Luxembourg

Luxembourg, officially the Grand Duchy of Luxembourg, is a landlocked country in Western Europe, bordered by Belgium, France, and Germany. Luxembourg has a population of over half a million people in an area of approximately 2,586 square kilometres (999 sq mi). A representative democracy with a constitutional monarch, it is ruled by a grand duke. It is the world's only remaining sovereign grand duchy. The country has a highly developed economy, with the world's highest GDP (nominal) per capita according to the IMF. However, it also suffers the world's highest external debt burden. Its historic and strategic importance dates back to its founding as a Roman era fortress site and Frankish count's castle site in the Early Middle Ages. It was an important bastion along the Spanish Road when Spain was the principal European power influencing the whole western hemisphere and beyond in the 16th–17th centuries.

Luxembourg is a member of the European Union, NATO, OECD, the United Nations, Benelux, and the Western European Union, reflecting the political consensus in favor of economic, political, and military integration. The city of Luxembourg, the capital and largest city, is the seat of several institutions and agencies of the European Union.

Luxembourg culture is a mix of Romance Europe and Germanic Europe, borrowing customs from each of the distinct traditions. Luxembourg is a trilingual country; German, French and Luxembourgish are official languages. Although a secular state, Luxembourg is predominantly Roman Catholic.

The most important tax advantages of Luxembourg are elaborated below:
 

  • A corporate income tax rate of 21% applies to companies whose taxable income exceeds EUR 15,000. Otherwise, companies are taxed at 20%. A municipal income tax also may be levied (see below under "Other"). A 4% contribution to the unemployment fund brings the top 21% tax rate to 21.84% in Luxembourg.
  • Regulated vehicles are either: (1) exempt from income tax (SIFs, UCIs), with a limited entitlement to tax treaty benefits (i.e. for corporate forms taking the form of a SICAV/F); or (2) fully taxable (SICAR, Securitization Companies), generally with full entitlement to benefits under tax treaties / EU Directives (to be determined on a case-by case basis) and benefiting from a preferential tax regime, resulting in a low tax liability in practice.
  • Participation exemption – Dividends and capital gains derived by a qualifying entity from a shareholding may be exempt from Luxembourg corporate income tax and municipal business tax if the entity deriving the income holds or commits to hold directly or indirectly the shareholding for an uninterrupted period of at least 12 months and the shareholding threshold does not fall below 10% or below an acquisition price of EUR 1.2 million (EUR 6 million for capital gains) throughout that period.
  • Holding company regime – A wealth management vehicle (SPF) succeeds the 1929 holding company that was repealed as from 1 January 2007, although existing entities benefit from a grandfathering clause until the end of 2010. SPF companies are exempt from income tax and withholding tax on dividend distributions.
  • The IP box regime provides for an 80% exemption of net income and gains arising from the exploitation of IP (i.e. patents, trademarks, copyrights on software, designs, models and domain names) rights acquired or registered after 31 December 2007.
  • Dividends – Dividends paid to a non-resident company are generally subject to a 15% withholding tax unless the rate is reduced under a tax treaty. No tax is withheld on dividends paid to a qualifying company under the EC parent-subsidiary directive.
  • Taxation of dividends – Dividends received by resident companies are included in taxable income unless the participation exemption regime applies. A 15% withholding tax is levied on dividends distributed by Luxembourg companies, unless the conditions for application of the participation exemption are satisfied.
  • Thin capitalisation – There is no specific legislation but, in practice, the tax administration uses a debt-to-equity ratio of 85:15 for the holding of participations.

Our Luxembourg office was opened in August 1999.

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