Luxembourg continues to be one of the most attractive European countries for business investment. This is, to a large extent, due to its corporate tax regulations, which are characterized by low taxation.

The tax regime is divided into several levels: Companies resident in Luxembourg must pay corporate income tax (ISR or CIT rate) at the state level. At the municipal level, they must pay MBT.

The tax rate for Luxembourg-based entities

The CIT rate varies depending on the taxable base:

• If the base does not exceed EUR 175,000, the applicable rate will be 15%.
• The intermediate rate ranges from 15% to 17% for companies with a taxable income exceeding 175,000 euros but not exceeding 200,000 euros.
• For companies with a taxable income exceeding 200,000 euros, the applicable rate is 17%.

Additional taxes

All legal entities based in Luxembourg must pay an amount equal to 7% of their CIT as a contribution to the employment fund. In other words, a company that is taxed at 17% pays a 1.19% surcharge to this fund.

On the other hand, there is the municipal business tax or MBT. In the case of Luxembourg City, the levy is 6.75%.

However, these rates can be reduced if exemptions of up to 25% are used for a period of eight years, which is what the country offers to foreign companies located there.

There is a state tax on the net wealth of companies called the Net Wealth Tax (NWT). The NWT is levied at a rate of 0.5% on the portion of net wealth equal to or less than EUR 500 million, and 0.05% for everything in excess of that amount.

Entities subject to this tax

The ISR applies to those entities that have the consideration of legal entities according to the Income Tax Law. That is to say, the Private Limited Liability Company, the Public Limited Company, and the Special Limited Company or SCSp.

The tax doesn’t apply with respect to fiscally transparent entities, but their partners must be taxed in Luxembourg according to their share of the partnership’s income.

As for the payment of MBT, it’s paid even by partnerships, since what is taxed is the income generated by commercial activities in the country. However, certain legal entities don’t pay this tax if they don’t carry out activities of a commercial nature.

What is the corporate income tax in Luxembourg?

Luxembourg’s corporate income tax works in the classical style and is levied on effectively realized corporate income.

Profits are determined in accordance with the commercial balance sheet, after adjustments according to accounting valuation rules. This implies that profits are adjusted for tax purposes in two ways:

• Adding all expenses that are not deductible.
• By deducting exempt income and tax loss carryforwards.

A particularity of Luxembourg’s ISR is that all the income of the company is considered business income, and it’s not segregated by categories. All income receives the same tax treatment, regardless of its nature or origin.

Income subject to Corporate Income Tax

The general rule is that Luxembourg-based companies are taxed there on income earned anywhere in the world. Non-resident companies are subject to tax in Luxembourg if they’ve obtained the following income in Luxembourg:

• Business profits from a permanent establishment or a permanent representative in Luxembourg.
• Rental income from real estate located in the country.
• Gains from the sale of real estate located in the country.
• Short-term gains derived from the sale of a substantial shareholding (a shareholding of more than 10%).

Deduction of tax losses

Tax losses can be deducted as special expenses and offset against Luxembourg’s taxable income, not only those derived from the activity itself. As long as they’re properly accounted for.

Since 2017, the carry forward of losses is limited to a total of 17 tax years. Once this period has expired, it will no longer be possible to deduct them. On the other hand, the transfer of losses from one shareholder to another after the acquisition of the company by a third party is not allowed either.

The real attraction of Luxembourg for companies

In addition to lower income tax rates in comparison to other European countries, Luxembourg’s great attraction for foreign companies is that it doesn’t apply any withholding tax on interest and royalties paid by its subsidiaries to their parent companies in other countries.

Moreover, it offers exemptions for corporate dividends in certain cases and also for capital gains and capital gains obtained from the sale or transfer of assets.

All of this has made Luxembourg a particularly interesting place for companies to have their headquarters there. Although it’s still something that the European Union doesn’t like at all, and it has been reflected in different reports.

Do you want to take your company to Luxembourg or another country?

Relocate&Save is an international network of tax law experts made up of a dozen leading law firms. If you want to change your tax residence to reduce your tax bill, don’t hesitate to contact us.

And if you’re not sure which is your ideal tax destination, we recommend you to read the report “The top three tax destinations right now”, available for free below.