Value-added tax (VAT)
Supplies of goods and services, which are deemed to take place in Luxembourg, are subject to VAT at the standard rate of 17% (lowest standard VAT rate in the European Union) or, on certain transactions, at 14% (e.g. certain wines, advertising pamphlets, management and safekeeping of securities), 8% (e.g. supply of gas or electricity), or 3% (e.g. food [except most alcohol beverages]; pharmaceutical products; books [including e-books since the Circular n°793 released by the Luxembourg VAT authorities of 17 May 2019]; radio and television broadcasting services [except adult entertainment]; shoes, accessories, and clothes designed for children under the age of 14).
Banking, financial, insurance, and reinsurance transactions are generally exempt activities. The VAT paid on costs that have a direct and immediate link with these transactions cannot be recovered except when related to services performed for persons established outside the European Union. Other VAT-exempt transactions, such as exports and related transports, allow the supplier to recover input VAT on related costs.
Luxembourg resident taxable persons are, in principle, required to be registered for VAT. However, taxable persons carrying on exclusively VAT-exempt activities and who do not have any right to recover input VAT are not required to register for VAT unless they are liable to self-assess VAT on good/services required from abroad. If so, they may be subject to simplified VAT compliance obligations.
Taxpayers whose activities are subject to VAT are entitled to offset against their VAT payable the amount of such tax charged to them by their suppliers or self-accounted by them on import or acquisitions of goods or services from abroad.
VAT returns and compliance
VAT returns must, in principle, be filed on a monthly basis (as well as a recapitulative annual return). Derogations may be obtained to file quarterly or only annual VAT returns, subject to certain conditions (level of turnover or incoming transactions subject to VAT and level of purchases of goods and services on which Luxembourg VAT must be self-accounted for).
An obligation to provide a Standard Audit File for Tax (SAF-T), containing reliable accounting data, has been implemented by the VAT authorities. In Luxembourg, the SAF-T equivalent is referred to as FAIA (Fichier d’Audit Informatisé de l’Administration de l’Enregistrement, des Domaines et de la TVA). This specific .xml file is used by taxable persons to make information available to Luxembourg VAT authorities during a VAT audit. Only specific taxable persons (subject to the Luxembourg Standard Chart of Accounts) having a certain minimum number of transactions (+/- 500) and registered under a 'normal filing regime' with a turnover exceeding EUR 112,000 are currently concerned. On the other hand, some entities (i.e. banks and insurance companies) are not yet subject to these SAF-T obligations, although they may be required to provide all VAT-relevant data to the authorities in a structured electronic file.
Penalties and late interest may be imposed by the VAT authorities in case of infringements to the VAT legislation. Furthermore, aggravated tax fraud (fraude fiscale aggravée) and tax swindle (escroquerie fiscale) can be punished with imprisonment.
Luxembourg VAT particularities
- A VAT grouping regime has been implemented in the Luxembourg VAT legislation in the summer 2018. Such regime allows any company established in Luxembourg (and Luxembourg fixed establishments of foreign companies) having financial, economic, and organisational links to be seen as a single VAT person. This regime is optional. Transactions between group members are disregarded for VAT purposes, and only the VAT returns of the group must be submitted (no individual VAT returns for the members) by the group representative.
- Article 80 of the EU VAT Directive has also been implemented in the Luxembourg VAT legislation in the summer 2018. This provision aims at avoiding VAT loss for member states in specific situations where the sale or purchase price of a supply has been overestimated or underestimated between related parties. This provision allows member states to disregard the consideration agreed between related parties, to retain the open market value of that supply.
- A Circular letter released by the Luxembourg VAT authorities has confirmed that the activity performed by independent directors is an economic activity that makes them VATable persons (irrespective of whether the director is a company or a private individual). This activity is, as a rule, subject to VAT at the standard rate of 17% (there are some exceptions to the principle of taxation).
- Managing directors, managers of companies (established and/or VAT registered in Luxembourg), as well as ‘de jure’ and ‘de facto’ managers in charge of the daily management of such companies, can be held jointly and personally liable in the event of breach of VAT compliance obligations and/or non-payment of the VAT due by the taxpayer they manage.
Customs duties/import tariffs
Based on a European Regulation, goods entering within the territory of the European Union may be subject to customs duties/import tariffs. Applicable rates are based on the nature and on the quantity of the products.
In addition to VAT, some products are subject to specific excise duties. In Luxembourg, these products are electricity, mineral oils, manufactured tobacco, and alcohol.
Excise duties are not based on the sale price of the products but on the quantity. Excise duty becomes chargeable at the time, and in the EU member state, of release for consumption. Release for consumption occurs in any of the following instances:
- The departure of excise goods from a duty suspension arrangement.
- The holding of excise goods outside a duty suspension arrangement where excise duty has not been levied, pursuant to the applicable provisions of Community law and national legislation.
- The production of excise goods outside a duty suspension arrangement.
- The importation of excise goods, including irregular importation, unless the excise goods are placed, immediately upon importation, under a duty suspension arrangement.
There is no stamp duty in Luxembourg.
There are no environment taxes applicable to Luxembourg entities.
Net wealth tax (NWT)
Both Luxembourg resident companies and Luxembourg branches of non-resident companies are subject to NWT on their net wealth, based on prescribed valuation methods. The following scale of rates applies for NWT:
- On a taxable base of up to EUR 500 million: 0.5%.
- On the taxable base exceeding EUR 500 million: NWT of EUR 2.5 million, plus 0.05% on the component of the NWT base above EUR 500 million. No cap is set.
In general, assets are to be taken into account at market value (except for real estate, which is subject to a special regime). Shareholdings qualifying for the participation exemption (see Dividend income in the Income determination section) generally are exempt from NWT.
A minimum NWT charge applies for all corporate entities having their statutory seat or central administration in Luxembourg.
Entities with aggregated fixed financial assets, transferable securities, inter-company receivables, and cash in excess of both 90% of their total gross assets and EUR 350,000 will be subject to a minimum NWT charge of EUR 4,815.
All other corporations with a statutory seat or central administration in Luxembourg (including securitisation vehicles, Société d'Investissement en Capital à Risque [SICARs], Société d’Epargne-Pension à Capital Variable [SEPCAVs], and Association d’Epargne-Pension [ASSEPs]) will be subject to a minimum NWT charge ranging from EUR 535 to EUR 32,100, depending on company’s total gross assets, as follows:
|Total gross assets (EUR)||Minimum NWT charge (EUR)|
|Up to 350,000||535|
|350,001 to 2,000,0000||1,605|
|2,000,001 to 10,000,000||5,350|
|10,000,001 to 15,000,000||10,700|
|15,000,001 to 20,000,000||16,050|
|20,000,001 to 30,000,000||21,400|
|30,000,001 and above||32,100|
The minimum NWT charge due by a tax unity (see the Group taxation section) is capped at EUR 32,100.
The legislation makes it clear that the balance sheet to be used for these purposes is the closing balance sheet for the tax year concerned that is in conformity with all CIT provisions (n.b. rather than the NWT provisions for computing the normal NWT basis). Consequently, all figures to be used are those as shown in the commercial balance sheet, subject only to any specific revaluations necessary to apply CIT provisions.
In particular, shareholdings that qualify for the participation exemption and Luxembourg-situs real estate must both be included in gross assets for these purposes. Conversely, foreign-situs real estate and other assets, such as those of a foreign branch, the income from which is excluded from the Luxembourg tax base under the provisions of a DTT, are not to be included in gross assets.
The CIT due in a given year N-1 (e.g. 2018) represents the limit for the NWT reduction for the following year N (e.g. 2019). The CIT to be taken into consideration for the limit of NWT reduction is the amount due, including the employment fund contribution, before any tax credits. As a second limit, the NWT reduction is limited by the minimum NWT as of 2016 (and to the minimum CIT until 2015). In other words, NWT cannot be reduced down to 0 by constituting a NWT special reserve. The minimum NWT remains due.
The NWT reduction for year N (e.g. 2019) has to be requested in the corporate tax returns of year N-1 (e.g. 2018). The NWT special reserve of year N (e.g. 2019) (for the NWT reduction of year N, i.e. 2019) should be kept during the five-year period following the NWT reduction request (i.e. years N, N+1, N+2, N+3, and N+4). After the five-year period (i.e. as from year N+5), the NWT reserve of year N is released and can be either distributed to the shareholders or used to constitute a new NWT reserve.
Investment funds are subject to subscription tax (at various rates) on their total net assets valued at the last day of each quarter. Institutional funds and monetary funds are subject to an annual rate of 0.01% and the other funds to an annual rate of 0.05%. Funds of institutional funds and monetary institutional funds are exempt from subscription tax.
However, a graduated rate reduction will apply as of 1 January 2021 for fund vehicles covered by the law of 17 December 2010 relating to the undertakings for collective investments (Part I and Part II of the 2010 Undertakings for Collective Investment [UCI] regime) that invest in 'sustainable' investments, tabulated as follows:
|Percentage of net assets of the fund or compartment invested in 'sustainable' assets||Subscription tax rate (annualised) applicable to element of net assets that are 'sustainable' (%)|
'Sustainable' assets are those as defined in Art. 3 EU Regulation 2020/852. Investment level percentages will need to be formally certified by an auditor and transmitted to the indirect tax authorities (i.e. Administration de l’Enregistrement, des Domaines et de la TVA) together with the subscription tax returns.
Exemptions from subscription tax are available for exchange traded funds, and an extension of exemption is available for funds dedicated to multi-employer pension vehicles or to several employers providing pension benefits to their employees.
Where a foreign UCI is managed by a Luxembourg-based management company (or where the foreign UCI’s place of effective management is located in Luxembourg), the UCI will not be deemed to be domiciled in Luxembourg and therefore not be subject to subscription tax in Luxembourg.
General registration taxes
A fixed registration duty of EUR 75 is levied on certain transactions involving Luxembourg legal entities (i.e. incorporation, amendment to the articles of association, and transfer of seat to Luxembourg).
Real estate transactions
The sale or transfer of immovable property located in Luxembourg is subject to a proportional registration duty (inclusive of the transcription tax) of 7% (plus a city surtax of 3% if the building is located in Luxembourg City).
Contributions of immovable property located in Luxembourg in exchange for securities are subject to a proportional registration duty (inclusive of the transcription tax) of 1.1% (plus a city surtax of 0.3% if the building is located in Luxembourg City).
Contributions of immovable property located in Luxembourg in exchange for other than by shares are subject to a proportional registration duty (inclusive of the transcription tax) of 7% (plus a city surtax of 3% if the building is located in Luxembourg City).
The contribution of immovable property in the context of restructuring transactions are not subject to proportional registration duty if some conditions are met.
Rental agreements are not subject to any registration obligation, with the exception of long-term leasing agreements. Parties still have the possibility to register lease agreements voluntarily, notably to determine the date of an agreement for civil law purpose, or make them enforceable against third parties. If the rental agreement is voluntarily registered, registration duty at 0.6% would remain due, unless a valid VAT option has been duly approved by the Luxembourg VAT authorities. In that case, only the fixed registration of EUR 75 duty will apply.
Commune (municipalities) real estate tax
Communes (municipalities) levy an annual real estate tax, the basis of which is the unitary value of real estate, which represents its estimated value in 1941. The basic rate varies from 0.7% to 1% of the unitary value, according to the category of property, and is multiplied by a coefficient, which varies with communes and different types of property. For commercial property, the coefficient in Luxembourg City is 750%, which should be applied to 1% of the unitary value. The real estate tax is deductible for CIT purposes.
Real estate levy for Luxembourg funds owning Luxembourg real estate directly
The real estate levy
The 2021 Budget Law introduces a new tax, termed a real estate levy (prélèvement immobilier). It will, however, apply only in the restricted circumstances of a Luxembourg investment fund vehicle that:
- is regulated under the 2007 specialised investment fund (SIF) regime, or the 2016 reserved alternative investment fund (RAIF) regime, or Part II of the 2010 UCI regime
- has its own legal persona, unless it has the société en commandite simple (SCS) legal form, the combined effect of which is to place the FCP, SCSp, and SCS legal forms all outside the scope of this new levy (this is appropriate because investors in fund vehicles having these legal forms are likely for tax purposes to be treated as having direct ownership of any underlying real estate owned directly in the name of the fund vehicle, and thus be immediately taxable on the income and gains derived from such real estate, and so not having to be brought within the scope of anti-avoidance measures)
- owns directly (or indirectly through one or more entities that are regarded as tax transparent under Luxembourg principles) real estate assets, and
- where such assets are sited in the Grand Duchy of Luxembourg.
Luxembourg real estate owned by any Luxembourg tax-opaque corporate (i.e. fully taxable) entity, which is in turn owned by the fund vehicle concerned (i.e. whilst there is indirect ownership), falls entirely outside the scope of this provision.
Fund vehicles that are within scope will incur the real estate levy by derogation from the more general provisions that exempt the income of the various types of regulated fund vehicles noted above. The real estate levy is to apply to:
- the gross (but VAT-exclusive) amount of rental income deriving (directly or through tax transparent entities) from Luxembourg real estate assets, and
- the net amount of gains on disposal deriving from such assets (directly or through tax transparent entities, either on disposal of the real asset by a transparent entity or disposal of the interest in the tax transparent entity owning the Luxembourg real estate)
on or after 1 January 2021, and is charged at a rate of 20%.
Real estate levy due on income or gains arising or realised in a calendar year must be reported to the tax authorities no later than 31 May of the following calendar year, and the levy due must be paid no later than 10 June of the following calendar year. Returns of real estate levy due must be accompanied by an auditor’s certificate confirming that the amount being subject to the levy is computed in accordance with the provisions of the legislation.
The wider real estate levy reporting requirement
It should, however, be noted that, the legislation provides for a far broader reporting requirement. All Luxembourg investment fund vehicles that meet the conditions noted above regarding their applicable regulatory regime and legal form (i.e. which are not FCPs, SCSs, or SCSps) must, by 31 May 2022, make a special report on a prescribed form giving details of any Luxembourg real estate that they have owned at any time in 2020 or 2021, irrespective of whether or not it has yielded any gross rental income or net gains in those two years; or alternatively confirm the absence of ownership of any Luxembourg real estate during 2020 and 2021. Timely filing of a return showing real estate levy due for 2021 is to be regarded as satisfying this reporting requirement.
Similar reporting is also to be made by any fund vehicles that have changed their legal form, at any time in 2020 and 2021, from a tax-opaque corporate entity to a tax-transparent entity, and which own at least one Luxembourg real estate asset at the time of that transformation.
A fine of up to EUR 10,000 can be imposed for failing to satisfy this reporting requirement in a timely manner, even if no Luxembourg real estate assets at all are owned by the fund vehicle.
Payroll taxes have to be withheld by the employer. The top payroll tax withholding rate is 42%. A solidarity tax of a maximum of 9% of tax must also be applied.
Social security contributions
Compulsory social security contributions for employees are listed below:
- For sickness: 3.05% of gross periodic remuneration, which is limited to a monthly ceiling of EUR 10,709.97 (annual ceiling estimated at EUR 128,519.64 as of 1 January 2020).
- For pension: 8% of gross remuneration, which is limited to a monthly ceiling of EUR 10,709.97 (annual ceiling estimated at EUR 128,519.64 as of 1 January 2020).
The social security contributions have to be withheld by the employer from the employee's gross salary.
Certain multilateral and bilateral social security agreements protect the interests of temporarily resident employees.
Employees (residents and non-residents) paying Luxembourg social security contributions are subject to the so-called dependency contribution on their gross professional income, reduced by EUR 535.50 per month (i.e. estimated at EUR 6,426.00 as of 1 January 2020). Net portfolio income and taxable capital gains of Luxembourg resident taxpayers are also subject to the dependency contribution, except for interest within the scope of the 20% withholding tax (WHT) in full discharge of income tax. The dependency contribution rate amounts to 1.4% (flat rate).