Tax environment of Professionals of the Financial Sector (PSF)

Corporate income tax (IRC)

Taxable income

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).

Exempt income

‘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.

Non-deductible expenses

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

Tax rate

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).

Tax relief

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.

Learn more about corporate tax for PSF

Value added tax

Liability

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.

VAT rate

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.

Exemption

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’).

VAT registration

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.

VAT returns

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.

e-TVA

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).

Learn more about VAT for PSF