LUXEMBOURG Law and Practice Contributed by: Romain Tiffon and Marie Bentley, ATOZ Tax Advisers
4. Taxation of Inbound Investments 4.1 Application of Withholding Taxes As a general rule, Luxembourg does not levy withhold - ing tax on the following outbound payments made by Luxembourg corporate taxpayers to non‑residents: • ordinary interest paid at arm’s length; • royalties; • liquidation proceeds; and • dividend distributions made by exempt undertak - ings for collective investment. Dividends distributed by Luxembourg‑resident com - panies are, in principle, subject to a 15% withholding tax. However, subject to the General Anti‑Avoidance Rule (GAAR), a withholding tax exemption applies where dividends are paid by a fully taxable Luxem - bourg resident company to: • a non‑resident collective entity falling within the scope of the EU Parent–Subsidiary Directive; • a Swiss‑resident corporation subject to Swiss corporate tax and not benefiting from a Swiss tax exemption; • a corporation or co-operative resident in an EEA country (other than an EU member state) and fully subject to an income tax comparable to Luxem - bourg CIT; • a collective undertaking resident in a tax treaty jurisdiction and fully subject to an income tax com - parable to Luxembourg CIT; or • a Luxembourg permanent establishment of any of the above qualifying foreign entities. The exemption applies where the foreign parent company holds – directly or indirectly through a tax transparent entity – at least 10% of the share capital or a participation with an acquisition cost of at least EUR1.2 million, for an uninterrupted period of at least 12 months. A 20% withholding tax applies to directors’ fees (increased to 25% if the tax is borne by the company paying the fees). For non‑resident directors whose Luxembourg‑source professional income consists solely of directors’ fees not exceeding EUR100,000
(a) the distributing entity is a Luxembourg‑resident company fully subject to Luxembourg income tax; (b) the distributing entity is a non‑resident capital company subject to an income tax compara - ble to Luxembourg corporate income tax, in a jurisdiction that has concluded a double tax treaty with Luxembourg (typically requiring a minimum effective tax rate of 8% on a compa - rable tax base); or (c) the distributing entity is resident in an EU member state within the meaning of Article 2 of the Parent–Subsidiary Directive. In addition to the 50% exemption, individuals may benefit from an annual EUR1,500 deduction on divi - dend income (doubled for jointly taxable couples). Capital gains realised by Luxembourg‑resident indi - viduals on the sale of shares – whether in closely held or other corporations – are taxed depending on the holding period and the size of the participation. • Shares held for six months or less (“speculative gains”) – Gains are fully taxable at the individual’s progressive personal income tax rate. • Shares held for more than six months – Taxation depends on whether the shareholding is consid - ered substantial. (a) Non‑substantial participation (less than 10%) – Capital gains are fully exempt from personal income tax. (b) Substantial participation (10% or more) – Capital gains benefit from the half‑global rate, meaning only 50% of the gain is taxed at the individual’s progressive rate. 3.5 Taxation of Individuals on Shares in Public Corporations The same tax treatment applies as that outlined at 3.4 Taxation of Individuals on Shares in Closely Held Corporations .
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