Explanation of the corporate income tax in Luxembourg

Entities subject to this tax

The ISR applies to those entities that have the consideration of legal entities according to the Income Tax Law. That is to say, the Private Limited Liability Company, the Public Limited Company, and the Special Limited Company or SCSp.

The tax doesn't apply with respect to fiscally transparent entities, but their partners must be taxed in Luxembourg according to their share of the partnership's income.

As for the payment of MBT, it's paid even by partnerships, since what is taxed is the income generated by commercial activities in the country. However, certain legal entities don't pay this tax if they don't carry out activities of a commercial nature.

What is the corporate income tax in Luxembourg?

Luxembourg's corporate income tax works in the classical style and is levied on effectively realized corporate income.

Profits are determined in accordance with the commercial balance sheet, after adjustments according to accounting valuation rules. This implies that profits are adjusted for tax purposes in two ways:

• Adding all expenses that are not deductible.
• By deducting exempt income and tax loss carryforwards.

A particularity of Luxembourg's ISR is that all the income of the company is considered business income, and it's not segregated by categories. All income receives the same tax treatment, regardless of its nature or origin.

Income subject to Corporate Income Tax

The general rule is that Luxembourg-based companies are taxed there on income earned anywhere in the world. Non-resident companies are subject to tax in Luxembourg if they've obtained the following income in Luxembourg:

• Business profits from a permanent establishment or a permanent representative in Luxembourg.
• Rental income from real estate located in the country.
• Gains from the sale of real estate located in the country.
• Short-term gains derived from the sale of a substantial shareholding (a shareholding of more than 10%).

Deduction of tax losses

Tax losses can be deducted as special expenses and offset against Luxembourg's taxable income, not only those derived from the activity itself. As long as they're properly accounted for.

Since 2017, the carry forward of losses is limited to a total of 17 tax years. Once this period has expired, it will no longer be possible to deduct them. On the other hand, the transfer of losses from one shareholder to another after the acquisition of the company by a third party is not allowed either.

The real attraction of Luxembourg for companies

In addition to lower income tax rates in comparison to other European countries, Luxembourg's great attraction for foreign companies is that it doesn't apply any withholding tax on interest and royalties paid by its subsidiaries to their parent companies in other countries.

Moreover, it offers exemptions for corporate dividends in certain cases and also for capital gains and capital gains obtained from the sale or transfer of assets.

All of this has made Luxembourg a particularly interesting place for companies to have their headquarters there. Although it's still something that the European Union doesn't like at all, and it has been reflected in different reports.

Do you want to take your company to Luxembourg or another country?

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Sources:

• PwC Tax Summaries – Luxembourg (Corporate: Taxes on corporate income) — supports the 2025 CIT rates (14% / intermediate formula / 16%) and the 7% solidarity surtax on CIT.