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LUXEMBOURG
OFFSHORE LEGAL AND TAX REGIME

 

 

The term 'offshore' is not used in Luxembourg legislation or in describing company forms. Use of the special 'holding company' forms is the key criterion for obtaining offshore tax treatment for most types of business; special forms are also available for collective investment vehicles and investment funds.

 

Fiscal laws – Corporations
People sometimes see Luxembourg as a tax haven, but this is not the case. Income tax rates in Luxembourg can be higher than in other European Union countries.

CORPORATE AND COMPANY INCOME TAX
Nevertheless, a liberal and pragmatic system founded on stable laws and politic ideas creates a positive environment, attractive for foreign investors. The quality of a financial system based on appropriate, discreet and efficient management is an important issue for people wanting to set up businesses, headquarters for management or invest their fortune in Luxembourg.

Corporate tax rates are based on :
- corporate income tax,
- commercial income tax,
- fortune tax,
- other indirect taxes.

Corporate Income Tax
All resident or foreign companies are subject to income tax. Resident companies are taxed on their global revenue, taking into account the various exemptions applicable under the European Treaty and the Double Tax Treaties between Luxembourg and a number of other countries. Check list of these countries below, at the bottom.

Taxable revenue is calculated on the increase in a company’s net assets during the fiscal year after deduction of exempted revenues (e.g. Capital Gain taxes on participations, Tax exempted Dividends, Permanent Establishment in other countries, etc.)

Income tax rate as at 1-1-2002: 30.38%.

The distribution of dividends is added to the tax base and may be subject to a withholding tax depending on the beneficiary status.

Double Tax Treaties allow certain reductions or exemptions (EC countries) on the distribution of dividends.

Another Directive applies now to the payment of interests and royalties as well. Withholding taxes will no longer be due on the payments of interests within Europe, provided  they are paid within a group of companies. Withholding taxes on Royalties has been cancelled (for resident and non resident)

Commercial Tax
Since 1-1-2002, this tax is now included in the 30.38% income tax rate.
and a number of other countries.

Taxable revenue is calculated on the increase in a company’s net assets during the fiscal year after deduction of exempted revenues (e.g. Capital Gain taxes on participations, Tax exempted Dividends, Permanent Establishment in other countries, etc.)

Income tax rate as at 1-1-2002: 30.38%.

The distribution of dividends is added to the tax base and may be subject to a withholding tax depending on the beneficiary status.

Double Tax Treaties allow certain reductions or exemptions (EC countries) on the distribution of dividends.

Another Directive applies now to the payment of interests and royalties as well. Withholding taxes will no longer be due on the payments of interests within Europe, provided  they are paid within a group of companies. Withholding taxes on Royalties has been cancelled (for resident and non resident)

Commercial Tax
Since 1-1-2002, this tax is now included in the 30.38% income tax rate.

Fortune Tax
Fortune tax is calculated on  Net Assets (Gross Fortune - debts - exemptions) as shown in the balance sheet at the end of the tax period. Significant participations are tax exempt.
The rate is 0.5%

When a Company is formed, the subscription of its capital is subject to a duty tax equal to 1% of the capital. The same is true for capital increase, whether in cash, in kind or for share premium.
However, if a company is formed in another European Country and can show that a similar tax has been paid in that country, the Luxembourg duty tax does not apply. This structure is used when a company requires large amounts of  capital subscription.

Registration Tax applies when  real estate changes ownership. In general, the proportional duty is due at the rate of 6% plus a Communal tax.

Below is a summary of Corporate Tax Rates (for resident companies – except Holding 1929) :

summary of Corporate Tax Rates

Corporate Tax

30.38%

Fortune Tax

0.5%

Withholding Tax

Interest

0%

dividends

0 to 20%

royalties

0 to10%

Capital Duty

0% - 1%

Double Tax Treaties

list of countries

Double tax treaties : list of countries

The Tax Treaties specify that corporate entities are liable to pay tax in their country of residence (the Treaties contain 'tie-breaker' clauses to resolve cases in which both countries assert residence). If an entity which is resident in one country has a permanent establishment in another country, then the income from the permanent establishment is taxed in the second country. Individual taxation is also calculated on the basis of residence, but in cases where income could be taxed twice, there is either a 'tie-breaker' clause or a provision offsetting tax paid in one country against tax due in the other for the same income. (or an exemption)

Under Tax Treaties, withholding tax on dividends is normally calculated at a lower rate than usual (zero rate can even be applied). Likewise, reduced rates of withholding tax are applied to interest, dividend and royalty payments; Luxembourg does not apply withholding tax to interest in any case). Tax paid in one country is normally allowed as a credit against tax due on the same income in the other country. Luxembourg generally considers income earned abroad exempt.

Portfolio

Substantial Holdings

Interest

Royalties

Recipient

%

%

%

%

Resident corporations

20

0 (2)

-

-

Resident individuals

20

20

10 (6)

-

Nonresident corporations and individuals

Nontreaty countries

20

20/0 (3)

-

-

Treaty

Austria

15

5/0 (3.8)

-

-

Belgium

15

10/0 (3.9)

-

-

Brazil

25

15 (11)

-

-

Bulgaria

15

5 (8)

-

-

Canada

15

5 (22)

-

-

China, P.R (13)

10

5 (8)

-

-

Czech Republic

15

5/0 (3.8)

-

-

Denmark

15

5/0 (3.8)

-

-

Finland

15

5/0 (3.15)

-

-

France

15

5/0 (3.15)

-

-

Germany

15

10/0 (3.23)

-

-

Greece

7.5

7.5/0 (3)

-

-

Hungary

15

5/0 (3.8)

-

-

Iceland

15

5 (8)

-

-

Indonesia

15

10 (8)

-

-

Ireland, Rep. of

15

5/0 (3.23)

-

-

Italy

15

15/0 (3)

-

-

Japan

15

5 (18)

-

-

Korea, Rep. of

15

10 (8)

-

-

Malaysia

10

5/0 (19)

-

-

Malta

15

5/0 (3.8)

-

-

Mauritius

10

5 (11)

-

-

Mexico

15

5 (11)

-

-

Mongolia

15

5/0 (19)

-

-

Morocco

15

10 (8)

-

-

Netherlands

15

2.5/0 (3.8)

-

-

Norway

15

5 (8)

-

-

Poland

15

5/0 (3.8)

-

-

Portugal

15

15/0 (3)

-

-

Romania

15

5 (8)

-

-

Russia

15

10 (20)

-

-

Singapore

10

5 (21)

-

-

Slovak Republic

15

5/0 (3.8)

-

-

Slovenia

15

5/0 (3.8)

-

-

South Africa

15

5 (8)

-

-

Spain

15

5/0 (3.8)

-

-

Sweden

15

0 (3.11)

-

-

Switzerland

15

5/0 (3.8)

-

-

Thailand

15

5 (8)

-

-

Trinidad & Tobago

10

5 (11)

-

-

Tunisia

10

10

-

-

Turkey

20

5 (8)

-

-

United Kingdom

15

5/0 (3.17)

-

-

United States

15

5/0 (16)

-

-

Uzbekistan

15

5 (8)

-

-

Vietnam

15

10/5 (14)

-

-

Notes : These notes are not extensive. The full text of the double tax treaty should be checked for a comprehensive view on the conditions of applications of reduced rates.

The numbers in parentheses refer to the notes below.

1. Dividends paid by Luxembourg 1929 holding companies or investment funds are exempt from withholding taxes.

2. Please note that the income from a qualifying participation held by either a fully resident capital company or a Luxembourg PE of an EU company covered by the Parent/Subsidiary Directive (article 2 of the Council Directive 90/435/EEC dated 23 July 1990) or a Luxembourg PE of a capital company resident in a state with which Luxembourg has concluded a tax treaty is exempt when, at the date the income is made available, the beneficiary holds or commits to hold said participation for an uninterrupted period of at least 12 months and for the duration of this period the level of the participation does not fall below the level of 10% or below the acquisition price of €1.2 million.

3. No withholding tax is levied on dividend paid by a Luxembourg subsidiary to either an EU resident company covered by the Parent/Subsidiary Directive (article 2 of the Council Directive 90/435/EEC dated 23 July 1990) or a Swiss resident capital company (subject to Swiss corporate income tax without benefiting from an exemption), provided the receiving company has held or commits to hold, for an uninterrupted period of at least 12 months, a participation of at least 10% of the share capital of the distributing company or with an acquisition price of at least €1.2 million.

4. Interest paid to non-residents is generally not subject to withholding tax in Luxembourg. However, interest that represents a right to profit participation on a bond may be assimilated as a dividend and subject to withholding tax as such. Further analysis should be made to determine the applicable reduced rate on the basis of the treaty (i.e. pursuant to dividend or interest clause) The withholding tax that may be due as a consequence of the EU Savings Directive (Council Directive 2003/48/EC dated June 3, 2003) is not mentioned.

5. Royalties paid to non-residents are not subject to withholding tax in Luxembourg without considerations whether the companies are associated or not.

6. Since January 1, 2006, a withholding tax of 10 % is withheld on defined interest income paid by a Luxembourg paying agent to resident individuals. Interest indirectly cashed through investment funds are out of the scope of this withholding tax.

7. Double tax treaties have been concluded with Ukraine, Argentine, Israel, the United Arab Emirates and Latvia, but are not yet in force. Double tax treaties are under negotiation with Azerbaijan, Estonia, India, Lebanon, Lithuania, San Marino, Serbia and Montenegro.

8. The recipient company holds at least 25% of the Luxembourg company's capital. In some rare cases a holding period requirement may have to be met as well (e.g., Spain, Switzerland).

9. The recipient company owns a 25% investment or the equivalent of an acquisition price of €6,197,338. The investments may be held by several Belgian companies, provided one owns at least 50% of the shares of each of the others. The investment must be held since the beginning of the financial year of the recipient of the dividends.

11. The recipient company holds at least 10% of the Luxembourg company's capital. A holding period requirement has to be met for Sweden.

13. Hong Kong is not covered by the Luxembourg–P.R. China double taxation treaty.

14. The rate of 5% of withholding tax on the gross amount of the dividends applies where the effective recipient company owns directly or indirectly at least 50% of the share capital of the paying company or has contributed more than US$ 10 million or the equivalent in Luxembourg or in Vietnamese currency, in the capital of the company paying the dividends; the rate of 10% of withholding tax on the gross amount of the dividends applies where the beneficial owner is a company which holds directly or indirectly at least 25% but less than 50% of the capital of the company paying the dividends and has contributed not more than US$10 million, or the equivalent in Luxembourg or Vietnamese currency, in the capital of the company paying the dividends.

15. The recipient company owns directly or indirectly 25% of the company's capital. Indirect participation includes the holding through several treaty resident companies located in the same country provided one owns more than 50% of the shares of each others.

16. The substantial holding is taxable at 5% where the recipient U.S company owns at least 10% of the voting stock of the paying company. No withholding tax is levied when the U.S company has held during an uninterrupted period of two years a direct shareholding of at least 25% of the voting power of the paying company and certain conditions regarding the nature of activities performed by the distributing company are met.

17. The recipient company owns directly or indirectly 25% of the company's voting rights. Indirect participation includes the holding through several treaty resident companies located in the same country provided one owns more than 50% of the voting rights of each others

18. The recipient company holds at least 25% of the Luxembourg company's voting shares during the period of six months immediately before the end of the accounting period in which the distribution of profits takes place.

19. The dividends are taxable at a rate of 5% if the beneficial owner is a company that holds directly at least 10% of the capital of the company paying the dividends. No withholding tax is levied when the beneficiary company has held during the 12 preceding months a direct shareholding of at least 25% of the capital of the paying company. The holding period must be met before the date of distribution of the dividend. Furthermore, certain conditions regarding the nature of activities performed by the company must be met.

20. The recipient company holds at least 30% of the Luxembourg company's capital and the acquisition price reaches at least €75,000 (or equivalent).

21. The recipient company holds at least 10% of the Luxembourg company's capital. Dividends paid to the Government of Singapore are exempt.

22. The recipient company holds at least 10% of the company's voting power.

23. The recipient company holds at least 25% of the Luxembourg company's voting shares (Germany/Luxembourg) or company's voting power (Ireland/Luxembourg).

Last updated - 05/06/2006

MEMBERSHIP OF 10 NEW STATES
The 27th of April 2006, have been approved the Convention avoiding the double taxation of associated companies with the 10 new states :
Czech Republic, Estonia, Cyprius, Lettonia, Lituanie, Hungary, Malta, Poland, Slovenia, Slovakia

The Convention 's  aim  is to insure, in a definite time, the  avoidance of double taxation  for European Member States associated companies.

Indeed, double taxation arising from these situations can produce capital flows disturbing  within  the EU working.
Source :  Administration des contributions directes du Grand-Duché de Luxembourg

 

 

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