How to pay business income tax
This guide covers income tax for businesses in Luxembourg, from calculating taxable income to applying tax rates and understanding potential deductions and exemptions. We also look at issues such as advance tax payments and complying with tax reporting requirements.
One of the most important taxes a business must pay is income tax. What type of tax should be paid and at what rate, whether it is possible to count on tax exemptions and how much will be withheld by the municipality — these are all questions an entrepreneur faces when trying to understand the tax system in Luxembourg.
Luxembourg has a complex tax system with several types of taxes including income tax, corporation tax and municipal business tax. It is important to understand which rates apply to your business and how they are calculated.
In Luxembourg, companies pay tax on their income. This is called the corporate income tax (impôt sur le revenu des collectivités — IRC).
*according to their activities and legal status
Luxembourg residents pay tax on their worldwide income, while non-residents pay tax only on income derived from sources in Luxembourg.
The 2019 tax rate, which is the same for residents and non-residents, is:
If the income is between 175,000 euros and 200,001 euros, the tax is calculated according to the formula: 26,250 euros + 31% of the income exceeding 175,000 euros.
It should be noted that the tax burden is increased by the mandatory employment fund contribution of 7%, which is levied on the originally calculated amount of corporate income tax.
- With an income of 210,000 euros per year, the tax rate will be 17% because the income exceeds 200,001 euros.
- In this case, the amount of corporate tax is 35,700 euros (we consider 17% of 210,000).
- From the amount received, we deduct 7% to the Employment Fund and obtain 2,499 euros of additional tax (consider 7% of 35,700).
- As a result, the amount of corporate tax will be 38,199 euros (35,700 + 2,499).
Thus, at a rate of 17%, the additional charge to the Employment Fund increases the rate to 18.19% (+1.19%) and at a rate of 15% to 16.05% (+1.05%).
Sole proprietorships, partnerships (SENC, SCS) and economic interest groups (GIE, GEIE) are subject to ordinary income tax (impôt commercial, IC).
Each municipality chooses a coefficient which is then approved by order of the Grand Duke. The coefficients vary from 2.25 to 3.5 (225 to 350).
The tax is calculated as follows: the basic municipal rate (3%) is multiplied by a coefficient, the amount of which depends on the municipality in which the company is located.
Thus, the municipal tax for Luxembourg is 6.75% (3 x 2.25), for Bertrange 9% (3 x 3.00) and for Diquirch 10.5% (3 x 3.5).
It is important to note that the three taxes — Income Tax + Employment Fund Contribution (also called Solidarity Tax) + Municipal Business Tax — are counted by the Luxembourg tax authorities as the effective combined rate (CIT).
In Luxembourg, the combined corporate tax rate ranges from 22.8% to 24.94%, depending on the company's annual income.
The CIT is 22.8% if your income is less than 175,000 euros per year
The CIT is 24.94% if the income exceeds 200,001 euros per year
CIT higher than 22.8% but lower than 24.94% if the income is between 175,000 and 200,001 euros
Let's assume that your small business is registered as an ordinary company (e.g. SARL) in Niederanven. The taxable income per year is 174,000 euros. What will be the final tax burden when you calculate the municipal tax and the income tax?
First you have to calculate the income tax. How to do this?
- Understand which tax to pay, IRC or IC?
For SARLs, IRC. For sole proprietorships, partnerships such as SENC, SCS and GIE, GEIE groups — IC.
- Correctly identify the amount of tax rate
In our case 15%, since the income does not exceed 175,000 euros.
- Calculate the amount of the tax burden
Find 15% of 174,000 = 26,100 euros.
- Set aside 7% of the resulting amount for the amount of the contribution to the Employment Fund
Find 7% of 26,100 = 1,827 euros.
- Calculate the final amount of income tax, taking into account the amount contributed to the Employment Fund
26,100 + 1827 = 27,927 euros.
Then we have to calculate the obligatory tax to be paid to the municipality.
- Take the basic municipal rate
It is 3%, the amount can be checked in the table of the Luxembourg tax office.
- Multiply the basic rate by the coefficient of the municipality
You can check the table of approved coefficients, for Niederanven it is 225%. Since we need a coefficient and the table gives percentages, we divide 225 by 100 and get 2.25, which is the coefficient to be multiplied by the base rate of 3%. We get 6.75% (3 x 2.25).
- Calculate the amount of the municipal tax
To do this, we find 6.75% of the taxable income — 174,000. We get 11,745 euros: this is the amount of the municipal tax.
Adding 27,927 euros and 11,745 euros, we get the total tax burden for income tax and council tax.
Note that the taxes included in the CIT are not all the taxes that companies have to pay in Luxembourg: there is also VAT, property tax, wealth tax and so on.
Before you can pay taxes in Luxembourg, you must register your business with the relevant authorities, which usually include the Administration de l'enregistrement, des domaines et de la TVA (AED) and the Registre de Commerce et des Sociétés (RCS). This is necessary to obtain an identification number, registration number and VAT number.
Usually, when starting a business, the documents are registered with all the necessary authorities by a notary. If, for any reason, the stage of registration with the tax authorities is missed, it must be corrected.
The Company must declare its estimated income for the tax year to the Luxembourg tax authority (ACD), which will calculate the amount of tax due to the Company and determine the payment terms.
Although Luxembourg's tax system appears complex on the surface, the Grand Duchy offers deductions and incentives for businesses that can significantly reduce the tax burden.
Alex Pospekhov, founder of the “Mission space” start-up
Which companies can expect to benefit from favorable tax regimes in Luxembourg?
If what you do is a product of intellectual property (IP), you can count on a significant tax break. Technology companies in Luxembourg have an effective corporate income tax rate — CIT — of 4.988%. IP includes:
- Inventions protected by patents, utility models and other IP rights functionally equivalent to patents, in particular in the pharmaceutical or phytopharmaceutical field.
- Software protected by copyright under national or international regulations.
Agricultural businesses can deduct 30% of any new investment up to a total of 250,000 euros made in the business. Investments in excess of this amount are eligible for a deduction of 20% of the difference between the amount invested and the aforementioned 250,000 euro limit.
Shipping companies are not subject to local business tax. In addition, they can benefit from investment tax incentives and accelerated depreciation, even for used assets.
Generally exempt from income tax, municipal business tax and dividend tax.
Generally subject to income tax at the ordinary income tax rate, but with the benefit of exemption from income and capital gains tax on transferable securities qualifying as venture capital investments, as well as on gains arising from investments in liquid assets before they are invested in venture capital for a maximum of 12 months.
Société de gestion du Patrimoine Familial, SPF, are generally exempt from income tax. Non-resident investors are not taxed in Luxembourg on dividends paid by the SPF or on capital gains realized on SPF shares.
In addition, the Grand Duchy supports entrepreneurs financially, creates special tax optimization schemes and offers business incubators. To learn more about the support and benefits available, please consult our dedicated guide.
In order to declare their income, entrepreneurs must file an electronic corporate income tax return through the MyGuichet.lu online data entry assistant. All companies excluded from the electronic procedure (partnerships, non-resident companies, agricultural associations, cooperatives) must file a paper declaration. Only the taxable income must be declared and the data sent to the ACD.
Налогооблагаемый доход обычно рассчитывается путем вычитания расходов, которые можно вычесть, из валового дохода бизнеса. Вычитаемые расходы могут включать операционные расходы, заработную плату, амортизацию и другие подобные расходы, связанные с ведением бизнеса.
In Luxembourg, business owners are generally required to make advance payments of IRC on the basis of their estimated taxable income for the current tax year.
These prepayments are made quarterly — in March, June, September and December — by the statutory deadlines.
The tax year in Luxembourg runs from January 1 to December 31.
In addition to the declaration, a so-called tax package, i.e. supporting accounting documents, is required. Depending on the activities of the company and the tax regime to which the company is subject, the list of documents may vary. In all cases, the minimum list of required documents must be submitted with the return.
The ACD will review the return and supporting documentation and then determine the amount of tax due and the deadlines by which it must be paid.
The amount of the provisional contributions charged by the ACD will be calculated on the basis of the most recent tax receipts for the previous financial year, where available, and will then be adjusted automatically or at the request of the company.
A final annual return is filed at the end of the year. It must be filed by March 31 of the year following the reporting year. This means that the 2023 return must be filed by March 31, 2024.
Following an audit by the ACD, the company will receive a tax bulletin stating the tax liability for the current year. It will state the amount of tax remaining, taking into account any advance payments already made, and the deadline for payment. This is normally one month after the issue of the bulletin.
It is important to maintain accurate reporting and file tax returns on time, otherwise you may be subject to significant fines and penalties for each day of delay. Therefore, entrepreneurs are advised not only to deal with tax issues on their own, but also to work with an accountant if this is not a mandatory requirement for the establishment of the company.
Frequently Asked Questions (FAQ)
What is the income tax rate for companies in Luxembourg?
What is the effective combined tax rate in Luxembourg?
What law is applicable to income tax in Luxembourg?
Source: guichet.public.lu, impotsdirects.public.lu, impotsdirects.public.lu, legilux.public.lu, impotsdirects.public.lu, iclg.com, www.wipo.int
We took photos from these sources: Markus Winkler для Unsplash
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