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Luxembourg Information · Joined: 16 Oct 2006 Posts: 17 Home Country: luxembourg

DOING BUSINESS IN LUXEMBOURG

LUXEMBOURG FORMS OF COMPANY

Societe Anonyme (Joint Stock Company)
The Societe Anonyme, abbreviated SA, or joint stock company, is formed under the Commercial Companies Law 1915, as amended. SAs must have a minimum capital of LUF 1.25 million divided into freely transferable shares held by at least two shareholders, who may be resident or non-resident persons or juridical entities. The shareholders' liability is limited to the amount of their subscribed (not necessarily paid-up) capital. There is a Board of Directors (at least three), and day-to-day management may be delegated to a managing director.

Incorporation takes 2 or 3 days; the SA's statutes must be printed in French or German; a director must give his name, address and occupation. There must be registered office in Luxembourg, but only the share register need be kept there. Accounts need to be submitted annually to the Registrar of Companies, but need only be audited if a company exceeds a certain size: either the balance sheet is greater than LUF 93 million, or sales are greater than LUF 186 million, or there are more than 50 employees.

Societee a Responsabilite Limitee (Limited Liability Company)
The Societe a Responsabilite Limitee, abbreviated SARL, or limited liability company, is also formed under the Commercial Companies Law 1915, as amended. The SARL must have a minimum paid-up capital of LUF 500,000 divided into 'participation certificates' which are not freely transferable. There may not be more than 40 shareholders, and they are liable for the amount of their paid-up capital. If there are fewer than 25 shareholders an annual gemeral meeting is not necessary.

In other respects, the SARL is similar to the SA.

General Partnership
General Partnerships are recognised in Luxembourg law either as a Societe Civile (most professional partnerships take this form) or as a Societe en Nom Collectif (for instance, a family business might choose this form). The partners are liable jointly and severally for the full debts of the partnership. Partnerships must be registered with Greffe du Tribunal de Commerce.

Limited Partnership
Limited partnerships in Luxembourg have general partners, who are responsible for management, and have unlimited liability, and limited partners, who are liable only to the extent of their capital contributions to the partnership. A limited partnership can either be a Societe en Commandite Simple in which case it is subject to the same rules as a general partnership, or it can be a Societe en Commandite par Actions, in which case the limited partners are issued with shares and the partnership is treated in the same way as an SA (see above) in most respects.

Branch of Overseas Company
An overseas company can carry on business in Luxembourg through a branch office, but will need to obtain a permit as does every business. A branch office will normally constitute a permanent establishment from a tax point of view.

'Holding' Company
The Luxembourg Holding Company and 'Soparfi' (Societe a Participation Financiere) are the forms which permit 'offshore' activity in Luxembourg. However, they are not separate legal forms as such, and employ one of the above forms, either SA, SARL or Societe en Commandite par Actions, as a legal base.

LUXEMBOURG DOMESTIC CORPORATE TAXATION

In Luxembourg there are three main taxes impinging on businesses: Corporate Income Tax, the Municipal Business Tax on Profits, and the Fortune Tax (a wealth tax). Of course there is also VAT, and there are withholding taxes.

Scope of Income Tax
Corporate Income Tax, or Impot sur le Revenu des Collectivites (IRC), was introduced during the German occupation in 1940/41 as Korperschaftssteure. In accordance with the general rule that a tax once introduced never dies, the Luxembourg tax authorities decided to keep this interesting German innovation after the war, although it was substantially modified by the Loi du 4 decembre 1967 portant sur l'impot sur le revenu.

Resident companies are taxed on their world-wide income. Residence for this purpose means that the business has its main establishment in Luxembourg, that is, the place from which it is managed, where it holds its general meetings, and where it performs central administrative functions. Non-resident companies having a 'permanent establishment' in Luxembourg (defined as a place of business or fixed equipment, which would normally include branches) pay income tax on their income originating in Luxembourg.

IRC applies to corporate entities, which includes SAs, SARLs, and Partnerships Limited by Shares (Societes en Commandites par Actions). Other types of partnership are considered fiscally transparent, here as elsewhere, so that tax is assessed directly on the partners rather than the partnership as such.

There are some tax incentives available for investors who are considered to be supporting the economic development of the country under the laws of 28th July 1923, 27th July 1972, and the Tax Reform Law of 6th December 1990. These apply to specified industries and investment situations, and apply equally to Luxembougeouis and foreign investors.

NB: A Luxembourg 'holding' company, which is the form normally used for offshore operations, is not subject to IRC.

Income Tax Rates
The rate of tax 20% for income lower than 10,000 EUR, 2,000 EUR + 26% of the income included between 10,000 EUR and 15,000 EUR, and
22% of the income beyond 15,000 EUR.

There is a 4% employment fund surcharge (rising to 5% IN 2006) and a charge of 7.5% in respect of municipal services (see below). This latter component can vary according to location, and in Luxembourg City is set to fall to 6.75% in 2006, taking the top corporate rate to 29.63% before the employment fund increase.

Calculation of Taxable Base
For companies, IRC is normally assessed for income arising in the previous fiscal year, which is the calendar year unless a company has chosen otherwise.

For resident Luxembourg companies 'income' for the purposes of the IRC is calculated by comparing the net worth (net balance sheet assets) of the taxable entity at the beginning and end of the period concerned. Businesses with turnover below LUF 2 million (subject to some other limits) may be able to use a simplified 'receipts and expenses' method of calculation, but this is not pursued further here.

The normal accounting principles applied in the formation of a company's 'commercial' balance sheet in Luxembourg are those of the 4th EU Company Law Directive (but there are special regimes for most types of financial institution); the 'fiscal' balance sheet used for calculating IRC is based on the commercial balance sheet, but some types of income and expense are treated differently for fiscal purposes.

NB: Although for general information some very brief details are given below about the calculation of IRC, this is not a full treatment of what is a complex subject and requires appropriate professional advice.

Allowable expenditure needs to be incurred exclusively and directly for the business; certain types of expense are not deductible, of which the most important are directors' fees, self-insurance provisions, foreign taxes and expenses connected with 'exempt' income. The 'foreign taxes' rule would seldom operate in practice, either because of a Double Taxation Treaty, or because of Luxembourg unilateral tax credit provisions. 'Exempt income' is income qualifying under the Luxembourg Participation-Exemption system, meaning dividends, interest, capital gains or royalties income received from another company in which the receiving company has a share interest greater than 10%, providing the paying company is in a jurisdiction levying at least 15% tax on such payments. Note that the interest costs on debt finance of such a exempt share interest would only be deductible up to the level of the exempt income received.

Profit distributions in the course of a year (widely defined) are added back to net worth at the end of the year prior to calculation of IRC.

Evidently, rules for asset valuation are particularly crucial in a 'net worth' income tax system. In Luxembourg there are rules dealing with what assets are to be included, their valuation, and permitted depreciation. The rules cover land and buildings, leased assets, goodwill, participation in other companies, inventory etc. The treatment of provisions is likewise important and is covered by a set of rules. Foreign exchange gains and losses can also have a major impact on valuation of foreign assets, and are dealt with under rules that provide for their 'neutralisation' (deferral) in many circumstances.

There are some tax credits available for certain types of investment into assets for use inside Luxembourg itself.

Losses at the taxable income level can be carried forward, but not back. Group relief exists under 'fiscal integration' provisions, applying subject to permission from the Minister of Finance with some differences to 99% and 75% participation. The rules for valuation of 'substantial participation in other companies' would have the same effect as group relief up to a point since a reduction in the net worth of a subsidiary would be reflected in a reduced valuation in the parent balance sheet.

For non-resident corporate entities, IRC applies to:

1. Income attributable to a Luxembourg permanent establishment;

2. Passive Luxembourg-sourced income such as dividends, interest, royalties and capital gains;

3. Income from immovable property in Luxembourg;

4. Interest on loans secured by immovable property in Luxembourg.

The calculation of taxable income is the same as it is for a Luxembourg-resident corporation. This means that if the non-resident operation does not fall under the LUX 2 million turnover limit, allowing the simplified 'receipts and expenses' calculation, then it will have to keep 'normal' accounts and tax will be calculated on a net worth basis as described above.

It follows that any foreign company doing business in Luxembourg should either use a 'holding company' structure, or else should be extremely careful not to create a permanent establishment in the country. With exceptions under Double Taxation Treaties, 'permanent establishment' is defined to include 'branches, factories, warehouses, place of purchase and sale, landing areas, offices or any other place of business which the entrepreneur uses to carry out its business'. The definition is looser under OECD-model Double Tax Treaties, which would for instance not count warehouses as constituting permanent establishment. E-commerce servers used for sales purposes would however probably amount to permanent establishment in either case, and this might be the case whether or not the server was owned by the company doing the selling. It's not a risk to take.

Municipal Business Tax on Profits
The legislative origins of the Municipal Business Tax on Profits (MBTP) are similar to those of the IRC. However it applies to all types of partnership engaged in commercial activity as well as to companies, whether resident or non-resident.

The calculation of taxable income for the MBTP is identical to that for the IRC, with certain specified additions and deductions which are mostly but not entirely concerned to remove the activities of foreign permanent representations (ie those outside Luxembourg), this being a tax paid to the municipality for its services.

The rate of the MBTP varies depending on the municipality; in Luxembourg City it is 6.75% as from 2006; the tax is payable on taxable income over EUR17,500. The MBTP is no longer, as it used to be, counted as an expense in its own calculation.

The Fortune Tax
The Fortune Tax (Net Worth Tax) is levied on resident and non-resident corporate entities (so excluding fiscally-transparent partnerships). For businesses, the two main components of Net Worth are Real Estate Unitary Value (in effect, the value of buildings in 1941 when the Germans imposed the tax!) and Business Net Worth which is an adjusted version of net worth as calculated for the Corporate Income Tax.

The rate of tax is 0.5%. However, for most companies the amount of Fortune Tax payable is offsettable against Corporate Income Tax subject to some balance sheet reserve requirements.

Taxation of Partnerships
For all partnerships engaged in commercial activity, the Municipal Business Tax on Profits is payable. For Societes en commandites par actions only among partnerships (Partnership Limited by Shares), the Corporate Income Tax (IRC) and the Fortune Tax are payable in addition.

Filing Requirements and Payment of Tax
Entities subject to Corporate Income Tax or the Municipal Business Tax on Profits should submit corporate tax returns by 31st May of the year following the end of the financial year, and the tax is due for payment within one month of the receipt of the resulting tax assessment. However, advance tax payments have to be made on a quarterly basis (10th March, 10th June etc) and these are based on the tax assessment of the preceding tax year, with adjustments in either direction made at the time of final assessment. Fortune Tax payments also have to be made quarterly, but on 10th February, 10th May etc.

Withholding Tax
Until 2004, the withholding tax regime required companies to deduct withholding tax from payments made in respect of dividends (25%), profit shares (variable), royalties (10% to 12%), directors' remuneration (20%), management fees (28.2%) and auditors fees (39.7%). However the rate of withholding on interest payments is nil.

Under the EU participation exemption rules, dividends paid to a company having at least a 25% share in the paying company are exempt from withholding tax (the stake must have been held for 12 months before the end of the accounting period in respect of which the dividend is being paid; and the paying company must be subject to a 'high-tax' corporation tax regime, which of course includes Luxembourg).

Changes to the parent/subsidiary directive in 2004 have reduced the holding requirement to 20% for 2005-06; to 15% for 2007-08; and to 10% for 2009 onward. Under the EU's Directive on Interest and Royalties, also in effect from 2004, both types of payment are exempt from withholding tax if they are between associated companies (rules as for the participation exemption).

Luxembourg has actually gone even further, meaning that there is no withholding tax on royalties paid to non-resident companies, and Luxembourg holding companies incorporated according to the terms of the law of 1929 are not subject to such withholding tax either. In line with the directive, the laws came into force retrospectively, with effect from January 1st 2004.

It isn't all good news, however. Luxembourg is being forced to comply with the EU's Code of Conduct Committee's campaign against 'harmful tax practices' by modifying the dividend taxation regime for 1929 holding companies. Currently, 1929 holding companies are exempt from all Luxembourg taxes, with the exception of the annual subscription tax levied on their net asset value and the capital contribution tax. Thus, a 1929 holding company can receive dividends from a foreign subsidiary and claim an exemption, even if the distributing subsidiary is not subject to tax or is subject to a tax regime that is notably more advantageous than the regime applicable to fully taxed Luxembourg resident subsidiaries.

Under 2005 legislation, a 1929 holding company loses its tax-exempt status if at least 5% of its dividends received relate to foreign participations that are not subject to tax at a rate comparable to the Luxembourg corporate income tax rate. An effective tax rate is considered to be comparable if it is at least 11%, equating to approximately one-half of the current corporate income tax rate that applies to regular resident taxpayers and is in line with the tax rate generally applicable to dividends received from participations that do not qualify for a full exemption.

Further, the taxable base needs to be determined under a method similar to the methods used in Luxembourg. An auditor or accountant is required to certify annually that the eligibility requirements have been met. A 1929 holding company that loses its tax-exempt status is subject to the normal corporate income tax regime.

For newly incorporated 1929 holding companies, the amendment applied as from 1 January 2004. For existing 1929 holding companies (i.e. those incorporated under the law applicable before 1 January 2004), the new rules will apply as from 1 January 2011.

In 2006, the European Commission attacked the holding company tax regimes in total, and it is likely that the existing regimes will be terminated, with a 'sunset' period until 2010 for companies already in existence.

LUXEMBOURG PERSONAL TAXATION

Luxembourg is a highly-taxed country and there are no special regimes for the foreign employees of 'offshore' companies. The main taxes are Income Tax, the Municipal Business Tax on Profits, and a wealth tax, the Fortune Tax. VAT applies to most goods and services.

Residence and Liability for Taxation
For taxation purposes, an individual is either resident or non-resident, and nationality is not a factor in determining tax status. An individual is considered resident in Luxembourg if he maintains a residence there with the intention of remaining on other than a temporary basis. A stay of more than 6 months amounts to residence. In legal terms, an individual is resident if either his tax domicile (domicile fiscale or Wohnsitz) or his usual abode (lieu de sejour habituel or gewohnlicher Aufenhalt) is in Luxembourg.

Double Taxation Treaties (of which Luxembourg has entered more than 30) may affect the residence and tax status of individuals.

Residents are liable to tax on their world-wide income.

Income Tax

Income tax (Impot sur le Revenu or IR) is charged on nine types of income:

1. Income from trade or business - business income
2. Professional income
3. Agricultural and forestry income
4. Self-employment income
5. Employment income
6. Pensions and annuities
7. Investment income
8. Income from letting and leasing
9. Other income (including capital gains)

These types of income are described in considerable detail in the legislation.

There are many allowances, deductions and exemptions in the Luxembourg income tax regime, including child relief, child tax credit, extra-ordinary childrens abatement, mono-parental abatement, deductions for employment-related expenses, deductions for interest payments, deductions related to share purchase, exemptions for pay for unsocial hours worked, part exemptions on dividend income, etc etc. These are described in great detail in the legislation.

Income tax bands and rates depend on family status, but for a married couple with two children, taxable income would be taxed as follows:

* To Euros 32.000: 0%
* To Euros 45,000: 14%
* To Euros 75,000: 25%
* To Euros 100,000: 31%
* To Euros 125,000: 35%
* Above: 38%

Dividends are normally taxed at source (via a withholding tax of 20%) and are added to total income, with an appropriate tax credit.

Employment income (number 5. above) is taxed at source through a monthly withholding tax applied by the employer, which additionally deals with social security contributions. All other types of income are declared on an annual tax return which is to be filed by 31st March of the year following the year being dealt with. Quarterly advance payments of tax are made on 10th of March, June, September and December, on the basis of one quarter of last year's actual tax bill.

In 2006, social security charges are:

* Sickness insurance, 2.80% each from employee and employer;
* Pension insurance, 8% each from employee and employer
* Accident insurance, between 1% and 6% for the employee, and 1% for the employer.

Total contributions can therefore be up to up to 16.80% for the employee. There is a lower income limit of Euros 1,402 per month, and an upper earnings limit of Euros 88,006 annually.

Municipal Business Tax on Profits
The same principles are applied to individuals when they undertake business activity that would be caught by the tax, for example through sole proprietorships or partnerships. However, there is a minimum level of business income below which the tax does not apply, so that individuals in a small way of business will not pay it.

The Fortune Tax
The Luxembourg Net Worth (Fortune) Tax is levied on all individuals who are liable to pay income tax. The tax distinguishes between resident and non-resident individuals on the same basis as does income tax.

Resident individuals pay net worth tax on their world-wide assets under the following headings:

1. Agricultural and forestry net worth; the values are based on those current when the Germans introduced the tax in 1940;

2. Real estate net worth; the values are likewise those obtaining in 1940, even for more recent and foreign constructions;

3. Net worth of a business; the calculation is basically assets less liabilities, and is similar to the calculation of net worth as applied in calculating corporate income tax liability, with some adjustments;

4. Other element; this category includes cash, valuables, shareholdings, insurances, etc.

Liabilities and debts are deducted from the asset figure, and there are various other deductions and allowances. The values are agreed once every three years unless there is a major change. The rate of net worth tax is 0.5% of the final net asset value, and it is payable in four equal instalments during the year.

Non-resident individuals pay net worth tax on their Luxembourg assets under the same headings as for residents, however they are not entitled to deductions and allowances.

Double Taxation Treaties may affect the liability of foreign nationals to the net worth tax.


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