1. Types of Business Entities, Their Residence and Basic Tax Treatment

1.1 Corporate Structures and Tax Treatment

Luxembourg has several forms of entities with separate legal personality. Businesses generally incorporate an entity with limited liability set up in one of the following forms:

  • a public limited company (société anonyme, SA);
  • ivate limited company (société à rèsponsable limitée, SARL); or
  • a partnership limited by shares (société en commandite par actions, SCA).

A SARL is probably the most popular corporate form to conduct a business through. Both a SARL and an SA are incorporated through a deed before a Luxembourg notary and are governed by a board of managers/directors (an SA can also be governed using a two-tier structure with a management board and a supervisory board). The minimum capitalisation requirement amounts to EUR12,000 for a Sarl and EUR30,000 for a SA. In contrast to an SA, shares in a SARL cannot be publicly traded and a SARL can have a maximum of 100 shareholders. 

An SCA is a partnership limited by shares. It is created through a notarial deed and has characteristics of both a limited partnership and a public limited company. There must be at least a general partner and a limited partner. In contrast to a limited partnership, the shares of an SCA can be freely transferred to individuals who are not shareholders, unless stated otherwise in the articles of association.

These corporate forms are considered opaque from a Luxembourg tax perspective and are fully subject to corporate income tax (CIT) and municipal business tax (MBT) at an aggregate tax rate of 24.94% (in Luxembourg City), and net wealth tax (NWT).

Fully taxable Luxembourg corporate entities that are part of the same group are eligible for group taxation (fiscal unity). Under this regime, each entity's taxable income is determined on a standalone basis, with the taxable results of all participants ultimately added together. As a result, intra-group transactions remain fully recognised.

Less common corporate entities are:

  • the simplified joint stock company (société par actions simplifiée, SAS);
  • the simplified private limited liability company (société à responsabilité limitée simplifiée, or SARL-S);
  • the European company (Societas Europaea, SE);
  • the co-operative company (société cooperative, SCOP); and
  • the European co-operative company (société coopérative européenne, or SE SCOP).

1.2 Transparent Entities

Luxembourg has several forms of transparent entities, some with legal personality:

  • general partnership (société en nom collectif, SNC);
  • a limited partnership (société en commandite simple, SCS);
  • ecial limited partnership (société en commandite speciale, SCSp); and
  • a civil company (société civil, SC).

The two most common forms are the SCS and SCSp. Both can be established through a partnership agreement or through a notarial deed. There must be at least one general partner and one limited partner, with no maximum amount of partners. A general partner has unlimited, joint, and several liability for all the partnership's obligations. A limited partner is in principle only liable up to the amounts pledged as contribution to the partnership. The difference between the two forms of partnership is that an SCS has legal personality while an SCSp does not. An SCSp is, in particular, commonly used in the private equity and alternative investment sectors.

Subject to the reverse hybrid rules, an SCS and SCSp are considered tax transparent entities. The partners of the partnership are considered to (indirectly) hold the assets of the partnership, and taxation should occur at the level of the partners, irrespective of whether the partnership distributes income.

If a partnership is engaged in, or deemed to be engaged in a commercial activity (in Luxembourg), Luxembourg MBT is levied at the level of the partnership.

1.3 Determining Residence of Incorporated Businesses

Corporate entities are deemed to be residents of Luxembourg for tax purposes if their legal seat or central administration is located in Luxembourg. This means that both collective entities registered in Luxembourg, and those registered abroad but with their central administration or registered office in Luxembourg, are considered tax residents.

The central administration of an entity is in Luxembourg if the entity's affairs are managed there. This is determined based on facts through a substance-over-form analysis. Generally, the location of the entity's central accounting and archives, as well as where the shareholders' and board meetings are held, are considered important factors in this determination.

A company established under Luxembourg law is by definition a Luxembourg tax resident, irrespective of its substance (physical and economical footprint) in Luxembourg.

rent entities are not considered Luxembourg tax residents.

1.4 Tax Rates

For the year 2024, the CIT rate amounts to:

  • 15%, if the corporation's taxable worldwide income is EUR175,000 or less;
  • EUR26,250 plus 31% of income on the portion exceeding EUR175,000, if the taxable income is between EUR175,000 and EUR200,000; or
  • 17%, if the taxable income is more than EUR200,000.

Additionally, a solidarity surcharge of 7% is levied as a contribution to the unemployment fund.

A local MBT on profits from trade or business is levied by the different municipalities. The rate varies depending on the municipality, but is often 6.75% (eg, in Luxembourg City).

The aggregate effective tax rate on income for a company located in Luxembourg City is generally 24.94%.

Luxembourg corporate resident taxpayers are subject to NWT levied on the fair market value of the taxable net wealth on 1 January of each year. The rates for fiscal year 2024 are:

  • 0.5% on taxable net wealth up to EUR500 million; and
  • 0.05% on the portion of taxable net wealth in excess of EUR500 million.

NWT is levied on the net wealth of the company (ie, non-exempt assets minus deductible liabilities, in both cases valued at fair market value, unless a specific provision prescribes a different valuation). A minimum NWT is applicable, which is levied if it is higher than the NWT liability determined on the basis of the taxable net wealth of the entity. The minimum tax depends on the total balance sheet of the resident corporate taxpayer and ranges from EUR535 to EUR32,100.

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Originally published by Chambers and Partners.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.