Taxes

Luxembourg – a tax haven in the center of Europe

In this article, we will delve into the reasons behind Luxembourg’s tax haven reputation and explore the various aspects that make it an attractive destination for tax optimization: tax policies, legal framework, and the benefits it offers to individuals and businesses seeking to minimize their tax exposure.

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Luxembourg has earned a distinguished reputation as a tax haven due to its historical appeal to corporations and wealthy individuals since the 1960s. Rising as a prominent financial center for the offshore trade of European bonds, Luxembourg became a favored choice for entities seeking to issue deb.

Luxembourg is often said to be a tax haven. But what does that even mean and why has the Grand Duchy earned such an assessment? Tax havens commonly share certain characteristics, including:

enticing tax benefits,
extremely low or even zero tax rates,
a lack of transparency,
and legal, administrative, or judicial provisions that ensure secrecy.

Kelly Sikkema, Unsplash

Recent developments have seen Luxembourg undergo significant policy changes: abolishment of banking secrecy and the embrace of international cooperation through participation in the automatic exchange of information.

What tax incentives Luxembourg offers to businesses

Luxembourg tax benefits offered to companies are a key aspect that has contributed extensively and continues to do so in attracting many companies. In the following sections, we will explore some of the specific measures designed to reduce tax burdens and create a favorable environment for entrepreneurial growth.

Progressive scale for corporate tax

Luxembourg offers a progressive scale for corporate tax.

Progressive scale for corporate tax

Total taxable income (euros)	Applicable rates
≤ to 175,000	Rate of 15% applicable to the total taxable income
175,001 – 200,000	Fixed amount of 26,250 euros plus a rate of 31% on the portion of the taxable income comprised between 175,000 and 200,000 euros.
> to 200,000	Rate of 17% applicable to the total taxable income

This rate is increased by 7% in favor of the employment fund, and a municipal business tax (MBT) should also be added, the amount of which depends on the municipality and varies between 6.75% (applicable in the municipality of Luxembourg) and 10.5%.

The resulting effective interest rate would therefore be as shown in the table.

Resulting effective rate

Corporate Income Tax (CIT) before increase for employment fund	17%
Employment fund markup	+1,19%
MBT on taxable profits	+6,75%
Effective rate of taxation	24,94%

Although the rate is attractive compared to other countries such as Germany, Italy, Malta, or Portugal, it is slightly higher than the European average, which stood at 20% in 2022.

This would seem contradictory as a rate slightly higher than the European average does not imply greater attractiveness for companies, however, given the considerable number of possible optimizations and tax benefits in Luxembourg, the actual rate may be considerably reduced.

The authors of OpenLux (a research paper on Luxembourg's status as a tax haven published in 2021) claim that the effective rate, given possible optimizations, could be as low as 1% or 2%.

Variable rate of VAT

The TVA rate in Luxembourg is divided into 4 parts and when compared to the rest of Europe, these are among the lowest.

VAT rate

Type of rate	Rate	Application field
standard rate	16%	all taxable operations except those included in any of the other categories.
intermediate rate	13%	custody and management of securities, printed advertising material, heat not provided by the heating network, and water distribution among others.
reduced rate	7%	gas, electricity, floriculture, hairdressing, and more.
super-reduced rate	3%	books, hotel accommodations, restaurants and non-alcoholic beverages, radio and television broadcasting services, and some others.

Additionally, those with a turnover lower than 35,000 euros benefit from a VAT exemption.

Tax optimization and special regimes in Luxembourg

The tax incentives offered by Luxembourg to businesses are a key aspect contributing to Luxembourg’s tax haven reputation. With a keen focus on attracting companies from various sectors, Luxembourg provides a range of enticing tax advantages that can significantly benefit businesses. We will take an overview of some of them.

Private Wealth Management Companies (SPF)

A Société de Gestion de Patrimoine Familial (SPF), which translates to Private Wealth Management Company, is an entity specifically designed for the management of an individual's wealth. Operating as a pure holding company, an SPF enjoys several tax advantages. It is exempt from corporate income tax, municipal business tax, wealth tax, and value-added tax.However, SPFs are required to pay a "subscription tax" based on a percentage of their taxable base, which amounts to 0.25 percent. It is important to note that the tax for SPFs ranges from a minimum of 100 euros to a maximum of 125,000 euros annually.

Specialized Investment Fund (FIS)

Luxembourg is one of the most attractive investment centers in Europe and a leading global fund distribution network. To strengthen its position, the Luxembourg government has introduced the Specialized Investment Funds (SIFs), which benefit from more flexible regulations and tax advantages.SIFs enjoy complete exemption from income tax, municipal business tax, and wealth tax. They are only subject to a modest subscription fee of up to 1,250 euros and an annual subscription tax set at a rate of 0.01% based on the total net assets of the funds.

Tax consolidation regime

Under specific conditions, a group of companies can take advantage of the tax consolidation regime. This enables them to merge the individual taxable results of each company within the group, resulting in taxation on the collective sum as if they were a single taxpayer. To be eligible for this regime, the parent company must hold a minimum of 95% ownership in the subsidiaries' capital. This tax consolidation framework provides a beneficial avenue for companies to streamline their tax liabilities and optimize their overall tax position.

Taxation of Intellectual Property

The Luxembourg law of December 21, 2007, introduced a beneficial measure for the taxation of intellectual property (IP), providing an 80% exemption on income derived from IP rights concession or utilization, as well as on capital gains resulting from IP transfers. Since its implementation in January 2008, this partial exemption regime demonstrates the Luxembourg government's support for research and development activities while incentivizing companies to acquire and maximize the value of their IP portfolios.

Dividends

One of the significant advantages that entice many business owners is the favorable treatment of dividends in Luxembourg. Dividends distributed by both resident and non-resident companies to their shareholders enjoy a 50% exemption from income tax for Luxembourg residents. To illustrate, let's consider the case of a company that pays out 200,000 euros in dividends to its shareholder after the fiscal year-end. The resident shareholder would only need to declare the receipt 100,000 euros which would be subject to taxation based on the applicable tax brackets and the individual's income tax class. This generous tax treatment of dividends serves as a compelling incentive for business owners and individuals considering investments in Luxembourg.

What tax incentives are available for individuals in Luxembourg

Not only companies but also citizens receive tax preferences.

Royalties

0% tax on royalties. That is, if you hold a patent, write books, or do educational courses, you can then 'park' all of your income at a 0% rate.

Capital gains

0% tax on capital gains when you sell shares of a company if you have held them for more than 6 months and owned less than 10% of the company's shares.

You can get more information about capital gains in our dedicated article: Luxembourg capital gains tax.

Income tax for married people with children

Married people with children fall into the second tax class, on this category, taxes are based on half the combined household income, and the tax amount is multiplied by 2 at the end. This process results in giving this category one of the most favorable tax rates in Europe.You can learn more about tax classes in our dedicated article: How to determine your tax class in Luxembourg.

Many other tax deductions

For transport, medical treatment, parental allowances, etc.

Is Luxembourg still a tax heaven in 2024

Luxembourg has been for a long time a favored choice for entities thanks to its advantageous tax incentives that enable substantial reductions in tax obligations. In the following section, we will see how Luxembourg has changed its policy, and examine the current outlook.

Initial policy position and drivers for change

Historically, the Luxembourg state seems to have wanted to maintain a dual position: on the one hand, it has long defended banking secrecy, but on the other hand, it has wanted to avoid being classified as a banking haven.

For a long time, the European Union has been fighting to get Luxembourg to renounce banking secrecy and accept automatic exchanges of information.

In 2008, the pressure on Luxembourg intensified with the economic crisis and a changing global context. In addition to the debate on banking secrecy within a framework of tax harmonization between the various member states, there was a more pressing need to maximize tax revenues in states sorely tested by a financial crisis immediately followed by a general economic slowdown.

Added to this pressure from the European Union was pressure from international and multilateral organizations such as the OECD and the G20, which in early 2009 threatened to put tax havens on a blacklist.

All these pressures quickly showed the limits of Luxembourg's resistance, and just before the G20, Liechtenstein, Andorra, Belgium, Switzerland, and Luxembourg announced almost simultaneously their intention to comply with OECD standards to avoid being blacklisted.

In October 2023, Luxembourg signed the agreements to end banking secrecy and participate in the automatic and mandatory exchange of financial information between tax administrations from 2017.

Additionally, with the LuxLeaks financial scandal coming to light in November 2014, Luxembourg, wanting to show its good intentions and political change, quickly declared its intention to participate actively in the OECD's base erosion and profit-shifting negotiations, the aim of which is to establish greater tax fairness worldwide.

Actual situation with transparency and privacy

While Luxembourg has made notable strides in its efforts to combat tax evasion and enhance transparency, it still has a long way to go before shedding its tax haven reputation. Significant policy changes, such as the elimination of banking secrecy and participation in the automatic exchange of information, demonstrate positive steps taken by the country. However, it is important to acknowledge that Luxembourg continues to maintain a high level of financial secrecy.

According to the Financial Privacy Index calculated by Tax Justice Network, Luxembourg scores 55 out of 100, indicating a considerable level of financial secrecy.

This index takes into account a country's laws regarding financial secrecy and the extent of its financial services provided to residents of other countries. It is worth noting that the index does not capture the full extent of undeclared capital that may be present due to the significant volume of financial activity.

The OpenLux investigation, conducted by Le Monde and sixteen other newspapers and published in February 2021, shed light on Luxembourg's characteristics as a tax haven. It revealed how multinational companies and billionaires engage in business with Luxembourg to avoid taxes through the use of shell companies.

Oxfam France, a leading organization advocating against inequality and poverty, emphasized that the investigation exposed the exploitation of loopholes in the economic system by billionaires and large corporations. They criticized the European Union for its failure to include Luxembourg on its tax haven blacklist, as well as other European tax havens.

Oxfam France believes that the European Union should update its tax haven blacklist and strengthen the criteria to include countries with a zero corporate tax rate.

In Luxembourg, despite the official corporate tax rate of 24.95%, various optimizations can significantly reduce the effective tax rate to as low as 1% or 2%, as highlighted in the OpenLux investigation.

And it is worth mentioning the extent and severity of the problem, according to estimates by economists in 2018, as much as 80% of the profits that are moved across the EU end up in tax havens located in Luxembourg, Ireland, and the Netherlands.

Considering these factors, several organizations such as Oxfam France maintain its stance that Luxembourg still functions as a tax haven. While efforts have been made to address the issue, further measures and international cooperation are necessary to ensure greater transparency and fairness in the country's taxation system.