LUXEMBOURG Law and Practice Contributed by: Michiel Boeren, Jeronimo Charvarria, Maxime Grosjean and Gauthier Mary, Tiberghien
• a minimum direct participation threshold of 10% in the capital or shares representing an histori - cal acquisition price of at least EUR1.2 million is required; and • a minimum uninterrupted holding period of one year is required. The participation exemption also applies to Luxem - bourg PEs of companies covered by the EU Parent- Subsidiary Directive that are resident in the EEA or in a country with which Luxembourg has concluded a tax treaty. Certain tax treaties concluded by Luxembourg provide for more favourable conditions for the partici - pation exemption on dividends, notably regarding the holding period requirement. If the full domestic exemption is not available, in some cases dividend income may be 50% exempt if the subsidiary is covered by the EU Parent-Subsidiary Directive or if the subsidiary is a company that is resi - dent in a country with which Luxembourg has con - cluded a tax treaty and the comparable tax test is met. Withholding Tax No withholding tax applies on arm’s length interest and royalties paid by Luxembourg companies. In principle, dividends (including deemed dividends) and profit-sharing interest paid by Luxembourg com - panies to their shareholders are subject to withholding tax at a rate of 15%. However, the withholding tax does not apply to these payments made to qualifying corporate shareholders if the following conditions are met at the date of the payments: • the recipient is an entity covered by the EU Parent- Subsidiary Directive (or a PE thereof), an entity resident in a tax treaty country and the comparable tax test is met (or a Luxembourg PE thereof), an entity resident and subject to tax in Switzerland without benefiting from an exemption, or an entity resident and subject to tax in an EEA country and the comparable tax test is met (or a PE thereof); • a minimum direct participation threshold of 10% in the capital or shares having an historical acquisi - tion price of at least EUR1.2 million is required; and
• a minimum uninterrupted holding period of one year is required (or a commitment to meet this condition subsequently). In cases where the direct shareholders are tax trans - parent entities from a Luxembourg perspective, a look-through approach applies to determine if the above conditions are met by corporate or individual shareholders. If the above exemptions are not available, exemptions or reduced withholding tax rates may be available under tax treaties. Liquidation distributions made by Luxembourg com - panies, including partial liquidation distributions in the context of share class buyouts, are not considered dividends and are therefore not subject to withhold - ing tax. In addition, under the regimes applicable to securitisation vehicles, SIFs, RAIFs, Venture Capital Investment Companies (SICAR) and Family Wealth Management Companies (SPF), dividend distributions are not subject to withholding tax. 3.4 Capital Gains Luxembourg Resident Individuals Residents are taxable on worldwide capital gains, with treatment depending on the nature of the asset and holding period. • Gains realised on movable assets (eg, shares) held for less than six months or real estate held for less than five years (so-called speculative gains) are subject to tax as ordinary income at progressive rates. • Gains on real estate held for more than five years and on “substantial participations” in companies (shareholding of more than 10% held for more than six months) are subject to tax at a preferential rate equal to half the global average tax rate (maximum effective rate of approximately 22.89%). • Residents benefit from a EUR50,000 allowance (doubled for jointly taxed couples) applicable to long-term gains every ten years. • Capital gains on the disposal of the taxpayer’s principal private residence are fully exempt from taxation.
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