Taxes

How to pay less tax in Luxembourg without breaking the law

Are you starting a business or running a microenterprise in Luxembourg? Then tax planning shouldn’t be an abstract concept — it’s a tool for survival and growth. This article provides a detailed yet accessible breakdown of how Luxembourg’s tax system works, the common mistakes entrepreneurs make, which tax optimization schemes are legal, and how to benefit from government support.

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Tax optimization and planning are among the most critical tasks for any business. The issue becomes especially pressing when a business is still small and every euro counts. Fortunately, Luxembourg offers many opportunities to reduce the tax burden — the key is knowing how to use them.

Tips for taxes in Luxembourg

Paying less in taxes is a natural goal — not just for individuals, but for companies too. This becomes especially critical in the early stages of a business. Many startups operate at a loss, struggle with processes, and if debt obligations pile on top, it can quickly become overwhelming. Fortunately, there are a few simple steps that can help avoid the most common — and costly — mistakes.

Common tax planning mistakes

Tax mistakes can be costly: fines, back taxes, lost benefits, or even suspension of operations. Missteps in tax strategy are not exclusive to beginners. Even experienced entrepreneurs can make errors that cause stress and unnecessary expenses.

Mixing personal and business expenses

Luxembourg’s tax authorities (ACD) strictly separate business and personal spending. If an entrepreneur uses the same vehicle for family and work, only part of the costs can be deducted — based on documented business mileage. These must be supported with logs, travel sheets, etc. Otherwise, the tax office may recalculate and impose penalties.

Wrong choice of legal structure

Many continue as sole proprietors even as profits grow. But personal income tax in Luxembourg is progressive and can reach up to 42%. Once earnings exceed ~€100,000, it's often more advantageous to switch to a Sàrl, where profit is taxed at a flat corporate income tax (CIT) rate of 14–16% in 2025, plus local tax.

Ignoring VAT obligations

Microenterprises are allowed not to register for VAT if their turnover is below a certain threshold (€50,000 in 2025). But if you exceed the threshold and continue invoicing without VAT, the tax office can charge VAT retroactively and fine you. On the flip side, registering too early can result in unnecessary paperwork with no actual benefit.

Neglecting tax credits

For instance, the investment tax credit (bonification d’impôt) allows up to 18% reimbursement on capital investments. Yet many businesses don't use it. Lack of awareness is no excuse — tax liability still applies.

Legal structures and taxation

Your choice of legal form affects not only the tax rate but also your personal liability, administrative burden, and access to tax benefits. Here are the main options:

Sole proprietor (entreprise individuelle)

The simplest and fastest way to start. But you're personally liable for debts, and profits are taxed as personal income. For small turnover, that’s manageable: the first ~€11,000 is tax-free, and rates increase gradually. But as your income grows, the tax bill grows steeply.

Sàrl (Limited liability company)

A separate legal entity subject to CIT. In 2025, the CIT rate is 14% on the first €175,000 of profit and 16% above that. Add 7% for the employment fund and municipal tax, and the total tax burden is around 22–25% — still better than paying 42% personal income tax. Plus, your personal assets are protected.

Sàrl-S (Simplified Sàrl)

A low-cost option for microenterprises. No notary needed to register; share capital from just €1; up to 5 employees. Taxed like a Sàrl, but far easier and cheaper to set up. A favorite among new entrepreneurs.

SIS (Société d’impact sociétal)

If you're launching a social enterprise (e.g., elder care, environmental projects), you may qualify for SIS status. These companies are exempt from CIT, municipal tax, and net wealth tax, as long as profits are reinvested in social goals. It’s like a nonprofit with a business structure.

How to legally reduce corporate tax

Even if your company pays CIT, that doesn’t mean you must surrender maximum amounts to the state. Luxembourg offers several legal, transparent, and well-established ways to reduce tax burdens. These apply to both Sàrl/Sàrl-S and sole proprietors using actual expense accounting.

Investment tax credit

One of the strongest tools: the bonification d’impôt pour investissement. Since 2024, the general credit rate is 12% of capital expenditure. If you invest in digital or green tech, you can get up to 18%. Rules are in the Income Tax Law (Loi modifiée du 4 décembre 1967). File Form 800 with your annual tax return.

Reduced CIT rates

In 2025, small businesses pay 14% CIT on profit up to €175,000 (down from 15%) and 16% above €200,000 (down from 17%) — part of the Entlaaschtungs-Pak reform passed in 2024. The rate cut may seem modest, but the savings add up fast for profitable companies.

Maximizing deductions

Deductible expenses lower your taxable income. Make sure to track everything: rent, equipment, ads, travel, training. Just keep documentation and ensure a business link. Large end-of-year purchases are especially helpful to reduce annual profit.

Grants and subsidies

The state reimburses part of your R&D, innovation, and sustainability spending through Luxinnovation, SNCI, and the Ministry of the Economy. These funds are tax-exempt when classified as non-repayable aid.

These tools work in tandem: you can use tax credits, receive subsidies, and lower your base with deductible expenses. The key is systematic planning.

When VAT exemption makes sense

For the smallest businesses, Luxembourg offers a VAT exemption regime — franchise de TVA. It simplifies accounting and makes pricing more attractive, but only works in certain cases.

You may skip VAT if your annual turnover stays under €50,000. While under the threshold, you don’t file VAT returns, charge VAT on invoices, or track input VAT. This is ideal for B2C models like freelancers or artisans where end-price matters.

Without VAT, you either keep the extra 17% or pass on savings to customers.

However, in B2B settings, your clients can reclaim VAT anyway. But as a non-payer, you can't deduct VAT on major purchases. In that case, it may be wiser to register voluntarily.

VAT registration is done via MyGuichet.lu. Once you cross the limit, you must switch to the standard VAT regime. As of 2025, a one-time 10% margin above the threshold is allowed — if you notify the tax authority (AED).

This exemption is a great launchpad, but growing businesses must be ready to transition when needed.

Which expenses are deductible?

Corporate tax in Luxembourg can be reduced by thoroughly accounting for business expenses. Deductions apply to costs incurred exclusively for professional purposes. This rule is valid for both individuals and legal entities.

Rent and office space

Rent for offices, workshops, or coworking spaces is deductible. Home-based workers can deduct a proportion of rent, mortgage interest, and utilities based on workspace size (e.g., 20% of the home).

Equipment and tools

Computers, furniture, phones, software — all count as expenses. These can be deducted at once (if under a threshold) or depreciated. IT purchases also qualify for digital tax incentives.

Internet and telecom

Business mobile plans, internet, and subscriptions (e.g., Google Workspace, Zoom, online accounting) qualify as expenses if used professionally.

Training

Courses, seminars, and professional books are deductible if directly related to your work. For instance, an accountant updating skills or a baker learning new methods.

Consulting and legal services

Accountants, tax advisors, lawyers, notaries, marketing agencies, designers — all external experts can be deducted with proper invoices and contracts.

Travel and transportation

Client meetings, conferences, and work travel are all deductible. Use mileage logs for personal vehicles or reimburse per kilometre.

Remote work

You may deduct part of home internet and utilities for employees working remotely — based on invoices or a company-set rate.

Other

Bank fees, insurance, advertising, domain names, website development, and even client entertainment (usually 50% deductible) count.

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Always keep documentation: contracts, invoices, bank statements, or proof of services. A separate business bank account simplifies this.

Avoiding double taxation and extracting profit smartly

Small businesses in Luxembourg often face the issue of double taxation. This isn’t just a theoretical concern — it impacts real income, especially when owners are actively managing and drawing income.

Double taxation means profits are taxed twice: first at company level (CIT), then again when dividends are paid to the owner. For example, the firm pays 22–25% CIT, then the owner pays personal income tax on dividends.

How to reduce this? Fully legal strategies:

Blended payout model. Instead of withdrawing all profits as dividends, pay yourself a salary. Salaries are deductible for the company, lowering its tax base. The owner still pays personal tax and social contributions, but overall liability may be lower — especially at modest income levels.
Reinvestment. Retain profits in the company and reinvest in assets, staff, or marketing. This avoids the second tax layer and strengthens the business.
50% dividend exemption. Luxembourg tax law (Art. 115, para. 15a) states that only 50% of dividends received by individuals is taxable. This effectively halves the tax rate on dividends.
International operations. If you work with foreign clients or are tax resident elsewhere, use Luxembourg’s 80+ double tax treaties. They let you either exclude income from one country or credit tax already paid abroad.

For instance, if a client withholds tax at source, you can declare it in Luxembourg and offset it against your CIT. Or if you get dividends from a foreign subsidiary, you might avoid local double taxation altogether.

Bonus Tip. As a business owner, pay yourself a modest salary (just above minimum to meet social security requirements, but low enough to stay in favorable tax brackets). Leave the rest of the profit in the company or withdraw it gradually as dividends. Always consult a tax advisor — the best mix depends on your overall financial picture.