DOING BUSINESS IN LUXEMBOURG 2017

Transcription

1 DOING BUSINESS IN LUXEMBOURG 2017

2 Editors: Africa: Ridha Hamzaoui, Emily Muyaa, Mei-June Soo Asia-Pacific: Mei-June Soo, Nina Umar, Ying Zhang Caribbean: Priscilla Lachman, Sandy van Thol Europe: Khadija Baggerman, Larisa Gerzova, Adrián Grant Hap, Marjolein Kinds, Ivana Kireta, Magdalena Olejnicka, Andreas Perdelwitz, Marnix Schellekens, Kristina Trouch, Ruxandra Vlasceanu Middle East: Ridha Hamzaoui, Mei-June Soo Latin America: Vanessa Arruda Ferreira, Maria Bocachica, Diana Calderon Manrique, Lydia Ogazón Juárez North America: John Rienstra, Julie Rogers-Glabush IBFD Visitors address: Rietlandpark DW Amsterdam The Netherlands Postal address: P.O. Box HE Amsterdam The Netherlands Tel.: IBFD All rights reserved. No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the written prior permission of the publisher. Applications for permission to reproduce all or part of this publication should be directed to: permissions@ibfd.org. Disclaimer This publication has been carefully compiled by IBFD and/or its author, but no representation is made or warranty given (either express or implied) as to the completeness or accuracy of the information it contains. IBFD and/or the author are not liable for the information in this publication or any decision or consequence based on the use of it. IBFD and/or the author will not be liable for any direct or consequential damages arising from the use of the information contained in this publication. However, IBFD will be liable for damages that are the result of an intentional act (opzet) or gross negligence (grove schuld) on IBFD s part. In no event shall IBFD s total liability exceed the price of the ordered product. The information contained in this publication is not intended to be an advice on any particular matter. No subscriber or other reader should act on the basis of any matter contained in this publication without considering appropriate professional advice. Where photocopying of parts of this publication is permitted under article 16B of the 1912 Copyright Act jo. the Decree of 20 June 1974, Stb. 351, as amended by the Decree of 23 August 1985, Stb. 471, and article 17 of the 1912 Copyright Act, legally due fees must be paid to Stichting Reprorecht (P.O. Box 882, 1180 AW Amstelveen). Where the use of parts of this publication for the purpose of anthologies, readers and other compilations (article 16 of the 1912 Copyright Act) is concerned, one should address the publisher.

3 DOING BUSINESS IN LUXEMBOURG ARGENTINA JANUARY MARCH

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5 DOING BUSINESS IN LUXEMBOURG 2017 INTRODUCTION This publication has been prepared by the International Bureau of Fiscal Documentation (IBFD) on behalf of BDO Member Firms and their clients and prospective clients. Its aim is to provide the essential background information on the taxation aspects of setting up and running a business in this country. It is of use to anyone who is thinking of establishing a business in this country as a separate entity, as a branch of a foreign company or as a subsidiary of an existing foreign company. It also covers the essential background tax information for individuals considering coming to work or live permanently in this country. This publication covers the most common forms of business entity and the taxation aspects of running or working for such a business. For individual taxpayers, the important taxes to which individuals are likely to be subject are dealt with in some detail. We have endeavoured to include the most important issues, but it is not feasible to discuss every subject in comprehensive detail within this format. If you would like to know more, please contact the BDO Member Firm(s) with which you normally deal. Your adviser will be able to provide you with information on any further issues and on the impact of any legislation and developments subsequent to the date mentioned at the heading of each chapter. About BDO BDO is an international network of public accounting, tax and advisory firms which perform professional services under the name of BDO. The fee income of the member firms in the BDO network, including the members of their exclusive alliances, was US$7.6 billion in These firms have representation in 158 countries and territories, with over 67,700 people working out of 1,401 offices worldwide. BDO s brand promise is built upon our vision, to be the leader for exceptional client service always, and everywhere. When you choose to work with BDO you quickly discover why we re different from the rest. BDO offers a comprehensive collection of high quality tax services and assets designed to support exceptional performance, and all our tax engagements benefit from the hands-on involvement of experienced professionals, backed by world-class resources. We are agile enough to handle the biggest and the smallest names in the industries we serve, and our relationship-driven culture means that we can provide responsive and personalised advice to all our clients. We work hard to understand our clients businesses and ensure that we match both our service offering and our people to their complex individual needs. We believe that providing our clients with access to experienced professionals who are actively engaged in addressing their tax and business issues is the most reliable way to provide exceptional service, always with a strong focus on trust and transparency. Regardless of your location, size or international ambitions we can provide effective support as you expand into new areas of the world. In an ever-evolving economic environment, businesses need a global network that provides exceptional, bespoke service combined with local knowledge and expertise. BDO is uniquely positioned to serve this demand, providing effective support and a truly global integrated global footprint. 3

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7 DOING BUSINESS IN LUXEMBOURG 2017 TABLE OF CONTENTS CORPORATE TAXATION... 9 ABBREVIATIONS... 9 INTRODUCTION CORPORATE INCOME TAX TYPE OF TAX SYSTEM TAXABLE PERSONS Residence TAXABLE INCOME General Exempt income Deductions Depreciation and amortization Reserves and provisions CAPITAL GAINS LOSSES Ordinary losses Capital losses RATES Income and capital gains Withholding taxes on domestic payments Minimum flat tax INCENTIVES Intellectual property regime Special depreciation Investment tax credit Incentive for new industrial activities Venture capital investment certificates Venture capital/private equity investment vehicle (SICAR) Securitization regime Occupational training credit ADMINISTRATION Taxable period Tax returns and assessment Payment of tax Rulings TRANSACTIONS BETWEEN RESIDENT COMPANIES GROUP TREATMENT INTERCOMPANY DIVIDENDS OTHER TAXES ON INCOME MUNICIPAL BUSINESS TAX TAXES ON PAYROLL PAYROLL TAX SOCIAL SECURITY CONTRIBUTIONS TAXES ON CAPITAL NET WORTH TAX Unitary value Net worth tax rate Minimum net worth tax SOPARFIs Other Luxembourg collective entities Luxembourg companies in a fiscal unity

8 DOING BUSINESS IN LUXEMBOURG 2017 TABLE OF CONTENTS Net worth tax reserve REAL ESTATE TAX INTERNATIONAL ASPECTS RESIDENT COMPANIES Foreign income and capital gains Foreign losses Foreign capital Double taxation relief NON-RESIDENT COMPANIES Taxes on income and capital gains Taxes on capital Administration WITHHOLDING TAXES ON PAYMENTS TO NON-RESIDENT COMPANIES Dividends Interest Royalties Other Withholding tax rates chart ANTI-AVOIDANCE GENERAL TRANSFER PRICING THIN CAPITALIZATION CONTROLLED FOREIGN COMPANY VALUE ADDED TAX GENERAL TAXABLE PERSONS TAXABLE EVENTS TAXABLE AMOUNT RATES EXEMPTIONS NON-RESIDENTS MISCELLANEOUS TAXES CAPITAL DUTY TRANSFER TAX Immovable property Shares, bonds and other securities STAMP DUTY CUSTOMS DUTY EXCISE DUTY OTHER TAXES Subscription tax INDIVIDUAL TAXATION ABBREVIATIONS INTRODUCTION INDIVIDUAL INCOME TAX TAXABLE PERSONS TAXABLE INCOME General Exempt income EMPLOYMENT INCOME Salary Benefits in kind

9 TABLE OF CONTENTS DOING BUSINESS IN LUXEMBOURG Pension income Directors remuneration BUSINESS AND PROFESSIONAL INCOME INVESTMENT INCOME Dividends Interest Royalties Income from immovable property CAPITAL GAINS PERSONAL DEDUCTIONS, ALLOWANCES AND CREDITS Deductions Allowances Credits LOSSES RATES Income and capital gains Withholding taxes ADMINISTRATION Taxable period Tax returns and assessment Payment of tax Rulings OTHER TAXES ON INCOME MUNICIPAL BUSINESS TAX SOCIAL SECURITY CONTRIBUTIONS EMPLOYED SELF-EMPLOYED TAXES ON CAPITAL NET WEALTH TAX REAL ESTATE TAX INHERITANCE AND GIFT TAXES TAXABLE PERSONS Inheritance tax Gift tax TAXABLE BASE Inheritance tax Gift tax PERSONAL ALLOWANCES Inheritance tax RATES Inheritance tax Gift tax DOUBLE TAXATION RELIEF Inheritance tax Gift tax INTERNATIONAL ASPECTS RESIDENT INDIVIDUALS Foreign income and capital gains Foreign capital Double taxation relief EXPATRIATE INDIVIDUALS NON-RESIDENT INDIVIDUALS Taxes on income and capital gains

10 DOING BUSINESS IN LUXEMBOURG 2017 TABLE OF CONTENTS Taxes on capital Inheritance and gift taxes Administration KEY FEATURES

11 CORPORATE TAXATION DOING BUSINESS IN LUXEMBOURG 2017 LUXEMBOURG This chapter is based on information available up to 24 March Abbreviations Abbreviation English definition French definition Circ. LIR 50bis/1 Circular LIR n 50bis/1 on the partial exemption of income derived from certain intellectual property rights of 5 March 2009 Circulaire sur l exonération partielle des revenus produits par certains droits de propriété intellectuelle L.I.R. n 50bis/1 du 5 mars 2009 CSS Code de la Sécurité Sociale LGI General Tax Law dated 22 May 1931 Loi générale des impôts du 22 mai 1931 LICC Law on Municipal Business Tax dated 1 December 1936 Loi sur l impôt commercial communal du 1er décembre 1936 LIF Law on Net Worth Tax dated 16 October 1934 Loi concernant l impôt sur la fortune du 16 octobre 1934 LIFonc Real Estate Tax Law dated 1 December 1936 Loi sur l impôt foncier du 1er décembre 1936 LIR Income Tax Law dated 4 December 1967 Loi concernant l impôt sur le revenu du 4 décembre 1967 Loi du 30 juin 1976 Introduction Law in modified version of 30 June 1976 on 1. the creation of an unemployment fund; 2. regulation on the introduction of full unemployment benefits Loi modifiée du 30 juin 1976 portant 1. création d un fonds de chômage; 2. réglementation de l octroi des indemnités de chômage complet MCIT Minimum corporate income tax MNWT Minimum net worth tax RGD Grand-Ducal regulation of 21 December 2001 taken in application of article 166(9) n 1 of the LIR Règlement grand-ducal du 21 décembre 2001 portant exécution de l article 166(9) n 1 LIR StAnpG Tax Adaptation Law dated 16 October 1934 Loi d adaptation fiscale du 16 octobre 1934 VATL VAT Law Loi concernant la taxe sur la valeur ajoutée Corporate income is subject to corporate income tax, increased by a surcharge for the employment fund and a municipal business tax. Companies are also subject to net worth tax. Social security contributions must be paid by employers. A VAT system also applies. The applicable currency is the euro (EUR). 1. Corporate Income Tax 1.1. Type of tax system The corporate tax system of Luxembourg is, in principle, a classical system. This means that the tax is levied on corporate income and that distributed profits are again taxed in the hands of the shareholders. For resident individual shareholders, a 50% exemption for dividends applies in many cases. For corporate shareholders, either a 9

12 DOING BUSINESS IN LUXEMBOURG 2017 CORPORATE TAXATION 50% exemption or a 100% participation exemption (see section 2.2.) may apply. Dividends and other profit distributions are not deductible in computing taxable income of the company Taxable persons Corporate income tax is levied on the entities listed in the law as corporate entities for tax purposes. These include, inter alia, corporations, limited liability companies, partnerships limited by shares, associations, cooperative entities and non-profit organizations (article 159 of the LIR). The income of partnerships, except for partnerships limited by shares, is first determined globally at the partnership level and then taxed at the level of the partners. Each partner is deemed to carry on his own business in proportion to his share in the partnership (article 175 of the LIR). This principle of fiscal transparency also applies for net worth tax purposes. Only the municipal business tax is based directly on the profits determined at the partnership level (i.e. in the case where the partnership is carrying out a commercial activity in Luxembourg or if it is commercially tainted also referred to as the Geprägetheorie) (article 14(4) of the LIR). This survey is restricted to the taxation of corporations (SAs) and limited liability companies (SARLs), as well as foreign-incorporated entities of a similar description, whether resident or non-resident. These entities will be referred to as companies Residence Resident companies are defined for tax purposes as companies that have their legal seat or central administration in Luxembourg (article 159 of the LIR) Taxable income General Corporate income tax is levied on worldwide income and capital gains of resident companies. All income derived by a company is characterized as business income (article 14 of the LIR). Commercial profit is calculated as the difference between the net assets invested at the end of the financial year and the net assets invested at the beginning of the period, increased by withdrawals made during the period and decreased by capital contributed during the period (net worth comparison method) (article 18 of the LIR) Exempt income The most important items of exempt income are domestic and foreign dividends (including liquidation proceeds) and capital gains qualifying for the participation exemption regime (see section 2.2.) (article 166 of the LIR and RGD ) Deductions Deductible business expenses include those exclusively incurred by the enterprise (article 45 of the LIR). Expenses economically connected with exempt income are not deductible; however, to the extent that expenses exceed tax-exempt income they are deductible for the exceeding part (though may be subject to recapture rules) (article 166 of the LIR and RGD ). Deductible expenses include, inter alia (articles 46, 49, 50 and 167 of the LIR): effective foreign taxes (taxes exceeding the amount creditable under domestic law or a treaty); 10

13 CORPORATE TAXATION DOING BUSINESS IN LUXEMBOURG 2017 deductible domestic taxes, such as the real estate tax and deductible VAT; royalties and service fees at arm s length; interest at arm s length not connected with exempt income; charitable donations (generally limited to EUR 1 million or in total 20% of net income, whichever is lower); social security payments; and legal expenses. Non-deductible expenses include, inter alia (articles 12, 45, 48, 155bis, and 168 of the LIR): corporate income tax, net worth tax and municipal business tax; profit distributions; directors fees; allocation to self-insurance reserves; gifts; most fines and penalties; and departure or dismissal indemnities exceeding EUR 300, Depreciation and amortization Depreciation of business assets that diminish in value either by use or by decrease of substance (e.g. mineral deposits) is compulsory and must take place whether the company is profitable or sustains a loss. Depreciation must be taken on the basis of the acquisition or production cost (less salvage value) and expected useful life. However, where the owner of the depreciable assets is also the user and the useful life does not exceed 1 year, or where the acquisition or production cost does not exceed EUR 870, the assets may generally be written off in the financial year of acquisition or manufacture (articles of the LIR). Land, participations in the share capital of other companies, and inventory are not depreciable for tax purposes. Purchased goodwill may be depreciated. The tax authorities accept depreciation of goodwill over its useful life. A depreciation period of 10 years is generally accepted (Administrative Circular 101 dated 5 November 1985). Two depreciation methods are generally allowed: the straight-line method (article 32 (1) of the LIR) and, for certain tangible assets (except buildings), the decliningbalance method (article 32 (2) of the LIR). With effect from 1 January 2017, taxpayers will be allowed to defer (optionally) the deduction of the annual amount of depreciation of a tangible asset. The unused depreciation amount can be carried forward and has to be deducted at the latest at the end of the useful lifetime of the asset (article 32 (1a) of the LIR). The taxpayer may change from the declining-balance to the straight-line method, but not vice versa. Extraordinary depreciation is allowed if justified by excessive wear and tear of the asset (technical as well as economic). Accelerated (special) depreciation is available for investments in certain assets (see section ) (articles 32bis and 32ter of the LIR). 11

14 DOING BUSINESS IN LUXEMBOURG 2017 CORPORATE TAXATION Under the straight-line method, the following depreciation rates generally apply: Asset Rate (%) Office buildings Industrial buildings 4 5 Plant Office equipment 20 Vehicles 25 The depreciation rate under the declining-balance method is subject to strict conditions and may not exceed three times the normal depreciation rate according to the straight-line method or 30% of the value of the depreciated asset (four times and 40% for scientific and technical research equipment) (article 32(3) of the LIR). The declining-balance method may not be applied to assets the use of which is transferred to another person. The asset may not be a building (article 32(3) of the LIR). With respect to a sale and lease-back, the lessor may not take depreciation that is higher than the rent paid by the lessee (article 32(6) of the LIR) Reserves and provisions Subject to certain conditions, rollover relief applies to capital gains derived from the sale of a building or a non-depreciable fixed asset. The selling price must be reinvested within 2 years after the selling year (article 54 of the LIR). Tax-deductible provisions may be formed for, inter alia, guarantees and warranties, damage claims, litigation expenses and (within certain limits) future pension payments to employees. Self-insurance provisions and deferred repair and maintenance provisions are not deductible. A sufficient approximation may be used to value bad debts and a corresponding amount may be deducted from annual taxable income. If the debt is actually paid in a subsequent year, the deducted amount must be included in the tax base Capital gains No distinction is made between gains arising from the sale of capital assets and those arising from the sale of non-capital assets. Capital gains derived from the alienation of assets, in principle, are included in annual taxable income in the same manner as other income from the business (article 14 of the LIR). Capital gains on the sale of shares may be exempt from corporate income tax, subject to certain conditions (see section 2.2.) (RGD ). Rollover relief may also be obtained in relation to share-for-share exchanges subject to certain conditions (article 22bis of the LIR) Losses Ordinary losses Tax losses incurred until 31 December 2016 are available for indefinite carry-forward. Losses incurred with effect from 1 January 2017 are available for carry-forward (with the possibility of a 100% offset of yearly profits) for a period of 17 years (article 114 of the LIR). No carry-back is allowed. 12

15 CORPORATE TAXATION DOING BUSINESS IN LUXEMBOURG 2017 A successor company in a statutory merger or reorganization may not take over the net operating losses of an absorbed company. In cases where there is a change in control of a company with unused tax losses, the tax authorities may apply the Mantelkauf principle (based on the abuse-of-law theory) (article 114(2)3 of the LIR and Administrative Circular LIR 114/2 dated 2 September 2010) Capital losses A loss from the sale or other disposition of business property is also deductible, unless the business property has been allocated to a foreign permanent establishment located in a tax treaty jurisdiction and the tax treaty foresees the exemption method. A capital loss from the disposal of shares is tax deductible Rates Income and capital gains The general corporate income tax rate has been reduced from 21% to 19% in 2017 and will be further reduced to 18% in 2018 (article 174 of the LIR). A 7% surcharge for the employment fund ( solidarity surcharge ) is levied on the corporate income tax due, making the general effective rate 20.33% (19.26% in 2018) (Loi du 30 juin 1976). Currently, the combined corporate tax rate for the City of Luxembourg is 27.08%. This rate comprises the corporate income tax of 19%, the 7% surcharge and the 6.75% municipal business tax. The corporate income tax rate amounts to 15% for corporations with a taxable income below EUR 25,000. F or companies with a taxable income between EUR 25,000 and EUR 30,000, the corporate income tax amounts to EUR 3,750 plus 39% of the income exceeding EUR 25,000. For the municipal business tax, see section Withholding taxes on domestic payments In general, a 15% withholding tax is levied on dividends paid by resident companies to other resident companies (articles 146 and 148 of the LIR). An exemption from withholding tax is granted under similar conditions that apply to the participation exemption for corporate income tax purposes (see section 2.2.) (article 147 of the LIR). Liquidation proceeds are not subject to withholding tax. Dividends paid by certain investment vehicles are exempt from withholding tax (article 147(3) of the LIR). The tax withheld is credited against the recipient s corporate income tax liability of the same year. Any excess withholding tax may be credited against other tax claims (article 154(7) of the LIR). However, withholding taxes on income from capital are not refundable, except for dividends that can benefit from the Luxembourg participation exemption regime and after the 12-month holding period has elapsed (article 154(6a) of the LIR). In principle, there is no withholding tax on ordinary interest paid to resident companies. Interest on profit-sharing bonds is, however, subject to the same withholding tax that applies to dividends (article 146(1)3 of the LIR). In principle, royalties are not subject to withholding tax. For withholding tax rates on payments to non-resident companies, see section

16 DOING BUSINESS IN LUXEMBOURG 2017 CORPORATE TAXATION Minimum flat tax With effect from 1 January 2011, a system of minimum corporate income tax (MCIT) was introduced for companies, the assets of which are comprised for at least 90% of financial assets. From 1 January 2013, this tax was extended to all corporate taxpayers, including companies that were part of a consolidated group and regulated holding and financing companies that were considered corporate taxpayers. With effect from 1 January 2016, the minimum corporate income tax has been repealed and replaced by a new (minimum) net worth tax (see section ) Incentives Intellectual property regime Old regime An 80% exemption is granted for qualifying income and gains from intellectual property (IP) (article 50bis of the LIR and Administrative Circular LIR 50bis/1). The 80% exemption applies to the net positive income (i.e. gross revenue from the IP less directly connected expenses, depreciation and write-downs) of certain types of IP, including software copyrights, patents, trademarks, service marks, domain names, designs and models. To qualify for the regime, the IP must have been acquired or developed after 31 December Expenses, amortizations and write-downs economically related to the IP must be capitalized on the company s balance sheet and included in the profit and loss account from the first financial year for which the company wishes to benefit from this regime. The 80% exemption does not apply to IP acquisitions from directly related companies where there is a common and direct ownership between them of at least 10% (for example: either (i) the seller and buyer companies are direct owners of each other by at least 10% or (ii) both the companies are directly owned for at least 10% by the same common parent). Qualifying IP assets are fully exempt from net worth tax (see section 5.1.). Repeal of the old regime The old IP regime described above has been repealed with effect from 1 July There is, however, a grandfathering rule under which taxpayers benefiting from the old regime are allowed to continue the exemption until 30 June Special depreciation A special depreciation allowance is permitted for investments to enable disabled persons to work and for investments to protect the environment, save energy or reduce waste (article 32bis of the LIR). The acquisition or production cost of the investment must be at least EUR 2,400 (exclusive of VAT). This depreciation allowance may not exceed 80% of the acquisition or production cost of the qualifying assets. The depreciation may be taken during the year of investment or one of the following 4 years. Alternatively, it may be spread equally over these years. This special depreciation allowance does not exclude taking depreciation concurrently under the straight-line method, which is then computed on the acquisition or production cost after deduction of the special depreciation allowance. Concurrent depreciation under the declining-balance method is excluded. 14

17 CORPORATE TAXATION DOING BUSINESS IN LUXEMBOURG Investment tax credit Two types of investment tax credits are available for certain investments in assets acquired in the current year and used in Luxembourg, the territory of another Member State or a state party to the EEA Agreement (article 152bis of the LIR). Under the first type of credit, the additional investment tax credit companies may deduct from the corporate income tax due an amount equal to 13% of the additional investment carried out during the tax year in qualifying assets, i.e. tangible depreciable assets, other than buildings, livestock and mineral and fossil deposits. The additional investment is the difference between: the net book value of the qualifying assets at the end of the financial year increased by the depreciation on those qualifying assets acquired or created during the year; and the reference value of the qualifying assets, which corresponds to the average value attributed to the same category of assets at the end of the 5 preceding financial years. The reference value is deemed to amount to at least EUR 1,850. In principle, the following assets are not considered qualifying assets: assets depreciable over a period of less than 3 years; assets acquired upon the transfer for consideration of a whole enterprise or of an autonomous part or subdivision of an enterprise; motorized vehicles used for personal purposes; second-hand assets; and individual assets acquired free of charge. Under the second type of credit (which may be applied in addition to the additional investment tax credit (see above)), companies may deduct from the corporate income tax due an amount equal to 8% of the total acquisition price of investments in qualifying assets acquired during the tax year. If the total amount invested in a tax year exceeds EUR 150,000, the deduction is limited to 8% for the first EUR 150,000 and 2% for the part of the investment exceeding EUR 150,000. For investments that qualify for special depreciation (see section ), these percentages are increased to 9% and 4%, respectively. This increased tax credit is granted in addition to the accelerated depreciation allowance in respect to the same assets. Qualifying assets are tangible depreciable assets (other than buildings, livestock and mineral and fossil deposits), heating plants and sanitation systems in hotel buildings and investments in certain buildings used for social purposes. The tax credit for global investment is in principle not granted for: (1) assets depreciable over a period of less than 3 years; (2) assets acquired upon the transfer of a whole enterprise or autonomous part or subdivision of an enterprise; (3) second-hand assets acquired; and (4) motorized vehicles used for personal purposes. With regard to (2) and (4), both tax credits are available under certain requirements where investments are made within 3 years from the date of the first establishment of a new enterprise. However, if these investments made within the first 3 years after the establishment of the company exceed EUR 250,000, the basis for computing the tax credits is reduced by the amount exceeding the EUR 250,000 threshold. 15

18 DOING BUSINESS IN LUXEMBOURG 2017 CORPORATE TAXATION A circular issued by the head of the Luxembourg tax authorities on 3 August 2015 clarifies the conditions under which car rental and car leasing companies can benefit from the investment tax credit. The investment tax credit is now also available for a lessor of ships used in international traffic (provided that the conditions set forth by the law are met). This new provision applies as from the tax year The above tax credits may be set off upon request against the corporate income tax of the tax year in which the investments were made. However, the corporate income tax charge cannot be reduced below the minimum corporate income tax (applicable until tax year 2015) (see section ). No refund of corporate income tax is granted where the tax credit(s) exceed the tax due decreased by the minimum corporate income tax. Excess tax credit(s), however, may be carried forward for 10 years Incentive for new industrial activities New businesses and business activities that are considered to be vital to the growth of the national economy may benefit from a partial tax exemption during 8 financial years, provided that they do not compete with other businesses. The amount of the tax exemption depends on the type and on the extent of the investment in land, buildings and equipment and is subject to a maximum of 25% of the profits generated by the new activity (Law of 27 July 1993 in modified version) Venture capital investment certificates Certificates issued for investment in venture capital with the aim to encourage enterprises using the funds to finance the development of a product, means of manufacture or initial marketing, entitle the investing company to credit 30% of the nominal value of the certificate against the corporate income tax due (Law of 22 December 1993 in modified version) Venture capital/private equity investment vehicle (SICAR) The Law of 15 June 2004 provides for a venture capital/private equity vehicle known as a SICAR (Société d investissement en capital à risque) to facilitate the raising of funds and the investment in risk-bearing capital. A SICAR can take several legal forms of business entities, including the SA and SARL. The SICAR must be managed from Luxembourg and have a minimum capital of EUR 1 million. Other requirements apply in order to qualify for SICAR status, including pre-approval by the financial services authority (CSSF). SICARs are generally subject to full corporate income tax. However, SICAR income derived from transferable securities (e.g. dividends and capital gains) is exempt. Dividends paid from a SICAR are generally exempt from withholding tax. SICARs are also exempt from net worth tax. Also, management services rendered to a SICAR subject to supervision of the CSSF are exempt from VAT Securitization regime The Law of 22 March 2004 provides for a legal and regulatory framework for Luxembourg securitization vehicles (SVs). SVs can take the form of either a company or a fund run by a management company, and can be regulated or non-regulated, generally depending on whether there is a public or continuous issuance of securities. 16

19 CORPORATE TAXATION DOING BUSINESS IN LUXEMBOURG 2017 SVs that are companies are subject to full corporate income tax. However, payments made pursuant to commitments made to investors are generally deductible (article 46 of the LIR). Commitments can include dividends and interest payments, and therefore may result in a reduction of the taxable base close to zero. Further, an SV is exempt from net worth tax and is not subject to any thin capitalization restrictions. Also, management services rendered to an SV are exempt from VAT Occupational training credit Companies may apply for credit relief for the training costs of employees, subject to the conditions of the law and regulations. The credit is equal to 14% of qualifying training costs (Law of 31 July 2006 in modified version) Administration Taxable period The tax year of a corporate taxpayer is generally the calendar year. However, if a taxpayer s financial year does not coincide with the calendar year, the tax year is the financial year ending in the calendar year in question (article 17 of the LIR) Tax returns and assessment The official deadline for filing corporate income tax, municipal business tax and net worth tax returns is 31 May of the year following the tax year. This deadline may be extended upon request. Companies are required to electronically file their corporate tax returns with effect from 1 January The tax authorities must review the returns and issue the final tax assessments within a 5-year period, which begins on the first day following the end of the tax year and closes at the end of the 5th year following the tax year. However, the tax authorities may issue a provisional tax assessment (subject to further control) and determine the tax liability on the basis of the tax return filed, without having the tax return reviewed. This provisional tax assessment becomes final after the above-mentioned 5-year period, unless the tax authorities issue a final tax assessment after review of the tax return before the expiration of the 5-year period, following the tax year in question Payment of tax Advance payments of corporate income tax are due quarterly on 10 March, 10 June, 10 September and 10 December (article 135 of the LIR). Advance payments of municipal business tax and net worth tax are due quarterly on 10 February, 10 May, 10 August and 10 November. The amount of the advance payment is based on the latest tax assessment. The final tax liability is determined by assessment (see section ). Advance payments are creditable against the final tax liability and any excess is generally refunded (article 154 of the LIR) (see also section ). Any outstanding tax must be paid within 1 month of the date of receipt of the tax assessment. 17

20 DOING BUSINESS IN LUXEMBOURG 2017 CORPORATE TAXATION Rulings A taxpayer may request advance tax clearance from the tax authorities with respect to the application of Luxembourg tax law to the taxpayer s specific facts and circumstances. With respect to transfer pricing issues, an Advance Pricing Agreement (APA) may be requested from the tax authorities. The advance tax clearance procedure was formalized into Luxembourg domestic law with effect from 1 January 2015 (article 29a of the LGI). A ruling commission gives a binding advice on the request of the taxpayer. In addition, an administrative fee for a ruling, which ranges between EUR 3,000 and EUR 10,000, must be paid upfront. The advance tax agreement is valid for a 5-year period and is binding for the tax authorities, unless: the description of the situation or transactions was incomplete or inaccurate; the situation or the transactions realized subsequently differ from the ones described in the request; or the decision is not or no longer in line with national, European or international law. 2. Transactions between Resident Companies 2.1. Group treatment Fiscal consolidation is allowed for corporate and business tax purposes (article 164bis of the LIR), but not for net worth tax purposes. Domestic provisions allow eligible companies to set up a vertical or (new provisions applicable with effect from 1 January 2015) a horizontal tax consolidation group (to the extent that all the conditions are met). The consolidated companies are bound for a 5-year period. A company cannot simultaneously form part of more than one tax consolidated group. Vertical consolidation A fully taxable resident company or a Luxembourg permanent establishment of a nonresident company fully subject to a tax comparable to the Luxembourg corporate income tax, of which at least 95% of the capital is directly or indirectly held by another fully taxable resident company, or by a Luxembourg permanent establishment of a non-resident company fully subject to a tax comparable to the Luxembourg corporate income tax, may apply for tax consolidation with its parent company. The scope of eligible subsidiaries has been enlarged as from tax year 2015 to include Luxembourg permanent establishment of a non-resident company fully subject to a tax comparable to the Luxembourg corporate income tax in order to comply with EU law. Vertical tax consolidation means that the taxable income (whether negative or positive) of the integrated subsidiary is added to the taxable income of the integrated parent so that the integrated parent is taxed on the aggregate taxable income. Horizontal consolidation In order to comply with EU law, new measures have been introduced as from tax year 2015 which provide for the possibility to apply for a so-called horizontal tax consolidated group, whereby eligible sister companies can form a tax consolidated group without having their parent company being part of the tax consolidated group. 18

21 CORPORATE TAXATION DOING BUSINESS IN LUXEMBOURG 2017 The setting-up of a horizontal tax consolidated group is subject to the following conditions: The non-integrating parent company must be either a fully taxable resident company, or a Luxembourg permanent establishment of a non-resident company fully subject to a tax comparable to the Luxembourg corporate income tax, or a European Economic Area (EEA) resident company fully subject to a tax comparable to the Luxembourg corporate income tax, or an EEA permanent establishment of a non-resident company, both fully subject to a tax comparable to the Luxembourg corporate income tax. The integrated subsidiaries must be either a fully taxable resident company or a Luxembourg permanent establishment of a non-resident company fully subject to a tax comparable to the Luxembourg corporate income tax. The integrating subsidiary must be either a fully taxable resident company or a Luxembourg permanent establishment of a non-resident company fully subject to a tax comparable to the Luxembourg corporate income tax. The integrated subsidiaries and the integrating subsidiary must be held for at least 95% (directly or indirectly) by the same non-integrating parent company. The integrating subsidiary must have in the group structure a holding relationship with the non-integrating parent company that is at least as close as the one of the other integrated subsidiaries. The request to be filed (see below) needs to designate this parent company. Horizontal tax consolidation means that the taxable income (whether negative or positive) of the integrated subsidiaries is added to the taxable income of the integrating subsidiary so that the integrating subsidiary is taxed on the aggregate taxable income. Common conditions for vertical and horizontal consolidation A joint written request must be sent to the tax authorities by the members of the tax consolidated group and by the non-integrating parent company (in case of horizontal consolidation), before the end of the first year during which the application of the tax consolidation regime is sought. The tax consolidation needs to cover at least five accounting periods. Tax consolidation is also available for participations held indirectly through a non-resident fully taxable capital company, to the extent that all the other conditions are fulfilled. In exceptional cases, the 95% interest requirement may be reduced to 75%. The condition with respect to the holding percentage must be met at the beginning of the financial year for which the consolidation is requested. The General Tax Law has been modified with effect from 1 January 2015 in order to facilitate the recovery of tax claims within the tax consolidated group and thus ensure that each member of the tax consolidated group can be held liable for the taxes due by the parent company or the integrating subsidiary of the tax consolidated group (in case of default of the latter) (section 114 of the LGI). SICARs and SVs (see sections and ) are excluded from the tax consolidation regime. 19

22 DOING BUSINESS IN LUXEMBOURG 2017 CORPORATE TAXATION 2.2. Intercompany dividends Dividends In general, dividends are included in taxable income for corporate income tax purposes. However, dividends derived from a qualifying participation may be exempt. To qualify for this participation exemption, the parent company must be (article 166(1) of the LIR): a fully taxable resident collective entity (i.e. company) with a legal form listed in the Parent-Subsidiary Directive (2011/96/EU); a fully taxable resident corporation not listed in the Parent-Subsidiary Directive (basically corporations established under the law of a non-european Union country); or a Luxembourg permanent establishment of either: a collective entity that is listed and covered by the Parent-Subsidiary Directive; a corporation resident in a country with which Luxembourg has signed a tax treaty; or a corporation or a co-operative company that is resident in an EEA country other than a Member State of the European Union. The subsidiary must be (article 166(2) of the LIR): a collective entity (i.e. company) listed and covered in the Parent-Subsidiary Directive (2011/96/EU); or a fully taxable resident corporation not listed in the Parent-Subsidiary Directive (basically corporations established under the law of a non-european Union country); or a non-resident corporation fully subject to income tax comparable to the Luxembourg corporate income tax. A corporate income tax rate of 9.5% generally satisfies this requirement as long as the taxable basis is determined according to rules and criteria similar to those applicable in Luxembourg. The parent must have owned directly or indirectly (i.e. through tax transparent entities) a capital participation of at least 10% or a participation with an acquisition cost of at least EUR 1.2 million for an uninterrupted period of at least 12 months on the date the dividend is distributed or the parent commits itself to hold the minimum participation for an uninterrupted period of at least 12 months (article 166(1) of the LIR). The exemption also applies to participations held in a qualifying company through tax transparent entities (article 166(3) of the LIR). Dividends received by a Luxembourg entity that do not qualify for the participation exemption are taxed at the normal corporate tax rate (see section 1.6.). However, 50% of such dividends are exempt from taxation if they are paid by (article 115(15a) of the LIR): a fully taxable resident corporation; a corporation resident in a country with which Luxembourg has signed a tax treaty and that is fully subject to income tax comparable to the Luxembourg corporate income tax; or a company that is listed and covered in the Parent-Subsidiary Directive. 20

23 CORPORATE TAXATION DOING BUSINESS IN LUXEMBOURG 2017 General anti-abuse rule and anti-hybrid rule A general anti-abuse rule (GAAR) and an anti-hybrid rule were introduced into Luxembourg domestic tax law in order to implement the EU Directives 2014/86/EU of 8 July 2014 and 2015/121/EU of 27 January Profit distributions falling within the scope of the EU Parent-Subsidiary Directive (2011/96) are, with effect from 1 January 2016, no longer exempt in Luxembourg in the cases where the subsidiary is a collective entity listed and covered in the Parent- Subsidiary Directive if (i) such distributions are deductible by the payer located in another EU Member State (the anti-hybrid rule); or if (ii) the transaction is characterized as abusive within the meaning of the Parent-Subsidiary Directive (article 166(2bis) of the LIR). In this respect, a transaction may be considered as abusive if it is an arrangement, or a series of arrangements, that is not genuine (i.e. that has not been put in place for valid commercial reasons reflecting economic reality) and has been put in place for the main purpose or one of the main purposes of obtaining a tax advantage that is not in line with the objective of the Parent-Subsidiary Directive (the general anti-abuse provision). Capital gains Capital gains derived from the disposal of shares may also be exempt from corporate income tax under the participation exemption. The conditions are the same as for dividends, except that the minimum acquisition cost for the shares is EUR 6 million (RGD ). Deductibility of related expenses Expenses in relation with a participation qualifying for the participation exemption (e.g. interest expenses on loans used to finance the acquisition of a shareholding) are only deductible to the extent that they exceed the exempt income arising from such a participation in a given year (article 166(5) of the LIR). The part of the capital gain which would otherwise be exempt on the disposal of a qualifying participation is, however, reduced by the amount of any deducted expenses related to the participation, including decreases in the acquisition cost, that have previously reduced the company s Luxembourg taxable income. 3. Other Taxes on Income 3.1. Municipal business tax A municipal business tax is levied on all business establishments located in Luxembourg, including those of a tax-transparent entity (e.g. partnership), which carry on a commercial activity in Luxembourg (section 2 of the LICC). This tax is in addition to corporate income tax. The tax is computed following the rules for the corporate income tax, with certain exceptions. A basic deduction of EUR 17,500 generally applies (section 11 of the LICC). The basic rate of the business tax is 3% (section 11 of the LICC). It is multiplied by coefficients determined by the municipality in which the business establishment is located. The effective rate for the City of Luxembourg is 6.75% in 2017 (3% 2.25). The tax is not deductible for corporate income tax purposes. 21

24 DOING BUSINESS IN LUXEMBOURG 2017 CORPORATE TAXATION 4. Taxes on Payroll 4.1. Payroll tax Luxembourg does not levy taxes on payroll. However, employers are required to withhold wage tax on salaries of their employees Social security contributions Employers must make social security contributions on behalf of their employees. The taxable base includes gross wages and salaries, including benefits in kind, subject to a monthly ceiling of EUR 9, (from 1 January 2017). The rates are as follows (Code de la Sécurité Sociale, hereafter CSS): 2017 Employee rate (%) Employer rate (%) Monthly social security ceiling EUR 9, Pension and disability (arts. 238 and 240 CSS) 8 8 Health insurance (arts. 29, 30, 32 CSS Accident insurance (art. 149 CSS) 1.00 Health at Work Mutual health insurance Dependency insurance (uncapped) (art. 376 CSS) 1.40 Dependency insurance monthly free amount EUR On monthly gross salary. The rate is 2.8% on non-periodic remuneration (the 13th month payment, bonuses, etc.) and benefits in kind (e.g. company car). 2. The rates are 0.46%, 1.21%, 1.85% and 2.93%, depending on the absentee rate of the employees in the company. For social security contributions payable by employees and the self-employed, see Individual Taxation section Taxes on Capital 5.1. Net worth tax Unitary value Luxembourg companies and foreign companies with Luxembourg branches are subject to a net worth tax charge on their worldwide unitary value (generally equal to the net asset value of the company or branch subject to certain exemptions and adjustments) (section 7 of the LIF). In calculating the unitary value, the fair market value of assets is considered (as opposed to the book value). The value of a qualifying participation is generally exempt from net worth tax under the same conditions that apply to the participation exemption for dividends (see section 2.2.), except that there is no holding period condition. From 2015 on, the net asset value is determined annually Net worth tax rate Until 31 December 2015, the net worth tax rate was fixed at 0.5%.With effect from 1 January 2016, the net worth tax rate is reduced to 0.05% for the part of the unitary value exceeding EUR 500 million, whereas the part of the unitary value equal or below EUR 500 million remains taxable at the rate of 0.5% (section 8(1) of the LIF). 22