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Taxation in Luxembourg

Taxation in Luxembourg

The Luxembourg taxation system is made of several taxes which are imposed to tax residents in the Grand Duchy. The term tax residents comprises both natural persons and companies in Luxembourg which are taxed on their worldwide incomes. Foreign individuals and companies carrying out activities which generate an income will be taxed only on the income accrued in Luxembourg.

The following categories of income are taxed in Luxembourg:

  • business income;
  • income derived from agriculture;
  • employment income;
  • income for carrying out activities as sole traders;
  • income from pensions;
  • income generated by investments;
  • income derived from the rental of property;
  • other incomes, such which capital gains.

Our lawyers in Luxembourg can offer more information on the tax legislation applicable in the Grand Duchy.

Taxation based on residency in Luxembourg

The Income Tax Act is the main law providing for the taxation of both individuals and natural persons in Luxembourg. The law covers not only the taxes that are to be paid in Luxembourg, but also how the tax base is determined.

Taxation in Luxembourg is based on the residence status of the taxpayer. There are two categories of taxpayers in the Grand Duchy:

  • Luxembourg resident companies and natural persons;
  • non-resident companies and individuals.

While residents are taxed on their worldwide income, non-residents will be taxed on the income earned in Luxembourg. In the case of foreign citizens and companies, these must also pay attention to the exceptions from taxation which are usually available under Luxembourg’s double taxation agreements.

In the case of companies, tax residency is easier to determine, as in order to be a domestic business, a company must have its legal seat or at least a management place in Luxembourg.

In the case of natural persons, these can either be residents based on specific types of visas which enable them to live, work and conduct other activities in the Grand Duchy, or by living in this country for a determined period of time during a calendar year (usually 6 months) from the day of moving here. 

Our lawyers in Luxembourg can offer detailed information on the provisions of the Income Tax Law and its appliance to both resident and non-resident taxpayers.

The personal income tax in Luxembourg

One of the most important direct taxes applicable in Luxembourg is the personal income tax which is levied on individuals. Luxembourg residents are assessed and taxed progressively based on three classes, which are:

  • class 1 applicable to single individuals;
  • class 2 which applies to married and civil partners;
  • class 1a which applies to pension beneficiaries who must be at least 65 years old and to single individuals with children.

The tax is levied on a progressive basis, as mentioned above, with the lowest percentage of 8 and a maximum of 40. An additional solidarity surcharge of 7 also applies.

Taxation of companies in Luxembourg

Companies registered in Luxembourg and foreign companies operating here will apply the corporate income tax at two different rates. Companies with business profits below 15,000 euros will be levied a 20% tax rate, while companies with profits above this amount will be taxed at a 21% rate.

Partnerships will not be taxed as companies in Luxembourg, as the partners will be taxed individually and the personal income tax will apply. The 7% solidarity surcharge also applies to companies in Luxembourg. An additional tax applicable to companies is the municipal business tax which is set at various rates in every city. We can assist with EORI registration in Luxembourg.

The VAT in Luxembourg

The VAT is the most important indirect levy imposed in Luxembourg thanks to its contribution to the economy. The value added tax is levied on the sale of goods and services and in order to collect it, an economic operator must register with the tax authorities first.

It is possible for both natural persons and companies to sell VAT-taxable goods and services in Luxembourg, however, registration for this tax become mandatory only after the reaching an annual turnover of 25,000 euros.

The VAT is imposed at the following rates:

  • the standard rate of 17% standard which is levied on the majority of goods and services;
  • the lower rate of 14% which is imposed on products like beverages and mineral fuels and oils;
  • the reduced rate of 8% rate which is levied on services related to the supply of natural gas and electricity, art works, repairs, but also on household goods;
  • the 3% rate which is levied on food products, clothes, pharmaceutical products, non-alcoholic beverages.

There is also the 0% rate which is imposed on intra-community and international transport of goods.

You can rely on our Luxembourg lawyers for assistance in incorporating a business and registering it for taxation and VAT purposes in the Grand Duchy.

Tax rates in Luxembourg

The Luxembourg taxation system relies on various rates applicable on the income generated by natural persons and companies. In the case of individuals, it should be noted that income is taxed at progressive rates, while companies are imposed with the corporate tax which is levied at fixed rate.

Here are rates applicable under the Luxembourg taxation system:

  1. generally, the income tax is levied at rates ranging between 0% (the lowest) and 42% (the highest rate applied to individuals);
  2. apart from the 0% rate,  the lowest one is 8% and it is applied starting with a personal income of 11,266 euros;
  3. the highest personal income tax rate is 42% and it is applied to income surpassing 200,000 euros;
  4. companies are imposed with the corporate tax at a fixed rate of 17%, however, a lower rate of 15% is also available under certain circumstances.

There are also other important taxes levied in Luxembourg, however, some of them are considered indirect levies and one of the most important is the value added tax.

Our law firm in Luxembourg is at the service of both individuals and companies seeking to register for taxation in this country. We remind foreign citizens that in order to become Luxembourg tax residents they need to obtain a certificate of tax residence which will also grant them rights to various benefits. This certificate is issued by the Luxembourg Inland Revenue Service.

Tax minimization in Luxembourg

Tax minimization in Luxembourg is the legal use of the tax system in order to reduce taxes. It can take many forms and it is different from tax evasion, which is the illegal form of escaping payment. Owners of the companies in Luxembourg who want to make sure they do not pay more than they are required can use a set of measures and effective tax planning methods to avoid unnecessary taxation or larger taxation rates. Our lawyers in Luxembourg can help you draw up an effective tax plan for minimizing tax liabilities.

Tax minimization strategies in Luxembourg

Investors in Luxembourg can arrange their investments and business activities for the purpose of reducing the amount of taxes paid. A common tax minimization strategy is to bring forward the tax deductions into the current financial year. This can be applied to corporate gifts for clients, employees in Luxembourg or business partners. It can apply to the purchase of necessary office supplies and even the renovation of the office space and/or the property in Luxembourg used as the companys’ headquarters. 

Charitable donation can also be used to lower the amount of taxes due. Deductions apply for different types of donations. The most common type of donation and the easiest to quantify is the donation in cash. However, companies can also make donations in tangible and intangible assets. Our Luxembourg lawyers can advise you regarding the different types of donations and the deductible and non-deductible types.

Contributions to retirement plans are also a way to minimize the tax contributions. If possible, taxpayers in Luxembourg can consider maximizing their retirement plan contribution. Our lawyers in Luxembourg can help with VAT registration.

Filing tax returns in Luxembourg

Both companies and individuals are required to file tax returns with the local authorities in order to have their income taxes assessed. The tax year is usually the same as the calendar year in Luxembourg, however, companies can decide otherwise. In most cases, the tax year begins on the 1st of January and ends on the 31st of December with the requirement to file the tax return by the end of March of the following year.

You can also watch our video on taxation in Luxembourg:

Taxes in Luxembourg

The corporate income rate in Luxembourg is calculated according to the company’s taxable income, as follows: a rate of 17% applies to a taxable income that exceeds 15,000 euros. The value added tax (VAT) in Luxembourg has a standard rate of 15% and a lower rate of 12% for certain goods and services. Based on the VAT number, a Luxembourg company can also apply for EORI registration.

Our lawyers in Luxembourg can offer more information on the tax obligations companies and individuals must comply with in this country. For full information on the taxation system in the Grand Duchy, please contact our law firm in Luxembourg.