Tax environment of Professionals of the Financial Sector (PSF)
Corporate income tax (IRC)
IRC (corporate income tax) is calculated on the operating profit as posted in the balance sheet. Certain restatements must be made on that basis to obtain the taxable base to which the tax rate will apply, as certain categories of income are exempt and certain expenses are not tax deductible (the main restatements are given below).
‘Parent company and subsidiaries’ regime:
Dividends and gains received from subsidiaries of a Luxembourg entity may be exempt from corporate income tax and from municipal business income tax (Impôt Commercial Communal) subject to some conditions.
Exemption from withholding tax on dividends:
Dividends paid to subsidiaries of Luxembourg entities may be exempt from withholding tax subject to some conditions:
Exempt income under a double taxation treaty:
Several categories of income are covered by such treaties which should be referred to on a case-by-case basis depending on the type of income and the country in question. Nevertheless, a permanent entity or real estate assets are means to capture taxation in the related country.
The ‘Parent company and subsidiaries’ directive has been recently amended to include an anti-hybrid loan mismatches provision and a common anti-abuse rule to prevent misuse of the directive and to ensure a greater consistency in its application in different Member States. The law of 18 December 2015 transposed these amendments applicable on revenues allocated after 31 December 2015.
The tax law stipulates that a number of expenses are not tax-deductible including:
- Distributed earnings
- Director’s fees or pay
- Penal and administrative fines
- Donations made to non-recognised organisations
- Expenses relating to exempt income
- Non-deductible taxes (including IRC, ICC, IF)
Other deductions from the taxable base
- Donations and gifts paid to organisations recognised by law and subject to certain conditions
- Losses which can be indefinitely carried forward to future results without any limit on amount
If the taxable base is less than €15,000, the IRC rate is 20% (or 21.40% including the employment fund contribution tax applicable since 1 January 2013). Above €15,000, the rate is set at 21% (22.47% since 1 January 2013).
The tax law makes provision for various types of tax credit applicable to the IRC base:
- Relief for hiring previously unemployed people (law of 24 December 1996). The tax credit available for hiring unemployed persons has been extended from the 31 December 2014 to the tax year ending 31 December 2016
- Relief for continuous professional training (law of 22 June 1999)
- Tax relief for investments (see hereafter)
Investments made in commercial companies are granted income tax relief, on request:
- The relief is equal to 12% of the additional investment in depreciable tangible assets, other than constructions, made during the business year in question.
- The relief for global investment is granted in respect of investments made during the business year.
Minimum flat tax
All collective entities with their statutory seat or central administration in Luxembourg are liable to the minimum income tax, regardless of whether they are regulated (before 2013, only unregulated collective entities were subject to the minimum tax). Luxembourg permanent establishments of foreign companies are beyond the scope of the minimum tax on the basis that, in principle, foreign companies have their statutory seat or central administration outside of Luxembourg.
Municipal business tax (ICC)
The ICC taxable base is calculated using a method similar to IRC. The base is 3% of the adjusted taxable operating profit. A rebate of €17,500 is provided for entities liable for IRC and of €40,000 for other taxpayers.
The ICC rate varies from one locality to another. The rate for the city of Luxembourg is 225%, i.e. a global rate of 6.75% (3% x 225%).
For the city of Luxembourg, including IRC (corporate income tax), ICC (municipal business income tax) and the employment fund tax, the effective rate is therefore
Net wealth tax (IF)
The tax applies to the value of all goods, rights and assets making up the wealth as at 1 January of each year, minus any liabilities burdening such wealth.
Just like the IRC and the ICC, restatements must be made to determine the unit value including the exemption of significant interests (special ‘parent company and subsidiaries’ regime).
Assets must be valued at market value except for real estate located in Luxembourg which is valued at a
set-rate value based on 1941 prices.
Once the unit value of the entity is determined, the applicable rate is 0.5%. The applicable rate is 0.05% for the value beyond € 500 million. A minimum net wealth tax has now replaced the minimum tax since 2016.
The lawmaker has made provision for a deduction system which partially or totally cancels out the wealth tax burden subject to meeting certain conditions. To this end, the taxpayer must undertake to book, latest by the end of the accounting year following the one when net wealth tax reduction is claimed, a non-distributable reserve of five times the amount of the tax of which deduction (the reduction) is sought (the undertaking must naturally have the necessary available profits, carryovers or reserves in the balance sheet serving as a reference for net wealth tax reserve implementation application to book such a reserve). The non-available reserve must be kept in the balance sheet for five years, and any distribution during that time entails additional wealth tax assessment amounting to one fifth of the reserve amount distributed before maturity.
Obligations to declare – IRC, ICC and IF
Must be filed by 31 May following the fiscal year for corporate income tax (IRC), municipal business tax (ICC) and net wealth tax (IF).
Payment of tax
Advance payments are to be paid on a quarterly basis:
- IRC: 10 March, 10 June, 10 September and 10 December
- ICC and net wealth tax: 10 February, 10 May, 10 August and 10 November
The tax stipulated on the notice is payable within one month of receiving notification from the tax authorities.
Value added tax
A taxable person for VAT purposes is “anyone who performs in an independent and regular manner, operations connected with any economic activity, regardless of the aims or results of such activity and the place in which it is conducted”. Thus, PSF are generally considered as taxable persons which implies various VAT obligations.
Since 1st January 2015, the standard Luxembourg VAT rate is 17%, thereby currently being the lowest within the EU.
In addition to that, there is a super-reduced rate, a reduced rate and an intermediary VAT rate of 3%, 8% and 14% respectively, applicable to specific supplies of goods or services defined by the Luxembourg VAT law.
The 14% rate, for example, applies to the custody and management of securities and to the management of loans by a person other than the entity granting them.
The supply of services (and goods) is in principle taxable. As an exception and within the limits set by the Luxembourg VAT law, certain transactions are VAT exempt, including the following services:
- Granting and negotiation of loans as well as the management of loans by the granting person
- Transactions, including negotiation, concerning debts, except for debt collection
- Transactions, including negotiation but excluding management and safekeeping, of shares,
- Management of the following vehicles.
Entitlement to VAT deduction
A taxable person is entitled to deduct input VAT incurred on received supplies that directly relate to taxable supplies provided.
However, VAT cannot be deducted on received supplies that directly relate to VAT exempt supplies (such as financial services listed in the previous point).
If a received supply relates to both taxable supplies in respect of which VAT can be deducted, and VAT exempt supplies, in respect of which VAT cannot be deducted, the input VAT can be deducted partially based on a predefined pro-rata coefficient.
Based on a circular issued by the Luxembourg VAT authorities, as of 2013, VAT payers should, for partial input VAT deduction, use primarily VAT recovery alternative methods based on appropriate objective allocations such as the ‘direct allocation’ method or special ‘pro-rata’ method.
Place of taxation of supply of services
As a general rule, services provided to other taxable persons established abroad are taxable where the recipient is established (‘B2B’). The recipient is then generally obliged to self-assess VAT based on its national VAT legislation (‘reverse charge’ mechanism). Services provided to persons that do not qualify as taxable persons are in principle taxable where the provider is established (’B2C’).
In principle, any taxable person is required to register for the purposes of VAT under a normal regime. By derogation, a taxable person is not required to register if its entire turnover is VAT exempt without entitlement to deduct the corresponding input VAT.
A PSF registered under the normal regime is required to file VAT returns at a frequency depending on the total sum of annual sales, annual intra-Community acquisition of goods and annual purchase of services from other EU Member States subject to reverse charge in Luxembourg. A PSF registered under the simplified regime is only required to file an annual VAT return.
EC Sales List
Furthermore, since 1st January 2010, any taxable person established in Luxembourg is required to file an EC Sales List when providing services to other taxable persons established in other EU Member States who are liable to self-assess VAT in their Member States. A PSF may also be required to file an EC Sales List when it performs intra-Community delivery of goods.
Since 1st January 2013, VAT returns and EC Sales List must be filed via the Internet using the e-TVA system of the Luxembourg VAT authorities (Administration de l’Enregistrement et des Domaines).
Double taxation treaties
Luxembourg has a fabric of more than 70 double taxation treaties. Some additional agreements are currently under negotiation or pending ratification by Luxembourg or the other nation. The aim of the double taxation treaties is to tax a taxpayer at a reduced rate and thus encourage investments in these countries.
Furthermore, a double taxation of one specific income may occur when the same income (e.g. dividends, interest, royalties) is subject to taxation in two or more countries. The source of the double taxation issue is that one taxing jurisdiction might tax income at its source, while others will tax income based on the residence of the recipient.
In order to avoid the double taxation of income, the tax treaties concluded between Luxembourg and other countries provide the possibility of tax reliefs. Tax treaties can only have the effect of restricting, but never enlarging, the power to tax that already exists in Luxembourg. The fact that the right to impose a tax may be given to Luxembourg by a treaty is without consequences if the tax in question is not already anchored in domestic law. There are two methods being used to avoid double taxation that are explicitly mentioned in each concluded treaty. The first method is tax exemption and the second one is tax credit.
Capital duty was abolished with effect from 1 January 2009 and was replaced by registration fees, which are explained in this section. Pursuant to the law of 19 December 2008, a fixed registration fee of €75 must be paid to incorporate a company. In the event of a contribution of real estate or a contribution of moveable assets for payment, a proportional duty is payable in the manner set forth by Articles 4 and 5 of the law:
- The pure and simple contribution of a real-estate asset is subject to the registration fee of 0.5% + 2/10 and to the transcription fee of 0.50%
- The contribution for payment of a real-estate asset is subject to the registration fee of 5% + 2/10 and to the transcription fee of 1%
The contribution for payment of moveable assets is subject to the proportional duty as set by the taxation schedule of the law of 7 August 1920 as amended and completed by subsequent laws
15% of the gross dividend (exemption possible under the ‘parent company and subsidiaries’ regime and/or application of a reduced rate with countries having a treaty).
0% as a general rule (save application of the European savings directive or payment to a natural person who is a resident in Luxembourg).
0% as a general rule.
Distribution of liquidation proceeds
The tax regime applicable to directors’ fees is provided by article 152 title 2 of the Luxembourg law on income tax. This regime provides that a withholding tax of 20% applies to the directors’ fees gross amount and is creditable against the personal income tax due by the director.
The resident taxpayers must submit a tax return whenever their income includes directors’ fees exceeding €1,500. However, regarding non-resident taxpayers’ taxation, the 20% withholding tax is final if the director has no other Luxembourg-source professional income and if directors’ fees do not exceed €100,000 per annum. Finally, whenever directors’ fees exceed €100,000, it is compulsory for the taxpayer to file a tax declaration. This leads to the application of the income tax schedule. As a result, the average tax rate is increased by at least 10% as compared to a withholding tax of 20% (for a single taxpayer).