An essential part of living in a new country is understanding its tax structure. One systematic tax in Luxembourg is the net wealth tax, which affects both corporations and individuals.
This is one of the major taxes in the country. In terms of revenue, the net wealth tax in Luxembourg contributed 771 million euros in 2019. This amount accounted for 2.7% of the total revenue generated by public administrations.
If you want to know more about other taxes in Luxembourg, make sure to reach our dedicated section about Taxes in Luxembourg in the Knowledge Library.
What is the net wealth tax
The net wealth tax is an individual tax that diverges from the conventional approach of taxing income or transactions. Instead, it targets the cumulative value of assets owned by individuals or corporations. This tax system is only implemented at the national level in a handful of countries globally, and Luxembourg stands among them.
However, within the Grand Duchy, the net wealth tax is exclusively applicable to opaque corporate entities. "Opaque corporate entities" refer to companies or corporate structures that are deliberately set up in a way that makes it hard to see or understand their true activities, ownership, or financial dealings.
While the net wealth tax plays a significant role in Luxembourg's revenue stream, it operates in conjunction with other taxes, such as the income tax.
This tax is collected by the Luxembourg Inland Revenue, and the relevant companies are required to submit a declaration for the net wealth tax to this authority. The tax is levied annually at a rate
Who is subject to net wealth tax in Luxembourg
Since 2006, in conjunction with the introduction of the liberating withholding tax, significant changes have been enacted regarding the net wealth tax's scope. Notably, for individual taxpayers, the net wealth tax was abolished during this period.
Consequently, the net wealth tax is currently applicable exclusively to specific categories of corporate entities, primarily those categorized as opaque capital companies. This includes the following entity types:
Additionally, opaque companies holding a stake in a transparent corporation are liable for the net wealth tax based on the proportion of ownership they hold in the transparent entity.
For instance, consider Acme Luxembourg, a transparent company. It has two partners: public limited company A, which holds 45% of the stake, and natural person B, who holds the remaining 55%.
In this case, individual person B is exempt from the net wealth tax, as individuals are not subject to this tax. However, public limited company A must include its 45% share in the invested net assets of Acme Luxembourg when calculating its taxable wealth.
It’s important also to note that this tax is applicable to both resident and non-resident companies, although the assessable amount differs in each scenario.
They are subject to taxation based on their total wealth, encompassing assets both within Luxembourg and abroad.
Non-resident opaque companies
They are taxed solely on the wealth they possess within the borders of Luxembourg.
When net wealth tax is not applicable
As we have mentioned, the net wealth tax in Luxembourg was abolished in 2006 for natural persons and partners in sole proprietorship and transparent companies, like SENC, SCS, civil companies.
Net wealth tax also does not affect in Luxembourg:
- Variable capital pension savings companies (SEPCAV),
- Securitization companies,
- Venture capital companies,
- Family Wealth Management Companies (SPF),
- Investment funds.
Calculating your net wealth tax
Calculating your net wealth tax in Luxembourg involves distinct steps and considerations and it can be determined through two distinct approaches: the normal rate and the minimum net wealth tax derogation. The latter applies solely to resident capital companies.
The net wealth tax normally operates with a progressive rate, divided into two tiers based on the assessable amount. For wealth up to 500 million euros, the tax rate is 0.5%. For wealth surpassing this threshold, the rate drops to 0.05%.
To understand how the net wealth tax is calculated, it's essential to grasp the concept of the taxable wealth base, which is the net taxable fortune, obtained by subtracting liabilities and exemptions from gross assets.
Tax base = Gross assets – Liabilities – Exemptions
The gross fortune encompasses a range of assets:
- Assets invested in agricultural operations,
- Real estate holdings,
- Capital invested in commercial, industrial, mining, or artisanal enterprises,
- Capital used for practicing a liberal profession,
- Mobile assets.
Net wealth tax is usually calculated every 3 years. However, it may be recalculated sooner if:
- The taxpayer's wealth greatly changes.
- There's a new tax obligation or a loss of one, like a change in residency status. In these cases, the tax is based on the wealth at the start of the next year after the event.
Minimum net wealth tax
The Luxembourg minimum net wealth tax applies exclusively to resident capital companies, offering a fixed assessment method. The amount varies based on specific criteria.
For companies whose financial positions exceed 350,000 euros and represent at least 90% of their total balance sheet, the minimum wealth tax amounts to 4,815 euros.
For other companies not meeting the above conditions, the minimum wealth tax ranges from 535 euros to 32,100 euros, depending on the size of the balance sheet.
|Total gross assets (euros)||Minimum wealth tax|
|<= 350 000||535 euros|
|350 001 – 2 000 000||1 605 euros|
|2 000 001 – 10 000 000||5 350 euros|
|10 000 001 – 15 000 000||10 700 euros|
|15 000 001 – 20 000 000||16 050 euros|
|20 000 001 – 30 000 000||21 400 euros|
|> 30 000 000||32 100 euros|
Let us now make an example taking the case of a company with a gross taxable fortune of 5 million euros, a liability of 1 million euros, and exemptions for 500 thousand euros.
- Net wealth tax = tax base x rate of tax
- Net wealth tax = (gross assets – liabilities – exemptions) x rate of tax
- Net wealth tax = (5,000,000 – 1,000,000, 500,000) X 0.005
- Net wealth tax = (3,500,000) X 0.005
- Net wealth tax = 17,500 euros
Exemptions and reductions available
The net wealth tax in Luxembourg offers several exemptions and reductions that impact both gross taxable wealth and net wealth, contributing to a more nuanced taxation framework. These exemptions and reductions address specific situations, with one stemming from the unique dynamics of parent and subsidiary companies, and the other involving reductions facilitated through the creation of a reserve maintained on the balance sheet for a five-year period.
Full exemption for participations
Certain participations are excluded from the taxable wealth calculation, consequently impacting both gross and net wealth. This applies when the ownership stake constitutes at least 10% of the subsidiary's share capital or involves an acquisition cost of no less than 1.2 million euros. Furthermore, specific conditions must be met by both the parent and subsidiary companies:
The parent company must fall into one of two categories:
- A resident capital company.
- A Luxembourg-based permanent establishment of a resident capital company in a European Union member state, a European Economic Area (EEA) agreement country, or a country covered by a tax agreement.
The subsidiary company must be one of the following:
- A fully taxable resident capital company.
- A resident capital company in the European Union.
- A capital company established in a non-EU country, treaty-bound or not, provided it is subject to taxation comparable to that in Luxembourg. This is achieved when the effective tax rate is at least 10.5% (half the corporate income tax rate), based on administrative practice.
Reduction for companies maintaining reserves for 5 years
Resident opaque companies can seek a wealth tax reduction during the corporate income tax declaration. To qualify, they need to commit to creating a reserve equal to five times the requested reduction before the following year's end. This reserve must be retained on the balance sheet for the subsequent five years.
The reduction in wealth tax corresponds to one-fifth of the established reserve but cannot exceed the combined sum of corporate income tax (IRC) and the employment fund contribution due for the taxation year.
Let's consider Acme Luxembourg's data for Year 1:
- Net wealth tax due: 15 million euros.
- Corporate income tax (IRC) for the same taxation year: 10 million euros.
- After-tax profit: 30 million euros.
- Carried-over results and reserves: 15 million euros.
In this scenario, Acme Luxembourg cannot request a 15-million-euro reduction as it surpasses the IRC amount. The company can only opt for a wealth tax reduction of 10 million euros, which is equivalent to the IRC.
However, the total of the annual results and carried-over results and reserves (30 + 15 = 45 million euros) falls short of constituting a reserve equivalent to five times the wealth tax (10 x 5 = 50 million euros).
Reporting and paying taxes in Luxembourg
To fulfill the declaration and payment requirements of the net wealth tax in Luxembourg, applicable companies are obligated to submit an electronic declaration through the online data entry assistant on MyGuichet.lu.
If you want to learn more about tax declarations for companies and individuals we recommend you to check out our dedicated article.
However, specific entities are mandated to file a paper declaration, which should be directed to the Luxembourg Inland Revenue. This applies to entities such as partnerships, non-resident companies, agricultural associations, and cooperative companies.
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Frequently Asked Questions (FAQ)
Who is subject to the Net Wealth Tax in Luxembourg
How is the Net Wealth Tax calculated
Are there any exemptions available
Can non-resident companies be subject to the Net Wealth Tax
We took photos from these sources: Kelly Sikkema for Unsplash