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Income Tax in Luxembourg


Personal Income Tax:

The tax year is calendar year and the return shall be filed upto 31st March of the following year.
Tax Rates for 2018:

Taxable Income
Tax Rate
From
To
0
11,265
0
11,266
13,173
8
13,137
15,009
9
15,009
16,881
10
16,881
18,753
11
18,753
20,625
12
20,625
22,569
14
22,569
24,513
16
24,513
26,457
18
26,457
28,401
20
28,401
30,345
22
30,345
32,289
24
32,289
34,233
26
34,233
36,177
28
36,177
38,121
30
38,121
40,065
32
40,065
42,009
34
42,009
43,953
36
43,953
45,897
38
45,897
100,002
39
100,002
150,000
40
150,000
200,004
41
Above 200,004
42

Previously a fixed monthly cash bonus of EUR 76.88 was granted for each child falling within the scope of the Luxembourg family allowances regime, irrespective of the taxable income of the parents. The child bonus was deducted from the tax liability up to the amount of tax due through the tax return for taxpayers who do not receive family allowances (expatriates not subject to Luxembourg social security for instance).

The new law introduces the individualization of the family allowances, i.e. the boni is merged with the family allowance, and a unique amount of family allowance is paid per child born as from 1 August 2016 (EUR 265/month). The old amounts are grandfathered for children born before 1 August 2016.

Child tax relief is still applicable however under limited conditions.

· Family allowances – additional monthly amount/child (As from 1 August 2016, EUR 20 if the child is between 6 and 11, EUR 50 for children of 12 years and older)

· Supplementary special family allowances for disabled children – monthly amount/child (EUR 200 paid until the age of 25 years old)

· Back-to-school allowance – annual amount/child (As from August 2016 EUR 115 for children between 6 and 12 years, EUR 235 for children of 12 years and older)

Taxpayers are divided into three classes.

Class 2 - married couples who are filing jointly, including couples in a same-sex marriage;

· persons who became widowed in the 3 years preceding the tax year; and

· persons who separated or divorced in the 3 years preceding the tax year (as long as they did not apply for this provision within the last 5 years).

Taxpayers in this category apply the tax rates to one half their incomes and then multiply the liability by two (that is splitting system).

Class 1a - The following taxpayers fall under class 1a, as long as they do not fall under class 2:

·  taxpayers separated or divorced and aged 65 or over;
· single parents; and
·  widow(er)s.

For tax class 1a the taxable amount is calculated as follows:

50% of the difference between net taxable income and EUR 45,060, provided that the maximum rate cannot exceed 39% for the income bracket between EUR 37,842 and EUR 100,002, 40% for the income bracket between EUR 100,002 and EUR 150,000, 41% for the income bracket between EUR 150,000 and EUR 200,004 and 42% for the income in excess of EUR 200,004.
   
Class 1 Taxpayers (singles) who do not belong to either Class 1a or Class 2.

Taxpayers living in a registered partnership can, upon request, be treated as a married couple through the filing of a joint annual personal tax return, as long as the partnership vs. the marriage has been valid during the whole tax year. In this case, partners will file jointly, and will be granted tax Class 2.

Starting the year 2018, married couples can opt to be taxed individually during the tax year concerned. This election has to be made at the latest by 31 March of the tax year following the tax year concerned.

Registered partners remain taxable individually during the tax year concerned and can opt to be taxed jointly after year-end of the tax year concerned. This election has to be made at the latest by 31 March of the tax year following the tax year concerned. These elections can be made every year.

For couples requesting to file separately, most tax deductions applicable to the household should then, in principle, be equally split between spouses/registered partners. The tax class applicable in these circumstances will be the tax class 1. However, couples may opt for a different allocation of the taxable income. Such different allocation of income will have no impact on the ceilings of deductions for special expenses.

The extra-professional abatement will amount to € 2,250 per spouse/registered partner filing separately.

A surcharge amounting to:

· 7 percent (of the computed income tax liability) for taxable income not exceeding EUR150,000 in tax classes 1 and 1a or EUR300,000 in tax class 2

·  9 percent (of the computed income tax liability) for taxable income exceeding EUR150,000 in tax classes 1 and 1a or EUR300,000 in tax class 2 is levied as a contribution to the employment fund.

Residency Rule:

An individual may be considered a Luxembourg resident for tax purposes to the extent the following circumstances are met, subject to double taxation treaty provisions.

An individual is considered a resident of Luxembourg if his domicile or customary place of abode is in Luxembourg. A person's domicile is the place where he occupies a home under circumstances that indicate he will retain and use it. A customary place of abode is deemed to exist if an individual has been present in Luxembourg for a period of at least 6 months.

·      This is not restricted to 6 months in the calendar year. If an individual arrives on 1 October in year N and is still staying in the country on 2 April in year N + 1, the 6-month' stay will be deemed met. In such case, the individual is deemed to be a resident taxpayer in Luxembourg retrospectively to 1 October in year N.


Taxable Income:

Employment income:

Income from employment includes all benefits in cash and in kind received by an individual and is subject to progressive income tax rates (0 to 45.78%).

If an employer provides a house or apartment to an employee, the monthly benefit in kind is valued at 25% of its unitary value, with a minimum of 75% of the rent effectively paid by the employer. If the employer also makes available the furniture contained in the accommodation, the value of the benefit in kind is increased by 10%. If the employer pays electricity and other charges, these must be added to the benefit at their nominal value. If the employee rents a house or an apartment and pays the rent, reimbursement of the rent by the employer is taxed entirely as a benefit.

The monthly benefit in kind arising from the private use of a company car corresponds to private mileage multiplied by the car’s kilometre cost. This evaluation can be replaced by a lump-sum evaluation method, according to which the monthly taxable fringe benefit corresponds to a fixed percentage (0.8% up to 1.8%) of the full purchase price of the new car (including options and VAT).

A number of items are exempt from tax, such as debit-interest savings on a reduced or nil-interest loan granted by the employer (within certain limits) and additional salary for overtime payments under certain conditions.

Non-residents are taxed on salaried income if their occupation is exercised in Luxembourg or if their salary is paid from Luxembourg. Tax treaties generally grant exemption if the non-resident stays for less than 183 days in the calendar year and if the remuneration is neither paid nor borne by a Luxembourg entity.

Tax regime for qualifying international employees:

The Circular no. 95/2 (as amended) implements a tax regime for qualifying international employees. Eligible employees are:

· Employees who usually work in a foreign country and are assigned to Luxembourg by their foreign employer in order to temporarily exercise their professional duties in the Luxembourg undertaking.

· Employees directly recruited abroad by a Luxembourg undertaking in order to exercise their professional activities in that company.

If some conditions are met, qualifying international employees can benefit from a favourable tax regime. Allowances that the employee receives to cover expenses relating to one’s temporary employment in Luxembourg (which represent normally a taxable benefit in kind) may be tax exempted in the hands of the employees within certain limits (these allowances/reimbursements remain tax deductible for the company).

Capital gains:

Capital gains derived from the disposal of movable properties are subject to Luxembourg progressive income tax rates (0% to 45.78%), provided the holding period is less than six months and to the extent that the total capital gains exceed EUR 500. If movable properties are disposed of more than six months following their acquisition, capital gains are not taxed unless the individual holds an important participation (material interest).

Capital gains derived from the disposal of material interest after the six-month period are taxed as extraordinary income at half the average combined tax rate (maximum 22.89%).

An interest qualifies as material when the individual taxpayer (together with their household) holds or has held, directly or indirectly, more than 10% of the corporate capital during the five years prior to the date on which the shares are disposed of.

Capital gains on buildings and land (except the main residence of the taxpayer) are subject to Luxembourg progressive income tax rates (0% to 45.78%) if the disposal takes place within two years of acquisition. If disposal takes place after this two-year period, a reduced tax rate of 22.89% applies.

Capital gains on the sale of a main residence are exempt from taxation.

The first EUR 50,000 (doubled for married taxpayers and civil partners taxable jointly) realised over a ten-year period on cumulative capital gains is tax exempt. In the case of a capital gain on a building acquired through direct inheritance, an additional allowance of up to EUR 75,000 may be granted under specific conditions.

For long-term capital gains (holding period of more than six months for movable property and two years for immovable property), the acquisition price is adjusted by taking account of inflation coefficients.

Investment income:

Investment income is subject to a dual tax regime.

Whereas some interest payments are subject to a 20% WHT in full discharge of personal income tax, other incomes (interest not qualifying for the 20% WHT, dividends) are taxed pursuant to progressive rates after a deduction of EUR 1,500.

The above mentioned deduction is doubled in the case of collectively taxed spouses/civil partners. In addition, half of the dividend income received is tax exempt if paid by a qualifying company.

Rental income:

Income from real estate located in Luxembourg is subject to progressive income tax rates (maximum 45.78%).

Income from real estate located abroad is generally not taxed in Luxembourg under double tax treaty (DTT) provision. For residents, said income is taken into account to determine the global tax rate applying to their income taxable in Luxembourg.

Exempt income:

Very little income is exempt from Luxembourg tax; however, some examples of exempt income include:

· Lottery winnings.
· Gifts made by the employer based on the employee's seniority (up to certain limits).
·  Redundancy payments (under conditions and limits).

Deductions from Income:

Employment expenses:

Income-related expenses are normally deductible.

Employees benefit from minimum standard deductions of EUR 540 for job-related expenses. These deductions are doubled if the spouse/civil partner is also employed. If expenses for tools, specific work clothes, and so on, exceed the minimum, the actual expenses may be deducted. Commuting expenses between home and place of work are tax deductible, at a maximum of EUR 2,574 per year.

Compulsory Luxembourg and foreign legal social security contributions covered by a social security treaty are also tax deductible.

Employee’s contributions to a qualifying employer-provided pension scheme are tax deductible up to a limit of EUR 1,200 per year.

Personal deductions:

Non-residents can deduct only expenses related to income subject to Luxembourg taxation.

Residents may deduct extraordinary charges for sickness, accidents, living costs of parents, and so on, to the extent that they exceed a certain percentage of their taxable remuneration.

In addition to the following, specific deductions are also available, notably for kindergarten costs and domestic help.

Insurance premiums and interest expenses:

For residents, certain premiums paid for life, sickness, accident, disability, and third-party liability insurance, as well as interest arising on personal loans (contracted to purchase a car, furniture, and so forth), are deductible, up to EUR 672 increased by the same amount for jointly taxable spouses/civil partners and each dependent child. This allowance is increased for a one-time premium for death insurance subscribed to assure the reimbursement of a loan taken out for the purchase of a house. The related tax deduction varies with the age of the taxpayer.

Under specific conditions, insurance premiums paid within the context of a private pension scheme qualifying under Luxembourg tax law are also tax deductible up to EUR 3,200. The deduction applies to each spouse/civil partner, provided both are covered by a private pension insurance contract.

Home ownership savings plan:

Certain contributions to home ownership savings plans are deductible, up to EUR 672 (or EUR 1,344 for individuals up to 40 years of age) increased by the same amount for jointly taxable spouses/civil partners and each dependent child.

Standard deductions:

A minimum standard deduction of EUR 480 is granted for the above expenses; it is doubled if the spouse/civil partner is also employed.

A minimum lump-sum allowance of EUR 25 is deductible from income from capital and investments subject to progressive tax rates. The minimum lump-sum allowance is doubled in the case of collectively taxed spouses/civil partners if both earn income from capital and investments. Actual expenses exceeding this lump-sum allowance can be deducted.

Personal allowances:

Jointly taxable spouses/civil partners who both exercise a professional activity taxable in Luxembourg benefit from a lump-sum allowance of EUR 4,500.

Non-resident taxpayers:

Non-resident employees may deduct compulsory social security contributions and contributions to an employer-provided supplementary pension scheme, as well as the standard deduction of EUR 480.

In addition, if at least 90% of the income derived by a non-resident (or 50% of the professional income for Belgium resident) is taxable in Luxembourg , the taxpayer may opt to be treated as a resident for tax purposes, thus benefiting from the same deductions and allowances as a resident. The tax rate applied to Luxembourg-source income is then determined on the basis of the taxpayer’s households total worldwide professional income.

Losses:

Capital losses can be offset only against capital gains in the same year (only short terms).

Corporate Income Tax:

Corporate income tax:

Resident companies are subject to tax on their worldwide income. Companies whose registered office or central administration is in Luxembourg are considered resident companies.

Taxation in Luxembourg of foreign-source income is mitigated through several double tax treaties. In addition, if no tax treaty applies, a foreign tax credit is available under domestic law.
Nonresident companies whose registered office and place of management are located outside Luxembourg are subject to corporate income tax only on their income derived from Luxembourg sources.

The minimum corporate income tax regime, which took effect in Luxembourg on 1 January 2013, was abolished and replaced by a new minimum net wealth tax regime, effective from 1 January 2016.

Tax rates:

Corporate income tax rates currently range from 15% to 19%, depending on the income level. In addition, a surcharge of 7% is payable to the employment fund. A local income tax (municipal business tax) is also levied by the different municipalities. The rate varies depending on the municipality, with an average rate of 7.5%. The municipal business tax for Luxembourg City is 6.75% and the maximum effective overall tax rate for companies in Luxembourg City is 27.08%. The following is a sample 2017 tax calculation for a company in Luxembourg City.

Profit
EUR 100.00
Corporate income tax at 19%
(19.00)
Employment fund surcharge at 7%
(1.33)
Municipal business tax
(6.75)

EUR 72.92
Total income tax
EUR 27.08
As percentage of profit


Furthermore, corporate income tax is levied at a reduced rate of 15% for taxable profits not exceeding EUR 25,000. The maximum rate applies to amounts exceeding EUR 30,000.

A new general minimum net wealth tax regime (see Net wealth tax) replaced the former minimum corporate income tax regime, effective from 1 January 2016. The regime now also includes the following types of entities that were formerly exempt from net wealth tax:

·  Securitization vehicle
· Venture capital company (société d’investissement en capital à risque, or SICAR)
· Corporate pension fund (SEPCAV)
· Pension savings association (ASSEP)

Net wealth tax:

Net wealth tax is imposed on the net asset value as of 1 January, reduced by the value of qualifying participations (at least 10% of the capital of qualifying domestic or foreign subsidiaries) that are held directly or through a qualifying fiscally transparent entity. Net wealth tax may be reduced up to the amount of corporate income tax for the preceding year (including the contribution to the employment fund and before deduction of tax credits) by the creation of a net wealth tax reserve (equivalent to five times the reduction requested) that must be maintained for five years in the accounts. This net wealth tax reduction is not granted up to the amount of minimum net wealth tax (determined as described below) due from corporate entities, either on a stand-alone basis or within a tax-consolidation group.

Net wealth tax is levied at a rate of 0.5% on an amount of taxable net wealth called the unitary value (corresponding basically to the sum of assets less liabilities and provisions at a given date as valued according to the provisions of the Luxembourg Valuation Law) up to and including EUR500 million. If the unitary value exceeds this threshold, net wealth tax equals the sum of the following:

· EUR2,500,000 (which corresponds to a rate of 0.5% applied to the amount of EUR500 million)
·  0.05% of the taxable amount exceeding EUR500 million

Resident companies must pay the minimum net wealth tax equal to either of the following:

EUR4,815 if the sum of financial assets, transferable securities, cash and receivables owed by affiliated companies exceeds 90% of their balance sheet and EUR350,000

An amount ranging from EUR535 to EUR32,100, depending on their balance sheet total
If the minimum net wealth tax applies, it is reduced by the amount of corporate income tax (including contribution to the employment fund but after deduction of possible tax credits) due from the company for the preceding year.

Luxembourg investment vehicles:

 Luxembourg offers a large number of investment vehicles (companies and funds) that can be used for tax-efficient structuring.

Luxembourg Undertakings for Collective Investment in Transferable Securities (UCITs) are subject to an annual subscription tax (taxe d’abonnement) of 0.05%, levied on their total net asset value, unless a reduced rate or an exemption applies. For the rates of the subscription tax, see Section D. Distributions made by UCITs are not subject to withholding tax.

Investment vehicles offered in Luxembourg are described below.

Specialized Investment Funds:

Specialized Investment Funds (SIFs) are lightly regulated investment funds for “informed investors.” In this context, an “informed investor” is one of the following:

·  An institutional investor

· A professional investor

· Any other type of investor who has declared in writing that he or she is an “informed investor” and either invests a minimum of EUR125,000 or has an appraisal from a bank, an investment firm or a management company (all of these with a European passport), certifying that he or she has the appropriate expertise, experience and knowledge to adequately understand the investment made in the fund

SIFs are subject to significantly simplified rules for setting up fund structures such as hedge funds, real estate funds and private equity funds. Amendments to the SIF Law covering items, such as the authorization process, delegation, risk management, conflict of interest and cross investment between compartments of SIFs, took effect on 1 April 2012. The Law of 12 July 2013 on alternative investment fund managers (AIFMs) further amended the SIF regime.

An exemption for corporate income tax, municipal business tax and net worth tax applies to investment funds in the form of an SIF. These funds are subject only to a subscription tax at an annual rate of 0.01% calculated on the quarterly net asset value of the fund, unless an exemption regime applies (for example, investments in funds already subject to the subscription tax, certain money market funds and pension pooling vehicle funds). Distributions by SIFs are not subject to withholding tax.

Certain double tax treaties signed by Luxembourg apply to an SIF incorporated as an investment company with variable capital (société d’investissement à capital variable, or SICAV) or an investment company with fixed capital (société d’investissement à capital fixe, or SICAF). In general, an SIF constituted as a common fund (fonds commun de placement, or FCP) does not benefit from double tax treaties; however, certain exceptions exist (Germany, Guernsey, Isle of Man, Jersey, Saudi Arabia, Seychelles and Tajikistan).


Reserved alternative investment funds:

 On 14 July 2016, the Luxembourg parliament adopted Draft Law No. 6929, which introduces the reserved alternative investment fund (RAIF; the French translation is fonds d’investissement alternatif réservé, or FIAR). RAIFs are reserved to informed investors.

The law provides for a dual tax regime. The general tax regime is the same as for SIFs, with subscription tax levied at an annual rate of 0.01% (subject to certain exemptions). In addition, an optional tax regime is available for RAIFs investing in risk capital. This regime is identical to the venture capital companies’ tax regime.

Venture capital companies:

A venture capital company (société d’investissement en capital à risque, or SICAR) can be set up under a transparent tax regime as a limited partnership or under a nontransparent tax regime as a corporate company. SICARs are approved and supervised by the Commission for the Supervision of the Financial Sector, but they are subject to few restrictions. They may have a flexible investment policy with no diversification rules or leverage restrictions. SICARs in the form of a corporation benefit from a partial objective exemption regime for income from securities under which losses on disposals and value adjustments made against such investments are not deductible from taxable profits. In addition, SICARs are exempt from subscription tax and net worth tax. For corporations, a dividend withholding tax exemption regime applies. In principle, SICARs still benefit from a net wealth tax exemption. However, they are subject to the new minimum net wealth tax regime and, accordingly, must pay annual net wealth tax under this regime.

Securitization companies:

A securitization company can take the form of a regulated investment fund or a company (which, depending on its activities, may or may not be regulated). Securitization companies are available for securitization transactions in the broadest sense and are not subject to net worth tax (however, see below). They are subject to corporate income tax and municipal business tax. However, commitments to investors (dividend and interest payments) are deductible from the tax base. Distributions of proceeds are qualified as interest payments for Luxembourg income tax purposes and are consequently not subject to withholding tax. In principle, securitization companies still benefit from a net wealth tax exemption. However, they are subject to the new minimum net wealth tax regime and, accordingly, must pay annual net wealth tax under this regime.

Private Asset Management Companies. The purpose of a Private Asset Management Company (Société de Gestion de Patrimoine Familial, or SPF) is the management of private wealth of individuals without carrying out an economic activity. SPFs are subject to subscription tax levied at a rate of 0.25% with a minimum amount of EUR100 and a maximum amount of EUR125,000. An exemption for corporate income tax, municipal business tax and net worth tax applies.

SPFs may not benefit from double tax treaties entered into by Luxembourg or from the EU Parent-Subsidiary Directive. Dividend and interest income arising from financial assets may be subject to withholding tax in the state of source in accordance with the domestic tax law of that state. Until 31 December 2011, the favorable tax status for SPFs was lost for any year in which the vehicle received 5% or more of its dividend income from participations in unlisted and nonresident companies that were not subject to a tax similar to Luxembourg corporate income tax. Under the amended law, effective from 1 January 2012, this restriction is removed. Dividend distributions to shareholders are not subject to Luxembourg withholding tax. Interest payments are exempt from withholding tax unless the recipient is a Luxembourg resident individual.

Holding companies. Holding companies (sociétés de participations financières, or SOPARFI) are fully taxable Luxembourg resident companies that take advantage of the participation exemption regime. They may benefit from double tax treaties signed by Luxembourg as well as the provisions of the EU Parent-Subsidiary Directive. For information regarding debt-to-equity rules, see Section E. A SOPARFI can be set up as a public company limited by shares (société anonyme), limited company (société à responsabilité limitée) or a partnership limited by shares (société en commandite par actions, or SCA).

Capital gains:

 The capital gains taxation rules described below apply to a fully taxable resident company.

Capital gains are generally regarded as ordinary business income and are taxed at the standard rates. However, capital gains on the sale of shares may be exempt from tax if all of the following conditions apply:

The recipient is one of the following:

· A resident capital company or a qualifying entity fully subject to tax in Luxembourg.

·  A Luxembourg permanent establishment of an entity that is resident in another EU state and is covered by Article 2 of the EU Parent-Subsidiary Directive.

· A Luxembourg permanent establishment of a capital company resident in a state with which Luxembourg has entered into a tax treaty.

· A Luxembourg permanent establishment of a capital company or cooperative company resident in an EEA state other than an EU state.

· The shares have been held for 12 months or the shareholder commits itself to hold its remaining minimum shareholding in order to fulfill the minimum shareholding requirement for an uninterrupted period of at least 12 months.

· The holding represents at least 10% of the capital of the subsidiary throughout that period, or the acquisition cost is at least EUR6 million.

The subsidiary is a resident capital company or other qualifying entity fully subject to tax, a nonresident capital company fully subject to a tax comparable to Luxembourg corporate income tax or an entity resident in an EU member state that is covered by Article 2 of the EU Parent-Subsidiary Directive.

However, capital gains qualifying for the above exemption are taxable to the extent that related expenses deducted in the current year and in prior years exceed the dividends received. These related expenses include interest on loans used to finance the purchase of such shares and write-offs.

Administration:

In general, the tax year coincides with the calendar year unless otherwise provided in the articles of incorporation. Tax returns must be filed before 31 May in the year following the fiscal year. The date may be extended on request by the taxpayer. Late filing may be subject to a penalty of up to 10% of the tax due.

Taxes are payable within one month after receipt of the tax assessment notice. However, advance payments must be made quarterly by 10 March, 10 June, 10 September and 10 December for corporate income tax, and by 10 February, 10 May, 10 August and 10 November for municipal business tax and net worth tax. In general, every payment is equal to one-quarter of the tax assessed for the preceding year. If payments are not made within these time limits, an interest charge of 0.6% per month may be assessed.

Luxembourg has introduced a partial self-assessment procedure that is optional for the authorities. This procedure allows the authorities to release tax assessments without verifying the filed tax returns, while keeping a right of verification within a statute of limitations period of five years. In practice, the self-assessment primarily applies to companies having a holding activity.

Dividends:

Dividends received by resident companies are generally taxable. However, dividends received from resident taxable companies are fully exempt from corporate income tax if the following conditions are fulfilled:

·        The recipient is one of the following:

o   A resident capital company or a qualifying entity fully subject to tax in Luxembourg.
o   A Luxembourg permanent establishment of an entity that is resident in another EU state and is covered by Article 2 of the EU Parent-Subsidiary Directive.
o   A Luxembourg permanent establishment of a capital company resident in a state with which Luxembourg has entered into a tax treaty.
o   A Luxembourg permanent establishment of a capital company or cooperative company resident in an EEA state other than an EU state.

The recipient owns at least 10% of the share capital of the distributing company or the acquisition cost of the shareholding is at least EUR1,200,000.

The recipient holds the minimum participation in the distributing company for at least 12 months. The 12-month period does not need to be completed at the time of the distribution of the dividends if the recipient commits itself to hold the minimum participation for the required period.

Dividends received from nonresident companies are fully exempt from tax if the above conditions are met and if either of the following applies:

· The distributing entity is a capital company subject to a tax comparable to Luxembourg corporate income tax of at least 10.5%.

· The distributing entity is resident in another EU member state and is covered by Article 2 of the EU Parent-Subsidiary Directive.

The exemption for dividends also applies to dividends on participations held through qualifying fiscally transparent entities.

Expenses (for example, interest expenses or write-downs with respect to participations that generate exempt income) that are directly economically related to exempt income (for example, dividends) are deductible only to the extent that they exceed the amount of exempt income.

If the minimum holding period or the minimum shareholding required for the dividend exemption granted under Luxembourg domestic law is not met, the recipient can still benefit from an exemption for 50% of the dividends under certain conditions.

On the distribution of dividends, as a general rule, 15% of the gross amount must be withheld at source; 17.65% of the net dividend must be withheld if the withholding tax is not charged to the recipient. No dividend withholding tax is due if one of the following conditions is met:

· The recipient holds directly, or through a qualifying fiscally transparent entity, for at least 12 months (the holding period requirement does not need to be completed at the time of the distribution if the recipient commits itself to eventually hold the minimum participation for the required 12-month period) at least 10% of the share capital of the payer, which must be a fully taxable resident capital company or other qualifying entity, or shares of the payer that had an acquisition cost of at least EUR1,200,000, and the recipient satisfies one of the following additional requirements:

o   It is a fully taxable resident capital company or other qualifying entity or a permanent establishment of such company or entity.
o   It is an entity resident in another EU member state and is covered by Article 2 of the EU Parent-Subsidiary Directive.
o   It is a capital company resident in Switzerland that is fully subject to tax in Switzerland without the possibility of being exempt.
o   It is a Luxembourg permanent establishment of an entity that is resident in another EU member state and that is covered by Article 2 of the EU Parent-Subsidiary Directive.
o   It is a company resident in a state with which Luxembourg has entered into a tax treaty and is subject to a tax comparable to the Luxembourg corporate income tax of at least 10.5%, or it is a Luxembourg permanent establishment of such a company.
o   It is a company resident in an EEA member state and is subject to a tax comparable to the Luxembourg corporate income tax of at least 10.5%, or it is a Luxembourg permanent establishment of such a company.

·        A more favorable rate is provided by a tax treaty.
· The distributing company is an investment fund, an SIF, an SPF, an SICAR or a securitization company.

Luxembourg has enacted the anti-hybrid clause and the anti-abuse clause, as adopted by the European Commission through Directives 2014/86/EU and 2015/121/EU, respectively. Since 1 January 2016, the Luxembourg tax exemption for dividends derived from an otherwise qualifying EU subsidiary (see above) does not apply to the extent that this income is deductible by the EU subsidiary. In addition, the participation exemption for dividends from qualifying EU subsidiaries and the exemption from Luxembourg dividend withholding tax for income (dividend) distributions to qualifying EU parent companies of Luxembourg companies does not apply if the income is allocated in the context of “an arrangement or a series of arrangements which, having been put into place for the main purpose or one of the main purposes of obtaining a tax advantage that defeats the object or purpose of the PSD (Parent-Subsidiary Directive), are not genuine having regard to all relevant facts and circumstances.” In line with the European Council’s resolution, the law continues by stating that “an arrangement, which may comprise more than one step or part, or a series of arrangements, shall be regarded as not genuine to the extent that they are not put into place for valid commercial reasons which reflect economic reality.”

These clauses apply only within the intra-EU context for income allocated after 31 December 2015.

Interest:

Except for the cases discussed below, no withholding tax is imposed on interest payments. For interest linked to a profit-sharing investment, dividend withholding tax may apply.

Interest payments made by Luxembourg payers to beneficial owners who are individuals resident in other EU member states or to certain residual entities (defined as paying agents on receipt in the directive) were subject to withholding tax, unless the recipient elected that information regarding the interest payment be exchanged with the tax authorities of his or her state of residence. The withholding tax rate was 35%.

The law of 25 November 2014 abolished the withholding tax described above. Since 1 January 2015, the option to deduct withholding tax from interest payments to EU-resident individuals is no longer applicable in Luxembourg.

Withholding tax at a rate of 10% is imposed on interest payments made to individuals resident in Luxembourg by the following:

· Luxembourg paying agents

· Paying agents established in the EEA or in a state with which Luxembourg has concluded an agreement containing measures equivalent to those in the EU Savings Directive, if a specific form is filed by 31 March of the calendar year following the year of receipt of the interest.

The withholding tax is final if the interest income is derived from assets held as part of the private wealth of the individual. The 20% final tax has been extended to interest payments made by paying agents residing in other EU and EEA countries.

Foreign tax relief:

A tax credit is available to Luxembourg resident companies for foreign-source income (derived from a country with which no double tax treaty is in place) that has been subject to an equivalent income tax abroad. The same applies to withholding tax that would have been levied in the country of source of the income, according to the provisions of the applicable double tax treaty and Luxembourg tax law. The maximum tax credit corresponds to the Luxembourg corporate income tax that is payable on the net foreign-source income.




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Note: Information placed here in above is only for general perception. This may not reflect the latest status on law and may have changed in recent time. Please seek our professional opinion before applying the provision. Thanks.



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This blog is Created by CA Anil Kumar Jain.