A REWARDING TAX CLIMATE FOR BUSINESS AND EMPLOYEES

The legal and tax environment is certainly one of the most important reasons why Luxembourg is attractive to companies looking for a location for their headquarters. The country has developed favourable tax rules from both corporate and individual standpoints.

Luxembourg companies are subject to a corporate income tax rate of 29,22%, plus a surcharge of 7% of the tax, as well as a municipal business tax. In Luxembourg City, the maximum effective overall tax rate is 28.8%. Through e.g. investment tax credits and an 80% exemption for income from qualifying IP rights, the Luxembourg tax law allows a company to reduce the effective tax rate.

The report “Paying Taxes 2012”, by PWC and the World Bank, calculates a “Total Tax Rate” which takes all business taxes and compares this with pre-tax profits; by this measurement, Luxembourg is graded the lowest in the EU. According to this report, Luxembourg ranks 14th (up one ranking point from 2010) out of 183 economies worldwide and lowest in the EU in terms of “ease of paying taxes”, based on average tax liabilities and time required to file tax returns. On average, annual corporate tax returns can be completed in 59 hours in Luxembourg, resulting in a ranking of 6th overall (unchanged), and 2nd lowest in the EU.

Comparison of the Total Tax Rates across the EU

Source: World Bank/PWC, Paying Taxes 2012
For more details go to http://www.doingbusiness.org/Taxes

Double tax treaty network

Taxation in Luxembourg of foreign-source income is mitigated through numerous double tax avoidance treaties. If no treaty applies, a foreign tax credit is available under domestic law.

Favourable tax regime

Luxembourg does not impose any withholding tax on the payment of interest, except in some very specific cases. There is no withholding tax on royalties paid to resident or non-resident companies related to patents, trademarks and know-how. There is no withholding tax on liquidation proceeds.

Luxembourg has a favourable tax regime for income, gains or net worth related to the substantial holding of shareholdings. Under the participation exemption regime, there is an exemption from Luxembourg corporate income tax on dividends received from qualifying entities in the European Union or treaty-related countries (under certain conditions). Likewise, capital gains derived from the sale of qualifying participations can be exempt. In certain cases, the amounts received upon the partial or total liquidation of a subsidiary may also benefit from the participation exemption.

Special exemption for income from IP rights

The tax scheme in place to foster innovation and intellectual property management includes an 80% exemption of the income deriving from the use, exploitation and/or disposal of qualifying IP rights, bringing the effective tax rate down to 5.76%. Three situations are covered:

-The remuneration for exploitation of IP rights;

-The use of IP rights by a company for its own activity;

-The disposal of IP rights.

The exemption regime applies to income from patents, trademarks, designs, models, software copyrights and domain names. Moreover, these IP rights are fully exempt from net worth tax.

Investment tax credit

Luxembourg is encouraging operational companies to invest in their production assets. A tax credit of 7% is granted on qualifying investments acquired during a year (3% on the amount of the investment exceeding €150 000). For investment in ecological equipment and projects, these rates are increased by a further 1%. In addition, a tax credit of 13% is granted for additional investments made during the tax year. These tax credits will reduce the corporate income tax and may be carried forward for 10 years, if unused.

Attractive labour costs

Compared to other EU countries, an employee in Luxembourg with the same gross salary would cost less to the employer and get a higher salary, due to low personal income tax and social security charges. Nevertheless, the high social security benefits allow most Luxembourg employees not to seek additional private health insurance.

The following comparison gives an example of a married person with two children and whose spouse has the same income: