Net wealth tax in Luxembourg

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.

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.

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:

• Public limited companies,
• Partnerships limited by shares (SECA),
• European companies (SE),
• Limited liability companies (SARL).

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.

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.

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.

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Companies

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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.

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.

Example

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

This is surely an oversimplified example, the actual calculation involves many intermediate steps, such as the proper calculation of the tax base, liabilities, and exemptions. You might want to contact tax consultant for precise calculations for your case.

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:

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.

Example

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). 

Therefore, Acme Luxembourg can only apply a reduction of 9 million euros, which represents one-fifth of the total annual profit and carried-over results and reserves (45 / 5 = 9 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.

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.