Luxembourg is a small, economically developed state located in the center of Europe. The largest number of investment funds and banks operate in Luxembourg. The state has made a lot of business opportunities for business persons around the world. Besides, the taxation system is loyal to businessmen.
Most entrepreneurs seek to register a company in Luxembourg in the following forms:
- public limited company or joint-stock company (SA);
- limited liability company (SARL);
Public Limited Company (Société Anonyme – SA)
The most popular type of company in Luxembourg. The minimum share capital must be € 31,000. At the time of registration of the company in Luxembourg.
Private Limited Liability Company (Société à responsabilité limitée – SARL)
The minimum share capital issued by subscription must be from € 12,500. Moreover, the auditor’s report is not required.
Registration for VAT
VAT (Value Added Tax) is a levy on transactions related to economic activity paid by enterprises. However, businesses pass it on to customers in the form of price increases.
Businesses pay VAT in Luxembourg based on their total turnover.
VAT registration in Luxembourg is mandatory for businesses and individual entrepreneurs with an annual turnover of over 30,000 euros.
Those with a turnover of less than EUR 30,000 can register as a VAT payers at will. After registration, companies receive a Luxembourg VAT number, which can be used for commercial purposes.
There are four VAT rates:
- Normal rate 17%;
- Interim rate of 14% on alcohol, fuel, and gasoline;
- Reduced rate of 8% on heating, lighting, clothing, hairdressing salons, bicycles, and household cleaning;
- Super reduced rate of 3% on food, soft drinks, baby clothes, books, medical supplies, water, and rental costs.
VAT in Luxembourg is payable monthly, quarterly, or annually, depending on the turnover.
If the annual turnover is less than 112,000 euros, declarations must be submitted annually. The deadline for filing a VAT return is March 1 of each year. Monthly and quarterly returns must be submitted by the 15th of the month.
Property tax
Costs associated with the purchase process:
• 7% – real estate tax
• 15% VAT – payable when purchasing a new home
• 7-10% – notary services
• € 3000 – property registration
• € 3000 – loan processing
Mortgage
Mortgage loans in Luxembourg are very popular. However, it is very difficult for a foreign citizen to obtain a mortgage, it is available for residents of the country and persons with a residence permit.
Mortgage interest rates are quite low, with a fixed rate of about 6% and a floating rate of 4%.
Communal business tax
A municipal fee is supposed to help municipalities finance their expenses.
It is paid by companies subject to corporate income tax in Luxembourg, as well as sole proprietors and partnerships that receive operating income.
For individual entrepreneurs and partnerships, there is an income limit of 40,000 euros, below which they are not paid. Reduced to 17,500 euros in cases where corporate income is paid.
The municipal business tax rate in Luxembourg is 8.25% in Esch / Alzette and 9% in Troisvierges.
The combined corporate and utility business tax rate for limited liability companies is 29.25% in Ash / Alzette and 30% in Troisvierges.
Net wealth tax
The fee applies to limited liability companies as well as to limited partnerships if one of the shareholders is the first type of company.
The tax is levied on net assets. The rate is 0.5% for assets up to 500 million euros and 0.05% for assets over 500 million euros.
Corporate income tax
Foreigners in Luxembourg must pay corporate taxes on any business income that is not subject to personal income tax.
This includes income from SARL limited liability companies, SA public limited liability companies, and registered partnerships.
Companies based here pay corporate tax on profits anywhere in the world, while companies based outside Luxembourg pay on profits generated domestically.
Freelancers, sole proprietors, and those with a share in an unincorporated partnership often pay income tax instead of corporate tax.
Who pays corporate tax in Luxembourg?
Corporate tax for individual entrepreneurs
Freelancers and sole proprietors rarely need to pay corporate tax as profits are classified and taxed as personal income.
Self-employed freelancers or sole proprietors must file a personal tax return once a year. They then pay the taxes due to the IRS (Contributions Administration or ACD) as an individual.
Income tax rates in Luxembourg are divided into 23 groups. They range from 0% to 42%, with the top group reserved for incomes over € 200,000.
Although individual entrepreneurs do not pay corporate tax in Luxembourg, they are required to pay for utilities, and for a property on any premises they own.
Corporate taxes for partnerships
Partnerships, like sole proprietorships, usually do not pay corporate tax. This applies to standard partnerships (societe em nom Collectif – SENC), and limited partnerships (societe en commandite simple – SECS), where profit is the personal income of the participating partners.
If the partnership is limited to shares, then taxation is applied to the profits of the shareholders.
The main business taxes paid by partnerships in Luxembourg are:
- utility business tax,
- VAT,
- on property,
- net ownership (if applicable),
- tax registration fee.
Corporate tax for limited liability companies
Limited liability companies in which the business has been registered and exists as a legal entity on its own must pay corporate tax.
The owners of limited liability companies, being a director, pay personal income tax from their salaries (bonuses), and additional profits are taxed in Luxembourg.
This applies to public limited companies (société anonyme – SA) and limited liability companies (société à responsabilité limitée – SARL). Cooperative firms (société coopérative) also pay corporate tax.
Limited companies in Luxembourg must pay taxes:
- for the utility business,
- for the clean property,
- VAT,
- on property
- tax registration fee.
Luxembourg corporate tax rates
Companies earning more than 200,000 euros per year pay corporate tax at a rate of 17%. The indicator was reduced from 18% in 2019.
Companies must also pay an additional solidarity tax. The rate is 7%, and the municipal business tax in Luxembourg City is 6.75%.
The effective corporate tax rate for high-income companies in 2019 is 24.94%.
With an annual income of less than EUR 175,000, a lower rate of 15% is paid, resulting in an overall effective rate of 22.8%.
Those with earnings ranging from 175,001 to 200,000 euros will pay 26,250 euros plus 31% of profits over 175,000 euros.
Companies usually pay corporate tax in advance for each quarter with payments in installments in March, June, September, and December.
Since these payments are made in advance, when an overpayment is established, a refund is required or deducted from future bills.
Tax incentives for corporations in Luxembourg
In calculating the amount of payment, any eligible selling expenses are deducted from the net profit.
In addition to standard expenses such as salaries, equipment, and office expenses, deductions for any gifts or donations, and tax losses from previous years are allowed.
Luxembourg corporate tax credits
Businesses can get tax breaks for:
- Audiovisual or venture capital investments;
- Hiring the unemployed;
- Investments in continuing professional education;
- Incentives for research and development;
- Investment tax credit;
- Foreign taxes at source.
Tax exemption in Luxembourg
Businesses can apply for tax exemptions if they agree to contribute to the structural development of a national or regional economy.
If approved, give a tax exemption of 25% of profits for the next 10 years.
