Luxembourg Tax & Business Guide - Deloitte

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Basic facts
Population 470,000 Inflation 3.0% (2006)
Main languages Luxembourgish, German, French GDP per head US$89,350*
Currency Euro (ƒ) GDP growth 6.2% (2006)
Economic communities European Economic Area, EU, OECD, WTO
GDP sources 1% agriculture, 30% industry, 69% services
*Economist Intelligence Unit estimate.
Political environment

The Grand Duchy of Luxembourg is a constitutional monarchy and a parliamentary democracy.

The current government, comprising the centrist Christian Social Party (CSV) and the centre-left Socialist WorkersÌ Party (LSAP), is led by the prime minister, currently Jean-Claude Juncker (CSV). The next general election is due in June 2009.
Foreign trade and investment
Exports US$16.6bn (2006)* Imports US$20.9bn (2006)*
*Economist Intelligence Unit estimates.

Major exports: Machinery and equipment, steel products, chemicals, rubber products and glass.

Leading export markets: Germany, France, Belgium and other EU countries.

The government actively encourages foreign investment. There are strict environmental and planning laws, generous labour protection and high wages, but low employer contribution costs.
Business and financing
Business forms Soci»t» anonyme (SA), soci»t» á responsabilit» limit»e (SARL), soci»t» en commandite par actions (SCPA), soci»t» en nom collectif (SNC), soci»t» en commandite simple (SECS), soci»t» coop»rative, soci»t» civile

The SA (corporation) is the form more often used by medium-sized and large companies (including foreign-owned firms), since it is generally more flexible than the SARL (limited liability company). A foreign parent company may set up a branch, which is subject to the same tax rates as Luxembourg companies.

Luxembourg is the worldÌs eighth-largest banking centre by assets and the second-largest centre for mutual funds.
Labour environment
Unemployment rate 4.1% (2006)* Minimum wage ƒ1,570.28 (monthly)
*Economist Intelligence Unit estimate.

The minimum monthly wage for unskilled workers is ƒ1,570.28 and for skilled workers ƒ1,884.34.

Employers contribute to the state pension fund, sickness and maternity insurance and accident insurance.

Nationals of the European Economic Area (EEA) and Switzerland do not need a work permit, with the exception of nationals from Bulgaria, the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Romania, Slovakia and Slovenia. Nationals of all EEA countries and Switzerland, however, must apply for a residence permit from the local authorities (generally only a formality).

Nationals of other countries must apply for a work and residence permit (the latter is issued by the Ministry of Justice and is subject to certain conditions).
Taxation
Corporate tax
Main rate Effective rate of 29.63%

Resident companies are taxed on worldwide income; non-resident companies are taxed only on Luxembourg-source income. A company is resident if its legal seat (according to the articles of association) or its place of effective management is in Luxembourg. The rate of corporate income tax is 22%, with a solidarity tax of 4% of income tax. The municipal business tax depends on the locality; it is 6.75% in Luxembourg City. The effective rate of corporate tax is therefore 29.63%.

Special tax regimes include regimes for securitisation vehicles (all remuneration paid, including dividends, is tax-deductible), SICARs (exempt on all income from securities and on transit funds) and (regulated) investment funds (SICAVs, SICAFs, FCPs). The regime for tax-exempt 1929 holding companies was abolished on January 1st 2007, with a transitional period for existing companies until the end of 2010.
Individual tax
Progressive rates to 38.95%

Resident individuals are taxed on their worldwide income; non-residents are taxed only on Luxembourg-source income. An individual whose domicile or customary place of abode is in Luxembourg is considered to be resident. An individual is domiciled where that person occupies a home in circumstances that indicate that the person will retain and use the home. If an individual is present in Luxembourg for six months, this indicates that Luxembourg is the customary place of abode. Tax is charged at progressive rates to 38%, with a 2.5% surcharge for the employment fund, resulting in an effective rate of 38.95%. A 50% exemption may be available for dividend income, subject to certain conditions.
Capital gains
Gains of companies and short-term gains of individuals are taxed as income

Capital gains of companies are generally taxed as income. There is a participation exemption for shareholdings of 10% or more and for shareholdings with an acquisition price of at least ƒ6 million, subject to certain conditions, including a one-year holding requirement. Tax may be deferred on gains on certain fixed assets held for more than five years against the cost of replacement assets acquired in the same tax year or within two years thereafter.

Short-term gains of individuals are taxed as income; long-term gains receive more favourable treatment, including an exemption of ƒ50,000 for gains realised in a ten-year period and taxation of remaining long-term gains at one-half the taxpayerÌs global rate. Gains of individuals on real estate are long term if the property was held for more than two years; gains on an individualÌs private residence are normally exempt. Gains derived by an individual on shares are long term if the shares are held for more than six months and only taxable insofar as the shareholding exceeds 10%. Gains on other movable assets are exempt if the holding is more than six months. A temporary, more beneficial tax regime is in effect throughout 2007.
Indirect tax
Standard rate 15% Lower rates 12%, 6%, 3%

Value-added tax (VAT) applies to most transactions at the standard rate of 15%. A lower 12% rate applies to heating oils, wine and some other items. A 6% rate applies to gas and electricity, and a 3% rate applies to food, books and newspapers, pharmaceuticals, water, agricultural produce and some other items. Exports are zero-rated. Exemptions include some financial, health and medical services and leasing of immovable property.

The minimum registration threshold for VAT is ƒ10,000.
Tax administration and compliance
Tax year Corporations: accounting year; Individuals: calendar year

The tax year for a company is either the calendar year or the accounting year ending in a particular calendar year. Companies make four quarterly advance payments of tax based on the latest assessment, and a tax return must be filed by May 31st in the year following the tax year.

Employment income is taxed by withholding; other income of individuals is taxed quarterly by way of payments in advance. Individuals must file a tax return by March 31st following the tax year. In practice, filing extensions of a few months are granted by the tax authorities both for individuals and companies.
Additional tax information
Withholding taxes Dividends 15%, Interest 0% if paid to resident or non-resident corporations, 10% if paid to Luxembourg resident individuals and potentially 15% if paid to non-resident individuals (EU Savings Directive), Royalties 0%. Rates may be reduced by domestic law, tax treaty or EC directives.
Tax treaties Luxembourg has concluded about 50 tax treaties.
Dividends Dividends are taxable, with a 50% or full exemption in some cases.
Revenue protection There is a general anti-abuse provision, but no specific transfer-pricing legislation.
Groups A fiscal unity is possible.
Incentives State grants; new industrial activities; new venture capital; audiovisual certificates.
Other taxes Capital duty, Duty on transfer of immovable property, Gift tax, Import duty, Local real estate tax, Net worth tax, Subscription tax, Tax on registration of lease contracts, Tax on registration of loan agreements.