CMS Expert Guide on substance issues across Europe in Luxembourg

The substance of Luxembourg companies is often questioned and/or audited by foreign tax authorities. This is especially true following the development of anti-abuse rules, measures against aggressive tax planning and a desire to move towards greater transparency. From a pure Luxembourg standpoint, formal rules governing substance are, prior to the enactment and incorporation of ATAD 3, very limited, except for those applicable to Luxembourg companies involved in intra-group financing activities.

A company will be considered as tax resident in Luxembourg if it has its registered office (as designated in the company’s articles of incorporation), or ‘place of central administration’ in Luxembourg. This is the place where the company is managed and controlled. In practice, this is determined by a variety of factors, for example the place where strategic decisions are taken or the location of meetings of board of directors/managers and shareholders.

Companies involved in intragroup financing are subject to specific ‘substance’ criteria. These are set out in a transfer pricing circular published in 2016. While this circular targets only companies involved in intragroup financing, it can help serve as a guide to how the Luxembourg tax authorities might deal with substance more generally. These factors are considered here.

Under the circular, a company has ‘real presence’ in Luxembourg if:

• The majority of board members with decision-making power and the ability to bind the company are either Luxembourg residents or non-residents with a professional activity subject to tax in Luxembourg
• The company has qualified employees
• Key management decisions are taken in Luxembourg
• When required under company law, at least one general meeting per year is held in Luxembourg
• The company is not tax resident elsewhere

At present, none.

A company must employ or have access to ‘qualified personnel’ to manage and control its risks and transactions. Functions that do not have an impact on the control of risks assumed by the company may be outsourced.

There are no specific provisions which require a company to have premises in Luxembourg. However, it is often advisable to have a dedicated office space with a minimum level of facilities.

There are no specific provisions which require a company to have a local bank account. However, having a bank account with a Luxembourg financial institution, which is used for day-to-day management, is normally recommended.  

At present, none.

Same as those applied to a Luxembourg company.

The implementation of ATAD 3 into Luxembourg domestic tax law will establish a more formal and binding substance framework.