Taxes in Luxembourg, Taxation in Luxembourg, Taxes system in Luxembourg
In Luxembourg there are three main taxes impinging on businesses: Corporate Income Tax, the Municipal Business Tax on Profits, and the Fortune Tax (a wealth tax). Of course there is also VAT, and there are withholding taxes.
Presenting the government's budget for 2010, Finance minister Luc Frieden categorically ruled out any increases or reductions in taxes for companies or individuals for the following year, adamant that there was no scope to implement tax cuts, and that any rise in taxes would merely prove damaging to the economy.
Then, in April 2010, Frieden unveiled details of the government’s ambitious proposals to reduce spending and to increase tax revenue, in a bid to achieve a balanced budget by 2014, and to maintain public debt at a manageable level.
From January 2011, a ceiling of EUR300,000 was imposed for severance pay and 'golden' handshakes to limit the impact of severance pay on the corporation's taxable base, employment fund contributions were raised by 1% to 5%.
Luxembourg Scope of Income Tax
Resident companies are taxed on their world-wide income.
Residence for this purpose means that the business has its main establishment in Luxembourg, that is, the place from which it is managed, where it holds its general meetings, and where it performs central administrative functions.
Non-resident companies having a 'permanent establishment' in Luxembourg (defined as a place of business or fixed equipment, which would normally include branches) pay income tax on their income originating in Luxembourg.
Luxembourg Income Tax RatesThe rate of tax for income lower than EUR15,000 is 20%, and 21% for income beyond EUR15,000.
There is a 5% employment fund surcharge and a charge of between 6% and 10.5% in respect of municipal services (see below).
This latter component varies according to location.
Luxembourg Calculation of Taxable Base
For companies, IRC is normally assessed for income arising in the previous fiscal year, which is the calendar year unless a company has chosen otherwise.
For resident Luxembourg companies 'income' for the purposes of the IRC is calculated by comparing the net worth (net balance sheet assets) of the taxable entity at the beginning and end of the period concerned.
Businesses with very low turnover may be able to use a simplified 'receipts and expenses' method of calculation, but this is not pursued further here.
'Exempt income' is income qualifying under the Luxembourg Participation-Exemption system, meaning dividends, interest, capital gains or royalties income received from another company in which the receiving company has a share interest greater than 10%, providing the paying company is in a jurisdiction levying at least 15% (at the time of writing) tax on such payments.
Note that the interest costs on debt finance of such a exempt share interest would only be deductible up to the level of the exempt income received.
Profit distributions in the course of a year (widely defined) are added back to net worth at the end of the year prior to calculation of IRC.
Evidently, rules for asset valuation are particularly crucial in a 'net worth' income tax system.
In Luxembourg there are rules dealing with what assets are to be included, their valuation, and permitted depreciation.
The rules cover land and buildings, leased assets, goodwill, participation in other companies, inventory etc.
The treatment of provisions is likewise important and is covered by a set of rules.
Foreign exchange gains and losses can also have a major impact on valuation of foreign assets, and are dealt with under rules that provide for their 'neutralisation' (deferral) in many circumstances.
There are some tax credits available for certain types of investment into assets for use inside Luxembourg itself.
For non-resident corporate entities, IRC applies to:
1. Income attributable to a Luxembourg permanent establishment.
2. Passive Luxembourg-sourced income such as dividends, interest, royalties and capital gains.
3. Income from immovable property in Luxembourg.
4. Interest on loans secured by immovable property in Luxembourg.