LUXEMBOURG Law and Practice Contributed by: Romain Tiffon and Marie Bentley, ATOZ Tax Advisers
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). Capital Gains Exemption Capital gains realised by a Luxembourg company or permanent establishment on the disposal of shares in a subsidiary can also be exempt from tax where, at the time the gain arises, the seller has held – or commits to hold for at least 12 uninterrupted months – a direct and continuous participation of at least 10% in the subsidiary or shares with an acquisition cost of at least EUR6 million. The subsidiary must be either an EU undertaking covered by the Parent–Subsidiary Direc - tive, a fully taxable Luxembourg capital company, or a non‑resident company subject to a tax comparable to Luxembourg corporate income tax. In practice, the Luxembourg tax authorities generally require that the foreign company be subject to a minimum tax rate of 8% on a basis comparable to Luxembourg’s. Waiver Under LITL Article 166 As from tax year 2025, the Luxembourg tax law pro - vides, in Article 166 of the Luxembourg Income Tax Law (LITL), for the possibility for a taxpayer to waive the benefit of the Luxembourg participation exemp - tion referred to in Article 166 of the LITL. However, this option is only available to the taxpayer where the con - ditions for the participation exemption are met solely by virtue of the threshold of the acquisition price of the shareholding, ie, if is at least equal to an amount of EUR1.2 million. In other words, when the conditions for the exemption are met on the basis of a sharehold - ing of at least 10%, it is not possible to exercise this waiver. The limitation of the waiver to these cases is due to the constraints arising from the Parent–Subsid - iary Directive. The waiver must be exercised individu - ally for each tax year and for each shareholding and has an impact on the recapture rule. If the waiver is not exercised, the participation exemption continues to apply normally. Innovation‑Driven Activities Luxembourg offers targeted incentives for innova - tion‑driven activities.
• Research and development (R&D) expenses are generally tax deductible. Since 1 January 2018, Luxembourg has implemented an intellectual property (IP) regime that complies with the “modi - fied nexus” approach endorsed by both the OECD and the European Union as part of the Base Ero - sion and Profit Shifting (BEPS) project. Under this regime, an 80% exemption from CIT and MBT may apply – subject to certain conditions – to the net income derived from qualifying rights in patents (defined broadly) and copyrighted software. The exemption is limited to IP assets that are not mar - keting‑related and that were created, developed or enhanced after 31 December 2007, provided the income originates from eligible R&D activities. In addition, IP assets that qualify for the 80% (corpo - rate) income tax exemption are 100% exempt from net wealth tax. • In addition to the IP regime, the law on 19 Decem - ber 2023 introduced a major reform of the invest - ment tax credit (ITC) framework, effective as from the 2024 tax year. This framework aims to accelerate the digital transformation as well as the ecological and energy transition of Luxembourg businesses and to strengthen the competitiveness of Luxembourg companies, by stimulating more innovation, while promoting the development of knowledge and skills in digital transformation and ecological and energy transition. The framework provides for the following: (a) a global ITC of 12% based on the acquisition price or cost price of investments made during a financial year, granted on investments in tan - gible depreciable assets other than buildings, livestock and mineral and fossil deposits, and for the acquisition of software; (b) for investments in fixed assets approved to be eligible for the special depreciation referred to in Article 32bis of the LITL, the tax credit is increased to 14%; and (c) a specific income tax credit for investments and operating expenses linked to the digital transformation or ecological and energy transi - tion – the rate of the new tax credit is either 18% or 6% depending on whether investments are made in tangible depreciable assets or not.
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