LUXEMBOURG Law and Practice Contributed by: Michiel Boeren, Jeronimo Charvarria, Maxime Grosjean and Gauthier Mary, Tiberghien
tax classes (eg, Class 2 splitting) as residents. This option is available if: • at least 90% of the taxpayer’s worldwide income is taxable in Luxembourg; or • the taxpayer’s net income not subject to Luxem - bourg tax is less than EUR13,000. A specific threshold applies to Belgian tax residents, who may qualify if more than 50% of their household’s professional income is taxable in Luxembourg. If assimilation is chosen, the non-resident will be sub - ject to tax on their Luxembourg-sourced income at the average rate applicable to their worldwide income (exemption with progression). This regime is particu - larly beneficial for non-residents with high-deductible personal expenses, and for married couples with dis - parate incomes who wish to be jointly taxed. 2.5 Tax Residence of Legal Entities In Luxembourg, the tax residence of collective enti - ties, such as capital companies, is determined based on either their registered office (as stated in their for - mation documents) or their place of effective man - agement (where shareholders’ meetings and board meetings are held, decisions are made, the compa - ny’s relevant information is stored, etc). If both are situated in Luxembourg, the tax residence is clearly established. Companies incorporated under foreign laws but effec - tively managed in Luxembourg are considered Lux - embourg tax residents. Tax-transparent entities formed under Luxembourg law, such as limited partnerships (SCS) or special partnerships (SCSp), are not considered tax residents of Luxembourg. 2.6 Definition of Permanent Establishment Under Luxembourg law, a permanent establishment (PE) is defined as any fixed local facility or instal - lation used for the purpose of conducting ongoing business activities. Examples of PEs include branch offices, manufacturing facilities, warehouses, mines, construction sites, etc.
The domestic definition is generally broader than those in tax treaties. However, under domestic law, the criteria used to determine the existence of a for - eign PE of a Luxembourg taxpayer are those set out in the applicable tax treaties, thus avoiding any conflict - ing interpretations. While Luxembourg’s tax treaties generally align with the OECD Model Tax Convention, including the PE provisions, some specific treaties differ. 3. Taxation of Cross-Border Income 3.1 Income From Immovable Property Luxembourg Resident Individuals Individuals who are tax residents of Luxembourg are subject to tax on their worldwide taxable income, including income derived from immovable property located in Luxembourg or abroad. Net rental income is aggregated with other taxable income and is subject to the progressive income tax schedule. Luxembourg immovable property Income from the rental of private property is subject to tax as net rental income. The taxable base is cal - culated as gross receipts minus deductible expenses (eg, interest, maintenance, depreciation and manage - ment fees). A key feature is that buildings (excluding land) can be depreciated for tax purposes. This amortisation is generally tax-deductible and does not reduce the acquisition price for future capital gains calculations. Foreign immovable property If a double tax treaty applies, foreign rental income is generally exempt in Luxembourg but is subject to the exemption with progression rule. This means that, while the income itself is not subject to tax, it is included in the worldwide income base to determine the applicable tax rate on other Luxembourg-source income. In the absence of a tax treaty, foreign rental income is fully taxable in Luxembourg. However, a foreign tax credit is usually available for taxes paid abroad to miti - gate double taxation, subject to domestic limitations.
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