The municipal business tax and its legal framework
In Luxembourg, municipalities are autonomous local authorities with their own legal personality and manage their own assets and interests through local representatives under the supervision of the central government. To carry out their tasks, the municipalities are provided with financial resources from three sources:
- A financial allocation from the state.
- Local taxes comprising the municipal business tax (MBT) and real estate tax.
- Taxes and fees collected by local authorities in exchange for services rendered.
The municipal business tax is thus part of the local taxes that constitute, together with real estate taxes, the second source of revenue for municipalities in Luxembourg.
The municipal business tax is a tax levied exclusively on the profits of commercial enterprises. Its specific purpose is to help municipalities finance additional expenses generated by companies established on their territory such as the provision of industrial parks, the construction of parking spaces or the implementation of specific measures to ensure the quality of the natural environment, among many other services.
In Luxembourg, the municipal business tax is mainly regulated by the General Tax Law and its subsequent amendments. This law establishes both the legal basis for its implementation and the details on the determination of the tax base and the applicable rates. In addition, the municipal business tax is also governed by specific rules in the Municipal Tax Code, which allows each municipality to define the tax rate applicable in its jurisdiction.
Tax calculation and rates
The municipal business tax is a tax levied on the commercial activity of companies in Luxembourg and since it is a communal tax its rate varies depending on the municipality where such activity is carried out. The municipal business tax is calculated by multiplying the taxable base by the tax rate. Let's see then how to calculate each of these factors:
Tax base
To calculate the tax base we start from the business profit, then we add:
- The profits and salaries attributed to general partners for managing partnerships limited by shares.
- Losses incurred in a partnership or a permanent establishment abroad.
Then we deduct:
- Shares in the profits of a partnership and dividends allocated based on a participation in a resident capital company or a fully taxable nonresident capital company, if the participation represents at least 10% of the share capital of the distributing company and if this income is included in the operating profit.
- Mandatory statutory personal social security contributions paid by sole proprietors and partnerships.
- Operating losses recorded during the previous 3 years.
- Cash donations up to a limit of 20% of the operating profit and 1,000,000 euros, to an entity whose activity is in the public interest in Luxembourg or an institution expressly approved by the Luxembourg Inland Revenue.
Finally, a tax allowance of 40,000 euros is applied for taxpayers not subject to corporate income tax or 17,500 euros for others.
Tax rate
The municipal business tax rate is not uniform throughout Luxembourg, as each municipality sets its own rate. This rate is made up of two factors, a national basic rate and a municipal multiplier:
- The national basic rate: this is a basic rate for the whole country of 3%.
- The municipal multiplier: this is a factor that each municipality applies to the national base rate and is set according to its financial needs. It usually ranges from 200% to 400%. A table with the multiplier factors for each commune can be downloaded from the Luxembourg Inland Revenue website.
In the Luxembourg commune, the multiplier factor is 225%, when this value is multiplied by the national base rate, the final rate of 6.75% is obtained.
Tax declaration and payment
The municipal business tax return is integrated with the corporate income tax return. When the company declares its taxable income to the Luxembourg Inland Revenue, it will calculate both the municipal business tax and the corporate income tax.
This declaration is normally made electronically using the online input assistant on MyGuichet.lu. However, associations, non-resident companies, agricultural associations and cooperative societies must continue to file the return on paper. This form can be downloaded from the dedicated LIR page.
The return must be filed no later than May 31 of the year following the tax year in question and payment of the tax is made with quarterly advance payments on February 10, May 10, August 10 and November 10. The final balance is paid upon receipt of the tax form.
The amount of these advance payments is provisionally determined based on the most recent tax returns (corresponding to the previous fiscal year) and then adjusted automatically or at the company's request if necessary.
