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Budget 2013: Tax Measures

Luxembourg
A law (6497) voted on 13 December 2012 introduced tax measures aimed at increasing the state revenues. Taxand Luxembourg presents below the key tax measures, and how these will translate as additional tax costs for most Luxembourg taxpayers.

Introduction of minimum corporate income taxation for companies
The law introduces a minimum Corporate Income Tax (CIT) which varies, as reflected below, between EUR 500 and 20,000 EUR. Taking into account the solidarity surcharge of 7% as of 2013, this brings the maximum amount of minimum CIT to EUR 21,400. The minimum CIT will apply to all "non-SOPARFIs" (from FR: Societe de Participations Financieres) within the meaning of article 174 - 6 ITL, ie to companies holding assets other than financial assets (shares, loans, cash, etc). The minimum CIT currently in place for SOPARFIs remains, but is increased (see below). The minimum CIT is an advance creditable against any future CIT liability. However, should the company never become taxable, it will not be able to get a reimbursement of the minimum CIT paid and thus the minimum CIT can become a de facto final liability.

Total Balance Sheet Minimum CIT due
<= EUR 350,000 EUR 500
<= EUR 2,000,000 EUR 1,500
<= EUR 10,000,000 EUR 5,000
<= EUR 15,000,000 EUR 10,000
<= EUR 20,000,000 EUR 15,000
>= EUR 20,000,000 EUR 20,000

Minimum income taxation of SOPARFIs increased
The minimum CIT of SOPARFIs is increased from EUR 1,500 to EUR 3,000. Taking into account the solidarity surcharge, this means that the minimum taxation of SOPARFIs is increased from EUR 1,575 to EUR 3,210. As for non-SOPARFIs, the minimum CIT is not a final tax but a tax advance creditable against any future CIT liability and which cannot be reimbursed.

As of 2013, this minimum CIT of EUR 3,210 is extended to regulated companies (ie companies subject to the authorisation and supervision of the CSSF (Commission de Surveillance du Sectueur Financier/ supervisory authority of the financial sector) which are subject to CIT, ie SICARs (venture capital investment vehicle) and Securitisation Companies.

The definition of SOPARFI within the meaning of article 174 - 6 ITL has been amended in such a way that it is now clear that a commercial balance sheet approach and not a tax balance sheet approach has to be taken, meaning that companies which hold assets indirectly via a tax transparent entity are considered as holding an interest in a company (and thus financial assets), and not as holding the underlying assets directly. The commentaries specifically refer to the case of shareholdings in tax-transparent real estate entities. Here, you will consider that the SOPARFI holds shares in the tax-transparent entity and not real estate assets. As a consequence, this company will be considered as a SOPARFI within the meaning of article 174-6 ITL and will be subject to the minimum CIT of EUR 3,210.

The definition of SOPARFI within the meaning of article 174 - 6 ITL is slightly amended to include loans to related companies. SOPARFIs with financing activities fall within the scope of the EUR 3,210 minimum CIT and not within the scope of the EUR 21,400 minimum CIT.

Tax consolidation
As far as tax consolidation is concerned, the law amends the rules in such a way that even in case of tax consolidation, the minimum CIT due by the parent will be increased by the minimum CIT due by each of the companies included in the tax consolidation (which was not the case so far) without exceeding EUR 20,000. This may provide a measure of relief to groups including a large number of companies, however the 5 year requirement for a company to be consolidated may be problematic.

Luxembourg tax credits not creditable against the minimum CIT
The law provides that the Luxembourg tax credits (such as the investment tax credit within the meaning of article 152bis LIR) are not creditable against the minimum CIT. Certain foreign tax credits should, however, still remain creditable against the minimum CIT due.

Net Worth Tax ("NWT") reduction not granted up to the amount of the minimum CIT
The law amends the rules according to which Luxembourg taxpayers can reduce, by means of the creation of a NWT reserve (of the NWT law), their NWT liability by an amount of CIT due. The aim of the amendment is to make sure that the minimum tax will not be compensated by a corresponding reduction of the NWT due by the companies. The law provides therefore, that the reduction of the NWT will not be granted up to the amount of the minimum CIT that would be due based on article 174 - 6 ITL.

This change applies to all companies, and not only to companies subject to the minimum CIT. Companies already paying "normal" CIT may therefore see their NWT liability increase in future, by an amount equal to the minimum CIT.

Increase of the solidarity contribution
The solidarity contribution applied to the amount of income tax due is increased by 3% for individuals and 2% for companies as of 1 January 2013, meaning that:

  • For companies, the contribution is increased from 5% to 7%, which brings the global income tax rate (Corporate Income Tax, "CIT" + Municipal Business Tax, "MBT") from 28.80% to 29.22% (if we assume a MBT rate of 6.75%, which is the rate applicable in Luxembourg city);
  • For individuals with a taxable income up to EUR 150,000 (EUR 300,000 for tax class 2): the contribution is increased from 4% to 7%, leading to a marginal income tax rate of 42.80%;
  • For individuals with a taxable income of more than EUR 150,000 (EUR 300,000 for tax class 2), the contribution is increased from 6% to 9%, leading to a marginal income tax rate of 43.60%.

Decrease of the investment tax credit rates
The complementary investment tax credit will decrease from 13% to 12% and the global investment tax credit will decrease from 3% to 2% for investments exceeding EUR 150,000.

Increase of tax brackets for individuals
A new marginal rate of 40% will apply to income exceeding EUR 100,000.

Tax treatment of warrant plans amended
The tax treatment of warrant plans is amended by a Circular of 20 December 2012. The Circular amends the calculation of the benefit in kind on the grant of warrants. In the absence of a more precise valuation, the value of the warrants will now be estimated as being equal to 17.5% of the underlying asset (previously 7.5%). Depending on the terms of the warrant plan, this still represents a reasonably attractive, effective tax rate. Employers using warrant plans are advised to review their plans accordingly.

VAT: scope of the small business exemption scheme broaden
The maximum turnover up to which the VAT exemption scheme can apply is increased from EUR 10,000 to EUR 25,000.

VAT - housing: reduction of the ceiling from EUR 60,000 to EUR 50,000
A Grand-Ducal Regulation implements the reduction of the ceiling from EUR 60,000 to EUR 50,000 for the application of the "super-reduced" VAT rate (3%) on construction and renovation work, as initially introduced by the law of 30 July 2002.


Your Taxand contacts for further queries are:
Keith O'Donnell
T. +352 26 940 257
E. keith.odonnell@atoz.lu

Samantha Merle
T. +352 26 940 235
E. samantha.merle@atoz.lu 

Taxand's Take

The tax measures which apply as of 2013 will mean additional tax costs for most of Luxembourg's taxpayers. To remove any sources of concern for companies holding foreign property, a common structure in Luxembourg, the tax authorities have now clarified that assets (like real estate) which are exempt based on a Double Tax Treaty and thus which generate or may generate income which has to be exempted in Luxembourg based on the relevant DTT, should not be taken into account, when determining the amount of minimum CIT due.

Taxand's Take Author

Keith O&#039;Donnell
Taxand Board member & Taxand global real estate tax service line leader
Luxembourg