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Chapter Summary

Section 28.1: Corporate Income Tax Rates and Structure​

  • Luxembourg's standard corporate income tax rate is 17%
  • Combined tax rate includes: Corporate Income Tax (17%), Municipal Business Tax (6.75% - 7.5%), Employment Fund (1.19%)
  • Effective combined rate: Approximately 24.94% - 25.69% depending on municipality
  • Tax calculated on taxable profit (accounting profit ± tax adjustments)
  • Tax planning can reduce effective rates through deductions and incentives

Section 28.2: Tax Deductions and Allowances for SMEs​

  • Common deductions: Business expenses, depreciation, R&D costs, interest
  • SME-specific allowances: Investment allowance (up to 8%), start-up deductions, training deductions
  • Non-deductible expenses: Personal expenses, fines, dividends, corporate tax itself
  • Tax losses: Can be carried forward (unlimited with conditions), limited carry-back available
  • Proper documentation essential for all deductions

Section 28.3: Municipal Business Tax (Impôt Commercial)​

  • Municipal business tax is local tax on business profits
  • Base rate: 3% multiplied by municipal coefficient (typically 200% - 250%)
  • Effective rates: 6.0% - 7.5% depending on municipality
  • Luxembourg City: 6.75% (3% Ă— 225%)
  • Calculated on same taxable profit as corporate income tax
  • Filed and paid together with corporate income tax

Section 28.4: Tax Filing Requirements and Deadlines​

  • Filing deadline: 7 months after fiscal year-end
  • Payment deadline: Same as filing deadline
  • Extensions: Up to 3 months available with request
  • Electronic filing: Required through eCDF platform
  • Required documents: Tax return, financial statements, supporting schedules
  • Late filing/payment: Penalties (€250 - €2,500) and interest apply

Section 28.5: Tax Accounting - Deferred Tax Assets and Liabilities​

  • Temporary differences create deferred taxes
  • Deferred tax assets: Arise when tax deductions exceed accounting expenses
  • Deferred tax liabilities: Arise when accounting expenses exceed tax deductions
  • Common differences: Depreciation methods, provisions, revenue recognition
  • Total tax expense = Current tax + Deferred tax expense
  • Proper recognition in financial statements required

Section 28.6: Luxembourg Tax Incentives for SMEs​

  • Investment incentives: Investment allowance (up to 8%), accelerated depreciation
  • R&D incentives: R&D tax credits (up to 20%), full R&D expense deductions
  • Innovation incentives: IP Box regime (5% rate on qualifying IP income)
  • Employment incentives: Job creation incentives
  • Regional incentives: Location-based incentives available
  • Proper documentation and compliance required

Section 28.7: Transfer Pricing Considerations​

  • Transfer pricing rules apply to related-party transactions
  • Arm's length principle: Transactions must be priced as if between independent parties
  • Transfer pricing methods: CUP, Cost Plus, Resale Price, TNMM, Profit Split
  • Documentation required: Master file, local file, country-by-country report (if applicable)
  • Compliance: Maintain documentation, ensure arm's length pricing, regular review
  • Penalties: €10,000 - €250,000 for non-compliance

Key Takeaways​

  1. Combined Tax Rate: Understand all components (CIT, municipal tax, employment fund)
  2. Deductions: Maximize available deductions and allowances
  3. Municipal Tax: Consider municipality location for tax planning
  4. Filing: File and pay on time to avoid penalties
  5. Deferred Taxes: Properly account for temporary differences
  6. Incentives: Utilize available tax incentives to reduce effective rate
  7. Transfer Pricing: Ensure arm's length pricing for related-party transactions

End of Chapter 28 Summary