Depreciation rates must be consistent with economic reality. The depreciation must be calculated on the total acquisition cost, bearing in mind the normal life of the asset and the estimated residual value. As generally provided by the Luxembourg tax law, the accounting depreciation should be followed for tax purposes.
Depreciation normally is calculated using the straight-line method. However, the declining-balance method is permitted for fixed assets, other than buildings and intangible assets. The depreciation rate may not, however, exceed three times the rate applicable according to the straight-line method, or 30% (four times the applicable rate in the case of assets used exclusively for scientific and technical research, or 40%).
It is permissible to change from the declining-balance method to the straight-line method, but the opposite is not allowed.
In the event of a sale of a depreciated asset, the net book value at the moment of the disposal must be compared with the sales price of that asset. If this comparison indicates a profit, corresponding income tax may be due unless the sales price is reinvested in eligible assets. Capital losses are deductible.
Under certain conditions, fixed assets with a value of less than EUR 870 or an economic life that is not in excess of one year can be expensed fully in the year of acquisition. Special accelerated depreciation on 80% of the cost of fixed assets is available for assets that protect the national environment, save energy in Luxembourg, or permit the development of workplaces for handicapped workers, under certain conditions.
The rules governing depreciation of fixed assets for tax purposes have been amended as of 2017 in order to offer the possibility for taxpayers to defer deductions related to depreciation for any given tax year. For this purpose, a specific request needs to be made when filing the tax return for the year concerned.
The deduction can be deferred until, at the latest, the end of the depreciation life of the asset (i.e. any depreciation amounts deferred from previous years have to be deducted at the latest for the last year for which depreciation is allowed).
The application of this measure could potentially result in a timing difference that would increase the CIT and municipal business tax to be paid by a taxpayer for any given year. However, this might allow the taxpayer to reduce its NWT base, assuming certain conditions apply and that the taxpayer decides to book a special NWT reserve to reduce its NWT liability for the year concerned. This measure might also allow taxpayers to use investment and other tax credits during a tax year, whereas the company might otherwise have been unable to do this because it was in a tax loss position.
Goodwill is generally amortised over its useful life. In cases where its lifespan cannot be reliably estimated, goodwill cannot be amortised for a period longer than ten years. The Luxembourg tax treatment will follow the applicable accounting treatment.
Formation expenses can either be directly charged to the profit and loss account of the year in which they are incurred or depreciated on a straight-line basis over a five-year maximum period. The accounting treatment is followed for Luxembourg tax purposes.
Interest payments are, in principle, deductible to the extent they comply with the arm’s-length principle (see Transfer pricing in the Group taxation section).
Non-deductibility of the interest payments may arise in case they depend on the profits realised by the company or are derived from loans structured in the form of bonds or similar securities. Also, the deductibility will be limited in cases where the company is considered as being thinly capitalised (see Thin capitalisation in the Group taxation section).
Please see the Significant developments section regarding new developments on the deductibility of interest expenses.
Provisions for bad debts are generally tax deductible.
Gifts for scientific, charitable, or public purposes to institutions of general interest are deductible, subject to a maximum of 20% of the net income or up to an amount of EUR 1 million (the minimum being EUR 120), with a possibility to spread the deduction over two years in case of excess.
Expenses connected to the business activity of a taxpayer are, in principle, tax deductible. However, expenses linked to a shareholding qualifying for the participation exemption, including write-downs in the value of the shareholding booked as a consequence of a dividend distribution, are not deductible, up to the amount of the exempt dividend.
In the event of disposal of a shareholding financed by debt, recapture rules may apply. Basically, the effect of this rule is that the proceeds will become taxable up to the amount of the aggregate expenses and write-downs in relation to the participation deducted during the year of disposal and the previous years.
Luxembourg resident companies are subject to the NWT based on their net wealth.
Severance payouts or 'golden handshakes'
Severance payouts or ‘golden handshakes’ are deductible for CIT and municipal business tax purposes, up to EUR 300,000.
Fines and penalties
Fines and penalties suffered by the taxpayer are not considered as operating expenses and are therefore not tax deductible.
Several taxes are deductible in determining income subject to CIT, including the registration duties and real estate tax. Also, certain taxes are credited against the computed amount of income tax owed, including taxes withheld from Luxembourg dividend income received, tax withheld abroad from dividend and interest income received by a Luxembourg corporation (subject to limitations), and investment tax credits (see the Tax credits and incentives section). Foreign taxes are also deductible as expenses if not otherwise credited.
The main non-deductible taxes are CIT, municipal business tax, and NWT, as well as interest and penalties for late payment of said taxes.
Net operating losses
Losses generated as of 1 January 2017 will only be able to be carried forward for a maximum period of 17 years. Losses that arose before 1 January 2017 are not affected by this limitation. Losses cannot be carried back.
Payments to foreign affiliates
Royalties, management service fees, and interest charges paid to foreign affiliates by a Luxembourg company are deductible items, provided they are equal to what the company would pay an unrelated entity for comparable services (application of the arm’s-length principle).