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, resident in the municipality of Luxembourg-City, are generally subject to a corporate tax rate of 29.22%, including a 7% contribution to the unemployment fund for corporate income tax purposes. The tax rate may be detailed as follows:
• Corporate income tax: 21% * 1.07 = 22.47% (the rate of 21% is reduced to 20% if the taxable income does not exceed € 15,000)
• Municipal business tax: 6.75 (this rate may increase depending on the municipality in which the company is resident)
Furthermore, companies are generally subject to net wealth tax of 0.5% on the company's unitary value (which basically consists in the company's net equity, increased/decreased by certain tax adjustments).
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: