Tax Management Portfolio, Business Operations in Luxembourg, contains the basic information to enable foreign businesses to determine the best method of conducting their operations in Luxembourg from both the tax and the general legal points of view. To view this Portfolio,
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Tax Management Portfolio, Business Operations in Luxembourg, No. 7220, contains the basic information to enable foreign businesses to determine the best method of conducting their operations in Luxembourg from both the tax and the general legal points of view. It analyses in detail the statutory and procedural framework of Luxembourg income taxation as applied to individuals, business companies, holding and finance companies and funds.
The analysis includes a summary of many of the considerations relevant to establishing a business in Luxembourg. In addition to providing a detailed explanation of the Luxembourg system of income taxation, particularly the participation exemption available in Luxembourg, the Portfolio also discusses important business tax, net wealth tax, personal income tax and value added tax issues.
Although Luxembourg is far from being a tax haven (especially for individual taxpayers), the country has a liberal fiscal policy insofar as the avoidance of double taxation and withholding taxes, the possibility of obtaining advance rulings and the activities of investment funds and special purpose companies are concerned.
Among the Worksheets are model articles of incorporation for commonly used business entities in Luxembourg and the text of the Luxembourg-United States Income Tax Treaty. A complete list of the Worksheets is shown on the Table of Worksheets.
Person wishing to engage in transactions involving Luxembourg or using Luxembourg entities are advised to use this portfolio to obtain a general understanding of the Luxembourg tax law and tax system and should always seek professional advice before engaging in a transaction.
This Portfolio may be cited as Moons, 7220 T.M., Business Operations in Luxembourg.
Peter Moons is a partner at Loyens & Loeff's Luxembourg office focusing on cross-border tax structuring of multinationals and investment funds. He is a graduate in business economics and tax law of the Erasmus University in Rotterdam. He has previously worked in the Rotterdam and Frankfurt offices of Loyens & Loeff N.V. He is a member of the International Fiscal Association (IFA) and of the tax committee of the Luxembourg Private Equity Association.
Table of Contents
Detailed Analysis I. The Grand Duchy of Luxembourg — the Country, Its People and Its 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 Purpose Companies and Regimes 2. Incentives a. Tax Incentives (1) Tax Holiday (2) Tax Credit for Investment in Tangible Depreciable Assets (3) Tax Credit for Hiring Unemployed Workers (4) Tax Losses (5) Depreciation (6) Income from Intellectual Property b. Nontax Incentives (1) General (2) The Industrial Framework Law (3) The SME Framework Law (4) The Research, Development and Innovation Act 3. Restrictions a. General b. Repatriation of Funds and Profits 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. Business License b. Monopolies and Mergers c. Restrictive Trade Practices, Unfair Competition and Comparative Advertising d. Price Controls e. 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 with Respect to Financing 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. Incorporation a. Object Clause b. Corporate Denomination c. Shareholders d. Incorporation Deed e. Share Capital 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 f. Board of Directors (Conseil d'Administration), Management Board (Directoire), and Supervisory Board (Conseil de Surveillance) g. Supervisory Auditor (Commissaire aux Comptes) and Approved Statutory Auditor (Réviseur d'Entreprises Agréé) h. Books and Records i. Financial Statements j. Dividends and Other Distributions of Profits k. Reserves 3. Reorganizations 4. Dissolution and Liquidation C. Private Limited Liability Company (Société à Responsabilité Limitée) (S.à.r.l.) 1. General 2. Transfer of Shares 3. Acquisition of Own Shares D. Simplified Joint Stock Company (Société par Actions Simplifiée) (SAS) E. Other Entities 1. European Company (Societas Europaea) (SE) 2. Cooperative Company (Société Coopérative) F. Partnerships 1. General (Unlimited) Partnership (Société en Nom Collectif) 2. Limited Corporate Partnership (Société en Commandite Simple) 3. Special Limited Corporate Partnership (Société en Commandite Spéciale) 4. Partnership Limited by Shares (Société en Commandite par Actions) G. Branch of a Foreign Corporation (Succursale) H. Other Business Entities 1. Civil Company (Société Civile) 2. Temporary Commercial Company (Société Momentanée) 3. Commercial Company by Participation (Société en Participation) 4. Economic Interest Grouping IV. Special Purpose Companies A. Holding and Finance Companies (Sociétés à Participation Financière) 1. Background 2. Corporate Income Tax 3. Taxation of Incoming Dividends and Capital Gains a. Participation Exemption (1) Dividends (2) Capital Gains (3) Holding Period — Comparison with Tax Treaties (4) Subject to Tax (5) Pre-acquisition Retained Earnings (6) Luxembourg Permanent Establishment b. Deduction of Costs (1) Write-Offs (2) Financing Expenses (3) Currency Exchange Results on Debt Instruments c. Nonqualifying Participation (1) Dividends (2) Capital Gains 4. Taxation of Financing Activities 5. Withholding Tax on Outgoing Dividends a. Domestic Rate and Treaties b. Exemptions c. Liquidation of a Soparfi d. Repurchase of Shares in a Soparfi e. Capital Reduction 6. Capital Gains 7. Net Wealth Tax 8. Chamber of Commerce Fees B. Investment Funds 1. Introduction 2. Legal Forms a. Common 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. Master Feeder Structures of UCITS 5. General Regulations a. Depository b. Minimum Capital c. Administration d. Investment and Borrowing Restrictions e. Dividends f. Documentation and Reporting g. Promoter Requirement — Initiator 6. Management Companies of UCITS 7. Taxation of Undertakings for Collective Investment a. Exempt Status b. Annual Subscription Tax (Taxe d'Abonnement) c. Withholding Taxes on Dividends d. Taxation of Capital Gains e. Value-Added Tax f. Stamp Duty C. Specialized Investment Funds 1. Legal Form and Eligible Investors 2. Investment Policy 3. Capital Contributions, Distributions and Repayments 4. Custodian 5. Approval and Supervision 6. Publication of Prospectus and Annual Report 7. Tax Aspects of a Specialized Investment Fund D. Pension Funds 1. General 2. Legal Forms a. Pension Savings Company (Société d'Épargne-Pension à Capital Variable) b. Pension Savings Association (Association d'Épargne-Pension) c. CAA Pension Funds 3. Object Clause 4. Authorization 5. Management 6. Taxation a. Income Tax and Net Wealth Tax (1) Société d'Épargne-Pension à Capital Variable (2) Association d'Épargne-Pension (3) CAA Pension Funds b. Tax Treaty Protection c. Value-Added Tax E. Banks 1. Loan Provisions 2. Fiscal Neutralization of Exchange Gains F. 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 G. Regulated Venture Capital Companies and Partnerships 1. Legal Form, Object Clause and Investors 2. Minimum 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. Value-Added Tax H. Intellectual Property Companies 1. Eligible Intellectual Property 2. Requirements 3. Valuation 4. Tax Treatment I. Insurance and Reinsurance Companies J. Private Wealth Management Companies (SPFs) 1. Introduction 2. Form of a Société de Gestion de Patrimoine Familial 3. Permitted Activities a. Securities b. Cash and Other Assets Held in Accounts 4. Prohibited Activities 5. Eligible Shareholders of a Société de Gestion de Patrimoine Familial 6. Taxation a. Exemption from Income Taxes b. Withholding Tax c. Subscription Tax (Taxe d'Abonnement) d. Value-Added Tax e. Revocation of Tax Benefits f. Taxation of Nonresident Shareholders g. Tax Treaties K. Shipping Companies L. Venture Capital Certificates and Former Audio-Visual Certificates 1. Venture Capital Certificates 2. Audio-Visual Certificates V. Principal Taxes and Sources of Authority in Tax A. Sources of Authority in Tax 1. Legislative a. Organization of the Tax Law b. Other Legislative Documents that Can Be Used to Interpret the Law c. Legislative Process d. Constitutional Challenge 2. Administrative 3. Advance Tax Rulings 4. Courts a. Pre-litigation Process b. Trial Process (1) Before the Administrative Courts (2) Before the Civil Courts B. Income Tax (Impôt sur le Revenu) C. Municipal Business Tax (Impôt Commercial Communal sur le Bénéfice) D. Net Wealth Tax (Impôt sur la Fortune) E. Withholding Taxes F. Value-Added Tax G. Payroll Tax H. Other Taxes 1. Excise Duties 2. Vehicle License Tax 3. Real Property Tax 4. Estate, Gift, Inheritance, and Succession Taxes 5. Registration Duties 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 d. Transfer of Assets e. Mergers, Demergers and Conversions f. Dividend Income g. Intellectual Property Income h. Income from Foreign Sources (1) Foreign Interest Income (2) Income from a Permanent Establishment Located Abroad (3) Royalties (4) Capital Gains i. Other Inclusions in Gross Income j. Other Exclusions from Gross Income 4. Business Expenses a. General b. Organizational Expenses c. Travel and Entertainment Expenses d. Penalties and Bribes e. Interest and Royalties f. Taxes g. Depreciation and Amortization h. Obsolete Equipment i. Charitable Contributions j. Casualty Losses k. Reserve Accounts l. Bad Debts m. Inventory Write-downs n. Rents o. Salaries and Wages p. Commissions and Fees q. Other Deductions from Gross Income 5. Capital Expenditures 6. Loss Carryforward and Carryback 7. Tax Credits a. Foreign Tax Credits b. Investment Tax Credit c. Other Credits 8. Tax Rates and Calculation of Taxable Income 9. Assessment and Filing a. Tax Returns b. Tax Assessments c. Payment of Tax d. Tax Audits e. Statute of Limitations f. Interest C. Other Taxes 1. Dividend Withholding Tax 2. Municipal Business Tax 3. Net Wealth Tax a. Tax Rates b. Minimum Net Wealth Tax c. Reduction of Net Wealth Tax (1) General Reduction (2) Minimum Tax Reduction 4. Value-Added Tax a. General b. VAT Returns c. VAT Rates d. Exemptions e. Customs and VAT Free Zone 5. Registration Duties 6. Property Taxation a. Tax on Transfer in the Mortgage Register b. Transfer Tax VII. Taxation of Foreign Companies Introductory Material 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. Carried Interest for Employees of an Alternative Investment Fund Manager c. Benefits in Kind 5. Income from Pensions and Annuities 6. Income from the 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 e. Inpatriate Tax Regime 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 e. Step Up for New Luxembourg Residents 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 h. Sustainable Transport 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. Credits in Lieu of Allowances (1) Tax Credit for Employees (2) Tax Credit for Pensioners (3) Tax Credit for Single Parents (4) Tax Credit for Independents c. Credit for Descendants Ceasing to Qualify for Dependent's Allowance in the Preceding Two Years d. Credit for Specified Luxembourg Business Investments e. Credit for Foreign Income Taxes 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 Nonresident Individuals 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 Introductory Material 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 4. 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) Non-qualified Residents g. Other Limitations on Benefits Provisions 5. Exchange of Information Pursuant to FATCA 6. Automatic Exchange of Information Pursuant to CRS 7. Automatic Exchange of Information Pursuant to CBC Reporting XV. Social Security Contributions Introductory Material A. Caisse Nationale de Santé 1. Health Care and Health at Work 2. Allowance in Case of Illness or Accident 3. Contributions B. Caisse des Pensions 1. Coverage Under the Fund 2. Retirement Pension 3. Contributions
Table of Worksheets Worksheet 1 Model Articles of Incorporation for an S.A. Worksheet 2 Model Articles of Incorporation for an S.à.r.l. Worksheet 3 Social Security Contributions Worksheet 4 Income Tax Rates for Individuals Worksheet 5 Corporation Income Tax Rates Worksheet 6 Model Corporate Income Tax and Municipal Business Tax Return Worksheet 7 Model V.A.T. Tax Return Worksheet 8 List of Countries with Which Luxembourg Has In Force Income Tax Treaties and Other Tax-Related Agreements as of March 31, 2018 Worksheet 9 1996 Luxembourg-United States Income and Capital Tax Treaty Worksheet 10 1989 Luxembourg-United States Shipping and Air Transport Tax Treaty Worksheet 11 Circular 56/1–56bis/1 on Transfer Pricing for Group Financing Companies Worksheet 12 Useful Government/Industry Addresses
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