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28.1 Corporate Income Tax Rates and Structure

Understanding Corporate Income Tax​

Corporate Income Tax (CIT)—Impôt sur le Revenu des Collectivités (IRC) in Luxembourg—is a tax levied on the taxable profits of companies. It's one of two main components of Luxembourg's corporate tax system, along with municipal business tax.

Corporate Income Tax Rate​

Standard Rate: 17%​

Luxembourg's standard corporate income tax rate is 17% on taxable profits.

Calculation:

  • Taxable profit: €100,000
  • Corporate income tax (17%): €17,000

Combined Tax Rate​

Luxembourg's total corporate tax burden consists of:

  1. Corporate Income Tax (IRC): 17%
  2. Municipal Business Tax (ICC): Varies by municipality (typically 6.75% - 7.5%)
  3. Contribution to Employment Fund: 7% of IRC (1.19% effective rate)

Effective Combined Rate​

The effective combined tax rate depends on the municipality:

Example (Luxembourg City - 6.75% ICC):

  • Corporate Income Tax: 17%
  • Municipal Business Tax: 6.75%
  • Employment Fund Contribution: 1.19% (7% of 17%)
  • Effective Combined Rate: Approximately 24.94%

Example (Other Municipality - 7.5% ICC):

  • Corporate Income Tax: 17%
  • Municipal Business Tax: 7.5%
  • Employment Fund Contribution: 1.19%
  • Effective Combined Rate: Approximately 25.69%

Tax Base: Taxable Profit​

Corporate income tax is calculated on taxable profit, which is:

Taxable Profit = Accounting Profit ± Tax Adjustments

Tax Adjustments​

Common adjustments include:

  • Non-deductible expenses: Expenses not allowed for tax purposes
  • Tax-exempt income: Income not subject to tax
  • Depreciation differences: Differences between accounting and tax depreciation
  • Provisions: Tax treatment of provisions
  • Reserves: Tax treatment of reserves

Tax Calculation Process​

Step 1: Determine Accounting Profit​

  • Start with profit before tax from financial statements
  • Based on PCN-compliant accounting records

Step 2: Identify Tax Adjustments​

  • Add back non-deductible expenses
  • Subtract tax-exempt income
  • Adjust for depreciation differences
  • Adjust for provisions and reserves

Step 3: Calculate Taxable Profit​

  • Taxable Profit = Accounting Profit + Tax Adjustments

Step 4: Apply Tax Rates​

  • Corporate Income Tax: 17% of taxable profit
  • Municipal Business Tax: Municipality rate Ă— taxable profit
  • Employment Fund: 7% of corporate income tax

Step 5: Calculate Total Tax​

  • Total Tax = Corporate Income Tax + Municipal Business Tax + Employment Fund Contribution

Tax Rate Variations​

Reduced Rates​

Some income may qualify for reduced rates:

  • Qualifying participations: 0% on qualifying dividends
  • IP Box regime: 5% on qualifying IP income (with conditions)
  • Investment tax credits: Reduce effective rate

Surcharges​

Additional surcharges may apply:

  • Crisis surcharge: Temporary surcharges (if applicable)
  • Special contributions: Additional contributions (if applicable)

Luxembourg Compliance Note​

Important Considerations:

  • Municipality matters: Tax rates vary by location
  • Combined rate: Consider all components when planning
  • Tax planning: Legal tax planning can reduce effective rates
  • Compliance: Accurate calculation and filing required
  • Professional advice: Consult tax advisor for complex situations

Common Issues:

  • Incorrect municipality rate: Using wrong municipal tax rate
  • Missing adjustments: Not identifying all tax adjustments
  • Calculation errors: Mathematical errors in tax calculation
  • Timing issues: Incorrect recognition of income and expenses

Think It Through​

TechLux Solutions has €200,000 taxable profit and is located in Luxembourg City. How much corporate tax will they pay? What is their effective tax rate?

Concepts in Practice​

Corporate Tax Calculation

TechLux Solutions tax calculation:

Taxable Profit: €200,000

Tax Calculation:

  • Corporate Income Tax (17%): €34,000
  • Municipal Business Tax (6.75%): €13,500
  • Employment Fund (7% of €34,000): €2,380
  • Total Tax: €49,880

Effective Tax Rate: €49,880 ÷ €200,000 = 24.94%

After-Tax Profit: €200,000 - €49,880 = €150,120