Luxembourg proposes reduction in corporate income tax rates and other changes

Executive summary

On 17 July 2024, the Luxembourg government submitted a Draft Law to Parliament containing a variety of tax measures. Overall, the proposed changes aim to alleviate the tax burden on households and enhance Luxembourg's appeal as a work and investment place, with provisions for both corporate and individual taxpayers.

Key amendments affecting corporate taxpayers include a reduction of the CIT rates, a modernization of the SPF Law1 as well as a suggested subscription tax exemption for UCITS ETFs.

The reduced CIT rates would apply as from tax year 2025.

Detailed discussion

Reduction of corporate income tax rate

The Draft Law foresees a reduction of the CIT rate by 1%, aiming to align more closely with the European Union (EU) and Organisation for Economic Co-operation and Development (OECD) averages. This move follows a trend of CIT rate reductions in Luxembourg since 2017, which has seen decreases in the maximum rate from 21% to 17%, and the minimum rate from 20% to 15%.

In more detail, the Luxembourg CIT has a two-tiered rate structure: 15% for taxable income up to €175,000 and 17% for taxable income exceeding €200,000, with a smoothing mechanism for taxable income between these two amounts. The Draft Law proposes to lower the maximum CIT rate from 17% to 16% and the minimum CIT rate from 15% to 14% as from tax year 2025, with an intermediate rate to ensure a gradual increase for taxable income between €175,000 and €200,001.

To support the employment fund, the CIT rate is subject to a surcharge, which has been 7% since tax year 2013. As a result, for a company operating in Luxembourg City with taxable income exceeding €200,000, the global tax rate, inclusive of the employment fund surcharge and the municipal business tax (MBT), would drop to 23.87% in fiscal year 2025, down from the current 24.94%.

Modernization of the SPF regime

Introduced in 2007 Luxembourg legislation, the purpose of an SPF is the management of private wealth of individuals without carrying out an economic activity. SPFs are exempt from CIT, MBT and net wealth tax and are only subject to annual subscription tax (similar to funds).

The Draft Law suggests several amendments to the SPF Law, including:

• Enhanced identification requirements: Companies governed by the SPF Law must include the wording "société de gestion de patrimoine familial" or "SPF" in their corporate names to facilitate recognition.

• Tax base determination: The amendments provide clear guidelines for determining the subscription tax base, particularly for companies with fiscal years that do not align with the calendar year.
• Increase of the minimum annual subscription tax: The minimum annual subscription tax is increased from the current €100 to €1,000.

• Mandatory electronic filing: Annual certifications and tax returns will need to be submitted electronically.

• Administrative fines: Detailed provisions allow the tax authorities to levy administrative fines for noncompliance with the provisions of the SPF Law, with penalties of up to €250,000 for serious violations.

• Defined process for the withdrawal of the SPF status: The procedural framework for revoking the SPF tax status (typically causing the company to become fully taxable) would become more structured, including the possibility of offering companies the opportunity to address and correct issues prior to any final withdrawal decision.

The above measures will take effect from the first day of the trimester following the publication of the law, except for the measures related to fines and withdrawal of the SPF status. Those would apply only to breaches occurring after the Draft Law comes into force, with ongoing breaches to be addressed under the new framework.

Subscription tax exemption for certain UCITS ETFs

As from the first day of the trimester following the enactment of the law, UCITS ETFs (as well as compartments of UCITS ETFs) that meet certain conditions would be exempt from subscription tax.

The definition of (compartments of) UCITS ETFs aligns with the European Securities and Markets Authorities (ESMA) Guidelines and the Law of 17 December 2010 relating to Undertakings for Collective Investment. To be eligible for the exemption, a (compartment of a) UCITS ETF must be actively traded on a regulated market or multilateral trading facility with at least one market maker ensuring the share price closely reflects the net asset value or, where applicable, the indicative net asset value. The exemption applies only to those classes of shares within the (compartment of the) UCITS ETF that meet the ETF criteria.

Next steps and implications

The Draft Law will now go through the legislative process. Specifically, the text will be analyzed by a dedicated parliamentary commission; opinions will be collected from different advisory bodies (and most importantly the Council of State); and the final draft will be discussed and voted on in a parliamentary session before finally being published in the Official Gazette (Memorial). The entire process may take a couple of months.

Taxpayers potentially affected by one or more of the different measures of the Draft Law should remain aware of its progress through Parliament and consult with their tax advisors to fully understand how it could affect them.