Despite its size, Luxembourg has become one of the prime business locations worldwide over the past three decades. Not only for banking and financial institutions, but also for multinational companies, writes Georges Bock, of KPMG Luxembourg
It is no secret that the Grand-Duchy of Luxembourg is among the smallest countries in the world, with a surface area of just 2,586km2 and a population of slightly more than 500,000 inhabitants. However, Luxembourg is home to about 150 banking institutions, to the second largest fund administration sector worldwide, to the sixth largest private banking sector worldwide, biggest private banking sector in the eurozone, and several prominent industrial, e-commerce, logistics and maritime companies. Luxembourg’s economic success can be attributed to a very business friendly and focused environment which is mainly driven by the blend of its central geographic situation, its political and economic stability, its sensitive regulatory, legal and tax framework plus its multilingual and multicultural workforce. All these factors are further favoured by Luxembourg’s small size which allows the government to be very accessible and proactive through constructive dialogue and swift implementation. One of the most widely known factors of Luxembourg’s success is undoubtedly its attractive tax system, which largely contributes to the overall favorable investment climate. This article is intended to give a brief overview of the key features that make Luxembourg such an attractive business place.
Luxembourg: An attractive tax environment
The Luxembourg statutory corporate income tax rate of 22.05 per cent (including a five per cent employment fund contribution) is close to the European average. Additionally, a municipal business tax is levied on all business establishments. For Luxembourg City, this rate is 6.75 per cent, leading to an aggregate corporate tax rate of 28.80 per cent. However, the taxable basis for most Luxembourg companies tends to be narrower than those prevailing in most comparable jurisdictions.
This is achieved via a broad network of double tax treaties (DTTs), 64 to date, as well as a set of tax rules which either aim at avoiding double taxation, such as the Luxembourg participation exemption regime, or incentivise investments, such as the tax credit for investments (ITC) or the IP tax regime. Indeed, Luxembourg’s participation exemption regime in conjunction with a broad network of DTTs, have undeniably proven to be a very efficient tool for corporate structuring. The vast presence of holding companies, the “so-called” SOPARFI’s, speaks for itself.
Luxembourg’s participation exemption regime provides for 0 per cent withholding tax on dividends and exempts from tax all income arising from qualifying investments (i.e. dividends, capital gains and liquidation proceeds). Another key feature of Luxembourg’s fiscal regime are the investment tax credits, especially those for new investments. On this basis, Luxembourg resident companies may benefit from substantial allowances for new investments in tangible depreciable assets.
The Luxembourg government is putting considerable efforts in pushing R&D in Luxembourg. One of the most important measures taken has been the implementation of a new IP tax regime which provides for a very competitive tax rate applicable to a broad range of IP income generated by Luxembourg taxpayers. The hallmark of the Luxembourg IP tax regime is an 80 per cent exemption on royalties and capital gains derived from many types of IP. Companies benefiting from the regime are subject to an effective tax rate of as low as 5.76 per cent on qualifying “net” IP income (i.e. gross revenue from the IP less directly related expenses, depreciation and write-downs).
Other characteristic features of Luxembourg corporate taxation include generous thin capitalisation rules (debt/equity ratio of 6:1 for financing activities), no taxation of unrealised gains, indefinite carry forward of losses, non-existence of CFC rules as well as an attractive taxation of employees and low social security contributions for employers and employees.
In addition, Luxembourg also offers low VAT rates, with a standard rate of 15 per cent and reduced rates of 3 per cent, 6 per cent or 12 per cent for certain types of goods and services.
A final key feature that Luxembourg has to offer is that the taxpayer has the possibility to discuss in advance with the tax authorities the business foreseen and the tax treatment applicable to such an activity, which yields in an increased legal security for the taxpayers.
Luxembourg: A large selection of investment vehicles
Over the years, Luxembourg has developed a strong reputation as a centre of excellence for the fund administration sector, especially for the efficient implementation of UCITS regulations. The legal framework offers a large selection of investment vehicles to accommodate the strategies pursued by promoters. Indeed, Luxembourg’s legislation is very flexible on the legal form a fund takes. Thus, Luxembourg funds can be set up as mutual funds (FCP) or as investment companies with fixed (SICAF) or variable capital (SICAV). In addition, funds can be set up as “Special Investment Funds” (SIF), which offer qualified investors (namely institutional, professional and “well informed” investors) a greater flexibility of investment policy, the broadening of the investor circle and a more relaxed regulatory regime. When it comes to the taxation of investment funds, a different approach is taken when considering mutual funds respectively investment companies with fixed and variable capital even though the end result is much the same. Luxembourg mutual funds are fiscally transparent and are, thus, not subject to Luxembourg income or net wealth tax. Although investment companies operating as public limited companies with fixed capital or variable capital (SICAF or SICAV) are basically treated as resident taxpayers, they are specifically exempt from income and net wealth tax. In addition to the above vehicles, Luxembourg also offers a lightly regulated venture capital/private equity vehicle, the so-called “SICAR”. SICARs are investment vehicles which are reserved to “well-informed” investors only and are considered as resident companies fully liable to corporate and municipal business tax. However, income derived from investments in risk-bearing capital may be tax exempt as well as income on cash held by the SICAR for the purpose of a future investment.
Furthermore, corporate SICARs, i.e. SICARs that are not set-up as a limited partnership, benefit from a full withholding tax exemption on dividends distributed to its shareholders, irrespective of the residence and the tax status of its shareholders.
Why KPMG Luxembourg?
Luxembourg’s success is based on its continuous and strong efforts to develop its services vis-à-vis international groups. KPMG Luxembourg’s Tax Team stands among the best equipped and most experienced tax practices to guide you through the ever evolving possibilities that Luxembourg has to offer as a business location. Our team of 200 dedicated tax professionals advises clients in Luxembourg and across the world. Whether you are a business or an individual, we assemble a team of specialists to help achieve your objectives, using our in-depth technical tax knowledge and our broader understanding of how tax fits into the wider business picture. We are able to assemble multidisciplinary teams drawing on the dedicated resources across KPMG’s global network of member firms. Our people operate within industry groups, giving you access to advisors who understand the tax issues specific to your business.