Luxembourg tax system for small businesses

The package of tax measures adopted by Parliament on 11 December 2024 marked the beginning of a new era in which priority is given not only to large investment funds, but also to innovative start-ups and individual entrepreneurs.

The reforms, which came into force on 1 January 2025 and will continue in 2026, are aimed at increasing the country's global competitiveness, retaining talent and stimulating private investment in innovation. For small businesses, these changes mean a reduction in the direct tax burden, simplification of administrative barriers, and the emergence of new capitalisation mechanisms.

Legal architecture: choosing the optimal form of business

Before delving into the fiscal details, it is necessary to understand the structural basis on which small businesses in Luxembourg are founded. The choice of legal form (legal status) is a determining factor for the tax regime, the degree of personal liability and administrative costs.

Sole proprietorship

An individual enterprise (Entreprise Individuelle) remains the simplest way for freelancers and small traders to enter the market. In this case, the entrepreneur acts on their own behalf, makes all decisions independently, and bears unlimited liability for business debts with all their assets. From a taxation perspective, this structure is considered "transparent": profits are not taxed at the company level but are directly included in the taxable base of the individual and taxed on a progressive income tax scale.

Limited liability company (SARL) and its simplified version (SARL-S)

For those seeking to protect their personal assets, the most preferable form is a SARL (Société à Responsabilité Limitée). Partners are liable only to the extent of their capital contributions.

Of particular importance for start-ups is the SARL-S (simplified SARL), introduced to facilitate business start-ups. This form allows a company to be registered with a minimum capital of just €1 (up to a maximum of €12,000). Unlike the classic SARL, which requires the involvement of a notary and a minimum capital of €12,000, SARL-S can be created through a private deed, which significantly reduces the initial costs. However, SARL-S is only available to individuals, and one person cannot be the sole participant in more than one such company at the same time.

Incorporated Companies Tax (IRC)

The central element of the 2025 reform was a reduction in corporate income tax (IRC) rates. The Luxembourg government aims to bring the tax burden closer to the OECD average in order to maintain the jurisdiction's attractiveness for international business.

Small businesses in Luxembourg are subject to a two-tier profit tax system. From 1 January 2025, these rates will be reduced by one percentage point, resulting in direct savings for small businesses.

A solidarity levy (contribution to the employment fund) of 7% of the amount of IRC charged is always added to the basic IRC rate. Thus, the effective tax rate for small businesses with profits of up to €175,000 in 2025 was 14.98% (instead of 16.05% in 2024).

Municipal Business Tax (ICC)

The Luxembourg tax system is characterised by its multi-level structure. In addition to IRC, companies are required to pay municipal business tax (ICC). The rate depends on the commune (municipality) in which the company is registered.

In Luxembourg City, the ICC rate is 6.75%. However, it may vary in other regions: for example, in Esch-sur-Alzette, it is 8.25%.

Effective aggregate rate

The total tax burden on the profits of legal entities (IRC + solidarity tax + ICC) for companies located in the capital decreased as follows in 2025:

• For small businesses with profits up to €175,000: up to 21.73% (was 22.80% in 2024).
• For companies with profits exceeding €200,000: up to 23.87% (was 24.94% in 2024).

An important preference for small businesses and sole traders is the automatic tax-free deduction of €17,500 from their annual profits for municipal tax (ICC) purposes. This significantly reduces the effective tax rate for micro-enterprises.

Wealth tax (IF)

Luxembourg is one of the few countries in Europe that maintains an annual tax on companies' net assets (Net Wealth Tax). The tax is calculated based on the market value of assets minus debt obligations as of 1 January each year.

The standard tax rate is 0.5% for a tax base of up to €500 million. However, the most significant changes in 2025 concerned the "minimum wealth tax". After the Luxembourg Constitutional Court ruled that the previous system of fixed payments was discriminatory, the government introduced a progressive scale based solely on the company's final balance sheet total.

Companies can legally reduce or even completely eliminate wealth tax by creating a special five-year reserve on the liabilities side of their balance sheet. The amount of the reserve must be five times greater than the requested tax reduction. This is an effective tool for small businesses, allowing them to retain capital within the company for further development.

Value Added Tax (VAT/TVA)

Value added tax in Luxembourg remains one of the lowest in the European Union, making the country attractive for e-commerce and the service sector. The standard rate is 17%.

Increase in registration threshold

The main relief for microbusinesses in 2025 was the increase in the threshold for mandatory VAT registration. Whereas before 2025, the obligation arose at a turnover of €35,000, the threshold has now been increased to €50,000. This allows small businesses to avoid complex VAT reporting at the initial stage.

However, registration remains mandatory if the company makes cross-border purchases of services or goods within the EU worth more than €10,000 per year.

From 2025, Luxembourg is also introducing the SME Special Scheme, which allows companies with an annual turnover of up to €100,000 to apply for VAT exemption when trading with other EU countries, provided they comply with notification rules and use a special identification number.

Tax incentives for start-ups and innovation

Luxembourg aims to become a leading hub for technology companies. Legislation for 2025–2026 introduces unprecedented measures to support investment in innovation.

Tax credit for investors in start-ups

From the 2026 tax year, a new tax credit will be introduced for individuals investing in innovative start-ups. This is a powerful tool for attracting angel investment.

IP Box mode

The attractive Intellectual Property (IP) Box regime remains in place for small technology companies. It allows up to 80% of net income from patents and copyrighted software to be exempt from tax. Taking into account the reduction in base rates in 2025, the effective tax rate on intellectual property income will be around 5%.

Social insurance and labour costs

For small businesses in Luxembourg, social security costs are one of the most significant expense items. The system is based on the principle of solidarity, and contributions are calculated as a percentage of gross wages.

Social contributions are capped at a maximum threshold of five minimum social wages, which in 2025 amounted to approximately €13,518.68 per month. For the self-employed (sole traders), the burden is higher, as they are required to pay both the employee's and the employer's share (a total of around 24% for pension insurance alone).

Luxembourg's tax system in 2025–2026 is becoming more flexible and focused on small business growth. Lower corporate tax rates and higher VAT thresholds give entrepreneurs the breathing space they need during the start-up phase.

Despite the complexity of some procedures, Luxembourg remains one of the most predictable and entrepreneur-friendly jurisdictions for entrepreneurs willing to play by the rules of a transparent European market.