1. Types of Business Entities, Their Residence and Basic Tax Treatment
1.1 Corporate Structures and Tax Treatment
Luxembourg has several forms of entities with separate legal personality. Businesses generally incorporate an entity with limited liability set up in one of the following forms:
- a public limited company (société anonyme, SA);
- a private limited company (société à rèsponsable limitée, SARL); or
- a partnership limited by shares (société en commandite par actions, SCA).
A SARL is likely the most popular corporate form to conduct a business through. Both a SARL and an SA are incorporated through a deed before a Luxembourg notary and are governed by a board of managers/directors (an SA can also be governed using a two-tier structure with a management board and a supervisory board). The minimum capitalisation requirement amounts to EUR12,000 for a SARL and EUR30,000 for an SA. In contrast to an SA, shares in a SARL cannot be publicly traded and a SARL is limited to a maximum of 100 shareholders.
An SCA is a partnership limited by shares. It is created through a notarial deed and has characteristics of both a limited partnership and a public limited company. There must be at least one general partner and one limited partner. In contrast to a limited partnership, the shares of an SCA can be freely transferred to individuals who are not shareholders, unless stated otherwise in the articles of association.
These corporate forms are considered opaque from a Luxembourg tax perspective and are fully subject to corporate income tax (CIT) and municipal business tax (MBT) at an aggregate tax rate of 23.87% (in Luxembourg City), and net wealth tax (NWT).
Fully taxable Luxembourg corporate entities that are part of the same group are eligible for group taxation (fiscal unity). Under this regime, each entity's taxable income is determined on a standalone basis, with the taxable results of all participants ultimately added together. As a result, intra-group transactions remain fully recognised.
Less common corporate entities are:
- the simplified joint stock company (société par actions simplifiée, SAS);
- the simplified private limited liability company (société à responsabilité limitée simplifiée, or SARL-S);
- the European company (Societas Europaea, SE);
- the co-operative company (société cooperative, SCOP); and
- the European co-operative company (société coopérative européenne, or SE SCOP).
1.2 Transparent Entities
Luxembourg has several forms of transparent entities, some with legal personality:
- a general partnership (société en nom collectif, SNC);
- a limited partnership (société en commandite simple, SCS);
- a special limited partnership (société en commandite speciale, SCSp); and
- a civil company (société civil, SC).
The two most common forms are the SCS and the SCSp. Both can be established through a partnership agreement or through a notarial deed. There must be at least one general partner and one limited partner. There is no limitation on the number of partners. A general partner has unlimited, joint, and several liability for all the partnership's obligations. A limited partner is in principle only liable up to the amounts pledged as a contribution to the partnership. The difference between the two forms of partnership is that an SCS has legal personality while an SCSp does not. An SCSp is commonly used in the private equity and alternative investment fund sectors.
Subject to the so-called reverse hybrid rules, an SCS and SCSp are considered tax transparent entities. The partners of the partnership are considered to (indirectly) hold the assets of the partnership, and taxation should occur at the level of the partners, irrespective of whether the partnership distributes income.
If a partnership is engaged in, or deemed to be engaged in, a commercial activity (in Luxembourg), Luxembourg MBT is levied at the level of the partnership.
1.3 Determining Residence of Incorporated Businesses
Corporate entities are deemed to be residents of Luxembourg for tax purposes if their legal seat or central administration is located in Luxembourg. This means that both collective entities registered in Luxembourg, and those registered abroad but with their central administration or registered office in Luxembourg, are considered tax residents.
The central administration of an entity is in Luxembourg if the entity's affairs are managed there. This is determined based on facts through a substance-over-form analysis. Generally, the location of the entity's central accounting and archives, as well as where the shareholders' and board meetings are held, are considered important factors in this determination.
A company established under Luxembourg law is by definition a Luxembourg tax resident, irrespective of its substance (physical and economical footprint) in Luxembourg.
Transparent entities are not considered Luxembourg tax residents.
1.4 Tax Rates
For the year 2025, the applicable CIT rate amounts to:
- 14%, if the corporation's taxable worldwide income is EUR175,000 or less;
- EUR24,500 plus 30% of income on the portion exceeding EUR175,000, if the taxable income is between EUR175,000 and EUR200,000; or
- 16%, if the taxable income is more than EUR200,000.
Additionally, a solidarity surcharge of 7% is levied as a contribution to the unemployment fund.
A local MBT on profits from trade or business is levied by the different municipalities. The rate varies depending on the municipality, but is often 6.75% (eg, in Luxembourg City).
The aggregate effective tax rate on income for a company located in Luxembourg City is generally 23.87%.
Luxembourg corporate resident taxpayers are subject to NWT levied on the fair market value of the taxable net wealth on 1 January of each year. The rates as from fiscal year 2025 are:
- 0.5% on taxable net wealth up to EUR500 million; and
- 0.05% on the portion of taxable net wealth in excess of EUR500 million.
NWT is levied on the net wealth of the company (ie, non-exempt assets minus deductible liabilities, in both cases valued at their fair market value, unless a specific provision prescribes a different valuation). A minimum NWT is applicable, which is levied if it is higher than the NWT liability determined on the basis of the taxable net wealth of the entity. The minimum tax depends on the total balance sheet of the resident corporate taxpayer and ranges from EUR535 to EUR4,815.
Business Through a Transparent Entity
Businesses in Luxembourg that are operated by resident individuals, either directly or via a transparent entity, are liable to pay progressive income tax. The tax rate applicable for 2025 depends on the tax class of the individual. The tax brackets range from 8% to 42%. Additionally, there is a 7% unemployment fund contribution, which increases to 9% on taxable income above EUR150,000 or EUR300,000 (in the case of joint taxation). Therefore, the highest possible marginal tax rate reaches up to 45.78%.
2. Key General Features of the Tax Regime Applicable to Incorporated Businesses
2.1 Calculation for Taxable Profits
Resident corporate entities of Luxembourg are taxed annually on their global income, while non resident entities are only taxed on certain types of income originating in Luxembourg.
Typically, each category of income is determined and taxed separately. However, all income generated by corporations and commercial partnerships is considered business income.3
The business profit of an entity is generally defined as the increase in its net assets over the fiscal year, adjusted for capital contributions, repayments, and distributed profits. This is based on the entity's annual accounts (in Luxembourg GAAP), meaning that the taxable profit usually aligns with the financial result and is determined on an accrual basis, unless specific tax rules or a special tax regime apply.
A fiscal balance sheet is prepared for this purpose, where the accounting values of assets and liabilities are replaced by their tax values if they differ. Generally, all business-related expenses of a commercially active company are deductible unless they relate to exempt income. Some expenses are explicitly classified as deductible (eg, non-creditable foreign taxes and value-added tax, real estate tax and capital duty, depreciation and amortisation), while others are explicitly non-deductible (eg, CIT, MBT, NWT, directors' fees for supervisory services, fines, non-qualifying gifts and profit distributions).
For MBT purposes, profits and losses from a foreign permanent establishment (PE) or those already taxed at the level of a commercial partnership (of which the taxpayer is a member) are not considered.
2.2 Special Incentives for Technology Investments
Investment Tax Credit
Luxembourg tax law provides for two types of investment tax credits. First, a company carrying out a digital transformation or ecological/ energy transition project can benefit from an investment tax credit that is calculated based on investments and operating expenses incurred as part of that project. To be eligible, the project needs to comply with at least one of the objectives listed in the law.
The rate of the tax credit is 18% for investments and operating expenses, except for investments in tangible depreciable assets, which benefit from a rate of 6%, in addition to the 12% rate applicable to the overall investment tax credit (effectively reaching 18%).
Secondly, a company that makes investments during an operating year may qualify for a 12% overall investment tax credit. The tax credit for overall investment is based on the acquisition price or production costs of qualifying assets acquired. The qualifying investments encompass investments in tangible depreciable assets, as well as investments in sanitary and central heating installations in hotel buildings and buildings used for social activities. The rate is increased to 14% for investments that qualify for special depreciation. The credit for the acquisition of software is capped at 10% of the CIT due for the fiscal year in which the acquisition was made.
IP Regime
In 2018, Luxembourg adopted a new intellectual property (IP) regime that aligns with the guidelines set out by the OECD in its Base Erosion and Profit Shifting (BEPS) Action Plan 5. It adopted a nexus approach to ensure that only the R&D activities that have a direct connection with the Luxembourg taxpayer can benefit from the tax regime. This new regime came into effect on 1 January 2018.
Under the IP regime, net income from qualifying IP assets that meet the eligibility criteria may benefit from an 80% exemption from CIT and MBT, and a 100% exemption from NWT. The eligible assets should have been established, developed, or enhanced after 31 December 2007. These assets include patents, utility models, supplementary protection certificates for a patent on medicine and plant protection, plant variety certificates, extensions of a complementary protection certificate for paediatric use, orphan drug designations, and software protected by copyrights.
Income that qualifies for the IP regime include:
- income derived from the use of, or a concession to use, a qualifying asset;
- income related to a qualifying asset that is embedded in the sales price of products or services directly related to the eligible IP asset;
- capital gains derived from the sale of a qualifying asset; and
- the indemnities received based on an arbitration ruling or a court decision concerning a qualifying asset.
The part of the IP income that benefits from the favourable tax treatment is determined by a ratio that considers the research and development (R&D) costs. This ratio is the eligible R&D costs divided by the total R&D expenses. Luxembourg permits a 30% uplift of the eligible R&D costs, provided that the resulting ratio does not surpass the total expenditure. To be eligible, expenses must be incurred as part of an R&D activity. These activities can be carried out by the taxpayer or outsourced.
2.3 Other Special Incentives
Holding Regime
Proceeds derived by a Luxembourg taxable resident company from shares in a subsidiary company (such as dividends, liquidation distributions, capital gains and foreign exchange results) are subject to CIT and MBT, unless the domestic participation exemption applies. Pursuant to this exemption, dividends (including liquidation distributions) and capital gains received by a Luxembourg company are exempt from CIT and MBT provided that, at the time of the received distribution:
- a minimum participation of 10% or with an acquisition price of at least EUR1.2 million (EUR6 million for capital gains) is held;
- the participation is held in (i) a capital company that is fully subject to Luxembourg CIT or a comparable foreign tax (ie, a tax rate of at least 8.5% and a comparable tax base) or (ii) an EU entity qualifying under the EU ParentSubsidiary Directive; and
- on the date on which the dividend is received (or capital gain is realised), the company has held (or commits itself to hold) a qualifying participation continuously for at least 12 months.
Once the minimum threshold and holding period are met, newly acquired shares of a qualifying participation immediately qualify for the participation exemption.
A taxpayer may opt to waive the participation exemption for participations which qualify on the basis of the acquisition price being above EUR1.2 million (EUR6 million for capital gains). The waiver option is intended to allow taxpayers who are in scope of the so-called Pillar Two Rules to avoid a mismatch between the exclusion of income under the Pillar Two Rules and the Luxembourg domestic participation exemption. Such mismatch may potentially give rise to (cash) top-up taxes, which may be avoided (eg, if tax losses carried forward would be utilised to offset the otherwise exempt income).
Meeting the EUR1.2 million acquisition price threshold also makes a participation exempt from NWT.
Costs and losses related to an exempt participation, such as financing expenses and impairments, are tax deductible to the extent that the related costs and/or losses exceed the amount of exempt income in a given year. At the time of sale of the exempt participation, any appreciation in value is taxable up to the historical acquisition price (ie, recaptured), which would otherwise be an exempt capital gain.
2.4 Basic Rules on Loss Relief
The taxpayer that generated losses can carry them forward and offset them against the taxable income (on the condition that they result from acceptable accounts) for a maximum of 17 consecutive years. Losses generated before 2017 can be carried forward indefinitely. Usage of tax losses follows the "first-in, first-out" principle. Tax losses cannot be carried back.
The deductibility of the tax losses can be denied by the Luxembourg tax authority if a change in the taxpayer's control and activity (which has generated the tax losses) has the purposes of circumventing the personal nature of the right to carry forward tax losses and avoiding taxation of subsequently realised profits.
In case of a fiscal unity, pre-fiscal unity losses can only be used to offset income in relation to the entity that sustained such tax losses.
2.5 Imposed Limits on Deduction of Interest
Luxembourg applies the interest deduction limitation rule (IDLR) in accordance with the EU anti-tax avoidance directive. Subject to certain exclusions that are discussed below, the IDLR limits the deduction of the net amount of interest expenses and economically equivalent expenses (ie, the excess, if any, of such expenses over interest and economically equivalent income) in a taxable year to the higher of:
- 30% of EBITDA for tax purposes; or
- EUR3 million.
The IDLR does not distinguish between thirdparty and related-party interest. However, the rule contains a grandfathering rule pursuant to which interest and economically equivalent expenses incurred in respect of loans that were concluded prior to 17 June 2016 and were not modified after such date fall outside the scope of the earning stripping rules. Furthermore, taxpayers that qualify as "financial undertakings" or "standalone entities" within the meaning of the IDLR are excluded from their scope. Moreover, in case the ratio of equity to assets of a taxpayer is equal to or higher than such ratio for the consolidated group to which it belongs, such taxpayer is excluded from the scope of the rules.
The EBITDA is calculated on a Luxembourg tax basis, which means that dividends that qualify for the participation exemption are not included in the EBITDA. Any interest that is not deductible pursuant to the IDLR can be carried forward indefinitely. In addition, any unused deduction capacity can be carried forward for five years.
Luxembourg taxpayers that have opted for the fiscal unity regime can decide whether the IDLR applies at the level of each Luxembourg taxpayer on a standalone basis or at fiscal unity level.
2.6 Basic Rules on Consolidated Tax Grouping
The fiscal unity regime allows certain group companies to consolidate their results for CIT and MBT purposes, provided a joint written request is submitted before the end of the financial year for which the application is sought. This regime permits both horizontal and vertical integration, or a mix of both.
Vertical fiscal unity is available to a Luxembourg parent company or a Luxembourg Permanent Establishment (PE) of a foreign company that is subject to a tax comparable to the Luxembourg corporate tax, as well as to qualified subsidiaries. Horizontal fiscal unity is available to Luxembourg subsidiaries of a non-integrating parent company.
A non-integrating parent can be a Luxembourg parent company or a Luxembourg PE of a foreign company fully subject to a tax comparable to the domestic corporate tax, or a capital company resident in the European Economic Area (EEA) subject to a tax comparable to the Luxembourg corporate tax, or a PE of such an entity in the EEA. The non-integrating parent is not part of the fiscal unity itself. The consolidation occurs at the level of the integrating subsidiary.
A consolidated tax grouping in Luxembourg is possible if the following conditions are met:
- the qualified subsidiaries and the integrating subsidiary must be either a Luxembourg-resident fully taxable company or a local PE of a non-resident capital company fully subject to a tax comparable to the domestic tax;
- Luxembourg subsidiaries can be included when they are
controlled, directly or indirectly, by the group parent or the
non-integrating parent company for at least 95% of their capital
since the beginning of the fiscal year for which the option is
exercised:
- the book year must coincide for all companies included in the fiscal unity; and
- the request for a fiscal unity is filed jointly by all the intended parties.
Taxable income and losses of each company pertaining to the fiscal unity are determined individually (as if they were not integrated) and then aggregated at the level of the group parent or the integrating subsidiary with adjustments to eliminate double taxation and double deduction of the same items of income or expenses. The tax due on such aggregated result is then levied from the group parent or the integrating subsidiary.
Inter-corporate dividends paid within the fiscal unity regime are fully exempt and do not need to be adjusted when determining the profit of the group, as the requirements for the application of the participation exemption regime are less strict than the requirements for the application of the fiscal unity regime. Losses generated prior to the fiscal unity can only be used to offset the income of the group up to the taxable income of the integrated subsidiary that generated them. Once the regime ends, losses generated during the tax unity have to be left at the level of the group parent or the integrating subsidiary.
2.7 Capital Gains Taxation
Capital gains derived by a Luxembourg taxable resident company are subject to CIT and MBT, unless the domestic participation exemption applies (see 2.3 Other Special Incentives).
2.8 Other Taxes Payable by an Incorporated Business VAT
As a member of the European Union, Luxembourg adheres to the EU VAT Directive 2006/112/ EC and has a standard 17% VAT rate. Luxembourg also applies lower rates (3%, 8%, and 14%) to a variety of goods and services.
Unlike other member states, Luxembourg has not adopted the "use and enjoyment" rule, which requires non-registered holding companies to pay VAT on services received from non-EU suppliers without the ability to recover it.
Following rulings from the Court of Justice of the European Union (CJEU), Luxembourg has strictly confined the VAT exemption for an "independent group of persons" (cost-sharing) to taxable entities carrying out activities of public interest. In response to the near elimination of the costsharing exemption for the financial, fund, and insurance sectors, Luxembourg has introduced the VAT grouping mechanism, based on Article 11 of the EU VAT Directive 2006/112/EC.
Recently, the CJEU ruled that a member of the board of directors of a public limited company incorporated under Luxembourg law carries out an economic activity within the meaning of Directive 2006/112/EC (VAT Directive), but does not carry out that economic activity independently, insofar as the person concerned does not act on his/her own behalf or under his/her own responsibility and does not bear the economic risk associated with the activity. As a result, directors' fees, subject to the above reservations, are not subject to VAT.
Customs/Excise Duties
Besides VAT, goods imported into the EU may also be liable for customs or import tariffs. The rates applied can differ based on the type and amount of the products.
In Luxembourg, items such as electricity, mineral oils, manufactured tobacco, and alcohol are subject to excise duties.
Capital Duty or Registration Tax
A registration tax of EUR75 is levied in several instances, such as for the incorporation of a company, when the legal seat or effective management of a foreign company is transferred to Luxembourg, or when a local branch of a foreign company is established.
Depending on the assets or documents registered, other registration duties or stamp duties may be applicable.
Real Estate Taxation
An annual real estate tax is imposed on the unitary value of properties in Luxembourg, with the rate varying based on the property's classification and location. The unitary value, determined by the Luxembourg tax authority, typically does not surpass 10% of the property's market value.
Sales and transfers of real estate are subject to a registration duty of 6% and a transcription tax of 1% (plus a city surtax). Contributions of real estate are also subject to a registration tax of 1.1% (if contributed in exchange for shares) or 7% if contributed in exchange for other than shares.
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Originally published by Chambers and Partners.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
