All you need to know about tax compliance in Luxembourg

Luxembourg’s role in the international economy cannot be overstated – it is after all a global financial hub of Europe. Home to numerous multinational corporations, investment funds, and financial institutions, Luxembourg’s tax system is under constant scrutiny from both national and international regulators. So, ensuring full tax compliance is vital for maintaining not only company's, but the country's reputation as a secure and stable environment for business. And you can help it.

Landscape of tax compliance in 2024

Tax compliance in Luxembourg operates within a robust regulatory framework, overseen by several key entities. First, we will examine the different types of taxes and regulations that can be found in the country.

• Personal income taxes. These regulations govern the taxation of personal income for individuals, sole proprietorships, and partnerships. They define the different categories of income subject to taxation and outline the methods for calculating the tax amount.
• Corporate income taxes. Impôt sur le Revenu des Collectivités also known as IRC. These regulations are specific to companies and corporations, they apply to legal entities in Luxembourg, including capital companies, cooperatives, mutual insurance associations, public utility institutions, non-profit organizations, private legal entities, and certain trusts. These regulations categorize the different types of income subject to taxation and detail the methods for tax calculation, which is essential for businesses to maintain compliance.
• Municipal business tax. Impôt Commercial Communal, also known as ICC. This tax targets the profits of commercial enterprises and individual entrepreneurship in the scope of their revenues and helps municipalities finance the costs associated with hosting businesses within their territories. It addresses specific needs like industrial zones, parking facilities, and environmental protection measures. Keep in mind that the municipal business tax is also a tax owed by individual entrepreneurs on their income (often forgotten until the statement arrives).
• Wealth tax. Applicable to opaque companies such as public limited companies (SA), partnerships limited by shares (SECA), European companies (SE), and private limited companies (SARL), the wealth tax is determined based on the taxable wealth of these entities. It is calculated from the net assets reported on their balance sheets at the end of the taxable period, but there are two different rates: the first of 0.5% applies to the portion of net assets less than or equal to 500,000,000 euros, and the second of 0.05% applies to the portion of net assets over 500,000,000 euros. Finally, it is important to keep in mind that this tax can be reduced under certain conditions.
• Property taxes. Imposed by municipalities, this tax applies to all real estate properties, whether developed or undeveloped, regardless of ownership status or usage (commercial, private, or mixed). This tax is independent of the owner’s financial capacity and the methods used to acquire the property, making compliance a straightforward but essential obligation for property owners.
• Registration duties. These duties are related to corporate acts, such as the incorporation of a company, amendments to statutes, relocation of the statutory seat or central administration, and contributions. Proper payment of registration duties is critical for legal operations within Luxembourg.
• VAT. Value Added Tax regulations cover various aspects such as taxable turnover and applicable exemptions. Since VAT affects final consumption, businesses must diligently comply with these regulations to avoid penalties and ensure smooth operations.
• Stamp duties. In Luxembourg, an establishment authorization is required for all new businesses, regardless of their legal form (SARL, SA, sole proprietorships, etc.), and for liberal professions of a predominantly intellectual nature. Stamp duties apply to these establishment permit applications, making them an essential aspect of tax compliance for new ventures.
• Excise duties. These are indirect taxes on the consumption or use of specific products, notably alcohol, tobacco, and energy products. Compliance with excise duties is essential for businesses dealing in these products to avoid fines and legal issues.
• Subscription tax. Also known as Taxe d'abonnement, it is a levy on investment funds. It is calculated quarterly at 0.05% of the net asset value (NAV), with a reduced rate of 0.01% for certain funds. Some funds are exempt, including pension funds, funds investing in other funds already subject to subscription tax, or microfinance initiatives. The tax is paid by the fund's management company or the fund itself, based on the NAV at the end of each quarter. It is collected by AED.

Tax authorities in Luxembourg

Luxembourg's tax compliance is regulated by various entities, each focusing on specific areas of taxation. Administration des Contributions Directes (ACD) is the primary tax authority responsible for collecting direct taxes, including income tax, corporate tax, and solidarity tax. Then, there is Administration de l'Enregistrement, des Domaines et de la TVA. They manage the collection of VAT, registration duties, and other indirect taxes applied to business in the country.

Those are the main authorities to follow up with, especially when establishing a business in the country. Another useful website would be the National Commission for Data Protection (CNPD). Although not a tax authority, the CNPD plays a crucial role in overseeing compliance with data protection regulations, particularly concerning the exchange of tax-related information. Financial Intelligence Unit (Cellule de Renseignement Financier, CRF). The CRF collaborates with tax authorities to combat money laundering and terrorist financing, which are closely linked to tax compliance.

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Key tax compliance requirements

Businesses operating in Luxembourg must adhere to a comprehensive set of tax compliance obligations that extend beyond just paying taxes. These requirements include the preparation and submission of documentation, adherence to regulations related to transfer pricing, withholdings, financial reporting and fulfilling obligations related to international tax compliance. More about it further.

• Submit your tax returns Companies in Luxembourg are required to file an annual corporate tax return detailing their income, expenses, and calculated tax liability. In addition, VAT-registered businesses must file periodic VAT returns detailing taxable operations and the amount of VAT balance (due or recoverable). Accurate and timely filing of these returns is critical to maintaining compliance with local tax laws. Simplify your tax compliance with EasyBiz's expert Tax Compliance services.
• Collect the withholding taxes in your company Businesses must withhold taxes on payments such as salaries, dividends, interest, director’s fees and certain other types of income. These withheld amounts must be remitted to the Luxembourg tax authorities within certain time limits. 
• Report your finances Companies are required to prepare and file annual financial statements, including a balance sheet, income statement and notes, in accordance with either International Financial Reporting Standards (IFRS) or Luxembourg Accounting Standards (Lux GAAP). For companies that are part of a group, consolidated financial statements must be prepared if they meet certain size criteria or are publicly listed. Companies that exceed certain size thresholds must have their financial statements audited by an external auditor to ensure transparency and accuracy in their financial reporting.
• Respect the deadlines Tax payments must be made within the deadlines established by the Luxembourg Tax Administration. Failure to meet these deadlines, whether for tax payments or the submission of tax returns, can result in late payment interest and penalties. 
• Be aware of the harmful schemes Companies in Luxembourg must comply with Anti-Money Laundering (AML) and Countering the Financing of Terrorism (CFT) regulations, which require effective internal controls and the registration of ultimate beneficial owners. These regulations are particularly stringent for businesses in the financial sector or those involved in activities considered vulnerable to money laundering or terrorism financing. Implementing appropriate policies and procedures to prevent these illicit activities is a key component of maintaining global tax compliance.
• Exchange information globally Global tax compliance in Luxembourg requires adherence to international standards for information exchange. Financial institutions must comply with the Common Reporting Standard (CRS), developed by the OECD, which mandates the automatic exchange of financial information between participating countries to combat tax evasion. Additionally, under the EU’s Directive on Administrative Cooperation 6 (DAC6), companies are required to report certain cross-border tax planning arrangements that may be considered aggressive.
• Do not avoid taxes Luxembourg has implemented the EU Anti-Tax Avoidance Directive (ATAD), which sets minimum standards to prevent tax avoidance across EU member states. ATAD aims to combat aggressive tax practices that erode the tax base and shift profits to low or no-tax jurisdictions. Businesses must ensure that their tax planning and structuring comply with ATAD rules to avoid significant penalties and align with global tax compliance standards.
• Register with the authorities Companies must register and maintain up-to-date information with the Luxembourg Trade and Companies Register, including details about directors, shareholders, and ultimate beneficial owners. 
• Support transparency internationally Multinational enterprises (MNEs) with consolidated revenues exceeding 750 million euros are required to submit a Country-by-Country (CbC) report. This report provides a breakdown of income, profits, taxes paid, and economic activities across the jurisdictions in which the MNE operates. CbC reporting is a key component of global tax compliance, enabling tax authorities to assess whether profits are being appropriately taxed in the relevant jurisdictions.

Luxembourg tax compliance challenges and considerations

National tax legislation can be complex and requires a thorough knowledge of both local and international regulations. The tax system includes a wide range of taxes, which we observed previously, each with its own set of rules and filing requirements. The complexities of these regulations often make compliance tough, especially for businesses that operate across multiple jurisdictions or engage in sophisticated financial transactions. That is why we need legals and accountants.

Below we discuss the most common tax compliance issues and pitfalls so that you are aware of the most common tax compliance mistakes and can double check yourself.

• 1. Missing the deadline

  One of the most common issues businesses face is missing the filing deadline for the Luxembourg corporate tax return. Failure to file on time can result in significant penalties, including late filing fees and interest on unpaid taxes. Businesses must be vigilant in tracking deadlines and ensuring that all necessary documentation is prepared and submitted on time.

• 2. Incomplete tax papers

  Given the complexity of Luxembourg’s tax regulations, businesses often struggle with ensuring that their tax filings are both accurate and complete. Errors in reporting income, expenses, or deductions can lead to audits, additional tax assessments, and penalties. Maintaining meticulous financial records and seeking professional advice can help mitigate this risk.

• 3. Transfer pricing bias

  For multinational enterprises, transfer pricing is a critical area of concern. Luxembourg’s transfer pricing rules require that transactions between related entities be conducted at arm’s length. That means that buyers and sellers should act independently without one party influencing the other. Failure to comply with these rules can lead to adjustments in taxable income and increased tax liabilities. Businesses must ensure that they have proper documentation to support their transfer pricing policies and that these policies are consistent with local regulations. Failure to do so can result in heavy fines.

• 4. VAT exemptions

  VAT compliance in Luxembourg can be particularly challenging due to the varying rates and exemptions that apply to different goods and services. Businesses must accurately calculate VAT on their transactions, submit regular VAT returns, and ensure that they are claiming the correct amount of VAT refunds. Mistakes in VAT reporting can lead to audits and financial penalties.

• 5. International laws application

  As a major financial hub, Luxembourg is subject to numerous international tax regulations, including CRS, DAC6, and ATAD. Compliance with these regulations requires businesses to manage complex reporting obligations and ensure that their cross-border transactions adhere to international standards. Failure to comply with global tax compliance requirements can result in severe penalties and reputational damage.

Recent tax changes in Luxembourg

Luxembourg has seen several significant changes in its tax landscape recently, as the country continues to align its tax system with evolving international standards and EU directives. These changes reflect Luxembourg’s commitment to maintaining its position as a leading financial hub while ensuring compliance with global tax regulations.

ATAD 3

In line with the European Union’s Anti-Tax Avoidance Directives, Luxembourg began applying this directive in the beginning of 2024. It focuses on combating the misuse of shell entities within the EU. This directive imposes additional reporting requirements and scrutiny on entities that do not have substantial economic activities in their jurisdictions. Companies with minimal or no physical presence in Luxembourg must now demonstrate that they have sufficient substance to avoid being classified as a shell entity, which could lead to denial of tax benefits and increased tax liabilities.

BEPS upcoming

In line with the European Union’s Anti-Tax Avoidance Directives, Luxembourg began applying this directive in the beginning of 2024. It focuses on combating the misuse of shell entities within the EU. This directive imposes additional reporting requirements and scrutiny on entities that do not have substantial economic activities in their jurisdictions. Companies with minimal or no physical presence in Luxembourg must now demonstrate that they have sufficient substance to avoid being classified as a shell entity, which could lead to denial of tax benefits and increased tax liabilities.

BEPS upcoming

Luxembourg has updated its transfer pricing regulations to further align with the OECD’s BEPS (Base Erosion and Profit Shifting) Action Plan. These new guidelines require companies to provide more detailed documentation supporting their transfer pricing arrangements, ensuring that intra-group transactions are conducted at arm’s length. 

The changes also include stricter penalties for non-compliance, making it essential for multinational enterprises to review and update their transfer pricing policies accordingly. The European Commission published a draft transfer pricing directive on September 12, 2023. This directive is still in the process of implementation and must be transposed by EU Member States by December 31, 2025, with a first application as of January 1, 2026.

Yearly changes to the VAT

Every year, VAT undergoes a series of changes, and 3 new important tax changes in Luxembourg will come into effect on January 1, 2025. These include the extension of the VAT exemption regime for small businesses at the EU level, the clarification of the place of taxation for virtual events, and modifications to the profit margin regime for art objects, collections and antiques. These changes aim to align Luxembourg regulations with EU directives, particularly impacting art and digital commerce sectors.

OECD upcoming

Luxembourg is implementing Pillar 2 of the OECD global agreement, which establishes a global minimum tax of 15% for large multinational corporations. Although Luxembourg introduced these rules into its domestic law with the enactment of the law of December 22, 2023, ongoing adjustments may be necessary, as Luxembourg is expected to incorporate any administrative guidelines issued by the OECD from time to time.

This change will affect companies that operate in Luxembourg and are part of groups with consolidated revenues of over 750 million euros. The regulation seeks to ensure that companies pay a minimum level of tax, reducing tax base erosion and profit shifting to low-tax jurisdictions.

Tips on tax compliance in Luxembourg

Navigating the complex tax landscape in Luxembourg requires careful planning and a proactive approach. Ongoing attention to detail, staying updated on legislative changes, and employing the right tools and strategies become essential. Below are some tips and recommendations to help you meet tax obligations in Luxembourg.

• Partner with experienced tax advisors or accountants who are well-versed in Luxembourg's tax laws. They can provide valuable guidance and help.
• Make use of available resources, such as government websites, tax authority publications, and industry reports, to stay informed about the latest tax regulations and compliance requirements in Luxembourg.
• Passport, valid for at least 3 months after the expiration date of the requested visa. With at least two blank pages.
• Invest in reliable tax compliance software that can automate calculations, track deadlines, and generate reports. This can significantly reduce the risk of errors and streamline your tax compliance processes.
• Develop a daily routine for managing your tax records, including updating financial transactions and reviewing your accounts regularly. Always be prepared for a potential audit by maintaining organized and thorough records.
• Stay updated on any changes in tax legislation that could affect your business. This includes both local regulations in Luxembourg and relevant international tax laws.
• Ensure clear and consistent communication within your organization regarding tax compliance responsibilities. This includes setting expectations and keeping all relevant departments informed of deadlines and compliance requirements.