Guide to the Luxembourg Corporate Tax Return

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Acknowledgements

The authors did not write this book alone. Many of our colleagues from the Deloitte Tax & Consulting Tax Compliance department were active participants in the process.

We would like to thank them all for their contributions and ideas, with particular acknowledgement going to Charlotte Adant, Julie André, Odile Arts, Arnaud Bernat, Justine Bonhomme, Maxime Bosak, Anouar Boushab, Camille De Harlez, Angéline Godin, Joseph Grillo, William Heynen, Hélène Letudais, Mélanie Ravenel, Julie Riss, Thomas Sprumont, and others.

Furthermore, we would like to thank our colleagues, Anika Senekal and Johann Frances, who assisted with the English version.

Introduction

There has been a steady increase in the number of taxpayers subject to the various taxes on income and net worth levied on corporations resident in Luxembourg since the beginning of the decade. However, until now, no complete and up-to-date documentation has been available to guide taxpayers in the preparation of their tax returns. This book, which is both detailed and highly readable, is a practical response to that information gap.

This first English edition is based on the tax legislation applicable in Luxembourg as of 31 December 2018 and provides guidance on how to complete the corporate income tax, municipal business tax and net worth tax return for resident corporations for the 2018 fiscal year.

In addition, the book contains detailed information on administrative procedures relating to the filing of the tax return (including the electronic filing procedure), deadlines to be observed and tax payments.

This book undertakes a section-by-section analysis of the electronic tax return form for commercial companies and the annexes to that form, and draws attention to the most important laws, regulations and administrative circulars currently in force. It also incorporates many practical examples and screenshots of the online corporate income tax, municipal business tax and net worth tax return for resident corporations. These features make this book an ideal reference guide for anyone who needs to prepare returns for resident corporations in Luxembourg.

In writing this book, our objective was to offer the reader a complete, high-quality work structured around a logical framework that would be easily understood by the widest possible audience. With this objective in mind, all the following developments are based on the chronology provided in the electronic form entitled "Corporate income tax, municipal business and net worth tax return for resident corporations".

Part I discusses the concept of resident corporations subject to corporate income tax, municipal business tax and net worth tax and specifies the conditions that must be met in order to be subject to the obligation to complete and file an annual Form 500.

The online tax return filing procedure is described in Part II.

Part III then guides you through the pages of the electronic form, outlining the core knowledge that is required to complete the form. This part also contains practical tips to help you complete the form and a number of examples.

Part IV provides information on the rates applicable to the various taxes and on advance and other tax payments.

Part V provides details on the filing deadline and possible penalties in the event of late filing or failure to file.

Finally, Part VI covers a series of special topics that are important for a global understanding of the filing procedures.

List of Abbreviations

PART I

GENERAL

Chapter 1

Defining the reporting obligation

Choice of applicable form

Section 1.1. Introduction

Section 1.2. Your tax declaration – which forms do you need?

Section 1.1.

INTRODUCTION

Before we examine the methodology for preparing Form 500 and the rules underlying the determination of the taxable basis of a commercial company, we would like to focus for a moment on the different tax declaration forms relating to Luxembourg corporations.

There are a number of different reporting forms for corporations and the choice of the form to be completed is based on various criteria.

Although our analysis will focus on the preparation of Form 500 by commercial companies, this chapter covers some of the general concepts for the purpose of determining who should file which form and what the scope of taxation will be (i.e. worldwide income or income generated exclusively in Luxembourg, as well as the imposition of all or only some of the Luxembourg taxes that may apply to corporations ¹).

The rules for the determination of the filing requirements could vary depending on the type of tax concerned. To address this issue, Chapter 2 will be dedicated to both corporate income tax and net worth tax, and Chapter 3 will focus exclusively on municipal business tax.

Section 1.2.

YOUR TAX DECLARATION – WHICH FORMS DO YOU NEED?

All the declaration forms available for a corporation can be viewed and downloaded on the website of the Tax Authorities at the following website (not available in English):

https://impotsdirects.public.lu/fr/formulaires.html

This link provides access to the different forms available and to annexes that may be suggested or required by the LTA.

A glance at the list reveals how difficult it can be to choose the right form for those who are not familiar with the rules on income tax and net worth tax liability.

You can find an overview of the various declaration forms as well as the main criteria determining the choice of form to be completed for a given corporation on page 16 below.

This table can be easily understood if it is read in conjunction with the explanations provided in Chapters II and III detailing the rules on liability for the different types of tax.

1. Income tax, municipal business tax and net worth tax.

Chapter 2

Liability for corporate income tax and net worth tax

Section 2.1. The regulatory framework

Section 2.2. Scope of liability – requirements regarding legal form and residence

Section 2.3. Forms

Section 2.1.

THE REGULATORY FRAMEWORK

Since the rules for determining when a taxpayer is liable for net worth tax are similar to the rules applicable to corporate income tax, they are discussed in the same section.

The rules applicable to corporate income tax are covered by the Luxembourg income tax law of 4 December 1967 (L.I.R.). ¹

The rules applicable to net worth tax are covered by the Net Worth tax law of 6 October 1934 ("Vermögensteuergesetz or VStG) and the Valuation law of 16 October 1934 (Bewertungsgesetz or BewG") ².

Section 2.2.

SCOPE OF LIABILITY – REQUIREMENTS REGARDING

LEGAL FORM AND RESIDENCE

Two criteria are taken into account when determining whether a taxpayer is subject to corporate income tax and net worth tax: legal form and tax residence.

To determine the scope of the liability, we will examine these two conditions in more detail:

§ 1. – Legal form criterion

Principle:

Corporations in one of the legal forms specified by law ³ are subject to corporate income tax and net worth tax. Of such legal forms, this book focuses on what are known as commercial corporations.

More specifically, this means:

capital companies (i.e. public liability company, limited liability company, partnership limited by shares, European company);

cooperative companies; and

mutual insurance associations.

These entities are classified as commercial corporations by form as the law provides that their profits will by their very nature be considered to be commercial profits without further analysis of the commercial activity being necessary.

Specific exemptions: entities exempt from corporate income tax and/or net worth tax:

The law also sets out a number of exceptions to the principle of liability for corporate income tax and net worth tax.

As a result, although they take a legal form specified by law, some corporations are expressly exempt from taxation. This concept is referred to as specific exemptions ⁴. These specific exemptions apply only to resident corporations.

Tax transparency:

The entities referred to in article 159 L.I.R. are opaque entities. Consequently, they are taxable in their own name. In contrast, some entities are considered to be transparent from a tax point of view because of their lack of a separate tax ⁵ personality from that of their partners. These entities are partnerships.

The law ⁶ also lists the following entities, which are not subject to corporate income tax in their own name. However, their partners / stakeholders could be subject to corporate income tax on their interest in the jointly established profit of the transparent entity.

Transparent Luxembourg entities include:

general partnerships;

limited partnerships (special);

(European) economic interest groups;

short-term commercial companies;

joint ventures; and

civil companies.

The analysis of the reporting obligations of transparent companies is outside the scope of this book. In practice, if at least one of the partners is a Luxembourg legal entity subject to corporate income tax and net worth tax, the taxable basis for income tax and the unitary values of the assets and operating rights of the transparent entity will be determined and allocated to the legal entity in accordance with its proportionate share in the transparent entity.

§ 2. – Tax residence criterion

In addition to the criterion of legal form, the law also sets a condition of tax residence ⁷, which makes it possible to specify the extent of the liability.

While a resident corporation ⁸ is subject to corporate income tax on all of its worldwide income (unlimited tax liability), a non-resident corporation’s liability is limited to the income it earns in Luxembourg (limited tax liability). This principle also applies to net worth tax.

A corporation may be considered to be a Luxembourg tax resident if either of the following two criteria is met:

– Having a registered office in the territory of the Grand-Duchy of Luxembourg

The registered office is the address of the company indicated in its articles of incorporation and registered in the Register of Commerce and Companies. If this address is located in the territory of the Grand Duchy of Luxembourg, the corporation is a Luxembourg tax resident.

– Having their seat of effective management in the territory of the Grand-Duchy of Luxembourg

The effective management implies that the management of the company is exercised from the Grand-Duchy of Luxembourg. For this to be the case, the most important decisions concerning the economic activities of the company must be taken in the territory of the Grand-Duchy of Luxembourg. In other words, this refers to the seat of effective management, where the control and management bodies of the corporation are located.

The concept of seat of effective management is loosely defined, which may in many cases require in-depth analysis that goes beyond the scope of this book.

It should also be noted that these represent basic principles laid down in Luxembourg internal law. These principles may be subject to a variety of adaptations due to the application of international regulations (double-taxation treaties) ⁹ aimed at limiting the double taxation of certain types of income.

Although this may seem straightforward on initial consideration, it may also be of particular interest when a company is likely to be considered resident for tax purposes in more than one state. It may be necessary to refer to the double taxation treaties applicable between the states concerned for the purpose of examining the rules on the resolution of conflicts of tax residence. If there is no international treaty to resolve the issue, an entity could be recognised as a tax resident in more than one state and therefore be subject to tax on its income in each of the states involved.

Section 2.3.

FORMS

Once it has been determined whether a corporation is subject to corporate income tax and net worth tax, it remains to be determined whether it is subject to taxation:

in its own name or through its partners / stakeholders (legal form criterion); and

whether the tax is levied on its worldwide or local income/net worth (residence criterion).

For a more complete view please refer to the table presented in section 1.2. of Chapter 1 of this part as well as the below examples ¹⁰.

EXAMPLE 1

If the criterion of legal form is met but the corporation is not tax resident in Luxembourg territory although it generates income there, then there may be limited liability for the taxpayer’s local Luxembourg income/net worth.

The non-resident corporation will then have to declare:

its local income using Form 530 ¹¹.

its local net worth using the additional net worth form: Fort. 3 ¹².

EXAMPLE 2

If only the tax residence criterion is met and the corporation is not listed in article 159 L.I.R. but instead in article 175 L.I.R. dealing with transparent entities, the liability will, if applicable, be declared through the stakeholders. The entity will then have to complete:

Form 200 ¹³ if it does not have any commercial activity in Luxembourg territory;

Form 300 ¹⁴ if it engages in commercial activities in Luxembourg territory

An additional net worth form: Fort. 2 ¹⁵ Part 2.

EXAMPLE 3

If the two cumulative conditions of legal form and residence are fulfilled, the liability is said to be unlimited with respect to the taxable person’s worldwide income and net worth. In this case, the form to be completed is Form 500 ¹⁶, which is the subject of this book.

As Form 500 includes a section for corporate income tax, municipal business tax and net worth tax, no additional net worth tax form is required.

If neither of the two criteria of legal form or residence is met, there is no liability and therefore no reporting obligation.

1. More specifically, articles 159, 160, 161 and 175 L.I.R. detail the scope of CIT.

2. More specifically, §§ 1, 2 and 3 of the VStG detail the scope of net worth tax.

3. Art. 159 L.I.R. and § 2 (1) VStG.

4. For more information, please refer to article 161 L.I.R., which lists the specific exemptions applicable to CIT, and § 3 VStG for the list of specific exemptions applicable to the NWT

5. Although the law makes reference to legal personality, we prefer to use the term tax personality since these entities actually have legal personality and it is their lack of tax personality that makes them transparent from this point of view.

6. Art. 175 L.I.R.

7. Art. 160 L.I.R. and § 2 (2) VStG.

8. Fulfilling the criterion of legal form.

9. This book uses several terms to describe double taxation treaties, such as treaty, tax treaty, double taxation treaty.

10. All of the necessary forms can be downloaded from the Formulaires/Collectivités (Forms/Corporations) section of the website of the LTA.

11. Corporate income tax and municipal business tax return for the year 2018 of corporations whose registered office or central administration is not located in Luxembourg

12. Declaration of net worth (non-resident legal persons).

13. Declaration for the establishment of income from joint business operations

14. Declaration for the establishment of commercial income from joint business operations for municipal business tax purposes.

15. Declaration of net worth (resident legal persons).

16. The exception to this is the case of religious congregations or associations that are covered by a dedicated form: Form 510 Declaration for corporate income tax of religious congregations and associations (all legal forms). The analysis of this form is outside the scope of this book.

Chapter 3

Liability for municipal business tax

Section 3.1. The regulatory framework

Section 3.2. The exercise of a commercial activity within the meaning of § 2 GewStG

Section 3.3. Forms

Section 3.1.

THE REGULATORY FRAMEWORK

The rules applicable to municipal business tax are covered by the Municipal Business Tax Law of 1 December 1936 (GewStG) which refers to certain provisions of the Luxembourg income tax law.

The rules for determining a taxpayer’s liability for municipal business tax are different from those described in the previous chapter on corporate income tax and net worth tax.

The reason for this is the very nature of these taxes. While the latter two are so-called personal tax in that they take into account the ability of the taxpayer to pay tax, municipal business tax was historically considered to be a real tax that was intended to tax an activity without regard to the nature of the taxpayer.

However, we will see in Part II that the taxable basis used as a basis for municipal business tax is very similar to that of corporate income tax.

Section 3.2.

THE EXERCISE OF A COMMERCIAL ACTIVITY WITHIN THE MEANING

OF § 2 GEWSTG

a. Commercial entities by form

As with income tax, the law ¹ specifies the list of entities considered to be commercial entities for all their activities (commercial activity by form).

The following entities are concerned:

capital companies (such as public liability companies (sociétés anonymes), partnerships limited by shares (sociétés en commandite par actions), limited liability companies (sociétés à responsabilité limitée), and European companies (sociétés européennes);

cooperative companies (sociétés coopératives) and agricultural associations (associations agricoles); and

mutual insurance associations (associations d’assurances mutuelles).

These entities are deemed to be engaged in a commercial activity simply because of their legal form, regardless of their activity, and this applies to their entire commercial profit.

b. Partnerships

The income generated by a partnership (société de personnes) may be classified as commercial profit as long as the partners of the partnership can be considered to be co-traders ², which in practice will always be the case if the activity carried out is of a commercial nature.

A commercial activity is defined as an activity (i) carried out independently, (ii) for profit, (iii) on an ongoing basis and (iv) constituting participation in the broader economy. This will constitute a commercial entity subject to municipal business tax.

For non-commercial activities, such as farming, forestry ³ or self-employment ⁴, the rules applicable to commercial profit are superseded by the rules specific to that type of income.

Another distinctive feature of partnerships is the so-called commercial imprint theory ("Geprägetheorie") established by § 2 (2) 3 GewStG.

This is an addendum implemented during the 2001 tax reform to reaffirm the administrative practice based on German case law known as "Geprägerechtsprechung", which states that a partnership is presumed to generate commercial profit subject to municipal business tax even in the absence of a real commercial activity simply by virtue of the involvement in the activity of one or more capital companies.

This provision applies to:

a limited partnership or a special limited partnership engaged in an activity for profit if at least one general partner is a capital company holding at least 5% of the partnership interest, and

a general partnership, (European) economic interest group or civil company ⁵ engaged in an activity for profit if the majority of the interest/shares are held by one or more capital companies.

Finally, a partnership of a commercial nature or with a commercial imprint will be considered to be a capital company for the purpose of determining the nature of any partnership of which it is a partner.

EXAMPLES

A special limited partnership whose general partner is a public liability company holding at least 5% of the partnership interest is considered to be carrying out a commercial activity.

A civil company, a majority of whose shares are held by a public liability company and a limited liability company, is considered to be carrying out a commercial activity.

A public liability company is a partner in a partnership. The partnership itself is a partner/holds a partnership interest in another partnership. None of the partnerships are engaged in any commercial activity. However, the commercial nature of the public liability company influences the partnership. The partnership will then be treated as a corporation and will thereby confer a commercial nature on the other partnership in which it holds a partnership interest.

The consequence of this commercial imprint theory is that any income received by a partnership will automatically be subject to municipal business tax.

However, even if the law does not distinguish between Luxembourg and foreign companies, a foreign capital company will not automatically confer a commercial nature on the partnership unless it has a permanent establishment in Luxembourg ⁶.

Specific exemptions: entities exempt from municipal business tax

As is the case with corporate income tax, the law then provides for a number of exceptions to the principle of liability for municipal business tax.

As a result, some resident corporations are expressly exempt from municipal business tax, even though they theoretically fall within the scope of the law concerning that tax. The majority of these specific exemptions ⁷ are based on the exemptions mentioned for corporate income tax:

1. Religious, charitable or general interest organisations (refer to the conditions mentioned for corporate income tax purposes);

2. State, municipal, and municipal syndicate water, gas and electricity utilities;

3. The national lottery;

4. Agricultural associations subject to certain conditions relating to their activity; and

5. State banks provided that they are active in a role related to State economic policy.

There are also a number of personal exemptions from municipal business tax, just as there are for corporate income tax. These include, for example, corporations registered in the Luxembourg public maritime register.

Section 3.3.

FORMS

For opaque corporations, it should be noted that both Forms 500 and 530 include a municipal business tax component.

In addition, there is Form 510 for reporting the income of religious associations and congregations that benefit from a specific exemption from municipal business tax while remaining subject to corporate income tax.

In contrast, other instances of exemptions specific to municipal business tax are covered in Form 500.

After the profit has been calculated in accordance with the provisions of the law on corporate income tax on line C0010, it must be adjusted to take into account any specific exemptions.

As an example, companies registered in the Luxembourg maritime register ⁸. Pursuant to the specific