Luxembourg: Tax implications of 2009 budget

Géraldine Piat, Partner, PricewaterhouseCoopers Luxembourg
BNA International, October 2008

The Luxembourg draft budget for the year 2009 was submitted by the Luxembourg government to its parliament on 1st October 2008.
This year’s budget reaffirms some of the previous announcements and new tax measures of significant importance that further increase the competitiveness of Luxembourg as a financial centre.
The main measures relating to corporations’ taxation are briefly described below.

Capital Duty
One of the most important and much anticipated measures is the abolition of capital duty in Luxembourg.
Until the end of year 2007, the capital duty was levied at a rate of 1%, which was reduced to 0.5% in January 2008.
The main changes foreseen with respect to capital duty and registration duties would be as follows:

  • Abolition of capital duty as from 1st January 2009;
  • Introduction of a fixed registration duty (EUR 50 or EUR 100) that would be applicable on transactions involving Luxembourg entities (i.e. incorporation, amendments of by-laws and transfer of seat to Luxembourg);
  • Luxembourg real estate assets contributed to a company and remunerated by shares would be subject to a proportional registration duty of 1.2% and a transcription tax of 0.5%. Contributions remunerated by other means than shares would remain subject to a proportional registration duty of 6% and a transcription tax of 1%. However, transfers made within the framework a corporate reorganization would be exempt from any proportional registration duty under certain conditions.
Based on the current capital duty legislation, contributions of shares may be exempt from capital duty under certain conditions.
One of these conditions is that the company receiving the shares contributed commits to holding these shares for five years.
According to the commentaries on the draft bill, the capital duty exemption would be granted permanently. In other words, compliance with the five-year
claw back period would no longer be required after January 2009.

As Luxembourg was one of the last European Member States to levy a capital duty on the raising of capital, its abolition would certainly enhance Luxembourg’s international tax competitiveness and bring it to level playing field.

Exemption of withholding tax for dividends paid to treaty country corporate shareholders
Luxembourg domestic law providing for an exemption of withholding tax on dividends paid to corporate shareholders (under certain conditions), would be extended to corporate entities resident in countries which have signed a double tax treaty with Luxembourg.
Until now, these corporate entities were only entitled to a withholding tax exemption if the dividend was derived through their Luxembourg permanent establishment.

The exemption would be granted only to foreign entities that are subject, in their country of residence, to a tax similar to Luxembourg corporate income tax.
According to the commentaries on the draft bill and as per the administrative interpretation, a corporate income tax (CIT) is similar to the Luxembourg CIT if it is mandatory and it is levied at an effective rate of at least 10.5 % (half of Luxembourg CIT as of January 2009) calculated on a taxable base similar to the one applicable in Luxembourg.

Noting that Luxembourg has concluded tax treaties with more than 50 countries, this new measure would certainly increase and promote Luxembourg’s international tax competitiveness while offering similar conditions of investment compared to some of its neighbouring countries.

Reduction in the corporate income tax rate
In line with the previous announcement made during the traditional state of nation address on 22nd May 2008 and further to which it was foreseen that the aggregate corporate income tax rate would be decreased in several stages, from 29.63% (for Luxembourg City, including municipal business tax) down to 25.5%, the Bill of 1st October 2008, envisages to decrease the corporate income tax rate by 1% from 2009, thereby reducing it from 22% to 21%

As a consequence, the combined tax rate for Luxembourg-City including the municipal business tax and the contribution to the unemployment fund, would, in a first stage,
go down from 29.63% to 28.59% as from 2009.

Computation of profits based on IFRS and tax
The introduction of IFRS in Luxembourg companies’ statutory accounts rendered difficult the reconciliation of IFRS accounts with the Luxembourg’s tax regime.
The draft bill aims at clarifying and simplifying this procedure. Accordingly, it is proposed to stick as much as possible to the IFRS accounting and to limit tax adjustments.
Certain tax adjustment would however be possible, as the objective of the bill is that IFRS accounts should be as tax neutral as possible.
The IFRS statutory accounts would therefore be the basis for the computation of Luxembourg corporate taxes.

Amendment of the IP regime
The benefit of the new IP regime (introduced by the law of 21 December 2007 and providing for an 80% exemption on net income and gains deriving from qualifying IP) would be extended to domain names. Further, the qualifying IP would benefit from a net wealth tax exemption under certain conditions. These new measures would be retroactively applicable as from 1st January 2008.

Overall, the draft budget for the year 2009 comprises very interesting features which, if enacted, would outweigh the earlier tax disadvantages of Luxembourg vis-à-vis its competitors
and would further reinforce Luxembourg’s position as a financial centre .