Business Operations in Luxembourg provides foreign investors interested in conducting operations in Luxembourg with and the basic understanding information necessary to enable them to determine the best method for conducting business in the country from both a tax and a general legal point of view.

Written by Tom van der Meer as updated by Peter Moons, both of Loyens & Loeff, Luxembourg, this Portfolio analyses in detail the statutory and procedural framework of Luxembourg income taxation as it applies to individuals, business companies, and holding companies.  It summarizes many of the considerations relevant to establishing a business in Luxembourg—including regulations regarding trade and commerce, immigration, and labor—and provides a detailed explanation of the Luxembourg system of income taxation, paying particular attention to the participation exemption.  The important business tax, net wealth tax, capital tax, and value added tax are also discussed.

Business Operations in Luxembourg also examines the country’s liberal fiscal policy, particularly the possibility of obtaining advance rulings and the activities of special purpose companies.

Worksheets include summaries of the effects of tax treaties entered into by Luxembourg on withholding tax on dividends, interest, and royalties. The texts of the Luxembourg-United States and Luxembourg-United Kingdom tax treaties, are included.

Business Operations in Luxembourg allows you to benefit from:

• A perspective that addresses the concerns of foreign investors/enterprises and their advisors looking to invest/do business or already invested/doing business in the country
• Identification of those features of the country’s system that are likely to prove most problematic to outside investors
• Emphasis on those aspects of the tax system that impact transactions and structures with a cross-border dimension
• Information and insight to enable users to anticipate the pitfalls and opportunities likely to arise in making an initial investment, carrying on operations and devising potential exit strategies
• Invaluable practice documents including tables, charts and lists
• Time-saving citations to relevant sections of tax laws, regulations, court cases, and more

This Portfolio is part of the Foreign Income Portfolios Library, a comprehensive series containing more than 100 Portfolios, which covers critical transactions and issues in international taxation. This highly-regarded resource library offers commentary on a wide range of foreign income topics including: Foreign Tax Credit, Business Operations in Italy, Business Operations in Puerto Rico, Branch ProfitsTax, Source of Income Rules, Subpart F (Controlled Foreign Corporations), Foreign Partnerships and Partners, Transfer Pricing, and more.

 

Detailed Analysis

I. The Grand Duchy of Luxembourg - The Country, Its People and Economy

A. The Country

B. The People

C. The Economy

1. General

2. Transportation and Communication

3. Political Organization

4. Foreign Relations

II. Operating a Business in Luxembourg

A. Foreign Investment Regulations

1. Opportunities

a. Government Policy

b. Possible Business Structures

c. Investment Incentives

d. Labor

e. Finance

f. Financial Sector

g. Special Fiscal Regimes

2. Incentives

a. Tax Incentives

(1) Tax Holiday

(2) Tax Credit for Investment in Fixed Assets

(3) Tax Losses

(4) Depreciation

(5) Income from Intellectual Property

b. Nontax Incentives

(1) Capital Subsidy

(2) Interest Rebates

(3) Société Nationale de Credit et d'Investissement

(4) Government Guarantees

(5) Industrial Sites and Buildings

(6) Repatriation of Funds and Profits

(7) Aid for Upkeep and Development of Professional Permanent Education

3. Restrictions

B. Currency and Exchange Controls

1. Currency

2. Exchange Regulations

C. Trade and Commerce Regulation

1. Imports and Exports

a. Licenses and Quotas

b. Custom Duties and Other Taxes

c. Documentation

2. General Regulation of Business

a. Monopolies and Mergers

b. Restrictive Trade Practices, Unfair Competition and Comparative Advertising

c. Price Controls

d. Securities Regulations

3. Protection of Intellectual Property in the Grand Duchy of Luxembourg

a. Patents

b. Trademarks, Designs and Patterns

c. Industrial Know-How

d. Copyrights

D. Immigration Regulations

1. General

2. Citizens of European Union Member States and the European Economic Area

3. Non-European Union Citizens

4. Work Permit

E. Labor Relations

1. General Aspects

a. Social Climate

b. Labor Regulations

2. Employment Contracts

3. Working Conditions

a. Remuneration

b. Working Hours

c. Legal Holidays

d. Annual Leave

e. Personnel Representatives

F. Financing the Business

1. Credit Institutions

2. Investment Firms and Other Financial Sector Professionals

3. Government Aid

III. Forms of Doing Business in Luxembourg

A. Principal Business Entities

1. Sole Proprietorship

2. Limited Liability Company

3. Partnership

4. Branch of a Foreign Corporation

5. Other Entities

B. Public Limited Liability Company (Société Anonyme)

1. Formation

a. Purpose Clause

b. Corporate Name

c. Shareholders

d. Articles of Incorporation

e. Capital Stock

f. Incorporation Procedure

g. Cost of Incorporation

2. Operation

a. Business License

b. Amendment of Articles

c. Increases and Reductions of Share Capital

d. Acquisition of Own Stock

e. General Meeting of Shareholders (Assemblée Générale des Actionnaires)

f. Board of Directors (Conseil d'Administration)

g. Statutory Auditor (Commissaire)

h. Books and Records

i. Financial Statements

j. Dividends and Other Distributions of Profits

k. Reserves

3. Statutory Mergers and Reorganizations

4. Dissolution

5. Liquidation

C. Other Corporate Entities

1. Private Limited Liability Company (Société à Responsabilité Limitée)

a. General

b. Acquisition of Own Shares

2. Cooperative Company (Société Coopérative)

D. Partnerships

1. General (Unlimited) Partnership (Société en Nom Collectif)

2. Limited Corporate Partnership (Société en Commandite Simple)

3. Partnership Limited by Shares (Société en Commandite par Actions)

E. Branch of a Foreign Corporation (Succursale)

F. Other Business Entities

1. Noncommercial Company (Société Civile)

2. Joint Venture

a. Association Momentanée (Temporary Commercial Association)

b. Association en Participation (Commercial Association by Participation)

3. Economic Interest Grouping

4. European Company (Societas Europaea or SE)

IV. Special Purpose Companies

A. Financial Participation Companies (Société à Participation Financière)

1. Background

2. General

a. Capital Duty

b. Annual Net Wealth Tax

3. Taxation on Incoming Dividends and Capital Gains

a. Participation Exemption

(1) Dividends

(2) Capital Gains

b. Nonqualifying Participation

(1) Dividends

(2) Capital Gains

c. Holding Period

d. Subject to Tax

e. Pre-acquisition Retained Earnings

f. Luxembourg Permanent Establishment

4. Deduction of Costs

a. Write Offs

b. Financing Expenses

c. Currency Exchange Results on Debt Instruments

d. Liquidation Losses

e. Tax Credit

5. Withholding Tax on Outgoing Dividends and Capital Gains

a. Domestic Rate and Treaties

b. EC Parent Subsidiary Directive

c. Capital Gains

d. Liquidation of a Soparfi

e. Repurchase of Shares in a Soparfi

f. Capital Reduction

6. Other Issues

a. Corporate Income Tax Rate

b. Debt Equity Ratio

c. Like-Kind Exchange

B. "1929" Holding Companies

1. Introduction

2. Permitted Activities

a. Shares and Bonds

b. Loans

c. Patents

3. Taxation

a. Tax Exempt Status

b. Capital Duty

c. Subscription Tax (Taxe d'Abonnement)

d. "Milliardaire" Status

e. Withholding Tax

f. Double Taxation Treaties

4. Funding Ratios

5. Milliardaire Status Holding Companies

6. Financial Holding Companies

7. Investment Advisory Holding Companies

C. Private Wealth Management Companies

1. Introduction

2. Form of SPF

3. Permitted Activities

a. Securities

b. Cash and Other Assets Held in Accounts

4. Prohibited Activities

5. Eligible Shareholders of an SPF

6. Taxation

a. Exemption of Direct Taxes

b. Capital Duty

c. Subscription Tax (Tax d'Abonnement)

d. Withholding Tax

e. VAT

f. Revocation of Tax Benefits

g. Taxation of Nonresident Shareholders in an SPF

h. Double Taxation Treaties

D. Investment Funds

1. Introduction

2. Legal Forms

a. Collective Investment Funds (Fonds Communs de Placement)

b. Investment Companies with Variable Capital (Sociétés d'Investissement à Capital Variable)

c. Fixed Capital Investment Companies (Sociétés d'Investissement à Capital Fixe)

3. Umbrella Funds

4. General Regulations

a. Depository

b. Minimum Capital

c. Administration

d. Investment and Borrowing Restrictions

e. Dividends

5. Management and Advisory Companies

a. Management Companies of Fonds Communs de Placement

b. Management and Advisory Companies of Sociétés d'Investissement à Capital Variable and Sociétés d'Investissement à Capital Fixe

6. Taxation of Undertakings for Collective Investment

a. Exempt Status

b. Capital Duty

c. Annual Subscription Tax (Taxe d'Abonnement)

d. Withholding Taxes on Dividends

e. Stamp Duty

7. Taxation of Management Companies

a. Management Company of Single Fonds Communs de Placement

b. Advisory Holding Company

c. Other Management Companies

E. Banks

1. Loan Provisions

2. Fiscal Neutralization of Exchange Gains

3. Reduction of Personnel Costs

F. Insurance and Reinsurance Companies

G. Shipping Companies

H. Audio Visual Certificates

1. General

2. Tax Advantage

I. Venture Capital

J. Group Finance Companies

1. General

2. Luxembourg Tax Position

a. Corporate Income Tax

b. Net Wealth Tax

3. Swiss Tax Position

K. Pension Funds

1. General

2. Legal Forms

a. Société d'Epargne-Pension à Capital Variable

b. Association d'Epargne-Pension

3. Object Clause

4. Authorization

5. Management

6. Taxation

a. Capital Duty

b. Income Tax and Net Wealth Tax

(1) Société d'Epargne-Pension à Capital Variable

(2) Association d'Epargne-Pension

c. Tax Treaty Protection

d. Value Added Tax

L. Securitization Companies and Funds

1. Form and Characteristics of a Securitization Vehicle

2. Regulatory Aspects

3. Tax Aspects of a Fund Securitization Vehicle

4. Tax Aspects of a Company Securitization Vehicle

5. Value Added Tax Aspects

M. Regulated Venture Capital Companies and Partnerships

1. Legal Form, Object Clause and Investors

2. Minimum Capital, Variable Capital and Quotation on Stock Exchanges

3. Investment Policy

4. Capital Contributions and Repayments, Legal Reserves, and Dividend Distributions

5. Depository/Custodian

6. Approval and Supervision

7. Publication of Prospectus and Annual Report

8. Tax Aspects of a SICAR Company

9. Tax Aspects of a SICAR Partnership

10. Other Tax Aspects of a SICAR

V. Principal Taxes

A. Income Tax (Impôt sur le Revenu)

B. Net Wealth Tax (Impôt sur la Fortune)

C. Municipal Business Tax (Impôt Commercial Communal sur le Bénéfice)

D. Value Added Tax

E. Capital Duty (Droit d'Apport)

F. Payroll Tax

G. Local Taxes

H. Other Taxes

1. Excise Duties

2. Vehicle License Tax

3. Withholding Taxes

4. Estate, Gift, Inheritance, and Succession Taxes

VI. Taxation of Domestic Companies

A. What Is a Domestic Company?

B. Corporate Income Tax

1. Taxation of Worldwide Income

2. Accounting

a. General

b. Accounting Period

c. Accounting Methods

d. Valuation Methods

e. Group Taxation

f. Reserves

3. Calculation of Gross Income

a. General

b. Capital Gains

c. Exchange of Assets (Tauschgutachten)

d. Transfer of Assets

e. Mergers, Demergers and Conversions

f. Dividend Income

g. Income from Foreign Sources

(1) Foreign Interest Income

(2) Income from Permanent Establishments Located Abroad

(3) Royalties

(4) Capital Gains

h. Other Inclusions in Gross Income

i. Other Exclusions from Gross Income

j. Exemption for Intellectual Property Income

4. Business Expenses

a. General

b. Organizational Expenses

c. Travel and Entertainment Expenses

d. Interest and Royalties

e. Taxes

f. Depreciation and Amortization

g. Obsolete Equipment

h. Charitable Contributions

i. Casualty Losses

j. Reserve Accounts

k. Bad Debts

l. Inventory Write-downs

m. Rents

n. Salaries and Wages

o. Commissions and Fees

p. Other Deductions from Gross Income

5. Capital Expenditures

6. Income and Gains from Intellectual Property

7. Loss Carryforward and Carryback

8. Tax Credits

a. Foreign Tax Credits

b. Investment Tax Credit

c. Other Credits

9. Tax Rates and Calculation of Taxable Income

10. Assessment and Filing

a. Tax Returns

b. Payment of Tax

c. Tax Audits

d. Statute of Limitations

e. Interest

C. Other Taxes

1. Dividend Withholding Tax

2. Municipal Business Tax

3. Net Wealth Tax

4. Value Added Tax

5. Stamp Duty

6. Capital Duty

7. Property Taxation

a. Tax on Transfer in the Mortgage Register

b. Transfer Tax

VII. Taxation of Foreign companies

A. What Is a Foreign Company?

B. Determination of Taxable Income

1. Business Income

2. Dividends

3. Interest

4. Capital Gains

VIII. Taxation of Partnerships

IX. Taxation of Other Business Entities

A. Noncommercial Company (Société Civile)

B. Joint Ventures

C. Economic Interest Groupings

X. Taxation of Resident Individuals

A. Scope of Taxation

B. Residence

C. Determination of Gross Income

1. Income from Trade or Business

2. Income from Agriculture and Forestry

3. Income from Independent Personal Services

4. Income from Employment

a. Salary in Cash

b. Benefits in Kind

5. Income from Pensions and Annuities

6. Income from Investment of Capital

7. Income from Renting and Leasing

8. Capital Gains

a. Speculative Gains

b. Capital Gains Other than Speculative Gains

D. Allowances, Deductions, Credits

1. Allowances with Respect to Business Income

a. Business Expenses

b. Allowances for Discontinuance of Business

2. Allowances with Respect to Farming and Forestry Income

a. Deductible Expenses

b. Reduced Tax Rate

3. Allowances with Respect to Income from Independent Services

a. Self-employed Professionals

(1) Deductible Expenses

(2) Discontinuance of the Professional Activity

b. Board Members and Statutory Auditors

4. Allowances with Respect to Employment Income

a. Deductible Expenses

b. Lump-sum Allowances with Respect to Salaries

c. Tax Exempt Compensation

d. Reduced Tax Rates

5. Allowances with Respect to Pensions

a. Deductible Expenses

b. Lump-sum Deductions

c. Tax Exempt Pensions

d. Reduced Tax Rates

6. Allowances with Respect to Investment Income

a. Deductible Expenses

b. Lump-sum Deduction

7. Allowances with Respect to Rental Income

a. Deductible Expenses

b. Lump-sum Deduction

c. Reduced Tax Rate

8. Allowances with Respect to Capital Gains

a. Speculative Gains

b. Capital Gains

c. Tax Exempt Capital Gains

d. Rollover of Capital Gains

9. Private Recurring Expenses

a. Pensions and Annuities Payable in Consideration of a Contract or a Judicial Deed

b. Debt Interest

c. Insurance Premiums

d. Building Savings

e. Compulsory Social Security Contributions

f. Gifts

g. Loss Carryover

10. Deductions for Extraordinary Charges

a. Expenses Related to Exceptional Hardship

b. Allowances for Extraordinary Child-Related Charges

11. Investment Incentive

12. Tax Credits

a. Credit for Domestic Income Tax

b. Credit for Specified Luxembourg Business Investments

c. Credit for Foreign Income Taxes

d. Credit for Descendants Ceasing to Qualify for Dependent's Allowance in the Preceding Two Years

E. Rates and Calculation of Taxable Income

1. Aggregate Taxable Income

a. Wage Withholding Tax

b. Other Withholding Taxes

(1) Special Tax on Directors’ Fees

(2) Dividends

(3) Interest

(4) Royalties

2. Tax Classes and Child Allowances

a. Classification of Taxpayers

b. Differences in Taxation of Classes 1, 1a, and 2

c. Child Support

3. Tax Rate

a. Individual Income Tax Rates

b. Tax Free Brackets

F. Assessment and Filing

1. Tax Return and Assessment Formalities

2. Tax Payment

XI. Taxation of Nonresidents

A. General

B. Earned Income from Independent Activities

C. Income Subject to Wage Tax

1. Income from Employment

2. Pensions

3. Deductible Expenses

D. Income from Investment

1. Dividends

2. Interest

3. Royalties

4. Rental Income

5. Capital Gains on Private Assets

6. Deductible Expenses

E. Method of Taxation

1. Tax Rate

2. Classification of Nonresident Taxpayers

a. Earned Income and Passive Income in Luxembourg

b. More than 50% of Earned Income Derived from Luxembourg

c. Allowances for Dependents

3. Withholding Taxes

a. Passive Income

b. Directors’ Fees

c. Withholding Tax on Wages and Pensions

4. Assessment of Nonresidents

XII. Estate, Inheritance, and Transfer and Gift Taxes

A. Inheritance Tax and Transfer Tax

1. Tax Rates

2. Inheritance Tax

3. Transfer Tax

B. Gift Tax

1. Tax Rates

2. Effective Rates

XIII. Intercompany Pricing

A. Scope of Provision

B. Determination of Arm's-Length Price

XIV. Avoidance of Double Taxation

A. Foreign Tax Credits

B. Tax Treaties

1. General

a. The Exemption Method

b. The Tax Credit Method

2. Taxation of Foreign Business Income

a. Foreign Permanent Establishment

b. Industrial and Commercial Profits

3. Taxation of Investment Income

a. Dividends

b. Interest

c. Royalties

4. Comments on the 1996 Luxembourg-United States Tax Treaty

a. Income and Capital Gains from Real Property

b. Business Profits

c. Dividends, Interest and Royalties.

d. Triangular Cases

e. Avoidance of Double Taxation

f. Limitation on Benefits

(1) Qualified Residents

(2) Nonqualified Residents

g. Other Limitations on Benefits Provisions

XV. Social Security Contributions.

Introductory Material

A. Caisse de Maladie

1. Health Care

2. Allowance in Case of Illness

3. Contributions

B. Caisse des Pensions

1. Coverage Under the Fund

2. Retirement Pension

3. Contributions

Working Papers

Table of Worksheets

Worksheet 1 Model Articles of Incorporation for an S.A.

Worksheet 2 Model Articles of Incorporation for a S.Ã.r.l.

Worksheet 3 Model Object Clause for a Holding 1929 Company

Worksheet 4 Social Security Contributions

Worksheet 5 Income Tax Rates for Individuals Extracts of the tariff applicable from the year 2002

Worksheet 6 Corporation Income Tax Rates

Worksheet 7 Model Corporate Income Tax Return

Worksheet 8 Model V.A.T. Tax Return

Worksheet 9 List of Comprehensive Double Taxation Agreements and Related Protocols Signed by Luxembourg, as of November 15, 2007

Worksheet 10 Table of Withholding Tax Rates as of January 1, 2007

Worksheet 11 [Reserved]

Worksheet 12 [Reserved]

Worksheet 13 1967 Luxembourg – United Kingdom Income and Capital Tax Treaty

Worksheet 14 1978 Protocol Amending 1967 Luxembourg–United Kingdom Income and Capital Tax Treaty

Worksheet 15 1983 Protocol Amending 1967 Luxembourg – United Kingdom Income and Capital Tax Treaty as Amended by 1978 Protocol

Worksheet 16 1962 Luxembourg – United States Income and Capital Tax Treaty

Worksheet 17 1996 Luxembourg – United States Income and Capital Tax Treaty (In force)

Worksheet 18 1989 Luxembourg–United States Shipping and Air Transport Tax Treaty

Worksheet 19 Useful Addresses

Worksheet 20 Luxembourg Launches New Vehicle for Private Wealth Investment

Bibliography

OFFICIAL

Tax Codes