1. What are the key tax laws and regulations in Luxembourg that individuals and businesses should be familiar with?
The key tax rules to be aware of are, to a large extent, contained in the Income Tax Law, the Value Added Tax Law and the Net Wealth Tax Law. Procedural elements are included in the General Income Tax Law. Additionally, the tax authorities regularly issue circular letters providing guidance on specific tax matters.
2. Can you explain the personal income tax rates and thresholds for residents and non-residents in Luxembourg?
Personal income tax rates in Luxembourg are progressive and vary based on income levels. The rates range from 0% to 45.78%. The tax thresholds depend on the marital status of the taxpayer. The marginal rate for a single individual applies on the portion in excess of €200,004.
These principles apply to non-resident individual taxpayers on the portion of their income which is taxable in Luxembourg.
3. What are the corporate tax rates and incentives for businesses operating in Luxembourg?
Corporate taxpayers are subject to corporate income tax (CIT) on their worldwide income, while non-residents are taxed only on their Luxembourg-source income (in both cases, subject to treaty relief). The standard rate is 17% for income above €200,001. A 7% solidarity surcharge applies, leading to an aggregate CIT rate of 18.19%. Slightly reduced rates apply to companies below the above threshold.
A municipal business tax (MBT) is also levied, with a rate depending on the city where the taxpayer is located. Notably, the MBT rate for companies based in Luxembourg City is 6.75%, leading to an aggregate rate of 24.94%.
Several non-tax elements support the country as a major financial centre and a leading fund jurisdiction, such as its regulatory framework and its specialised workforce. Alongside these foundations, the tax environment is welcoming
to the establishment of holding companies and group financing structures, while strictly keeping in line with
OECD standards. Some tax credits and incentive regimes are available, depending on the assets and operations
of the taxpayer.
4. Are there any specific tax considerations or benefits for holding companies or intellectual property (IP) companies in Luxembourg?
Luxembourg companies benefit from a broad and rather straightforward participation exemption regime, making
it an ideal hub for holding companies.
Companies developing IP assets in Luxembourg can benefit from a favourable tax regime in relation to patents
and copyrights on software, leading to an exemption of up to 80% on the related income, as well as a net wealth
5. How does Luxembourg handle taxation of investment income, such as dividends, interest, and capital gains?
Corporate taxpayers are subject to tax on dividends and capital gains, unless the participation exemption regime applies. This is for instance the case if the participation is a taxable EU company, held for at least 12 months. The minimum holding threshold is 10% or €1.2m for dividends/ €6m for capital gain exemptions. Companies are subject to tax on interest income, after deduction of related expenses if any.
Individuals may benefit from an exemption on half of the dividend from qualifying companies. Capital gains on shares are exempt if held for at least six months and represent 10% or less of the share capital. Certain interest payments face a 20% withholding tax in full discharge of personal income tax; else they are taxed at progressive rates. Deduction of €1,500 per year on dividends and interest received applies.
Tax credit for foreign withholding taxes is available.
6. Can you provide guidance on the tax implications and compliance requirements for cross-border transactions and international tax planning in Luxembourg?
Cross-border transactions involving Luxembourg require a certain level of scrutiny and analysis to ensure local tax rules are complied with. The Luxembourg tax system has evolved over the last decade, with sophisticated rules stemming from EU initiatives, such as interest deduction limitation, anti-hybrid rules and DAC6 reporting obligations. In addition, the effects of transfer pricing regulations must be managed. Close collaboration between tax counsel of the relevant jurisdictions is key. Compliance requirements include documentation and disclosure obligations, as well as the submission of specific forms to the tax authorities.
7. What are the main tax deductions and credits available to individuals and businesses in Luxembourg?
Several of them are available. These include deductions for certain expenses such as mortgage interest, alimony payments and childcare expenses. Businesses can benefit from deduction on expenses related to their commercial activity, as well as tax incentives and tax credits for certain R&D expenses and investments.
8. Are there any specific tax treaties or agreements that Luxembourg has with other countries to avoid double taxation?
Luxembourg has an extensive network of tax treaties with other countries (86 as of 2023). These tax treaties provide rules for the allocation of taxing rights between countries and mechanisms for the elimination of double taxation. Luxembourg has entered into and ratified the OECD Multilateral Convention known as the MLI, applying alongside the relevant treaties.
9. How can I effectively structure my business or investments in Luxembourg to optimise tax efficiency and minimise liabilities?
The answer will not come as a surprise: in an ever-changing tax environment, it is advisable to seek professional advice and consider various factors to ensure compliance with relevant tax regulations. In a post-BEPS world, it is paramount for the structure to have proper capacity to support its functions in order to secure its tax benefits.
10. Are there any recent tax developments or upcoming changes in Luxembourg that individuals and businesses should be aware of?
Over the last decade, major tax changes have been implemented in Luxembourg, which has been rather co-operative in conforming to EU initiatives and OECD recommendations. These tax changes have had a noticeable influence on the structuring of investment funds, an industry which is at the heart of the Luxembourg financial centre.
Some tax reforms are expected, including a long-awaited and debated revamping of the personal income tax system.