The Luxembourg tax system
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Understanding the tax system in Luxembourg with Initium Group
Taxation of individuals in Luxembourg
A progressive income tax system
In Luxembourg, personal income tax is progressive, with rates ranging from 8% for an annual taxable income of EUR 11,265 to 42% for an annual income in excess of EUR 200,004. In addition to these rates, there is a supplementary contribution to the unemployment fund of between 7% and 9% of the tax due.
Calculation of taxable income
Annual taxable income is calculated on the basis of total gross income for the year, less the following items:
Tax-exempt income
Deductible expenses
Special allowances
Tax classes according to personal status
Personal status influences tax calculation via tax classes that take account of family situation (married, separated, widowed, with or without children, etc.). These classes are used to group taxpayers according to their specific situation.
Tax return and withholding
For residents, all income is declared in a single annual return. Salaried income is subject to advance withholding tax, which is then adjusted when the annual return is filed.
For non-residents:
The tax withheld may be final, unless a tax return is filed at the end of the year.
The return allows specific charges to be deducted and a refund of excess tax withheld to be claimed.
It is compulsory for non-residents who choose to be taxed as residents or who receive income other than salaries taxable in Luxembourg.
Benefits for impatriates
In general, impatriates can benefit from :
A special additional allowance
Tax exemption on the specific costs associated with setting up in Luxembourg
These benefits are subject to strict conditions, linked in particular to the impatriates’ high level of skills and the need for these skills for their employer.
Direct company taxation in Luxembourg
An attractive and competitive tax system
Luxembourg offers a favourable tax system for companies, combining corporate income tax, municipal tax and net worth tax. As a result, the overall tax rate is 24.94% for companies established in the commune of Luxembourg, with slight variations between communes.
SOPARFI tax regime: an advantage for holding companies
The Soparfi scheme is specially designed for holding companies, which benefit from tax exemption on :
Dividends
Capital gains from qualifying holdings
Eligibility requirements :
Significant and stable shareholding : Minimum 10% of the share capital held for 12 months in a company subject to normal taxation in its country of establishment.
This system attracts many holding companies and headquarters of international groups to Luxembourg thanks to its flexibility and the advantages offered by this tax system.
Family Asset Management Company (SPF)
Luxembourg also offers the Société de Gestion de Patrimoine Familial (SPF) scheme for individuals wishing to manage their securities portfolio.
Benefits :
Total tax exemption for income generated by portfolio management
Low cost : Only an annual fee of 0.25% on equity capital is applied
Eligibility requirements :
Held by or on behalf of individuals
Purpose strictly limited to holding and managing cash and securities
Other tax incentives
Luxembourg offers various tax incentives for :
Specific activities : Encouraging certain strategic economic sectors
Impatriates : Tax benefits for qualified professionals moving to Luxembourg, subject to specific conditions
Why choose the Luxembourg tax system for your business?
Competitive tax rates
Advantageous tax regimes for holding companies and asset management
Economic and legal stability
Strategic location at the heart of Europe
VAT tax system in Luxembourg
Introduction to Luxembourg VAT
Value Added Tax (VAT) in Luxembourg is an indirect tax applied to the consumption of goods and services. It plays a crucial role for companies operating in Luxembourg, whether local or international.
VAT features
VAT on sales : Payments are shared between all parties involved at each stage of the sales process.
VAT on consumption : This is ultimately paid by the end consumer.
Objectivity : VAT is not included in the cost price of goods or services.
Transparency : The amount due is clearly indicated at each stage of the transaction.
Scope of VAT
The following activities are subject to VAT in Luxembourg :
Delivery of goods
Provision of services
Intra-Community acquisitions of goods
Imports of goods
Unless specifically exempted, these transactions are subject to VAT.
VAT registration
Registration requirements
The tax system in Luxembourg requires a company to register for VAT if it meets one of the following conditions:
Domestic turnover in excess of EUR 10,000.
Foreign taxable person carrying out taxable activities in Luxembourg.
Taxable person or legal entity making intra-Community acquisitions exceeding EUR 10,000 per year.
Foreign taxable person carrying out distance selling exceeding EUR 100,000 per year.
Taxable person carrying out only activities without right of deduction in Luxembourg and providing B2B supplies in another Member State.
Example : A tenant of property opting for VAT on buildings located abroad, but not on those in Luxembourg.
Taxable person carrying out only exempt activities, receiving taxable supplies of goods/services from a taxable person in another Member State.
Example : SIF, SICAV, SICAR, management company for a FCP, securitisation company.
Allocation of VAT numbers
After submitting an initial VAT return, the company receives two separate VAT numbers from the Administration de l’Enregistrement des Domaines et de la TVA (AED) :
Registration number : Configuration example: 2010 2208 510
Used for all correspondence with the EDA.
VAT identification number : Configuration example: LU24162074
Used for intra-Community relations to avoid the application of foreign VAT by the supplier.
Billing requirements
Invoices issued must contain the following information :
Delivery date
Sequential invoice number
Sender’s VAT identification number
Customer’s VAT identification number (for intra-Community transactions
Name and address of sender and customer
Quantity, nature and unit price of goods or services supplied
Taxable amount and VAT amount for each applicable rate
Taxable amount, amount and reason for each exemption (legal reference)
Date of entry into service and specifications for new means of transport
Definition of a taxable person
Initium Group defines the term ‘taxable person’ as :
Any natural or legal person acting independently and regularly
Carrying out economic activities, whatever their purpose or result
Wherever these activities take place
The taxable person must be acting for professional purposes and not for personal needs or those of his staff.
Economic activity
Any activity involving production, trade or the provision of services is considered economic and may be taxable or exempt depending on the income generated within the tax system established in Luxembourg.
The following activities are not considered economic :
Acquisition of equity interests
Dividends, capital gains on securities, write-backs of provisions
Indemnities, compensation, subsidies, taxes
Interest-free and interest-bearing loans
Activities with the public sector
With the introduction of the VAT package, the concept of the taxable person has been clarified to determine the place of supply of services in a B2B context.
VAT liability for B2B services
Services supplied to a taxable person are subject to VAT in Luxembourg if :
Fully taxable person : Carries out only activities subject to VAT.
Partially taxable person : Carries out activities subject and not subject to VAT, but is liable for VAT on all services received.
Example : A mixed financial holding company in Luxembourg receiving accounting services from its Belgian subsidiary is liable for VAT in Luxembourg as the debtor.
Location of services and goods supplied
Supply of goods (Art. 14 LTVA)
Principle : Place where goods are made available.
Derogations :
Place of departure for transport
Place of installation or assembly
Member State of import
Member State of transport
Distance selling if the threshold is exceeded
Provision of services (Art. 17 LTVA)
Principle : Place where the service provider is established.
Derogations :
Location of the building
Place where the service is physically performed (cultural activity, etc.)
Country of the service provider established in another Member State
Country of the recipient established outside the EU
Intra-Community acquisitions of goods (Art. 18ter LTVA)
Principle : Member State where the transport arrives or from where it departs.
Imports (Art. 19 LTVA)
Principle : Member State where the goods are released for free circulation.
VAT exemptions
Exemptions with right of deduction (Art. 43 LTVA)
Exports of goods from the European Union
Intra-Community supplies of goods to taxable persons
Supplies of goods or services for air, sea and inland waterway transport used by international transport companies
Supplies of goods and services in the context of diplomatic and consular relations (including EU institutions)
Transport of persons travelling abroad
Exemptions without right of deduction (Art. 44 LTVA)
Financial and banking activities
Insurance and reinsurance activities, including insurance brokers and other intermediaries
Renting and supply of immovable property (except option)
Medical, hospital and medical practitioner services
Services closely related to education, early childhood, youth, school or university education and vocational training
VAT rate definition
Standard rate of 17% : Applicable to all goods and services not subject to another rate.
Intermediate rate of 14% : Applicable to heating fuel, unleaded petrol, printed advertising, wine, security and securities management.
Reduced rate of 8% : Applicable to gas, electricity and green plants.
Super-reduced rate of 3% : Applicable to food products, pharmaceutical products, passenger transport, private housing allowances, concert, theatre and sports tickets.
VAT return frequency
Each taxable person must submit periodic returns based on annual turnover :
Turnover < EUR 112,000 : Annual declaration.
Turnover between EUR 112,000 and EUR 620,000 : Quarterly and annual declarations.
Turnover > EUR 620,000 : Monthly and annual declarations.
Benefits of the Luxembourg VAT system
Simple administration : a clear and efficient registration and declaration process.
Competitive VAT rates : Among the lowest in the European Union, promoting business competitiveness.
Flexibility : Special schemes tailored to the specific needs of businesses.
Advice for companies
Compliance : Meet reporting and payment obligations to avoid penalties.
Tax optimisation : Take advantage of the special regimes and exemptions available.
Professional assistance : Call on tax experts to help you navigate Luxembourg’s VAT system effectively
Why choose Luxembourg for your VAT ?
Strategic location at the heart of Europe, facilitating intra-EU trade.
Attractive tax system with competitive VAT rates and advantageous special regimes.
Economic and legal stability, providing an environment conducive to growth and investment.
Social security in Luxembourg
Introduction to Luxembourg’s social security system
Luxembourg’s social security system is characterised by its advantageous and comprehensive nature, making it one of the best in Europe and the world. To benefit from the protection offered by this system, certain conditions must be met.
Social protection offered
The Luxembourg system covers a wide range of social benefits, including :
Illness
Maternity
Accidents at work
Old age
Disability
Unemployment
Family benefits
Who is covered by social security in Luxembourg?
In Luxembourg, all employers and employees are obliged to pay Social Security contributions. The rate of these contributions varies according to the status of each employee.
Social security contributions :
Employers : Obliged to contribute to various social security funds based on salaries and employee status.
Employees : Contributions deducted directly from salaries, varying according to status (e.g. manager or non-manager).
Conditions to benefit from social protections
To be eligible for the various social protection schemes, individuals must meet certain conditions relating to their employment and contributions. These include :
Period of contribution : Minimum period of contribution for certain benefits such as retirement or invalidity.
Nature of employment : Certain types of protection, such as industrial accidents, are specific to jobs recognised as presenting particular risks.
Family situation : Access to family benefits depending on the composition and needs of the family.
Advantages of the Luxembourg social security system
Comprehensive cover : Wide range of protection covering various aspects of professional and personal life.
Financial benefits : Generous benefits in the event of illness, unemployment or retirement, ensuring financial security.
Accessibility : Inclusive system covering all workers, self-employed and employees, whether resident or expatriate.
Why choose Luxembourg to work?
Advanced Social Protection : A robust social security system offering security and peace of mind to employees and employers.
Safe Working Environment : Guarantees against accidents at work and other occupational hazards.
Economic and Social Stability : A stable legal and economic framework favouring growth and the well-being of workers.
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