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Luxembourg Withholding Tax on Dividends - Updated Guide

Withholding Tax on Dividends in Luxembourg

Updated on Monday 23rd August 2021

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Withholding-Tax-on-Dividends-in-LuxembourgTaxation in Luxembourg covers the levies imposed on natural persons and companies. However, as an important financial center that hosts many investment funds, Luxembourg has a few particularities when it comes to their taxation.
 
Among taxes imposed on individuals and companies are the withholding levies on various types of incomes. It is worth noting that Luxembourg does not levy withholding taxes on royalties and interests (a few exceptions apply in this case), but dividend payments are subject to them.
 
Below, our specialists explain how the Luxembourg withholding tax on dividends is applied. If you need more information on the tax laws imposed in this country, our lawyers in Luxembourg are at your service.
 

The Luxembourg withholding tax on dividends and its appliance

 
Withholding taxes are, as their name say, taxes that are retained by an entity before making specific payments. In Luxembourg, companies can make payments that attract the levy of the dividend tax.
 
Not all companies are required to pay the withholding tax on dividends, as there are also exceptions that apply. These are strictly related to the recipient of the respective amount of money.
 
The dividend tax is levied at a standard rate of 15% in Luxembourg, however, it can be reduced under double tax treaties signed by the Grand Duchy with other countries.
 
The levy of this tax is based on the distribution of income.
 
Our law firm in Luxembourg is at your service if you want to set up a business here and want to take advantage of what this great country has to offer.
 

The distribution of profits in Luxembourg

 
The appliance of the Luxembourg withholding tax on dividends is based on the distribution of profits earned by companies operating here.
 
A local company can distribute profits by making dividend payments to its shareholders. These are distributed based on each shareholder’s shares in the business. Upon distribution, the beneficiaries will become liable for the dividend tax.
 
Considering that Luxembourg companies often have foreign shareholders, the distribution of dividends can fall under the provision of double tax treaties, as such income is usually taxed in most countries of the world.
 
In order to avoid double taxation, here are the main aspects to consider upon the distribution of dividends:
 
  1. the country of residence or registered address of the company distributing the profits under the form of dividends;
  2. the country of residence of the beneficiaries;
  3. the value of shares owned by a shareholder in comparison to the total value of the shares of the company.
 
The taxation of dividends in Luxembourg is also influenced by the EU legislation, among which the Parent-Subsidiary Directive is one of the most important.
 
If you need details on the Luxembourg withholding tax on dividends, our tax lawyers can provide them to you.
 

How is the payment of the dividend tax made?

 
Considering it must be withheld at source, the Luxembourg company making the dividend payment must deduct the 15% withholding tax, file a tax return (Form 900F) with the Luxembourg Tax Authority, and then pay the tax.
 
The payment of the tax must be made within 8 days from distributing the dividends.
 

The EU Parent-Subsidiary Directive in Luxembourg

 
The Luxembourg withholding tax on dividends is strongly connected to the EU Parent-Subsidiary Directive. Also known as the participation exemption scheme, this rule stipulates that qualifying income obtained from a qualifying company will no longer pay withholding taxes on dividends and capital gains.
 
In order qualify for the participation exemption:
 
  • a shareholder must commit to owning or must own at least 10% of the shares in a Luxembourg company;
  • alternatively, the shareholder must own share with a minimum acquisition value of 1,2 million euros;
  • the shares must be held for 12 uninterrupted months in order to be exempt from the payment of the dividend tax.
 
Our Luxembourg lawyers can provide more information on the EU Parent-Subsidiary Directive and its rules regarding the distribution of dividends.
 

The taxation of dividends under Luxembourg’s double tax treaties

 
The Luxembourg withholding tax on dividends benefits from special provisions, or better said, reduced rates under double tax treaties. In this case, however, the rate depends on the country of residence of the recipient which can also be a non-EU state.
 
Dividends can be taxed at:
 
  • a 10% rate in the case of countries like Azerbaijan, Bahrain and China;
  • a 5% rate in the case of Cyprus and Saudi Arabia;
  • a 7.5% rate which is the case of Greece.
 
If you need more information on the taxation of dividends, please contact our law office in Luxembourg.