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.

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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.

IRC, corporate income tax
ICC, Municipal Business Tax

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

This combined rate includes: - 15% income tax;- an employment fund levy of 7% of the income tax amount. Note that it is not necessary to literally add 7% to the 15% income tax, because the amount that is 15% of the total income acts as 100% in relation to the 7% employment fund levy. If this logic seems complicated to you, trust our calculation: in percentages, this is 1.05% added to the 15% income tax to calculate the CIT;- Municipal Business Tax 6.75%: 3 x 2,25. For each municipality, this figure must be calculated taking into account the table of approved coefficients for municipalities.

The CIT is 24.94% if the income exceeds 200,001 euros per year

This combined rate includes: - 17% of the income tax; - an employment fund levy of 7% of the income tax. In terms of interest, this is 1.19%, which is added to the 17% income tax to calculate the CIT;- Municipal business tax of 6.75%: 3 x 2,25. For each municipality, this figure must be calculated taking into account the table of approved coefficients for municipalities.

CIT higher than 22.8% but lower than 24.94% if the income is between 175,000 and 200,001 euros

This combined rate includes:- Income tax, calculated according to the formula €26,250 + 31%;- Employment Fund levy of 7% of the income tax amount;- Municipal business tax depending on the approved coefficient of the municipality.
Example of calculation of CIT for a company in Niederanven

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?

  1. Understand which tax to pay, IRC or IC?

    For SARLs, IRC. For sole proprietorships, partnerships such as SENC, SCS and GIE, GEIE groups — IC.

  2. Correctly identify the amount of tax rate

    In our case 15%, since the income does not exceed 175,000 euros.

  3. Calculate the amount of the tax burden

    Find 15% of 174,000 = 26,100 euros.

  4. 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.

  5. 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.

  1. Take the basic municipal rate

    It is 3%, the amount can be checked in the table of the Luxembourg tax office.

  2. 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).

  3. 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.

Learn how a company can apply for RCS and how to register with the AED
Find out where to register for sole proprietorships and self-employment

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.

Contrary to popular beliefs, Luxembourg has a great tax system. I personally call the Grand Duchy a country for those who “get it”.
Alex Pospekhov, founder of the “Mission space” start-up

Alex Pospekhov, founder of the “Mission space” start-up

Read interview
Which companies can expect to benefit from favorable tax regimes in Luxembourg?
Agricultural businesses
Shipping companies
Mutual funds
Venture Capital Funds
Private asset management companies

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 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.

Minimum set of documents to be submitted with the tax returnMinimum set of documents to be submitted with the tax return
Check your packet of documents
Something is missing
*The mandatory items are marked with red asterisks.
Accounting balance sheet
Income statement
Table of fixed assets of the organization and their depreciation in the balance sheet
General expense report
Check your packet of documents
Something is missing
*The mandatory items are marked with red asterisks.

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.

Tax declarations for companies and individuals
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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?

We took photos from these sources: Markus Winkler для Unsplash

Authors: Maria, Kadriia
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