LUXEMBOURG Law and Practice Contributed by: Romain Tiffon and Marie Bentley, ATOZ Tax Advisers
3.2 Individual and Corporate Rates Luxembourg does not prohibit professionals from incorporating companies, but a combination of anti- abuse rules, substance requirements, transfer pric - ing rules and income recharacterisation principles ensures that individuals cannot simply route personal professional income through a company to artificially benefit from corporate tax rates. These rules effective - ly prevent misclassification of income and safeguard the integrity of the progressive personal income tax system. In principle, while corporate rates may be lower, dis - tributed profits are still subject to taxation at individual level (at the marginal rate, subject to a 50% dividend exemption) unless other reliefs apply. The 15% with - holding tax levied at source by the distributing compa - ny should be creditable against the individual income tax of the dividend beneficiary. Combined with CIT + MBT + withholding/exemption mechanics, the over - all effective tax rate is often not lower than personal marginal rates once profits are extracted. 3.3 Restrictions on Retention of Earnings by Closely Held Corporations Luxembourg does not have a specific “accumulated earnings tax” like the US or certain other jurisdictions. However, Luxembourg companies are subject to net wealth tax (NWT) each year on the value of their net assets. Accumulating large passive portfolios inside a closely held corporation increases NWT liability annually, making it less attractive to stash investment assets inside operational companies merely to defer personal taxation. 3.4 Taxation of Individuals on Shares in Closely Held Corporations For Luxembourg‑resident individuals, dividends received from closely held corporations are generally: • taxed at the progressive personal income tax rate, which can go up to approximately 45.78%; and • eligible for a 50% exemption, provided certain statutory conditions are met (eg, when dividends originate from qualifying shareholdings). A par - ticipation qualifies if it meets one of the following conditions –
Since 1 January 2021, an annual 20% real estate levy ( prélèvement immobilier ) has been introduced. It applies to income and gains arising from real estate assets situated in Luxembourg and realised either directly or indirectly (through tax transparent entities) by certain categories of exempt investment vehicles (ie, undertakings for collective investment, SIFs and RAIFs) which are “opaque” from a Luxembourg tax perspective. 3. Corporations and Non-Corporate Businesses 3.1 Form of Closely Held Local Businesses Luxembourg does not have a proper closely held local businesses regime and there are no available statis - tics on whether closely held local businesses operate mostly in corporate or non-corporate form. However, Luxembourg company law provides for simplified company forms that are suitable for closely held local businesses. • A simplified private limited liability company, or société à responsabilité limitée simplifiée (Sàrl‑S) is designed to give first‑time entrepreneurs immedi - ate and simplified access to business activity. It benefits from significantly reduced share capital requirements – ranging from EUR1 to EUR12,000 instead of the standard EUR12,000 – and its arti - cles of association do not need to be notarised. Only individuals may be shareholders, and in prin - ciple a person may hold shares in only one Sàrl‑S at a time, while management must be entrusted exclusively to individuals. • The simplified limited company or société par actions simplifiée (SAS), although less commonly used than the Sàrl, SA or SCA, can nevertheless serve as a suitable structure for start‑ups or joint ventures. It is chosen in situations requiring flexible governance while still retaining certain features of the SA, particularly regarding capital structure and share arrangements. The SAS cannot publicly offer its shares, and although the law formally requires the appointment of only one chairman, it allows for more sophisticated and adaptable governance frameworks.
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