as per the transposition into domestic law of the DAC 6.
• Action 13: transfer pricing documentation as requested by the new transfer pricing rules; CbCR which is applicable in Luxembourg for financial years starting on or after 1 January 2016.
• Action 14: Luxembourg chose to opt for mandatory arbitration under the MLI which will be improved due to the new BEPS-MLI.
• Action 15: Luxembourg signed the MLI.

Further to the implementation of the several “Actions”, the Council of the EU adopted Pillar 2. The EU Member States were expected to transpose the directive into their domestic laws by 31 December 2023. Accordingly, Luxembourg implemented Pillar 2 in the law of 22 December 2023 applying the related implementing provisions in respect of the fiscal years beginning from 31 December 2023 for the so-called “Income Inclusion Rule” and the “Qualified Domestic Top-up Tax” and in respect of the fiscal years beginning from 31 December 2024 for the “Undertaxed Payment Rule”. The law of 22 December 2023 is likely to be further amended to incorporate additional OECD guidance which was issued in the meantime.

As mentioned above, Luxembourg has made significant efforts to comply with the OECD recommendations in its BEPS Action Plan, as long as these become mandatory measures from the EU parliament initiative. However, as a competitive jurisdiction it does not plan to impose measures that would go beyond of the recommendations of the BEPS report. The interesting exception to that is the introduction of the mandatory binding arbitration, which is not required under the MLI instrument. Also, it is worth noting that the Luxembourg law on transfer pricing expressly makes reference to the OECD transfer pricing guidelines, when interpreting the national law.

The Luxembourg tax system follows mainly the OECD Model.

The LITL provides for eight categories of income that are taken into account for the determination of the taxable net income: income from commercial activities, income from independent activities (including directors’ fees), income from agricultural/forestry activities, employment income, pension income, investment (dividend and interest) income, rental and royalty income and miscellaneous income (including capital gains).

(a) Business profit / capital companies taxation

Luxembourg levies CIT on the annual net worldwide profits of Luxembourg resident companies and on source-based profits of non-resident companies. Profits and charges are accounted for on an accrual basis.

As from the tax year 2019, income exceeding EUR 200,000 is taxed at a rate of 17%. In addition, a 7% solidarity surcharge for the employment fund and a 6.75% municipal business tax (“MBT”) for companies registered in Luxembourg City are levied. For companies located outside of the Luxembourg City a different rate of MBT may apply.

The above amounts to an aggregate tax rate for Luxembourg-City domiciled companies of 24.94%. Since 1 January 2019, two intermediary CIT rates have been introduced:

• 15% for taxable income up to EUR 175,000, and
• EUR 26,250 plus 31% of the tax base above EUR 175,000, for taxable income between EUR 175,000 and EUR 200,000.

As already mentioned, on the 17 July 2024, the Luxembourg government published a draft law, pursuant to which the CIT rate will decrease from 17% to 16%, effective as from 1 January 2025, which will result in an aggregate tax rate of 23.94%.

(b) Employment income and pensions / individuals

Individuals tax resident in Luxembourg are taxable on their worldwide income (unless an applicable treaty determines otherwise). The calculation of Luxembourg income taxes depends on the taxable income and the individual’s family status. With regard to employment income not exceeding EUR 220,788, it is subject to progressive tax rates ranging from 0% to 44.69% (the threshold is of EUR 441,556 for couples taxed jointly). The income in excess is subject to 45.78%. Pension income is subject to a specific tax regime where 50% of the life annuities is tax exempt. Lump-sum payments in the framework of pension may be paid tax free or are only taxable at 50% of the average tax rate, depending on the kind of the premiums paid.

(c) VAT

Supply of goods and services are subject to VAT in Luxembourg. Currently, four rates are applicable: 17% standard rate; an intermediary rate of 14%; a reduced rate of 8%; and a super-reduced rate of 3%. The 1% reduction of the standard, intermediate and reduced VAT rates ceased on the 31^st December 2023.

Annexes A, B and C of the law of 12 February 1979 as amended (the “VAT Law”) provide for a detailed list of services and goods that are subject to the reduced rates. Such Annexes are to be interpreted strictly. There are also custom and excise duties applicable for certain goods.

(d) Savings income and royalties

Under Luxembourg general tax laws currently in force and subject to the law of 23 December 2005, as amended (the “Relibi Law”) mentioned below, there is no withholding tax on payments of interest made to Luxembourg residents.

Under the Relibi Law, payments of interest or similar income made or ascribed by a paying agent established in Luxembourg to an individual beneficial owner who is a resident of Luxembourg will be subject to a withholding tax of 20%. Such withholding tax will be in full discharge of income tax if the beneficial owner is an individual acting in the course of the management of his/her private wealth. Responsibility for the withholding of the tax will be assumed by the Luxembourg paying agent. Among others, the budget law for 2023 clarified that the Relibi Law applies only to a paying agent making payments in the course of its normal economic activity and only to debt instruments that are listed and admitted to trading on a regulated market.

An individual beneficial owner of interest or similar income who is a resident of Luxembourg and acts in the course of the management of his private wealth may opt for a final withholding tax of 20% when he/she receives or is deemed to receive such interest or similar income from a paying agent established in another EU Member State (other than Luxembourg) or in a State of the European Economic Area (which is not an EU Member State).

Royalties are taxed as income following the rules as mentioned above.

(e) Income from land

Rental income is subject to taxation at normal tax rates mentioned above (for companies or individuals).

(f) Capital gains For Luxembourg resident companies, in principle capital gains arising from the sale of assets are treated as ordinary income and taxed as such, unless participation exemption applies.

Capital gains exemption is available if, at the time the capital gains are realised as follows:

• the Luxembourg company has held a direct participation representing at least 10% of the nominal paid-up share capital of its subsidiary (or if below 10%, a direct participation having an acquisition price of at least EUR 6 million);
• it has held such qualifying participation for an uninterrupted period of at least 12 months; and
• the subsidiary entity is (i) a Luxembourg resident entity fully subject to Luxembourg income taxes, or (ii) a non-resident capital company liable for an income tax in its country of residence comparable to the Luxembourg CIT, or (iii) an entity resident in a Member State of the European Union (as defined in Article 2 of the EU Parent Subsidiary Directive 2011/96, as amended (the “PSD”).

It is important to note that the GAAR does not apply to capital gains deriving from qualifying subsidiaries benefitting from the Luxembourg participation exemption, regardless of their location.

With regard to individuals, non-speculative gains on the sale of shares (if no important participation of 10% or more), are not taxable.

(g) Stamps and/or capital duties

Under Luxembourg law, certain acts such as official acts, acts of estate agents and transfer of ownership of certain goods are required to be registered with the Luxembourg AED. Registration duties are fixed or proportional, depending on the nature of the acts and transfers that are subject to them.

Capital duty has been abolished in Luxembourg since 2008. Since then, a fixed registration fee of EUR 75 is due in some specific cases determined by law such as but not limited to: upon incorporation or subsequent capital increase and migration of a company to Luxembourg.

Luxembourg companies are taxed on their annual net profits as determined under Luxembourg general accounting principles (“Lux GAAP”) under which both upward and downward adjustments are allowed. As a general rule, the commercial accounts are used as a basis for the computation of the Luxembourg tax, unless a specific tax rule specifies otherwise (principe de l’accrochement fiscal au bilan commercial).

The main tax adjustments to the commercial balance sheet are as follows:

• tax-exempt profits (e.g. as per the participation exemption regime applicable for dividends and capital gains);
• add-back expenses (e.g. interest expenses on assets generating tax-exempt income);
• adjustment to the tax results from the transactions that were not at arm’s length (e.g. the interest rate set was not at market conditions, or interest payments were reclassified as hidden dividend distribution and hence not tax deductible anymore); and
• discrepancies between the application of different valuation rules in accounting and in tax (e.g. amortisation, rollover relief).

Luxembourg taxes retain and distribute profits in the same manner.

The qualification of Luxembourg companies for Luxembourg CIT follows a list/ catalogue approach. The LITL provides provisions defining all legal and corporate entities existing under Luxembourg laws as either tax opaque (Article 159 LITL) or tax transparent (Article 175 LITL).

The Luxembourg SA (Société Anonyme) and the Luxembourg S.à r.l (Société à responsabilité limitée) are the most commonly used company forms in Luxembourg. These company forms are opaque and fully taxable business entities.

With respect to partnerships, the Luxembourg limited partnership (société en commandite simple (“SCS”)) as well as the Luxembourg limited partnership without legal personality (société en commandite spéciale (“SCSp”)) which was introduced into Luxembourg law in 2013, are frequently used. The partnerships as mentioned before are tax transparent not being subject to corporate tax in Luxembourg. Taxation occurs at the level of the partners.

The SCSp is mainly used for the structuring of funds and real estate transactions, providing more flexible solutions compared to other corporate forms.

Luxembourg provides a wide range of investment vehicles. Luxembourg investment funds such as the Specialised Investment Fund (“SIF”), the Reserved Alternative Investment Fund (“RAIF”) or the investment company into risk capital (“SICAR”) have favourable tax regimes.

From a Luxembourg point of view, a SIF is a taxpayer but not subject to tax as its income is fully exempt from Luxembourg CIT.

Depending on their performed activity, RAIFs are subject to either the same income tax exemption regime as SIFs or the same tax regime as SICARs.

The SIF as well the RAIF are unrestricted with respect to eligible assets and can be used for all investment purposes.

The tax regime of SICARs depends on the chosen legal form. SICARs established in form of a SCS or SCSp are tax transparent and thus not subject to tax.

SICARs established in the form of an SA or an S.à r.l are fully taxable entities being subject to CIT. However, income resulting from securities that represent the risk capital held as well as income resulting from the transfer, contribution or liquidation of these assets does not constitute taxable income and is thus fully tax exempt.

SICARs are designed for investments in private equity and venture capital.

In principle, SICARs established under the corporate form benefit from the Luxembourg double tax treaty network. However, UCITS, SIFs and RAIF may or may not benefit from the provisions of a double tax treaty. Such benefit is to be checked on a case-by-case basis.

As of 1 January 2022, the reverse hybrid mismatch rules provided for by ATAD 2 are applicable in Luxembourg. As a result, entities which are transparent for Luxembourg tax purposes may be subject to corporate income tax under certain conditions.

According to article 159 of the LITL, companies are considered as resident in Luxembourg for tax purposes if their registered seat or the central place of administration is located in the Grand Duchy of Luxembourg.

The central administration of a company may be defined as the seat of its administration, i.e. the place where: central accounting is kept, archives are kept, shareholders’ meetings are held, board of directors’ meetings are held, or in summary, where the direction of the company’s affairs is concentrated.

Companies which are tax resident in Luxembourg are subject to tax on their worldwide income.

In 2017, Luxembourg opened the so-called Freeport. The Freeport offers safe and secure storage for works of art, precious metals, wines, antiques, jewels, documents and archives (physical and digital), collection cars and other valuables.

For the goods as stored in the Freeport, a special VAT regime applies. In this respect and in line with the applicable EU regulations, VAT and custom duties are suspended on goods introduced into the free zone from third countries or originating in the EU. The suspensive regime is applicable as long as the goods remain stored in the Freeport.

Another interesting tax regime worth mentioning – next to the one applying to Luxembourg investment funds – is the one applying to securitisation companies. Under the LITL, payments or commitments to pay by a securitisation company to its investors (including shareholders) qualify as a tax deductible expense, so that the taxable basis of such company can be nil. That being said, careful attention should be paid to the impact of the ATAD 1 and 2 rules on securitisation structures.

Luxembourg reintroduced in 2018 in its LITL the new IP box regime that is now in line with the BEPS recommendations.

In addition, the Luxembourg tax authorities published a circular on 28 June 2019, L.I.R. n° 50ter/1, clarifying the patent box.

Under the new Article 50ter LITL, 80% of the income derived from the commercialisation of certain intellectual property (“IP”) rights is exempt, as well as fully exempt from NWT. The new rules are applicable as from the fiscal year 2018. Qualifying assets include the following IP rights:

• patents (broadly defined) and functionally equivalent rights that are legally protected by utility models, extensions of patent protection for certain drugs and phyto-pharmaceutical products, plant breeder’s rights, and orphan drug designations; and
• copyrighted software.

In line with the BEPS – Action 5 recommendations, marketing-related IPs can no longer benefit from the IP box regime.

Qualifying income includes the following:

• income derived from the use of, or a concession to use, qualifying IP rights (i.e. royalty income);
• IP income embedded in the sales price of products or services directly related to the eligible IP asset. The principles of Article 56bis LITL must be used to separate income unrelated to the IP (e.g. marketing and manufacturing returns);
• capital gains derived from the sale of the qualifying IP rights; and
• indemnities based on an arbitration ruling or a court decision directly linked to a breach of a qualifying IP right.

The regime applies on a net income basis, meaning that expenses relating to the qualifying IP assets need to be deducted from the gross qualifying income. The proportion of qualifying net income entitled to the benefits will be determined based on the ratio of qualifying expenditures and overall expenditures (nexus ratio). The previously qualifying IP assets can continue to benefit from the old regime during the grandfathering period, running until 30 June 2021.

1. Fiscal unity for direct tax purposes

Luxembourg allows a group of companies to apply a fiscal unity (or tax consolidation). Under such regime, the respective taxable profits of each company in the consolidated group are pooled or offset to be taxed on the aggregate amount, which means that the group is effectively treated as a single taxpayer. Generally, the conditions to qualify for a fiscal unity are as follows:

• each company that is part of the tax unity is a Luxembourg resident fully taxable company (the top entity may be a Luxembourg permanent establishment of a fully taxable non-resident company) (the “Eligible Company”);
• at least 95% of each subsidiary’s capital is directly or indirectly held by an Eligible Company;
• each company’s fiscal year starts and ends on the same date;
• and the fiscal unity is applied for at least five financial years.

The taxable income/loss of the fiscal unity is calculated as the sum of the taxable income/loss of each constitutive entity. The vertical fiscal unity regime has been extended since 1 January 2016 in accordance with the CJEU case law in particular to allow horizontal integrations. Eligible Companies (at least two Luxembourg companies) that are held by a common parent established in any European Economic Area country and subject to tax comparable to Luxembourg’s CIT in its country of residence are now also permitted to form a fiscal unity. Companies consolidated for CIT are also automatically consolidated for MBT. However, there is no tax consolidation for NWT purposes.

Securitisation entities and venture capital companies are excluded from the possibility to form a fiscal unity in order to prevent tax evasion schemes.

2. VAT Group

Since mid-2018, Luxembourg introduced a revised VAT group regime (in line with the CJEU Skandia case (C-7/13), and later on, the Danske Bank case (C-812/19)). Such VAT group regime treats all of the transactions between its members as “out of the scope” of the VAT. One of the major differences between the new and the former regime is that the VAT group regime is restricted to persons established in Luxembourg and Luxembourg branches of foreign companies, whereas the former regime allowed for grouping with other Member States of the EU.

Companies wishing to benefit from the VAT group regime must generally meet three requirements proving their bound: there must be (i) an economic (ii) financial and (iii) organisational link with the other VAT group members.

Dividends paid to residents as well as non-residents are in principle subject to a 15% withholding tax (“WHT”) in Luxembourg. It is possible, however, to benefit either from a reduced rate or an exemption under a double tax treaty or from the domestic participation exemption regime.

Domestic participation exemption is granted if, at the time of the dividend distribution:

• the parent company is a Luxembourg fully taxable company, or a resident company of a Member State of the EU as defined in Article 2 of the PSD, or a Swiss resident capital company that is subject to an income tax in Switzerland without being exempt from tax, or a foreign joint-stock company which is subject in its country of residence to an income tax regime corresponding to the Luxembourg CIT;
• said company holds or commits to hold a participation of at least 10% (or with an acquisition price of at least EUR 1.2 million) in the nominal share capital of the distributing company; and
• such qualifying participation has been held for an uninterrupted period of at least 12 months.

If the shareholder is an EU company within the scope of the PSD, the exemption applies subject to the additional specific GAAR below:

• the EU parent company is not used for the main purpose or as one of the main purposes of obtaining a tax advantage that defeats the object of the PSD.

Liquidation proceeds are not subject to dividend WHT. If properly structured a partial liquidation may as well not be subject to the WHT. In addition, dividend payments made by certain type of vehicles, e.g. SPFs, SICAV, SICAR and securitisation vehicles are not subject to WHT.

There has been no WHT on royalties in Luxembourg since 1 January 2004. Furthermore, there is no WHT on arm’s length interest payments in Luxembourg. Interest paid under certain hybrid instruments or not at arm’s length may be subject to a 15% WHT if reclassified as dividend payments by the tax authorities.

According to the latest Eurostat report, Luxembourg has collected the lowest shares of environmental tax revenue in the European Union. Following this, there is no recognizable environmental tax payable by businesses.

Dividend income received by a Luxembourg resident company is included in its taxable basis and fully taxable, unless a domestic or treaty exemption applies.

Under the domestic participation exemption, dividend income (and liquidation proceeds) is exempt if, at the time the income is put at the disposal of the taxpayer:

• the subsidiary entity is (i) a Luxembourg resident entity fully subject to Luxembourg income taxes, (ii) an entity resident in a Member State of the European Union (as defined in Article 2 of the PSD), or (iii) a non-resident capital company liable to an income tax in its country of residence comparable to the Luxembourg CIT;
• the Luxembourg company holds a direct participation representing at least 10% of the nominal paid-up share capital of its subsidiary (or if below 10%, a direct participation having an acquisition price of at least EUR 1.2 million); and
• it has held (or commits itself to hold) such qualifying participation for an uninterrupted period of at least 12 months.

If the dividends are distributed by an EU subsidiary which is listed in Article 2 of the PSD, the exemption applies subject to the two additional conditions below:

• the EU subsidiary is not used for the main purpose or as one of the main purposes of obtaining a tax advantage that defeats the object of the PSD (GAAR); and
• the dividend/profit distribution from the EU subsidiary have not been deducted from its taxable base (anti-hybrid rule).

Luxembourg offers the following advantages for foreign investors:

• a global network of double tax treaties;
• a stable political and economic environment;
• an approachable public service
• a large panel of investment vehicles offering tax benefits;
• the access to the EU single market.

In the past years, Luxembourg has secured a leading position on the international financial scene. With more than EUR 5472.493 bn net assets managed by Luxembourg funds as of August 2024 [3], Luxembourg is the largest investment fund centre in Europe and the second largest worldwide after the United States. Generally speaking, the Grand Duchy of Luxembourg is an attractive investment hub for foreign direct investments which offers stability and economic opportunities.

[3] Source: Association of the Luxembourg Fund Industry (ALFI)