For individuals, Luxembourg knows a progressive income tax system with bands that start at 8 % for an annual taxable income of 11.265 EUR and going up to 42 % for an annual taxable income exceeding 200.004 EUR. This taxation for individuals does not consider a surcharge contribution to unemployment fund (7 to 9 % of the tax due).
Annual taxable income is determined as being the gross annual income summing up all incomes of the year, from which tax-exempt income, deductible charges and special allowances are deducted.
Individual private status is also taken into account for the determination of income taxation by way of classes of taxation that gather people according to their situation (married, separated, widow, with or without children, etc…).
All incomes of a resident taxpayer are taxed in a single annual return, but salaried income is subject to an anticipated withholding of tax which is then offset again the final taxation determined when filing the annual return. For non-resident taxpayers, the tax withheld during the year may be final unless such taxpayer files a return at the end of year. For instance, when such taxpayer has charges to be deducted from his Luxembourg salary income and therefore is willing to claim refund of an excess of tax withheld at source during the year. Such filing of a return is mandatory for non-resident taxpayers who elect to be taxed as resident taxpayers (subject to specific conditions) or when they collect an income other than a salary and that is taxable in Luxembourg.
Impatriates enjoy a special additional allowance and tax exemption in respect of their specific charges connected to their relocation to Luxembourg. That regime is however subject to specific conditions connected to their high level of competence and the need of those for the firm employing them.
CORPORATE DIRECT TAXATION
Luxembourg tax system provides for a combined taxation made of Corporate Income Tax, Municipality Tax and Net Worth Tax. The global rate reaches 24,94 % for companies established within the municipality of Luxembourg.
Rates may slightly vary from a municipality to another.
Exemption of tax is provided under specific conditions to income derived from holding activities known as “Soparfi” regime. We call “Soparfi” corporations taking advantage of the EU Parent Directive as transposed in Luxembourg tax legislation and offering the benefit of a tax exemption on dividend and capital gains derived from a qualified participation. A participation will generally qualify for that tax regime when it is important and stable, i.e. it represents 10 % of share capital held for 12 months in another corporation subject to a normal tax regime in its country of establishment. The income concerned by such exemption are dividends and the gain realized upon the sale of the qualified participation. The very attractive and flexible regime explains the huge amount of holding companies or group headquarters that have been established in Luxembourg.
Beside the Soparfi, Luxembourg also has a specific regime for individuals willing to lodge their portfolio of securities, which is called Private Wealth Management Company (SPF – Société de Gestion de Patrimoine Familial). Provided that such corporation is held by or on behalf of individuals and has its purpose strictly limited to the holding and management of a portfolio composed of cash and securities, it will enjoy a full tax exemption but will be subject to an annual small duty of 0,25 % on its equity.
Other tax incentives are available for specific activities or for impatriates relocating to Luxembourg under certain conditions.
LUXEMBOURG VAT SYSTEM
- on turnover: payments are divided among all participants at each stage of the sales process
- on consumption: it is paid by the end consumer
- that is objective: it is not part of the cost price
- that is transparent: the sum due is known at each stage
The following activities fall within the scope of VAT:
- The delivery of goods
- The provision of services
- Intra-Community acquisitions of goods
- Importations of goods
In the absence of a specific exemption, these transactions are liable to VAT
- Requirement to register for VAT:
A taxable person who achieves a domestic turnover in excess of €10,000.
A foreign taxable person who carries out taxable activities in Luxembourg.
A taxable person or legal person who makes intra-Community acquisitions of more than €10,000 per year.
A foreign taxable person who carries out distance selling in excess of €100,000 per year.
A taxable person who only carries out activities without a right to deduct in Luxembourg, and who provides B2B deliveries of goods and/or services in another Member State that are taxable there and not exempt and for which the receiver is liable to pay tax.
Example: property tenant who has opted for VAT for his/her buildings located overseas, but not for those buildings located in Luxembourg.
A taxable person who only carries out exempted activities, who receives deliveries of goods and/or services for which he/she is liable to pay tax from a taxable person established in a Member State.
Example: SIF, SICAV (unit trust company), SICAR (Luxembourg investment fund), management company for an FCP (mutual investment fund), securitisation company.
- Allocation of VAT numbers
After submitting an initial VAT return, the taxable person receives two separate VAT numbers from the Registration and Domains Administration):
- Registration number: configuration: 2010 2208 510
This number is for use during any contact with the AED
- VAT identification number: configuration: LU24162074
This number is for use in the context of intra-Community relations to avoid the application of foreign VAT by the country of the supplier of the goods or services
- Delivery date
- Sequential invoice number
- VAT identification number of the taxable person issuing the invoice
- VAT identification number of the customer when the transaction is taxable in another Member State.
- The name and address of the taxable person and the customer
- The quantity, nature and unit price of the goods and services provided
- Delivery date of the goods or service
- The tax base and amount of VAT for each rate
- The tax base, the amount and the reason for each exemption (legal reference)
- For new means of transport, the date of going into service and the specifications
A taxable person is defined as:
- Who independently and regularly
- Carries out activities relating to an economic activity
- Whatever their objective
- Whatever the results
- Wherever this takes place
The taxable person must act accordingly, i.e. for professional purposes rather than to meet his/her personal needs or those of staff.
Any activity involving production, trading or the provision of services that is taxable or exempt on account of the revenue it generates.
The following activities (examples) do not constitute an economic activity:
- The acquisition of shareholdings
- Dividends / capital gains on securities / reversals of provisions
- Indemnities and compensation / grants / taxes
- Interest-free loans
- Loans with interest
- Activities with the public sector
Following the introduction of the VAT package, the concept of the taxable person has been specified and broadened to determine the place of the provision of services in a B2B context.
The following are considered liable for all of the services provided to them:
- A fully taxable person : A taxable person who carries out only activities that fall within the scope of VAT (independently of the right to deduct input VAT)
- A partially taxable person, who at the same time carries out activities and transactions that fall within and those that fall outside the scope of VAT, is considered liable for all services received for the purposes of his/her activity, whether it is economic or non-economic.
Example: A mixed financial holding company in Luxembourg that receives accounting services from its Belgian subsidiary in relation to its shareholding activity is liable for tax in Luxembourg as the debtor receiver.
- A non-taxable legal person registered for VAT. A non-taxable legal person registered for VAT is considered as a taxable person for all intra-Community acquisitions of goods and all services from providers established abroad.
Example: A traditional holding company, a local authority or an association in Luxembourg that is registered for VAT that receives IT services from a French service provider is liable for Luxembourg tax as the debtor receiver.
The identification number becomes a prior condition for checking the status of the taxable person receiving the service and determining the location of the services. The services provided to an overseas receiver registered for VAT are considered to be effected at the place where the service receiver is established, and the receiver becomes liable for VAT.
Each taxable person must submit periodic returns with regard to the annual turnover achieved over the previous year:
If the turnover is below €112,000, an annual return is required.
If the turnover is between €112,000 and €620,000, quarterly returns and an annual return are required.
If the turnover is higher than €620,000, monthly returns and an annual return are required.
6 QUESTIONS ABOUT VAT
A taxable person is considered to be:
- Any legal or natural person who independently and regularly carries out activities relating to any type of economic activity, whatever the objective and results of this activity and wherever it takes place.
- The phrase economic activity refers to any activity that attracts revenue and in particular those activities involving production, trading and the provision of services.
In terms of VAT, the economic activity is only acknowledged if a service is carried out for payment (in the broader sense).
If one of these elements is missing, the activity does not fall within the scope of application of VAT.
Examples of transactions and activities that do not fall within the scope of application of VAT:
- capital gains on securities
- reversals of provisions
- indemnities and compensation
A taxable person who is exempt is one who only carries out activities and transactions that are exempt from VAT and that do not attract a right to deduct input VAT (e.g.: credit establishments, insurance companies, captive reinsurance undertakings, OPC [collective investment])
A partially taxable person is one who at the same time carries out taxable activities that attract the right to deduct and exempt activities that do not attract the right to deduct input VAT (e.g. universal banks, property companies that have opted for VAT)
Activities that fall within the field of application of VAT:
- Delivery of goods
- Provision of services
- Intra-Community acquisitions of goods
- Importation of goods
These activities are liable to VAT unless specifically exempted.
1. Delivery of goods (Art. 14 LTVA)
Principle: Place they were made available
- Place of departure of transport
- Place of installation or assembly
- In the importing Member State
- In the transporting Member State
(Distance selling if the upper limit has been exceeded)
2. Provision of services (Art. 17 LTVA)
Principle: Location where the service provider is established (§1)
– Place where the building is located
- Place where the service is physically carried out (cultural activity, etc.)
- Country of the taxable person who is established in a Member State other than that of the service provider
- Country of a receiver who is established outside of the EU
3. Intra-Community acquisitions of goods (Art. 18ter LTVA)
Principle: Member State in which the transport arrives or from which it departs
4. Importations (Art. 19 LTVA)
Principle: Member State in which the goods are put into free circulation
- Exemptions that attract a right to deduct (Art. 43 LTVA)
– exportations of goods outside the European Union
– Intra-Community deliveries of goods to taxable persons
– deliveries of goods or services carried out for the purposes of navigation by air, sea and river that are used by companies principally operating international paid transport services for goods or passengers
– deliveries of goods and provision of services in the context of diplomatic and consular relations (including EU institutions)
– transportation of people travelling to or coming from abroad
- Exemptions that do not attract the right to deduct (Art. 44 LTVA)
– financial and banking activities
– insurance and reinsurance activities, including those conducted by insurance brokers and other intermediaries
– property rentals and deliveries (except option)
– medical, hospital, doctor services
– services closely linked to education, childhood or youth, to school or university education and professional/vocational training
- Principles (art. 26 CTVA)
Obligation to pay the VAT due from the taxable person who carries out a Delivery of Goods or a Provision of Services
- Exceptions :
– VAT due on an intra-Community acquisition of goods by the taxable person who makes the acquisition
– VAT due on intangible services (covered by art 17§2 e LTVA) by the receiving Luxembourg taxable person when the provider is established outside of the country
– VAT due on an importation of goods by the importer
- Normal rate of 17 % : all goods and services not subject to another tax
- Intermediate rate of 14 %: heating fuel, lead free petrol, printed advertisements, wine, security and securities management
- Reduced rate of 8 %: Gas, electricity, green plants
- Super-reduced rate of 3 %: food products, pharmaceutical products, passenger transport, housing allocation for private purposes, concert, theatre and sport tickets.
The luxembourg social security system
What makes Luxembourg different from many other countries in the World is its social security system, which is one of the most advantageous and most complete system in Europe and in the World. In order to get protected by this system, some conditions must be fulfilled.
The protections that are provided by the Luxembourg social security system are the followings:
- Accidents at work
- Old age
- Family benefits
Who is concerned ? >>>
In Luxembourg every employer and employee are obliged to pay the contributions to the Social Security.
The percentage of the contributions that everybody pays depends as well on the status that every employee has in Luxembourg.