Luxembourg country tax guide

The Luxembourg direct tax administration, known as the Administration des contributions directes (“ACD”), uses French, German and Luxembourgish, which are the official languages of the Grand-Duchy of Luxembourg. In principle, for administrative, litigation, non-litigation and judicial matters, these official languages should be used. For specific matters, communication with the ACD in English is possible. Some of the tax forms are also available in English.

Luxembourg tax resident companies (and Luxembourg branches of non-resident companies) are subject to corporate income tax (“CIT”) at the rate of 17% (other rates exist for companies which realize taxable income below EUR 200,001), a contribution to employment fund’s contribution (contribution au fonds pour l'emploi) at the rate of 7% calculated on the CIT rate, and to municipal business tax (“MBT”) at a rate of 6.75% for the municipality of Luxembourg-City leading to a combined CIT-MBT rate of 24.94% for Luxembourg-City for the year 2023 (“Corporate Tax”). The MBT rate varies from one municipality to another.

Luxembourg tax resident companies are taxed on their worldwide income unless certain items of income benefit, subject to conditions, from an exemption under domestic law (e.g., Luxembourg participation exemption regime) or under an applicable double tax treaty (“DTT”). Non-resident companies are taxed only on their Luxembourg-source income.

Subject to any relevant DTT, companies are considered Luxembourg tax residents to the extent their statutory seat and/or central administration is in Luxembourg.

Luxembourg tax resident companies (and Luxembourg branches of non-resident companies) are subject to net wealth tax (“NWT”) on their net wealth.

NWT rate is regressive and is levied at the rate of 0.5% on the unitary value (valeur unitaire) up to EUR 500m and at the rate of 0.05% on the unitary value exceeding EUR 500m. The unitary value of a company corresponds to its net asset value subject to specific adjustments. Qualifying assets may be exempt from NWT under domestic law (e.g., Luxembourg participation exemption) or under an applicable DTT.

A minimum NWT of EUR 4,815 applies to companies whose sum of fixed financial assets, inter-company receivables, transferable securities, cash at bank, cash in postal cheques accounts, cheques, and cash in hand, exceeds 90% of their balance sheet and EUR 350,000.  Luxembourg companies that do not meet the above mentioned thresholds will be subject to minimum NWT varying from EUR 535 to EUR 32,100 depending on their total balance sheet.

Dividends derived by a Luxembourg taxable resident company are in principle subject to Corporate Tax in Luxembourg unless an exemption applies:

• Full exemption, subject to certain conditions, under the Luxembourg participation exemption regime or under an applicable DTT; and
• Partial exemption of 50%, subject to certain conditions, under domestic law.

Dividends distributed by a Luxembourg taxable resident company are subject to the Luxembourg 15% withholding tax unless an exemption under Luxembourg participation exemption regime or a reduced rate under an applicable DTT applies.

Interest income derived by a Luxembourg taxable resident company is recognized on an accrual basis and is subject to Corporate Tax. Arm’s length interest payable is in principle tax deductible unless one of the Luxembourg rules denying the deductibility of such interest applies (e.g., interest deduction limitation rules, anti-hybrid mismatch rules, etc.). Arm’s length interest payable is not subject to Luxembourg 15% withholding tax. However, in certain cases and under conditions, interest paid to a Luxembourg tax resident individual may be subject to a 20% final withholding tax (see point 3.5.2 below).

Capital gains realized by a Luxembourg taxable resident company are subject to Corporate Tax. Under certain conditions, such capital gains may be tax exempt. However, the sum of related expenses that has reduced the tax result of the Luxembourg company should become taxable. This recapture mechanism should in principle be tax neutral as the taxable capital gain may be offset by corresponding (carried forward) tax losses generated by the deduction of these expenses.

The family wealth management company or société de gestion de patrimoine familial (“SPF”), is an investment company conceived for individuals or a group of individuals for the management of their private assets. The activity of the SPF is limited to the acquisition, holding and sale of certain financial assets. Any type of commercial activity is prohibited. The SPF is subject to a beneficial tax regime and as such is exempt from Corporate Tax and NWT. However, the SPF is subject to an annual subscription tax of 0.25% calculated on a specific tax base. The minimum amount of the subscription tax is set at EUR 100 per year and cannot exceed EUR 125,000 per year.

Luxembourg investment fund vehicles (regulated or not) are either not subject to Corporate Tax and NWT, or benefit from a wide range of exemptions. Regulated vehicles are generally subject to an annual subscription tax at a rate ranging from 0.01% to 0.05% and calculated on their net assets, subject to certain specific exemptions. 

Dividend distributions made by Luxembourg funds to their investors are in principle not subject to withholding tax.

Individuals who are (i) Luxembourg resident taxpayers or (ii) non-resident taxpayers who derive Luxembourg-source income are subject to personal income tax (“PIT”) in Luxembourg.

Subject to any relevant DTT, an individual is considered resident of Luxembourg if his/her domicile or usual abode is in Luxembourg. A usual abode is deemed to exist if the individual has been present in Luxembourg for a period of at least six consecutive months. Short absences are disregarded.

The PIT is levied based on a progressive scale that goes from 0% to 42% for taxable income exceeding EUR 200,004.

The PIT rates are increased by an employment fund contribution of 7%, which rises to 9% if the gross salary of the individual reaches certain thresholds.

For taxpayers registered with social security insurance in Luxembourg, the PIT is also increased by an 8% pension contribution, a 3.05% health insurance contribution, and a 1.4% dependency contribution.

Luxembourg’s PIT is determined based on the taxable income of the taxpayer and the tax class to which she/he belongs (determined based on the individual’s status, i.e. single / partners / spouses, separated / divorced / widowed, with or without children, resident or not, age). There are three types of tax classes which aim to reducing the progressivity of Luxembourg’s PIT.

There is no personal wealth tax in Luxembourg since 2006.

Since 1 January 2016, foreign tax resident individuals who emigrate to Luxembourg and become Luxembourg tax residents benefit from a favorable measure called “step up”. Under this measure, these individuals can benefit, under conditions, from the non-taxation in Luxembourg of certain capital gains accrued in their country of origin. This regime allows to avoid double taxation given that these individuals retain the fair market value of certain assets (e.g., shares) when they emigrate to Luxembourg.

Since 1 January 2021 and subject to certain conditions, qualifying employees can benefit from a new inpatriate regime. Among others, the conditions to benefit from the regime are the following:

• The employee must become a Luxembourg tax resident (tax domicile or habitual abode);
• The employee must not have been a Luxembourg tax resident, nor have lived less than 150 km from the Luxembourg border, nor have been subject to Luxembourg income tax on professional income during the five tax years preceding the year of the beginning of the employment in Luxembourg;
• The employee must carry out the professional activity on a principal basis;
• The employee must earn a fixed gross annual salary of at least EUR 75,000 (excluding benefits in kind or in cash); and
• The employee must have acquired a thorough specialization in the sector concerned.

This preferential regime provides for:

• A full exemption for relocation costs and other costs such as school fees, accommodation costs, trip cost once a year from Luxembourg to the employee’s home country, tax equalization, etc.;
• A partial exemption of 50% of the inpatriate premium which cannot exceed 30% of the employee annual salary base (excluding benefits in kind and in cash). The inpatriate premium is a lump sum allowance granted to compensate the employee for the cost-of-living differential between Luxembourg and his/her home state, as well as any relocation expenses.

These exemptions are applicable for the duration of the employee’s assignment, but at most until the end of the eighth tax year following the year during which the employee started to work in Luxembourg.

Under certain conditions, the old inpatriate regime remains applicable for employees who arrived in Luxembourg between 2016 and 2020. The old regime had slightly different advantages and only applied for five years.

Dividends

Dividends are included in the taxable income from movable capital. A 50% exemption is available, under conditions. 

Interest

Interest falling into the scope of the law dated 23 December 2005 as amended, introducing a final withholding tax on savings income paid by Luxembourg paying agents to Luxembourg tax resident individual beneficial owners, are subject to a 20% final withholding tax. There are certain exclusions from the law (e.g., interest payments on debt securities which have not been publicly issued on a regulated market).

Capital gains

Capital gains are taxed as follows:

*Subject to increase for employment fund’s contribution and dependency contribution; allowances apply.

Gift tax

To be legally valid, a gift needs to be made via a written instrument authenticated by a Luxembourg notary. Gifts made in writing must then be registered with the Luxembourg indirect tax authority, known as the Administration de l'enregistrement, des domaines et de la TVA (“AED”), and are subject to registration duties that may be fixed or proportional. A fixed duty of EUR 12 is levied on all deeds that do not contain an obligation, nor transfer of ownership, usufruct, or enjoyment of movable or immovable property, while the proportional duty is levied on deeds and agreements that contain at least one of these characteristics, either inter vivo or by death. The proportional duty depends on the degree of relationship between the donor and the recipient and ranges between 1.8% and 14.4%. Gifts of immovable property located in Luxembourg may be subject to an additional 1% transcription fee. The fiscal domicile of the donor and the recipient is irrelevant for the purpose of the application of the registration duty.

Gifts on movable assets transferred by hand delivery are generally accepted without notarial deed and therefore are not subject to gift tax unless the donor dies within the year following the donation.

Inheritance tax and transfer tax

Luxembourg inheritance tax only applies when the deceased person was a resident of Luxembourg, i.e., a person either who had his domicile in Luxembourg or whose assets were managed from Luxembourg. In such situation, inheritance tax will be due on the total value of the assets bequeathed by the deceased person irrespective of whether the heirs or legatees are resident in Luxembourg.

Transfer tax only applies upon the death of a non-resident of Luxembourg that holds immovable property located in Luxembourg. Transfer tax is levied on the fair market value of all the immovable properties located in Luxembourg on the day of the death minus certain debts in relation with the building.

The taxes depend on the family relationship and the value of the assets.

Despite few exceptions, assets are valued at their market value on the day the person died.

The inheritance tax rate is calculated based on the net share collected by each heir. To determine the applicable rate, a distinction must be made between:

• the legal part collected by the heirs according to their capacity (children, spouse, brothers, etc.); and
• the extra-legal part collected by the heirs as a result of a will, donation, etc.

Donations made during the year prior to the death that were not subject to stamp duty and registration fees, will be taken into account for the calculation of the inheritance tax.

Luxembourg delivers the so-called “golden visa”, for third country nationals who wish to live in the Grand-Duchy for more than three months for the purpose of an investment in an undertaking. The golden visa is granted if certain pre-requisites are met and if the investments exceed certain thresholds (i.e., from EUR 500,000 to EUR 20m depending on the investment’s nature) and meet some conditions. 

If all of these conditions are met, a residence permit will be granted to the third country national.

This residence permit is valid for a maximum period of three years but is renewable for three more years if the conditions are still met. After five consecutive years and if the conditions are still met, the investor can apply for a permanent residence permit. 

The Luxembourgish resident permit together with the citizen’s passport enables one to freely travel within the European Union.

Charitable foundations, charitable associations and societal impact companies can be set-up and governed by law in Luxembourg.

Trusts cannot be set-up under Luxembourg law, but Luxembourg recognizes trusts that are governed by the law of foreign jurisdictions under the Hague Convention of 1985 on the law applicable to trusts and on their recognition.

Luxembourg fiduciary agreements (contrat fiduciaire) can be entered into but are not commonly used in practice, while partnership or corporate forms are preferred for income tax planning.   

Luxembourg fiduciary agreements (contrat fiduciaire)can be entered into but are not commonly used in practice, while partnership or corporate forms are preferred for income tax planning.

These vehicles are not subject to a disadvantageous tax regime in Luxembourg.

Trustees and fiduciaries must file information on fiduciary contracts and trusts, including certain details on the beneficial owners of any fiduciary contracts and trusts, in the register of fiduciary contracts and trusts (registre des fiducies et des trusts). It may be possible to access this register, under conditions.

The tax transparency of such arrangements from an income tax perspective should be analyzed on a case-by-case basis.