Luxembourg Tax Authority clarifies application of real estate levy including reporting requirement for all Luxembourg corporate investment vehicles

Executive summary

As from 2021, a real estate levy (prélèvement immobilier) applies to certain comprehensively listed investment vehicles receiving or realizing income from real estate located in Luxembourg1.  While the real estate levy only applies to income from real estate located in Luxembourg, there is a one-time information obligation for Luxembourg corporate investment vehicles irrespective of whether they hold real estate (in Luxembourg or elsewhere). Failure to provide said information by 31 May 2022 may trigger a fixed penalty of €10,000.

On 20 January 2022, the Luxembourg Tax Authority issued a Circular2  providing clarification on the application of the real estate levy and the above-mentioned information requirement.

This Alert details the main contents of the Circular.

Detailed discussion

The Real Estate Levy

The real estate levy of 20% is due by certain corporate investment vehicles receiving or realizing income from real estate located in Luxembourg. The due date for filing the first real estate levy return for calendar year 2021 is 31 May 2022.

For the real estate levy to apply, three components are required:

1. Real estate
2. From which income is derived
3. By a determined investment vehicle

Real estate

There is no separate definition for purposes of the real estate levy. As a result, the civil law concept applies.

Real estate income

The three following types of income fall within the scope of the real estate levy:

• Rental income: This concept refers to gross rent, excluding value added tax (VAT), derived from the renting and leasing of real estate located in Luxembourg.
• Capital gains derived from the transfer of real estate located in Luxembourg: “Capital gain” is defined as the positive difference between the price of the real estate that appears in the notarial deed drawn up at the time of the transfer of the real estate and the price paid or value used at the time of the acquisition, contribution or constitution of the real estate that is transferred. The concept of “transfer” is to be understood in a very broad sense, including a sale, exchange, contribution, merger, demerger, liquidation or dissolution.
• Income derived from the (direct or indirect) transfer of interests or units in a tax transparent entity or a mutual investment fund: such income corresponds to the positive difference between: (i) the disposal price of the interests or units corresponding to the proportion of the value of the real estate located in Luxembourg at the time of their transfer; and (ii) the acquisition price of these interests or units corresponding to the proportion of the value of the property located in Luxembourg at the time of their acquisition. Where the property was acquired or constituted by or contributed to a tax transparent entity or mutual investment fund (fonds commun de placement, FCP) subsequently to the acquisition of the interests or units in such entity or fund, the transfer price will be determined with respect to the proportion of the value of the real estate at the time of its acquisition, contribution or constitution by the tax transparent entity or mutual investment fund. 

Given that the real estate levy also applies to income received or realized indirectly by a targeted investment vehicle through a tax-transparent structure, the Circular identifies three situations where income from Luxembourg real estate is subject to the real estate levy:

   i) The income is received or realized by a targeted investment vehicle directly.

   ii) The income is received or realized by a tax transparent entity insofar as a targeted investment vehicle holds an interest in that entity during the calendar year, either directly or indirectly through one or more tax transparent entities or one or more mutual investment funds.

   iii) The income is received or realized by a mutual investment fund insofar as a targeted investment vehicle holds units of that fund during the calendar year, either directly or indirectly through one or more tax transparent entities or one or more mutual investment funds.

The allocation to the investment vehicle and the amount subject to the real estate levy will be determined on the basis of the proportion of interests or units held directly or indirectly (through one or more tax transparent entities or mutual investment funds) by the targeted investment vehicle. In the case of indirect holding, the proportion of interests is calculated by multiplying the holding percentage successively at the different levels.

The Circular illustrates the above with the following example: a Reserved Alternative Investment Fund (RAIF) holds an interest of 3% in a Luxembourg limited partnership, which in turn holds an interest of 5% in a Luxembourg civil company, acquired for €25 million. The sole asset of the civil company is a building situated in Luxembourg. The limited partnership sells its interest in the civil company with a gain of €23 million. The conditions for the real estate levy being fulfilled (income derived from Luxembourg real estate by a targeted investment vehicle), the RAIF will be liable to the real estate levy (at a rate of 20%) calculated on 3% x €23 million = €690,000.

Targeted investment vehicles

The real estate levy only applies if the real estate income is realized by targeted investment vehicles with a legal personality distinct from that of their partners, being: (i) Specialized Investment Funds (SIFs) governed by the amended law of 13 February 2007; (ii) Undertakings for Collective Investment (UCIs) governed by Part II of the amended law of 17 December 2010; and (iii) RAIFs governed by article 1 of the amended law of 23 July 2016. SIFs, UCIs or RAIFs formed as a limited partnership (société en commandite simple, SCS), a specialized limited partnership (société en commandite spéciale, SCSp) or as a mutual investment fund (FCP) are excluded from the measure.

Declaration and payment of the real estate levy

Investment vehicles concerned will have to declare all income to which the levy applies that was received or realized during a given calendar year, to the tax office in charge of the withholding tax on interest (Bureau de la retenue d’impôt sur les intérêts) of the Luxembourg Tax Authority by 31 May of the next calendar year (31 May 2022 for calendar year 2021). Targeted investment vehicles with a diverging financial year are required to determine and declare the relevant income received or realized between 1 January and 31 December of a given calendar year. Any real estate levy must be paid no later than 10 June.

The return, to be filed electronically, must detail the income from real estate that is subject to the real estate levy, a breakdown by property and the amount of the real estate levy. Upon request, the concerned investment vehicle, as well as any tax transparent entity or mutual investment funds in which the investment vehicle holds interests or units, must provide any relevant evidence to support the amount of income from real estate and the declared real estate levy.

The determination of the income derived from real estate property and the detail of the calculations required to determine the income to be allocated to the investment vehicle have to be certified by an independent auditor in a report to be filed with the return.

In the case of non-declaration, late declaration or incomplete or incorrect declaration by the investment vehicle, the tax authorities determine the amount of the deficiency by means of a tax assessment. The non-payment of the real estate levy within the required timeframe triggers late payment interest at a rate of 0.6% per month.

A request for reimbursement of undue real estate levy can be filed up to the end of the calendar year following the year of payment of the levy at stake (e.g., the deadline for filing a request for reimbursement of real estate levy paid in 2022, relating to income derived in 2021, is 31 December 2023).

The real estate levy is not deductible from the income derived from real estate and is neither creditable nor deductible by any taxpayer.

Information requirement

All targeted investment vehicles, whether or not they hold assets that could result in income covered by the real estate levy, have to inform the Luxembourg Tax Authority whether they have held any real estate located in Luxembourg, either directly or indirectly, at any time during the calendar years 2020 and 2021. This is a one-time information requirement. A one-time information requirement also applies to targeted investment vehicles that transformed into a partnership or into a mutual investment fund during the calendar years 2020 or 2021 and that have held, at that moment, either directly or indirectly real estate located in Luxembourg. The information is to be provided through a specific form to be filed electronically by 31 May 2022.

Failure to comply with this obligation to transmit information may trigger a fixed penalty of €10,000. The filing of a real estate levy return by an investment vehicle by 31 May 2022 is equivalent to fulfilling the aforementioned information obligations.

[1] See EY Global Tax Alert, Luxembourg Draft Budget Law 2021 – A look at the tax measures affecting companies, dated 16 October 2020.

[2] Circular PRE_IMM n°1 of 20 January 2022.