Important tax advantages in Luxembourg for legal and natural persons

The structure of the Luxembourg tax system is comparable to the German one in terms of commercial and wealth tax and to the French or Belgian tax system when regarding the taxation of the registration right. At the level of indirect taxes, Luxembourg applies the value added tax system, legislation in the field being in line with EU directives. Furthermore, there are certain important tax advantages in Luxembourg.

Tax collection is made through three distinct administrations: the Direct Contributions Administration – for income taxes, the Registration and Domain Administration – for value added tax, stamp duties, registrations, mortgages, successions, fines, and some intellectual property protection fees and the Customs and Excise Administration – for customs duties and excise duties.

Regarding taxes and the taxation system, Luxembourg has the lowest tax rate in the EU, namely an income tax of 30.38% (of which the contribution to the pension fund 16% – 8% paid by the employer and 8% to the employee, the health insurance 7.5% – 2.6% paid by the employer and 4.9% of the employee, unemployment fund 4% etc.), the profit tax is 22% and the local taxes approximately. 7.5%.

Luxembourg capital gains tax

The beneficiary of the corporate income tax is the Luxembourg State. Taxable legal persons are joint-stock companies, cooperatives, religious associations, non-profit organizations, foundations and public utility establishments, special funds, mutual insurance associations, industrial and commercial public services of public law persons.

Non-resident companies are liable to tax only for profits made in Luxembourg. The tax may be withheld at source, after which any other tax liability for the corporate tax is removed.

The main tax rates in Luxembourg are 20% (if the annual taxable income is less than 10,000 euros), 2000 euros + 26% of the amount over 10,000 euros (if it falls within the range of 10,000 – 15,000 euros) and 22% for taxable income higher than 15,000 euros.

The government has established important tax advantages in Luxembourg for certain categories of companies, generally consisting in tax exemptions for their income. Holding companies are those Luxembourg companies which have as their sole object the acquisition of shares of national or foreign companies and their management or capitalization (including patenting, financing groups of companies or subsidiaries, etc.).

Other companies that benefit from tax advantages in Luxembourg are Financial Participation Companies (SOPARFI), having about the same business object, but taking advantage of the favorable provisions of the double taxation treaties signed by the Grand Duchy of Luxembourg.

Luxembourg income tax

In the Grand Duchy of Luxembourg, those taxpayers who live in the country for 6 consecutive months (even with minor interruptions), including during two fiscal years, are considered residents. Residents owe income tax for all income they earn from the country or abroad. Treaties to avoid double taxation between Luxembourg and 30 or more countries are designed to ensure that income that has already been taxed in a country is not taxed again, which is another one of the important tax advantages in Luxembourg.

Non-residents, however, are subject to taxation only for income earned in Luxembourg. Non-resident capital income is, in principle, non-taxable, with two exceptions: interest in a mortgage loan registered in Luxembourg and dividends received from a capital company.

The tax base comprises eight revenue categories, as follows: commercial benefits; agricultural and forestry benefits; income from the exercise of a liberal profession; net salary earnings; net income from retirement; net income from equity; net income from disposing of goods; various incomes.

The Grand Duchy of Luxembourg has the most complex tax scale in Europe, and varies between 0% for incomes lower than 9,750 euros and 38% for incomes over 34,500 euros.

However, entrepreneurs or companies that would like to benefit from tax advantages in Luxembourg should acquire the help of a reliable tax planning expert to avoid any legal issues.

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