LUXEMBOURG Law and Practice Contributed by: Romain Tiffon and Marie Bentley, ATOZ Tax Advisers
6.2 Non-Deductible Local Expenses Luxembourg applies a matching principle: expenses directly connected to exempt income are not tax deductible. So, if foreign income is exempt, local expenses that are directly and economically linked to that exempt foreign income are non-deductible in Luxembourg. This applies particularly to exempt foreign source income, such as: • profits attributable to a foreign permanent estab - lishment (PE) exempt under a double tax treaty; • dividends or gains exempt under the participation exemption; and • other foreign income benefiting from a specific exemption. Examples of non-deductible expenses when they are directly linked to exempt income include: • impairments on a qualifying exempt participation; • interest on loans used to acquire an exempt par - ticipation; and • expenses incurred solely to earn exempt foreign source profits. 6.3 Dividends From Foreign Subsidiaries Dividends received by a Luxembourg tax resident are subject to CIT and MBT, unless the participation exemption applies. Under the participation exemption, dividends received from a foreign subsidiary are exempt if the following conditions are met. • The distributing subsidiary must be: (a) an EU company covered by the Parent–Sub - sidiary Directive; (b) a fully taxable Luxembourg company; or (c) a non‑resident joint‑stock company fully liable to a tax comparable to Luxembourg CIT (gen - erally at least 8% as of tax year 2025). • The Luxembourg parent company must be a fully taxable resident company (or qualifying PE). • The participation must satisfy a minimum threshold of:
(a) at least 10% of the subsidiary’s share capital; or (b) acquisition cost of at least EUR1.2 million for dividend exemption. • Minimum holding period – The parent must hold or commit to hold the participation for at least 12 months. If these conditions are met, the dividend is fully exempt from Luxembourg corporate income tax. If dividends received by a Luxembourg company do not meet the conditions for the full participa - tion exemption, 50% of the dividend is nevertheless exempt from corporate income tax under Luxem - bourg’s domestic half‑income method, provided the income is paid by: • a fully taxable Luxembourg resident company; • a company resident in a state with which Luxem - bourg has concluded a double tax treaty and which is fully liable to a tax corresponding to Luxembourg CIT; or • a company resident in an EU member state cov - ered by Article 2 of the EU Parent–Subsidiary Directive (Directive 2011/96/EU). 6.4 Taxation of Intangibles Developed by Local Corporations Intangibles developed by a Luxembourg company cannot generally be used by foreign subsidiaries without Luxembourg tax consequences. Luxembourg strictly applies the arm’s length principle to transac - tions between related parties, including the licensing or transfer of intangibles. If a Luxembourg corporation develops an intangible (eg, IP, software, trade mark, algorithm) and a foreign subsidiary uses it, the Luxembourg entity must: • charge an arm’s length royalty; • reflect an arm’s length buy in payment (if the intan - gible is transferred); or • ensure an arm’s length cost-sharing arrangement. Otherwise, Luxembourg tax authorities can make a transfer pricing adjustment to increase taxable income.
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