Luxembourg: Is Luxembourg still attractive under the increased substance requirements, remaining compliant under BEPS/OECD?

The Luxembourg current IP tax regime will be abolished as from 1 July 2016. The IP regime, including improvements made to such IP, will be maintained for income tax purposes for a transitional period starting on 1 July 2016 and expiring on 30 June 2021. The regime will be replaced by the OECD’s/BEPS approved ‘Nexus approach’. The Luxembourg working group will examine various subjects for corporate entities, which will be announced in the future, including a tax-exempt reserve for investments.

 

Corporate tax news

 

• The corporate income tax rate will be reduced from the current 21% to 19% in 2017 and 18% in 2018. Therefore the effective rate, including corporate income tax, municipal business tax (Luxembourg city) and the contribution to the unemployment fund, will decrease from 29.22% in 2016 to 27.08% in 2017 and 26.01% in 2018. A special rate (15%) is announced for young innovative companies whose annual taxable income does not exceed EUR 25,000.

• For the SOPARFIs or Holding companies there will be an increase of the minimum net wealth tax.

Till 2015 these companies paid a minimum corporate income tax of EUR 3,210, which was replaced from 2016 by a minimum wealth tax of the same amount. In 2017 the minimum wealth tax will be increased to EUR 4,815.

This rate is applicable to all corporate entities having their statutory seat or central administration in Luxembourg and that own fixed financial assets, transferable securities, and cash at banks (including receivables due by affiliated companies) exceeding 90% of their total assets and which is greater than EUR 350,000.

If the aforementioned threshold is not met, the amount of minimum net wealth tax will depend, from 2016, on the total of the balance-sheet at the closing of the preceding financial year. Ranging from EUR 500 to EUR 20,000 (increased by the solidarity surtax), depending on a company’s total assets, which is applicable to all other corporations having their statutory seat or central administration in Luxembourg (i.e. it is applicable to all corporations not falling within the scope of the EUR 3,000 CIT noted above), as follows:

Total assets (EUR)	Minimum wealthtax (EUR)
Up to 350,000	535
350,001 to 2,000,000	1,605
2,000,001 to10,000,000	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
30,000,0001 and above	32,100

A new IF tax of 0,05% has been introduced for the bracket of net taxable wealth greater than 500,000,000,00.

The current IF tax of 0,5% is preserved for the bracket of net taxable wealth inferior or equal to 500,000,000,00.

This tax makes it crucial to prepare the year end closing before 31 December.

• A really important new measure for Luxembourg is that the utilization of carried-forward losses will be restricted as from 2017. Losses realized as from tax year 2017 will be carried forward for a limited period of 17 years and could be set off against only 75% of the profits realized in a tax year.

• Tax credits for investments will be increased as follows:

• The complementary tax credit for investments will be increased from 12% to 13%;
• The global tax credit for investments will be increased from 7% to 8%;
• As to investments in fixed assets authorised to apply a special depreciation rate, the rate of 8% for the first bracket will be increased to 9%.

• To facilitate the transfer of family-owned companies, capital gains derived from immovable property (land or buildings) belonging to the divested business would be exempt if certain conditions are met.

 

Additional measures for Individual taxation

 

• Married couples would be permitted to opt to be taxed separately and equality of tax treatment will be introduced between cross-border workers and residents living in Luxembourg with respect to the applicable tax classes and tax allowances (if applicable).

• The maximum individual tax rate will be increased progressively from 40% to 41% or 42% (for taxable income above EUR 150,000 or EUR 200,000).

• A modulation of the benefit in kind for company cars depending on the carbon emissions and a tax allowance for zero-emission vehicles including bikes, as well as, a new tax reduction will be introduced.

• Various tax advantages will be considered as most important:

• The face value of meal vouchers for employees “chèques repas” will be increased from EUR 8.40 to EUR 10.80.
• The tax credits for single parent households will be increased up to EUR1,500.
• The tax credits for employees and pensions will be modulated depending on the revenues.
• The tax deduction for home saving schemes will be increased from EUR 672 to EUR 1,344 for taxpayers under 40.
• The monthly maintenance allowance amount which does not reduce the tax credits for single parent households (“Crédit d’impôt monoparental”) will be increased.
• The lump sum allowance for extra-ordinary charges currently amounts to EUR 3,600 per tax year. As from 2017, it will amount to EUR 5,400 per tax year.
• Premiums for voluntary pension schemes (3rd pillar) will be deductible up to €3,200 per year irrespective of the subscriber’s age

• The withholding tax on interest income will increase from 10% to 20% for Luxembourg resident individuals

• The capital gain from a real estate transaction involving one’s private wealth, under the condition that the property was held for more than 2 years, will fall to 25% of the global tax rate for the period from July 1, 2016 to December 31, 2017.

The taxation of speculative profits would however always apply following the normal regime, thus subject to the marginal rate.

 

Conclusion

 

The tax environment in Luxembourg is changing, thus affecting corporate entities in the way those are operating.

We are happy to assist you cope with the shifting environment and adapt your current structures to the new requirements emerging from the change.

 

Contributed by

Lut Laget, VGD Luxembourg

lut.laget@vgd.eu

newsletter_october_2016_f.pdf (871.13Kb)