Note: Before perusing the text below please have in mind that, although we strive to keep all of our information up to date, Luxembourg Laws and the Fiscal Regulations in particular are subject to continuous change. Therefore, the information below are only for your reference. Before establishing a corporate strategy, you can consult our tax lawyers in Luxembourg.
What are the main laws covering taxation in Luxembourg?
Here are the laws on taxation you need to be aware of if you intend to relocate and/or open a company in Luxembourg:
- the Income Tax Act, which was enabled in 1967, and which has suffered various updates to this day;
- the Corporate Tax Code, which is made up of Articles 159-174 in the Income Tax Law, and which provides for the taxation of resident and non-resident companies in the Grand Duchy;
- the VAT Law, which was enacted in 1979 and amended several times throughout the years, and which provides for the imposition of the value added tax, as well as the exemption applied to financial services;
- the General Tax Code, which covers the procedures, interactions, and penalties imposed in relation to failure to comply with the Tax Code.
What are the main taxation principles in Luxembourg?
The Luxembourg Tax Law covers several important principles, namely:
- the way it applies to natural persons and companies;
- the residence of a taxpayer and how the levy is imposed based on this aspect;
- the anti-abuse rules, which are used to prevent the wrongful use of tax avoidance rules.
How are natural persons taxed in Luxembourg?
The personal income tax is levied on the worldwide income obtained by Luxembourg citizens and residents and on the Luxembourg-sourced income for non-residents. The liability for taxation is related to the family status of a person, which categorises payers into 2 classes and one subclass. They are:
- Class 1, which applies to single people;
- Class 2, which applies to married people, as well as those in civil partnerships;
- Class 1a, which applies to unmarried people with children and singles aged at least 65 at the beginning of a tax year (the 1st of January).
In respect to the tax rates, they apply progressively, with the lowest rate of 0% for an annual income of maximum EUR13,230 and 42% for an income surpassing 234,870 per year.
The tax authorities are currently considering the introduction of a single class of taxpayers meant to simplify the taxation of natural persons.
What are the taxes paid by companies in Luxembourg?
Luxembourg resident companies are subject to the following types of taxes:
- taxes on income;
- the municipal business tax;
- the wealth tax and indirect taxes.
How are companies taxed in Luxembourg?
Companies are subject to the same residency principle when it comes to the corporate tax:
- resident companies pay it on their worldwide income;
- non-resident businesses pay it on the income derived in Luxembourg.
With respect to the applicable rates, here are the most important things to know:
- companies with an annual taxable income below EUR 175,000 are subject to a 14% tax rate;
- those with the annual taxable income between EUR 175,000 and EUR 200,000 pay EUR 24,500 plus 30% on the amount exceeding EUR 175,000;
- companies with a yearly taxable income above EUR 200,000 are subject to a 16% tax rate.
Please note that a solidarity surcharge of 7% and a 6.75% municipal business tax apply in Luxembourg City.
What other taxes should one be aware of in Luxembourg?
Dividends are added to the tax base and undergo a deduction at source, at a maximum 15%, but are fully exempt from such withholding when paid to taxable companies established in more than 90 countries with which Luxembourg has signed a tax treaty (if the participation of at least 10% is held for a period of 12 months). Unlike other jurisdictions, the interests and royalties are not subject to any withholding taxes.
The municipal business tax is included in the corporate tax rate, and it is levied by the municipality in which the company has its headquarters. The rate varies depending on the municipality, and it is ranging between 6.75% and 10%. Companies domiciled in Capellen are taxed at a rate of 7%.
The wealth tax is calculated on the value of net assets as shown in the balance sheet at the end of the taxable period. Buildings account for only a fraction of their value. Major holdings are fully exempt from the calculation base of the tax. The wealth tax is 0.5% for net assets worth up to EUR 500 million and 0.05% for values above this threshold.
What are the current rates of VAT in Luxembourg?
Here are the current rates for the VAT:
- 17% – the standard rate;
- 14% and 8% are the reduced rates;
- 3% rate applies to food, children’s clothing items, pharmaceutical products, books.
The minimum registration threshold for VAT in Luxembourg is set once a business reaches an annual turnover of EUR 35,000.
How can your Luxembourg tax lawyers help me?
You can rely on our tax lawyers in Luxembourg if:
- you are a foreign or local investor, and you started a new business in the Grand Duchy and want to understand the tax legislation;
- you are in search of tax minimization solutions;
- you need representation in tax-related disputes with the authorities.
Our law firm offers legal services related to the Luxembourg Tax Law. Please contact us with any questions regarding the matter.