CHAMBERS GLOBAL PRACTICE GUIDES

Corporate Tax
2024
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Luxembourg: Law & Practice

Peter Adriaansen, Julius Heino and Robin Pollet
Loyens & Loeff
LUXEMBOURG Belgium

Luxembourg
Germany

Law and Practice

Luxembourg City

France

Contributed by:
Peter Adriaansen, Julius Heino and Robin Pollet
Loyens & Loeff

Contents
1. Types of Business Entities, Their Residence and Basic Tax Treatment p.5
1.1 Corporate Structures and Tax Treatment p.5
1.2 Transparent Entities p.6
1.3 Determining Residence of Incorporated Businesses p.6
1.4 Tax Rates p.7

2. Key General Features of the Tax Regime Applicable to Incorporated Businesses p.7
2.1 Calculation for Taxable Profits p.7
2.2 Special Incentives for Technology Investments p.8
2.3 Other Special Incentives p.9
2.4 Basic Rules on Loss Relief p.9
2.5 Imposed Limits on Deduction of Interest p.10
2.6 Basic Rules on Consolidated Tax Grouping p.10
2.7 Capital Gains Taxation p.11
2.8 Other Taxes Payable by an Incorporated Business p.11
2.9 Incorporated Businesses and Notable Taxes p.12

3. Division of Tax Base Between Corporations and Non-corporate Businesses p.14

3.1 Closely Held Local Businesses p.14
3.2 Individual Rates and Corporate Rates p.14
3.3 Accumulating Earnings for Investment Purposes p.14
3.4 Sales of Shares by Individuals in Closely Held Corporations p.15
3.5 Sales of Shares by Individuals in Publicly Traded Corporations p.15

4. Key Features of Taxation of Inbound Investments p.16

4.1 Withholding Taxes p.16
4.2 Primary Tax Treaty Countries p.16
4.3 Use of Treaty Country Entities by Non-treaty Country Residents p.17
4.4 Transfer Pricing Issues p.17
4.5 Related-Party Limited Risk Distribution Arrangements p.17
4.6 Comparing Local Transfer Pricing Rules and/or Enforcement and OECD Standards p.17
4.7 International Transfer Pricing Disputes p.18

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LUXEMBOURG CONTENTS

5. Key Features of Taxation of Non-local Corporations p.18

5.1 Compensating Adjustments When Transfer Pricing Claims Are Settled p.18
5.2 Taxation Differences Between Local Branches and Local Subsidiaries of Non-local Corporations p.18
5.3 Capital Gains of Non-residents p.18
5.4 Change of Control Provisions p.18
5.5 Formulas Used to Determine Income of Foreign-Owned Local Affiliates p.19
5.6 Deductions for Payments by Local Affiliates p.19
5.7 Constraints on Related-Party Borrowing p.19

6. Key Features of Taxation of Foreign Income of Local Corporations p.19

6.1 Foreign Income of Local Corporations p.19
6.2 Non-deductible Local Expenses p.19
6.3 Taxation on Dividends From Foreign Subsidiaries p.19
6.4 Use of Intangibles by Non-local Subsidiaries p.20
6.5 Taxation of Income of Non-local Subsidiaries Under Controlled Foreign Corporation-Type Rules p.20
6.6 Rules Related to the Substance of Non-local Affiliates p.21
6.7 Taxation on Gain on the Sale of Shares in Non-local Affiliates p.21

7. Anti-avoidance p.21
7.1 Overarching Anti-avoidance Provisions p.21

8. Audit Cycles p.22

8.1 Regular Routine Audit Cycle p.22

9. BEPS p.22
9.1 Recommended Changes p.22
9.2 Government Attitudes p.23
9.3 Profile of International Tax p.23
9.4 Competitive Tax Policy Objective p.23
9.5 Features of the Competitive Tax System p.23
9.6 Proposals for Dealing With Hybrid Instruments p.23
9.7 Territorial Tax Regime p.24
9.8 Controlled Foreign Corporation Proposals p.24
9.9 Anti-avoidance Rules p.24
9.10 Transfer Pricing Changes p.24
9.11 Transparency and Country-by-Country Reporting p.24
9.12 Taxation of Digital Economy Businesses p.24
9.13 Digital Taxation p.24
9.14 Taxation of Offshore IP p.24

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LUXEMBOURG Law and Practice
Contributed by: Peter Adriaansen, Julius Heino and Robin Pollet, Loyens & Loeff

Loyens & Loeff is a leading law firm providing and high net worth individuals with a special
comprehensive and fully integrated legal and focus on multinationals, private equity and real
tax advice, handling all matters relating to in- estate. The firm is a well-respected professional
vestment fund formation, regulatory and fund service provider, renowned for exceptional cli-
financing, corporate and commercial law, bank- ent service, responsiveness, and in-depth in-
ing and financial law, real estate, mergers and dustry knowledge. Thanks to a full-service prac-
acquisitions and tax law. The Luxembourg team tice, specific sector experience and a thorough
advises clients such as fund managers, cross- understanding of the market, Loyens & Loeff’s
border and institutional investors, multinational legal and tax professionals help their clients to
enterprises, financial institutions, governments fulfil their strategies and grow their businesses.

Authors
Peter Adriaansen is a partner at Robin Pollet is an associate at
Loyens & Loeff, and a member Loyens & Loeff, and a member
of the tax practice group in of the tax practice group in
Luxembourg. He focuses on tax Luxembourg. He specialises in
structuring for Luxembourg- Luxembourg and international
based multinational enterprises tax matters, with a focus on
and international family offices and private family-owned business and private wealth.
clients.

Julius Heino is an associate at

Loyens & Loeff, and a member
of the tax practice group in
Luxembourg. He specialises in
Luxembourg and international
tax matters, with a focus on tax
structuring for multinational enterprises, private
equity funds and transfer pricing.

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LUXEMBOURG Law and Practice
Contributed by: Peter Adriaansen, Julius Heino and Robin Pollet, Loyens & Loeff

Loyens & Loeff

18-20, rue Edward Steichen
L-2540
Luxembourg
Luxembourg

Tel: +352 46 62 30
Fax: +352 46 62 34
Email: Robin.Pollet@loyensloeff.com
Web: loyensloeff.com

1. Types of Business Entities, cannot be publicly traded and a SARL can have
Their Residence and Basic Tax a maximum of 100 shareholders.
Treatment
An SCA is a partnership limited by shares. It is
1.1 Corporate Structures and Tax created through a notarial deed and has char-
Treatment acteristics of both a limited partnership and a
Luxembourg has several forms of entities with public limited company. There must be at least a
separate legal personality. Businesses generally general partner and a limited partner. In contrast
incorporate an entity with limited liability set up to a limited partnership, the shares of an SCA
in one of the following forms: can be freely transferred to individuals who are
not shareholders, unless stated otherwise in the
• a public limited company (société anonyme, articles of association.
SA);
• a private limited company (société à rèspon- These corporate forms are considered opaque
sable limitée, SARL); or from a Luxembourg tax perspective and are
• a partnership limited by shares (société en fully subject to corporate income tax (CIT) and
commandite par actions, SCA). municipal business tax (MBT) at an aggregate
tax rate of 24.94% (in Luxembourg City), and net
A SARL is probably the most popular corpo- wealth tax (NWT).
rate form to conduct a business through. Both
a SARL and an SA are incorporated through a Fully taxable Luxembourg corporate entities that
deed before a Luxembourg notary and are gov- are part of the same group are eligible for group
erned by a board of managers/directors (an SA taxation (fiscal unity). Under this regime, each
can also be governed using a two-tier structure entity’s taxable income is determined on a stan-
with a management board and a supervisory dalone basis, with the taxable results of all par-
board). The minimum capitalisation requirement ticipants ultimately added together. As a result,
amounts to EUR12,000 for a Sarl and EUR30,000 intra-group transactions remain fully recognised.
for a SA. In contrast to an SA, shares in a SARL

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Less common corporate entities are: Subject to the reverse hybrid rules, an SCS and
SCSp are considered tax transparent entities.
• the simplified joint stock company (société The partners of the partnership are considered
par actions simplifiée, SAS); to (indirectly) hold the assets of the partnership,
• the simplified private limited liability company and taxation should occur at the level of the
(société à responsabilité limitée simplifiée, or partners, irrespective of whether the partnership
SARL-S); distributes income.
• the European company (Societas Europaea,
SE); If a partnership is engaged in, or deemed to be
• the co-operative company (société coopera- engaged in a commercial activity (in Luxem-
tive, SCOP); and bourg), Luxembourg MBT is levied at the level
• the European co-operative company (société of the partnership.
coopérative européenne, or SE SCOP).
1.3 Determining Residence of
1.2 Transparent Entities Incorporated Businesses
Luxembourg has several forms of transparent Corporate entities are deemed to be residents of
entities, some with legal personality: Luxembourg for tax purposes if their legal seat
or central administration is located in Luxem-
• a general partnership (société en nom collec- bourg. This means that both collective entities
tif, SNC); registered in Luxembourg, and those registered
• a limited partnership (société en commandite abroad but with their central administration or
simple, SCS); registered office in Luxembourg, are considered
• a special limited partnership (société en com- tax residents.
mandite speciale, SCSp); and
• a civil company (société civil, SC). The central administration of an entity is in
Luxembourg if the entity’s affairs are managed
The two most common forms are the SCS and there. This is determined based on facts through
SCSp. Both can be established through a part- a substance-over-form analysis. Generally, the
nership agreement or through a notarial deed. location of the entity’s central accounting and
There must be at least one general partner and archives, as well as where the shareholders’ and
one limited partner, with no maximum amount board meetings are held, are considered impor-
of partners. A general partner has unlimited, tant factors in this determination.
joint, and several liability for all the partnership’s
obligations. A limited partner is in principle only A company established under Luxembourg law
liable up to the amounts pledged as contribution is by definition a Luxembourg tax resident, irre-
to the partnership. The difference between the spective of its substance (physical and economi-
two forms of partnership is that an SCS has legal cal footprint) in Luxembourg.
personality while an SCSp does not. An SCSp
is, in particular, commonly used in the private Transparent entities are not considered Luxem-
equity and alternative investment sectors. bourg tax residents.

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Contributed by: Peter Adriaansen, Julius Heino and Robin Pollet, Loyens & Loeff

1.4 Tax Rates balance sheet of the resident corporate taxpayer

For the year 2024, the CIT rate amounts to: and ranges from EUR535 to EUR32,100.

• 15%, if the corporation’s taxable worldwide Business Through a Transparent Entity

income is EUR175,000 or less; Businesses in Luxembourg that are operated
• EUR26,250 plus 31% of income on the by resident individuals, either directly or via a
portion exceeding EUR175,000, if the tax- transparent entity, are liable to pay progressive
able income is between EUR175,000 and income tax. The tax rate applicable for 2024
EUR200,000; or depends on the tax class of the individual. The
• 17%, if the taxable income is more than tax brackets range from 8% to 42%. Addition-
EUR200,000. ally, there is a 7% unemployment fund contri-
bution, which increases to 9% at the highest
Additionally, a solidarity surcharge of 7% is lev- marginal rates. Therefore, the highest possible
ied as a contribution to the unemployment fund. marginal tax rate could reach up to 45.78%.

A local MBT on profits from trade or business

is levied by the different municipalities. The rate 2. Key General Features of the Tax
varies depending on the municipality, but is often Regime Applicable to Incorporated
6.75% (eg, in Luxembourg City). Businesses
The aggregate effective tax rate on income for a 2.1 Calculation for Taxable Profits
company located in Luxembourg City is gener- Resident corporate entities of Luxembourg are
ally 24.94%. taxed annually on their global income, while non-
resident entities are only taxed on certain types
Luxembourg corporate resident taxpayers are of income originating in Luxembourg.
subject to NWT levied on the fair market value
of the taxable net wealth on 1 January of each Typically, each category of income is determined
year. The rates for fiscal year 2024 are: and taxed separately. However, all income gen-
erated by corporations and commercial partner-
• 0.5% on taxable net wealth up to EUR500 ships is considered business income.
million; and
• 0.05% on the portion of taxable net wealth in The business profit of an entity is generally
excess of EUR500 million. defined as the increase in its net assets over
the fiscal year, adjusted for capital contribu-
NWT is levied on the net wealth of the company tions, repayments, and distributed profits. This
(ie, non-exempt assets minus deductible liabili- is based on the entity’s annual accounts, mean-
ties, in both cases valued at fair market value, ing that the taxable profit usually aligns with the
unless a specific provision prescribes a different financial result and is determined on an accrual
valuation). A minimum NWT is applicable, which basis, unless specific tax rules or a special tax
is levied if it is higher than the NWT liability deter- regime apply.
mined on the basis of the taxable net wealth of
the entity. The minimum tax depends on the total

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A fiscal balance sheet is prepared for this pur- ify for a 12% overall investment tax credit. The
pose, where the accounting values of assets and tax credit for overall investment is based on the
liabilities are replaced by their tax values if they acquisition price or production costs of qualify-
differ. Generally, all business-related expenses ing assets acquired. The qualifying investments
of a commercially active company are deduct- encompass investments in tangible depreciable
ible unless they relate to exempt income. Some assets, as well as investments in sanitary and
expenses are explicitly classified as deductible central heating installations in hotel buildings
(eg, non-creditable foreign taxes and value-add- and buildings used for social activities. The rate
ed tax, real estate tax and capital duty, deprecia- is increased to 14% for investments that qualify
tion and amortisation), while others are explicitly for special depreciation. The credit for the acqui-
non-deductible (eg, CIT, MBT, NWT, directors’ sition of software is capped at 10% of the CIT
fees for supervisory services, fines, non-quali- due for the fiscal year in which the acquisition
fying gifts and profit distributions). was made.

For MBT purposes, profits and losses from a IP Regime

foreign permanent establishment (PE) or those In 2018, Luxembourg adopted a new intellectual
already taxed at the level of a commercial part- property (IP) regime that aligns with the guide-
nership (of which the taxpayer is a member) are lines set out by the OECD in its Base Erosion and
not considered. Profit Shifting (BEPS) Action Plan 5. It adopted
a nexus approach to ensure that only the R&D
2.2 Special Incentives for Technology activities that have a direct connection with the
Investments Luxembourg taxpayer can benefit from the tax
Investment Tax Credit regime. This new regime came into effect on 1
Luxembourg tax law provides for two types of January 2018.
investment tax credits. First, a company carrying
out a digital transformation or ecological/energy Under the IP regime, net income from qualify-
transition project can benefit from an invest- ing IP assets that meet the eligibility criteria may
ment tax credit that is calculated on the basis benefit from an 80% exemption from income tax
of investments and operating expenses incurred and a 100% exemption from NWT. The eligible
as part of that project. To be eligible, the project assets should have been established, devel-
needs to comply with at least one of the objec- oped, or enhanced after 31 December 2007.
tives listed in the law. These assets include patents, utility models,
supplementary protection certificates for a pat-
The rate of the tax credit is 18% for investments ent on medicine and plant protection, plant vari-
and operating expenses, with the exception ety certificates, extensions of a complementary
of investments in tangible depreciable assets, protection certificate for paediatric use, orphan
that benefit from a rate of 6%, in addition to the drug designations, and software protected by
12% rate applicable to the overall investment copyrights.
tax credit.
Income that qualifies for the IP regime include:
Secondly, a company that makes investments
during the course of an operating year may qual-

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• income derived from the use of, or a conces- • the participation is held in (i) a capital compa-
sion to use, a qualifying asset; ny that is fully subject to Luxembourg CIT or
• income related to a qualifying asset that is a comparable foreign tax (ie, a tax rate of at
embedded in the sales price of products least 8.5% and a comparable tax base) or (ii)
or services directly related to the eligible IP an EU entity qualifying under the EU Parent-
asset; Subsidiary Directive; and
• capital gains derived from the sale of a quali- • on the date on which the dividend is received
fying asset; and (or capital gain is realised), the company
• the indemnities received based on an arbitra- has held (or commits itself to hold) a qualify-
tion ruling or a court decision concerning a ing participation continuously for at least 12
qualifying asset. months.

The part of the IP income that benefits from Once the minimum threshold and holding period
the favourable tax treatment is determined by are met, newly acquired shares of a qualifying
a ratio that considers the research and devel- participation qualify immediately for the partici-
opment (R&D) costs. This ratio is the eligible pation exemption.
R&D costs divided by the total R&D expenses.
Luxembourg permits a 30% uplift of the eligible Meeting the EUR1.2 million acquisition price
R&D costs, provided that the resulting ratio does threshold also makes a participation exempt
not surpass the total expenditure. To be eligible, from NWT.
expenses must be incurred as part of an R&D
activity. These activities can be carried out by Costs and losses related to an exempt partici-
the taxpayer or outsourced. pation, such as financing expenses and impair-
ments, are tax deductible to the extent that the
2.3 Other Special Incentives related costs and/or losses exceed the amount
Holding Regime of exempt income in a given year. At the time
Proceeds derived by a Luxembourg taxable of sale of the exempt participation, any appre-
resident company from shares in a subsidiary ciation in value is taxable up to the historical
company (such as dividends, liquidation dis- acquisition price (ie, recaptured), which would
tributions, capital gains and foreign exchange otherwise be an exempt capital gain.
results) are subject to CIT and MBT, unless the
domestic participation exemption applies. Pur- 2.4 Basic Rules on Loss Relief
suant to this exemption, dividends (including liq- The taxpayer that generated losses can carry
uidation distributions) and capital gains received them forward and offset them against the tax-
by a Luxembourg company are exempt from able income (on the condition that they result
CIT and MBT provided that, at the time of the from acceptable accounts) for a maximum of
received distribution: 17 consecutive years. Losses generated before
2017 can be carried forward indefinitely. Usage
• a minimum participation of 10% or with an of tax losses follows the “first-in, first-out” prin-
acquisition price of at least EUR1.2 million ciple. Tax losses cannot be carried back.
(EUR6 million for capital gains) is held;

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The deductibility of the tax losses can be denied The EBITDA is calculated on a Luxembourg tax
by the Luxembourg tax administration if the basis, which means that dividends that qualify
change in the taxpayer’s control and activity for the participation exemption are not included
(which has generated the tax losses) has the in the EBITDA. Any interest that is not deduct-
purposes of circumventing the personal nature ible pursuant to the IDLR can be carried forward
of the right to carry forward tax losses and avoid- indefinitely. In addition, any unused deduction
ing taxation of subsequently realised profits. capacity can be carried forward for five years.
Luxembourg taxpayers that have opted for the
In case of fiscal unity, pre-fiscal unity losses can fiscal unity regime can decide whether the IDLR
only be used to offset income in relation to the applies at the level of each Luxembourg taxpay-
entity that sustained such tax losses. er on a standalone basis or at fiscal unity level.

2.5 Imposed Limits on Deduction of 2.6 Basic Rules on Consolidated Tax

Interest Grouping
Luxembourg applies the interest deduction The fiscal unity regime allows certain group com-
limitation rule (IDLR) in accordance with the EU panies to consolidate their results for CIT and
anti-tax avoidance directive. Subject to certain MBT purposes, provided a joint written request
exclusions that are discussed below, the IDLR is submitted before the end of the financial year
limits the deduction of the net amount of interest for which the application is sought. This regime
expenses and economically equivalent expens- permits both horizontal and vertical integration,
es (ie, the excess, if any, of such expenses over or a mix of both.
interest and economically equivalent income) in
a taxable year to the higher of: Vertical fiscal unity is available to a Luxembourg
parent company or a Luxembourg Permanent
• 30% of EBITDA for tax purposes; or Establishment (PE) of a foreign company that is
• EUR3 million. subject to a tax comparable to the Luxembourg
corporate tax, as well as to qualified subsidiar-
The IDLR does not distinguish between third- ies. Horizontal fiscal unity is available to Luxem-
party and related-party interest. However, the bourg subsidiaries of a non-integrating parent
rule contains a grandfathering rule pursuant company.
to which interest and economically equivalent
expenses incurred in respect of loans that were A non-integrating parent can be a Luxembourg
concluded prior to 17 June 2016 and were not parent company or a Luxembourg PE of a for-
modified after such date fall outside the scope eign company fully subject to a tax compara-
of the earning stripping rules. Furthermore, tax- ble to the domestic corporate tax, or a capital
payers that qualify as “financial undertakings” or company resident in a European Economic Area
“standalone entities” within the meaning of the (EEA) country subject to a tax comparable to the
IDLR are excluded from their scope. Moreover, in Luxembourg corporate tax, or a PE of such an
case the ratio of equity to assets of a taxpayer is entity in the EEA. The non-integrating parent is
equal to or higher than such ratio for the consoli- not part of the fiscal unity itself. The consolida-
dated group to which it belongs, such taxpayer tion occurs at the level of the integrating sub-
is excluded from the scope of the rules. sidiary.

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A consolidated tax grouping in Luxembourg is 2.7 Capital Gains Taxation

possible if the following conditions are met: Capital gains derived by a Luxembourg taxable
resident company are subject to CIT and MBT,
• the qualified subsidiaries and the integrating unless the domestic participation exemption
subsidiary must be either a Luxembourg-res- applies. Under this exemption, capital gains
ident fully taxable company or a local PE of a realised by a Luxembourg company are exempt
non-resident capital company fully subject to provided that, at the time of the disposal:
a tax comparable to the domestic tax;
• Luxembourg subsidiaries can be included • a minimum participation of 10% or with an
when they are controlled, directly or indirectly, acquisition price of at least EUR6 million is
by the group parent or the non-integrating held;
parent company for at least 95% of their • the participation is held in (i) a capital com-
capital since the beginning of the fiscal year pany that is fully subject to Luxembourg CIT
for which the option is exercised: or a comparable foreign tax (ie, a tax rate of
• the book year must coincide for all compa- at least 8.5% and on a comparable tax base)
nies included in the fiscal unity; and or (ii) an EU entity qualifying under the EU
• the request for a fiscal unity is filed jointly by Parent-Subsidiary Directive; and
all the intended parties. • on the date on which the capital gain is real-
ised, the company has held (or commits itself
Taxable income and losses of each company to hold) a qualifying participation continuously
pertaining to the fiscal unity are determined indi- for at least 12 months.
vidually (as if it were not integrated) and then
aggregated at the level of the group parent or Once the minimum threshold and holding period
the integrating subsidiary with adjustments to are met, newly acquired shares of a qualifying
eliminate double taxation and double deduction participation qualify immediately for the partici-
of the same items of income. The tax due on pation exemption.
such aggregated result is then levied from the
group parent or the integrating subsidiary. If a non-resident corporate investor earns
income from selling a significant stake (ie, at
Inter-corporate dividends paid within the fiscal least 10% of the share capital) in a Luxembourg
unity regime are fully exempt and do not need to company within six months of its purchase, the
be adjusted when determining the profit of the resulting capital gain will be subject to CIT in
group, as the requirements for the application Luxembourg, unless a tax treaty stipulates oth-
of the participation exemption regime are less erwise.
strict than the requirements for the application
of the fiscal unity regime. Losses generated prior 2.8 Other Taxes Payable by an
to the fiscal unity can only be used to offset the Incorporated Business
income of the group up to the taxable income of VAT
the integrated subsidiary that generated them. As a member of the European Union, Luxem-
Once the regime ends, losses generated during bourg adheres to the EU VAT Directive 2006/112/
the tax unity have to be left at the level of the EC and has a standard 17% VAT rate. Luxem-
group parent or the integrating subsidiary.

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bourg also applies lower rates (3%, 8%, and Capital Duty or Registration Tax
14%) to a variety of goods and services. A registration tax of EUR75 is levied in sever-
al instance, such as for the incorporation of a
Unlike other member states, Luxembourg has company, when the legal seat or effective man-
not adopted the “use and enjoyment” rule, which agement of a foreign company is transferred to
requires non-registered holding companies to Luxembourg, or when a local branch of a foreign
pay VAT on services received from non-EU sup- company is established.
pliers without the ability to recover it.
Depending on the assets or documents regis-
Following rulings from the Court of Justice of the tered, other registration duties or stamp duties
European Union (CJEU), Luxembourg has strict- may be applicable.
ly confined the VAT exemption for an “independ-
ent group of persons” (cost-sharing) to taxable Real Estate Taxation
entities carrying out activities of public interest. An annual real estate tax is imposed on the uni-
In response to the near elimination of the cost- tary value of properties in Luxembourg, with the
sharing exemption for the financial, fund, and rate varying based on the property’s classifica-
insurance sectors, Luxembourg has introduced tion and location. The unitary value, determined
the VAT grouping mechanism, based on Article by the Luxembourg tax authorities, typically
11 of the EU VAT Directive 2006/112/EC. does not surpass 10% of the property’s market
value.
Recently, the CJEU ruled that a member of the
board of directors of a public limited company Sales and transfers of real estate are subject
incorporated under Luxembourg law carries to a registration duty of 6% and a transcription
out an economic activity within the meaning of tax of 1% (plus a city surtax). Contributions of
Directive 2006/112/EC (VAT Directive), but does real estate are also subject to a registration tax
not carry out that economic activity indepen- of 1.1% (if contributed in exchange for shares)
dently, insofar as the person concerned does not or 7% if contributed in exchange for other than
act on his/her own behalf or under his/her own shares.
responsibility and does not bear the economic
risk associated with the activity. As a result, 2.9 Incorporated Businesses and
directors’ fees, subject to the above reserva- Notable Taxes
tions, are not subject to VAT. Pillar Two
Luxembourg has implemented the EU Directive
Customs/Excise Duties on a global minimum income tax (Pillar Two),
Besides VAT, goods imported into the EU may which imposes a minimum effective tax rate of
also be liable for customs or import tariffs. The 15% on multinational groups and large-scale
rates applied can differ based on the type and domestic groups that have had consolidated
amount of the products. revenues exceeding EUR750 million in at least
two out of the previous four years. Pillar Two
In Luxembourg, items such as electricity, min- includes three related tax measures: the income
eral oils, manufactured tobacco, and alcohol are inclusion rule (IIR), the undertaxed profits rule
subject to excise duties. (UTPR) and the qualified domestic top-up tax

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(QDMTT). In Luxembourg, the IIR and a QDMTT The Pillar Two rules further place new compli-
apply as from fiscal years starting on or after 31 ance obligations on Luxembourg resident enti-
December 2023, with the UTPR applying a year ties. All Luxembourg entities that are part of an
later. Luxembourg has implemented the transi- in-scope group would have to register with the
tional “CbCR Safe Harbours”, which generally Luxembourg tax authorities within 15 months
apply for the first three years that a group is con- after the end of a relevant year (18 months for
sidered “in-scope”. the transition year). Further, a Pillar Two informa-
tion return would have to be filed; such informa-
Luxembourg parent entities may be subject to tion return can be filed by a designated group
top-up tax under the IIR, to the extent that the entity in any qualifying jurisdiction (ie, a jurisdic-
group does not meet the 15% minimum tax rate tion that has implemented the Pillar Two rules).
in a jurisdiction as determined under the Pillar Luxembourg entities would have to notify the
Two rules. The starting point for the Pillar Two Luxembourg tax authorities about such desig-
calculations is the “standalone pre-consolida- nated reporting entity. Finally, to the extent that
tion” financial statements of the group, in the the IIR and QDMTT apply, an IIR and/or QDMTT
accounting standard used for consolidation. tax return would have to be filed. For such pur-
poses, a Luxembourg entity of the group can
Furthermore, all Luxembourg entities of a group also be designated as the filing entity.
are subject to the Luxembourg QDMTT, under
which top-up tax may be levied if Luxembourg NWT
as a jurisdiction of the group does not meet the Luxembourg corporate resident taxpayers are
15% minimum tax rate. Provided that all Lux- subject to NWT levied on the fair market value
embourg entities of a group apply Luxembourg of the taxable net wealth on 1 January of each
GAAP, the calculations for the QDMTT may year. The rates for fiscal year 2024 are:
be performed based on Luxembourg GAAP
accounts, rather than the standard used for con- • 0.5% on taxable net wealth up to EUR500
solidation purposes by the group. million; and
• 0.05% on the portion of taxable net wealth in
The UTPR, which should apply as from fiscal excess of EUR500 million.
years starting on or after 31 December 2024,
would impose a top-up tax on Luxembourg enti- The unitary value is typically determined using
ties in cases where a parent entity of the group accounting book values and adjusted as need-
is in a jurisdiction that has not implemented Pil- ed. For real estate in Luxembourg, the unitary
lar Two. The top-up tax due under the UTPR value is based on cadastral values.
would be the sum of the difference of the effec-
tive tax rate for all jurisdictions where a group is Assets that yield exempt or partially exempt
active and the minimum tax rate of 15%, and is income (like exempt participations and qualify-
allocated between all constituent entities of the ing intellectual property rights) are generally also
group that are located in jurisdictions that have exempt from NWT. Assets allocated to a foreign
implemented a UTPR. permanent establishment and foreign real estate
are usually exempt due to tax treaties Luxem-
bourg has signed.

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Liabilities are generally deductible unless they entity, or a regularly taxed entity resident in a
relate to exempt assets. Provisions for uncer- jurisdiction with which Luxembourg has con-
tain liabilities (like provisions for risks) are not cluded a tax treaty are exempted.
deductible. NWT is not deductible for income tax
purposes and is generally not creditable in for- 3.3 Accumulating Earnings for
eign jurisdictions. Net wealth tax is considered Investment Purposes
a “covered tax” for Pillar Two rules purposes. Luxembourg enforces controlled foreign com-
pany (CFC) rules based on so-called Model B
In the company’s first year of existence, NWT is per the EU anti-tax avoidance directive from
not due as the assets as of 1 January are con- 2016 (ATAD 1).
sidered to be nil. A minimum NWT applies and
depends on the resident corporate taxpayer’s A CFC is an entity or a permanent establishment
balance sheet total and ranges from EUR535 to of an entity that fulfils the following conditions:
EUR32,100.
• a Luxembourg taxpayer, either alone or in
The NWT liability can be decreased by adopt- conjunction with one or more associated
ing an NWT reserve. This decrease is limited to enterprises, holds a direct or indirect stake of
the amount of CIT (not including MBT) that the more than 50% in the voting rights, capital, or
entity is liable to pay. It is further required that the profit entitlement of such an entity; and
established reserve is five times the requested • the entity or permanent establishment is
NWT reduction. This reserve must be maintained subject to an effective tax rate that is less
for a minimum of five years. If not adhered to, than 50% of the Luxembourg CIT rate (ie, for
the granted NWT reduction will be reclaimed in 2024, an effective rate lower than 8.5%) that
its entirety. would be applicable if the entity or permanent
establishment were located in Luxembourg.

3. Division of Tax Base Between Luxembourg corporate taxpayers are taxed on

Corporations and Non-corporate the undistributed net income of a CFC, pro-
Businesses portionate to their ownership or control of the
entity (held directly and/or indirectly), provided
3.1 Closely Held Local Businesses that such income is associated with significant
It is more common for local businesses to oper- functions performed by the Luxembourg corpo-
ate in a corporate form, usually a SARL. rate taxpayer and only if the CFC in question
was essentially established to gain a tax advan-
3.2 Individual Rates and Corporate Rates tage. This CFC income is only subject to CIT,
Corporate entities are subject to an aggregate augmented by the solidarity surtax (resulting in
tax rate of 24.94% (in Luxembourg City), which a combined CIT rate of 18.19%), but it is not
is lower than the maximum tax rate of 45.78% subject to MBT.
applicable to individuals. Dividend income is
taxed according to the progressive tax rate
of the recipient individual, however half of the
dividends distributed from a regularly taxed EU

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3.4 Sales of Shares by Individuals in (b) the capital gain is taxed at 50% of the
Closely Held Corporations applicable personal income tax rate if the
Dividends shares represent more than 10%.
In general, dividends received by individuals
residing in Luxembourg are fully subject to per- 3.5 Sales of Shares by Individuals in
sonal income tax, but may qualify for a 50% Publicly Traded Corporations
exemption under certain circumstances. Individuals are taxed on dividends from and
gains on the sale of shares in publicly traded
Dividends fall under the 50% exemption if they companies under the same rules applicable in
are derived from a shareholding that qualifies as: relation to non-listed companies.

• a Luxembourg resident entity that is fully sub- Dividends

ject to Luxembourg income taxes; In general, dividends received by individuals
• a non-resident capital company that is sub- residing in Luxembourg are fully subject to per-
ject to an income tax in its country of resi- sonal income tax, but may qualify for a 50%
dence (and that is a country with which Lux- exemption under certain circumstances.
embourg has concluded a double tax treaty)
that is comparable to the Luxembourg CIT; ie, Dividends fall under the 50% exemption if they
a minimum 8.5% CIT rate on a comparable are derived from a shareholding that qualifies as:
tax basis; or
• an entity resident in an EU member state as • a Luxembourg resident entity that is fully sub-
defined in Article 2 of the Parent-Subsidiary ject to Luxembourg income taxes;
Directive. • a non-resident capital company that is sub-
ject to an income tax in its country of resi-
Dividends further benefit from a EUR1,500 annu- dence (and that is a country with which Lux-
al deduction (double in the case of joint taxation). embourg has concluded a double tax treaty)
that is comparable to the Luxembourg CIT; ie,
Capital Gains a minimum 8.5% CIT rate on a comparable
Capital gains earned by Luxembourg resident tax basis; or
individuals from the sale of shares are subject • an entity resident in a member state of the EU
to personal income tax in the following manner: as defined in Article 2 of the Parent-Subsidi-
ary Directive.
• If the shares are sold less than six months
after acquisition, they are taxed at the normal Dividends further benefit from a EUR1,500 annu-
progressive income tax rate. al deduction (double in the case of joint taxation).
• If the shares are sold more than six months
after acquisition: Capital Gains
(a) the capital gain is fully tax-exempt if the Capital gains earned by Luxembourg resident
shares represent less than a 10% share- individuals from the sale of shares are subject
holding; or to personal income tax in the following manner:

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• If the shares are sold less than six months EUR1,200,000 for an uninterrupted period of
after acquisition, they are taxed at the pro- at least 12 months.
gressive personal income tax rate.
• If the shares are sold more than six months No withholding tax is levied on arm’s length
after acquisition: interest payments made to non-resident enti-
(a) the capital gain is fully tax-exempt if the ties, except for profit-sharing interest which,
shares represent less than a 10% share- under certain circumstances, is subject to 15%
holding; or withholding tax (subject to reduction under tax
(b) the capital gain is taxed at 50% of the treaties).
applicable personal income tax rate if the
shares represent more than 10%. Interest payments made to Luxembourg resident
individuals by a Luxembourg paying agent are
subject to 20% Luxembourg withholding tax.
4. Key Features of Taxation of The 20% withholding tax operates as a full dis-
Inbound Investments charge of personal income tax for Luxembourg
resident individuals acting in the context of the
4.1 Withholding Taxes management of their private wealth.
Luxembourg imposes a withholding tax on divi-
dends (and hidden distributions) of 15% on the Luxembourg does not apply any withholding tax
net amount (or 17.65% on the gross amount), on arm’s length royalty payments or on distribu-
unless a tax treaty limits the amount Luxem- tions of liquidation proceeds.
bourg can levy.
4.2 Primary Tax Treaty Countries
A domestic exemption for withholding tax on Luxembourg has currently 86 tax treaties in
dividends applies in case: force, and most are based on the OECD Model
Convention.
• the recipient is a company that is:
(a) a Luxembourg resident entity; On 7 June 2017, Luxembourg signed the Multi-
(b) an entity which is covered by Article 2 of lateral Convention (MLI) to Implement Tax Trea-
the Parent-Subsidiary Directive; or ty Related Measures to Prevent Base Erosion
(c) a capital company subject in its country and Profit Shifting (BEPS), also known as the
of residence to income tax comparable MLI. The MLI came into effect in Luxembourg
with the Luxembourg CIT rate (ie, subject on 1 August 2019. However, due to the neces-
to a CIT rate of at least 8.5% on a similar sary national ratification process, as well as the
taxable basis) and is resident in a country schedule outlined in the MLI, the widespread
with which Luxembourg has concluded a effects varied in terms of timing. Nevertheless,
double tax treaty; and for many of Luxembourg’s treaties, the principal
• the recipient holds, or commits itself to hold, purpose test (PPT) entered into force on 1 Janu-
a participation of at least 10% in the share ary 2020.
capital of the Luxembourg company paying
the dividend or, an acquisition price of at least

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4.3 Use of Treaty Country Entities by The law also includes a requirement for taxpay-
Non-treaty Country Residents ers to provide transfer pricing documentation at
It is uncommon for Luxembourg to challenge the the request of the tax authorities. This documen-
use of treaties. However, national law contains tation should validate the arm’s length nature of
a general anti-abuse rule, as well as the EU Par- transactions between related parties. Therefore,
ent Subsidiary Directive anti-abuse rule, under the taxpayer carries the initial burden of proof.
which tax benefits can be denied if the main pur-
pose of an arrangement is to obtain a tax benefit. At the end of 2016, the Luxembourg tax authori-
ties issued guidance that clearly states the crite-
The domestic general anti-abuse rule, amended ria for determining arm’s length remuneration on
on 1 January 2019 to align the provision with intra-group financing transactions. The Circular
the wording of the general anti-abuse rule in applies to group companies whose main activity,
ATAD 1, includes the concept of a “non-genuine aside from holding activities, involves intra-group
arrangement”. A transaction will be disregard- financing transactions. These transactions are
ed or requalified if the following elements are defined as the provision of loans or advances to
met: (i) the use of one or more legal form(s) or associated companies, financed by any means.
institution(s) of law; (ii) the main purpose, or one While the guidance does not address other intra-
of the main purposes, of such use of legal form(s) group situations, its principles should be largely
or institution(s) of law is to avoid or reduce a applicable to those transactions.
tax liability in a manner that goes against the
object or purpose of the tax law; and (iii) such Among other things, the guidance outlines the
use of legal form(s) or institution(s) of law is non- main substantive requirements that a group
genuine. financing company established in Luxembourg
must meet to enter into an advance pricing
Since 1 January 2020, the PPT entered into force agreement with the tax authorities. In this con-
for the tax treaties concluded by Luxembourg. text, and among other substance requirements,
Tax benefits can be denied under this rule, if it the financing company should have adequate
can be reasonably concluded that obtaining the capital to handle the functions performed and
treaty benefit was one of the principal purposes the risks assumed in relation to its financing
of an arrangement or transaction that directly or activity.
indirectly caused the benefit.
4.5 Related-Party Limited Risk
4.4 Transfer Pricing Issues Distribution Arrangements
In 2014, the arm’s length principle, which was The arm’s length principle applies to related-
already in practice, was officially incorporated party limited risk distribution arrangements.
into Luxembourg’s tax law. In 2016, a new article
was introduced that outlined the main principles 4.6 Comparing Local Transfer Pricing
for conducting a transfer pricing functional anal- Rules and/or Enforcement and OECD
ysis. This analysis focuses on the commercial Standards
and financial relations between affiliated com- The Luxembourg tax administration applies the
panies and the economically significant circum- arm’s length principle in line with the OECD
stances of these relations. standards.

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4.7 International Transfer Pricing The Director of the Luxembourg tax authority
Disputes (Directeur des contributions) issued an update
Generally, the tax treaties concluded by Luxem- on the guidance on MAPs filed under a bilateral
bourg contain an article on the mutual agree- tax treaty concluded by Luxembourg.
ment procedure. This article establishes a mutual
agreement procedure for the settlement of dif- 5.2 Taxation Differences Between Local
ficulties arising from the application of the Con- Branches and Local Subsidiaries of Non-
vention. The Luxembourg tax authority issued local Corporations
guidance on 11 March 2011 concerning the In Luxembourg, local branches of non-local cor-
modalities for the implementation of the mutual porations are treated the same as Luxembourg
agreement procedure and specified which infor- resident companies for CIT purposes. A branch
mation and documents need to be included for is subject to MBT if it conducts a commercial
such a procedure. activity in the territory of Luxembourg.

5.3 Capital Gains of Non-residents

5. Key Features of Taxation of Non- Non-residents are subject to taxation of the
local Corporations income generated in Luxembourg. Gains real-
ised on the alienation of a substantial interest
5.1 Compensating Adjustments When in a Luxembourg company (more than 10%) by
Transfer Pricing Claims Are Settled non-residents are taxable, if the gain is realised
Upward and downward adjustments of taxable within a period of six months following the acqui-
income are in principle allowed in Luxembourg. sition of the shares. The foregoing may equally
apply to distributions received upon liquidation
If a foreign tax authority unilaterally makes an and proceeds from a redemption of shares.
adjustment of the taxable income, resulting in
an increase of the taxable income, the taxpay- Withholding tax will also be levied in case where
er may initiate a mutual agreement procedure the shareholder has been a Luxembourg resi-
(MAP) before the directorate at or the economic dent for more than 15 years and became a non-
division of the Luxembourg tax authority, provid- resident less than five years prior to selling the
ed that the applicable double tax treaty contains participation in the Luxembourg company.
a MAP article.
5.4 Change of Control Provisions
The Luxembourg tax authority will verify the No provisions in Luxembourg tax law address
request and assess whether the taxpayer’s the change of control of resident companies.
objection appears to be well-founded. If the
request is well-founded, the Luxembourg tax However, a change in control can have conse-
authority will try to provide a solution unilater- quences for the carry-forward of losses if the
ally, or if it is unable to provide such a unilateral change of the taxpayer’s control and activity
solution, the Luxemburg tax authority is obliged (which has generated the tax losses), has the
to contact the competent authority in the oth- purposes of circumventing the personal nature
er state in order to resolve the case by mutual of the right to carry forward tax losses and avoid-
agreement. ing taxation of subsequently realised profits.

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5.5 Formulas Used to Determine Income is required to pay under Luxembourg tax law.
of Foreign-Owned Local Affiliates However, it is required that the foreign tax cor-
No provisions in Luxembourg tax law, other than responds to Luxembourg CIT.
the general arm’s length principle for transac-
tions between related parties, are used to deter- 6.2 Non-deductible Local Expenses
mine the income of foreign-owned local affiliates Costs directly and economically related to tax-
selling goods or providing services. exempt participations (eg, impairments or inter-
est expenses on a loan financing an exempt par-
5.6 Deductions for Payments by Local ticipation) are only deductible to the extent that
Affiliates the expenses exceed the exempt income. Any
The deduction of expenses incurred by a non- deductible expenses on an exempt participation
local affiliate is only possible when: are subject to “recapture” upon a sale of the par-
ticipation, up to the historical acquisition cost.
• the expenses are charged to the Luxembourg
company; 6.3 Taxation on Dividends From Foreign
• the charge is beneficial to the business; and Subsidiaries
• the expense adheres to the arm’s length Dividends received by a Luxembourg tax resi-
principle. dent are subject to CIT and MBT, unless the par-
ticipation exemption applies.
5.7 Constraints on Related-Party
Borrowing Dividends received by a Luxembourg resident
Related-party borrowings paid by foreign-owned company from a foreign subsidiary are exempt
Luxembourg subsidiaries to foreign companies from Luxembourg CIT and MBT provided that,
are subject to the arm’s length principle and the at the time of the received distribution:
IDLR.
• a minimum participation of 10% or with an
acquisition price of at least EUR1.2 million is
6. Key Features of Taxation held;
of Foreign Income of Local • the participation is held in (i) a capital compa-
Corporations ny that is fully subject to Luxembourg CIT or
a comparable foreign tax (ie, a tax rate of at
6.1 Foreign Income of Local least 8.5% and a comparable tax base) or (ii)
Corporations an EU entity qualifying under Article 2 of the
Resident taxpayers in Luxembourg are subject to EU Parent-Subsidiary Directive; and
tax on their worldwide income. Foreign income • on the date on which the dividend is received,
is therefore subject to tax in Luxembourg, unless the company has held (or commits itself to
a double tax treaty restricts the taxation rights hold) a qualifying participation continuously
of Luxembourg. for at least 12 months.

If double taxation of the same income is not pre- Once the minimum threshold and holding period
vented, Luxembourg allows a credit for foreign are met, newly acquired shares of a qualifying
tax paid, limited to the tax amount the taxpayer

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participation qualify immediately for the partici- 6.5 Taxation of Income of Non-local
pation exemption. Subsidiaries Under Controlled Foreign
Corporation-Type Rules
6.4 Use of Intangibles by Non-local ATAD 1 introduced a CFC rule into Luxembourg
Subsidiaries domestic tax law. Under this rule, if a CFC is
A foreign subsidiary that uses intangibles essentially established in order to obtain a tax
developed by a Luxembourg resident company advantage, Luxembourg corporate taxpayers
should compensate the latter in line with the are taxed on the undistributed net income of the
arm’s length principle. CFC. This is proportional to their ownership or
control of the foreign branch or subsidiary (held
The income derived by a Luxembourg resident directly and indirectly), but only if such income is
company from intangibles is subject to Luxem- associated with significant functions performed
bourg taxation. by the Luxembourg corporate taxpayer.

Under the IP regime, net income from qualify- A CFC is an entity or a permanent establishment
ing IP assets that meet the eligibility criteria may of an entity that fulfils the following conditions:
benefit from an 80% exemption from income tax
and a 100% exemption from NWT. The eligible • a Luxembourg taxpayer, either alone or in
assets should have been established, devel- conjunction with one or more associated
oped, or enhanced after 31 December 2007. enterprises, holds a direct or indirect stake of
These assets include patents, utility models, more than 50% in the voting rights, capital, or
supplementary protection certificates for a pat- profit entitlement of such an entity; and
ent on medicine and plant protection, plant vari- • the entity or permanent establishment is
ety certificates, extensions of a complementary subject to an effective tax rate that is less
protection certificate for paediatric use, orphan than 50% of the Luxembourg CIT rate (ie, for
drug designations, and software protected by 2024, an effective rate lower than 8.5%) that
copyrights. would be applicable if the entity or permanent
establishment were located in Luxembourg.
Income that qualifies for the IP regime include:
Luxembourg corporate taxpayers are taxed on
• income derived from the use of, or a conces- the undistributed net income of a CFC, pro-
sion to use, a qualifying asset; portionate to their ownership or control of the
• income related to a qualifying asset that is entity (held directly and/or indirectly), provided
embedded in the sales price of products that such income is associated with significant
or services directly related to the eligible IP functions performed by the Luxembourg corpo-
asset; rate taxpayer and only if the CFC in question
• capital gains derived from the sale of a quali- was essentially established to gain a tax advan-
fying asset; and tage. This CFC income is only subject to CIT,
• the indemnities received based on an arbitra- augmented by the solidarity surtax (resulting in
tion ruling or a court decision concerning a a combined CIT rate of 18.19%), but it is not
qualifying asset. subject to MBT.

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The Luxembourg tax authorities have issued treaty benefit was one of the principal purposes
administrative guidance requiring Luxembourg of an arrangement or transaction that directly or
resident taxpayers to annually document the indirectly caused the benefit.
functions and risks undertaken by the foreign
entities in relation to any CFC income. If a Lux- 6.7 Taxation on Gain on the Sale of
embourg company can demonstrate, through Shares in Non-local Affiliates
sufficient documentation of its activities or func- Capital gains derived by a Luxembourg taxable
tions, that it does not perform significant func- resident company from shares in a subsidiary
tions related to the CFC’s activities, the CFC company are subject to CIT and MBT, unless
rules should not result in a negative tax impact. the domestic participation exemption applies.
Under this exemption, capital gains received by
However, if the foreign entities’ accounting prof- a Luxembourg company are exempt from Lux-
its are less than EUR750,000 or their accounting embourg CIT and MBT provided that, at the time
profits constitute less than 10% of their operat- of the disposal:
ing costs for a given year, the CFC rule does
not apply. • a minimum participation of 10% or with an
acquisition price of at least EUR6 million is
6.6 Rules Related to the Substance of held;
Non-local Affiliates • the participation is held in (i) a capital com-
The general anti-abuse rule in Luxembourg pany that is fully subject to Luxembourg CIT
domestic law also applies to the substance of or a comparable foreign tax (ie, a tax rate of
non-local affiliates. at least 8.5% and on a comparable tax base)
or (ii) an EU entity qualifying under the EU
The domestic general anti-abuse rule, amended Parent-Subsidiary Directive; and
on 1 January 2019 to align the provision with • on the date on which the capital gain is real-
the wording of the general anti-abuse rule in ised, the company has held (or commits itself
ATAD 1, includes the concept of a “non-genu- to hold) a qualifying participation continuously
ine arrangement”. A transaction will be disre- for at least 12 months.
garded or requalified if the following elements
are met: the use of one or more legal form(s) Once the minimum threshold and holding period
or institution(s) of law; (ii) the main purpose, are met, newly acquired shares of a qualifying
or one of the main purposes, of such use of participation qualify immediately for the partici-
legal form(s) or institution(s) of law is to avoid pation exemption.
or reduce a tax liability in a manner that goes
against the object or purpose of the tax law; and
(iii) such use of legal form(s) or institution(s) of 7. Anti-avoidance
law is non-genuine.
7.1 Overarching Anti-avoidance
Since 1 January 2020, the PPT entered into force Provisions
for the tax treaties concluded by Luxembourg. Luxembourg’s domestic tax law contains several
Tax benefits can be denied under this rule if it anti-abuse measures with a general anti-abuse
can be reasonably concluded that obtaining the

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provision, that has been amended in light of 8. Audit Cycles

ATAD 1.
8.1 Regular Routine Audit Cycle
Furthermore, the substance-over-from is a prin- For CIT, MBT and NWT, a tax return needs to
ciple underlying Luxembourg tax law. This princi- be filed every year, and will be used to deter-
ple dictates that the tax treatment of a structure mine the taxable income. The Luxembourg tax
or transaction is not bound to its legal classifi- administration will usually issue a “preliminary”
cation, and taxation is determined solely based tax assessment based on the tax return filed. A
on the substance of the structure or transaction. five-year limitation period applies for the Lux-
embourg tax authority to issue a revised tax
This approach has been used for the evaluation assessment if it disagrees with the “preliminary”
of a debt/equity instrument which has been con- tax assessment.
firmed by parliamentary history and Luxemburg
case law. The Luxembourg tax authority has dedicated
departments that have the competence to con-
Furthermore, the domestic general anti-abuse duct an on-site tax audit. The Service de révi-
rule, amended on 1 January 2019 to align the sion is responsible for periodically auditing the
provision with the wording of the general anti- accounts and other accounting documents of
abuse rule in ATAD 1, includes the concept of a taxpayers subject to audit and drawing up audit
“non-genuine arrangement”. A transaction will reports proposing any resulting changes to taxa-
be disregarded or requalified if the following ele- tion.
ments are met: (i) the use of one or more legal
form(s) or institution(s) of law; (ii) the main pur-
pose, or one of the main purposes, of such use 9. BEPS
of legal form(s) or institution(s) of law is to avoid
or reduce a tax liability in a manner that goes 9.1 Recommended Changes
against the object or purpose of the tax law; and Most of the BEPS-recommended action points
(iii) such use of legal form(s) or institution(s) of have been implemented in Luxembourg via the
law is non-genuine. transposition of related European directives
(ATAD 1 and 2):
Since 1 January 2020, the PPT entered into force
for the tax treaties concluded by Luxembourg. • Action 2 – anti-hybrid rules;
Tax benefits can be denied under this rule if it • Action 3 – CFC;
can be reasonably concluded that obtaining the • Action 4 – interest deduction limitation rules;
treaty benefit was one of the principal purposes • Action 5 – IP box;
of an arrangement or transaction that directly or • Action 6 – treaty abuse;
indirectly caused the benefit. • Action 8-10 – transfer pricing;
• Action 13 – country-by-country reporting
(CbCR); and
• Action 15 – multilateral instrument.

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9.2 Government Attitudes 9.4 Competitive Tax Policy Objective

Luxembourg is fully committed to combating Luxembourg continues to stay competitive with
detrimental tax competition and supports the other EU member states in terms of taxation,
BEPS initiative (which led to ATAD 1 and 2 and fully committing to all fair taxation initiatives.
the MLI).
9.5 Features of the Competitive Tax
In its effort to back tax developments, Luxem- System
bourg transposed the Pillar 2 Directive on mini- Although taxpayers can still obtain advance tax
mum taxation for corporations in December confirmations, the procedure and governing
2023. The income inclusion rule and the quali- rules have been changed, resulting in a decrease
fied domestic minimum top-up tax will become in the number of advance tax confirmations
effective for fiscal years starting on or after 31 issued by the Luxembourg tax authorities.
December 2023, whereas the undertaxed profits
rule will become effective for fiscal years starting 9.6 Proposals for Dealing With Hybrid
on or after 31 December 2024. Instruments
Luxembourg has transposed the hybrid mis-
The Luxembourg legislature has also tried to match rules from ATAD 2. The purpose of the
implement most of the OECD guidance released hybrid mismatch rules is to neutralise the tax
up to summer 2023, and it has also confirmed in effects of hybrid mismatches by limiting the
parliamentary documents the intention to (i) treat deduction of payments or by including the pay-
existing and additional OECD guidance as rel- ments in the taxable income of a Luxembourg
evant source of interpretation of the rules, and (ii) corporate taxpayer. The rules target double
implement (if appropriate) additional OECD guid- deduction and deduction-non-inclusion out-
ance that may require a change of law. In par- comes.
ticular, some additional clarifications for the fund
industry and the implementation of the Decem- The hybrid mismatches covered by the rules
ber OECD guidance could lead to amendments include (i) payments on hybrid financial instru-
to be voted in the course of 2024. ments, (ii) payments to or by hybrid entities, (iii)
payments to or by hybrid permanent establish-
9.3 Profile of International Tax ments, (iv) payments by dual resident entities
For many years, Luxembourg has been known and (v) payments made on a non-hybrid instru-
as a key European jurisdiction for cross-border ment that directly or indirectly finance a payment
investment structures for large multinational cor- that leads to a hybrid mismatch (“imported mis-
porations worldwide, as well as for the largest matches”). Exceptions may apply, depending on
collective investment structures, both regulated the specific facts and circumstances.
and unregulated, such as undertakings for col-
lective investment in transferable securities and If certain conditions regarding hybrid mismatch-
alternative investment funds. es are met, Luxembourg transparent vehicles
(eg, limited partnerships) may constitute so-
called reverse hybrid entities and become (fully
or partially) subject to Luxembourg CIT.

23 CHAMBERS.COM
LUXEMBOURG Law and Practice
Contributed by: Peter Adriaansen, Julius Heino and Robin Pollet, Loyens & Loeff

9.7 Territorial Tax Regime 9.11 Transparency and Country-by-

Luxembourg does not have a territorial tax Country Reporting
regime, but taxes residents on their worldwide Luxembourg tax legislation and regulations will
income. continue to combat tax avoidance and improve
transparency.
9.8 Controlled Foreign Corporation
Proposals 9.12 Taxation of Digital Economy
There is no applicable information in this juris- Businesses
diction. Luxembourg has not made any standalone
changes or proposals in relation to the taxation
9.9 Anti-avoidance Rules of transactions effected or profits generated by
Luxembourg is Europe’s main hub for invest- digital economy businesses operating largely
ment funds. Its success is partially due to the from outside its territory, nor are any such pro-
vast amount of tax treaties that the country has posals being discussed.
signed.
9.13 Digital Taxation
As part of the MLI, the PPT came into effect in Digital taxation in Luxembourg is expected to
Luxembourg on 1 January 2020. This general align with EU proposals on the topic. Luxem-
anti-abuse rule could have an effect on certain bourg has implemented the EU Directive (DAC
investment structures. 7) concerning platform operators, which enacts
transparency rules for digital platforms.
9.10 Transfer Pricing Changes
Luxembourg legislation on transfer pricing, 9.14 Taxation of Offshore IP
including the arm’s length principle, has been Luxembourg has not introduced any provisions
aligned with the OECD standard. The transpo- dealing with the taxation of offshore intellectual
sition of the BEPS project mainly affected intra- property that is deployed within its territory.
group transactions.

24 CHAMBERS.COM
CHAMBERS GLOBAL PRACTICE GUIDES

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